Filed Purusuant to Rule 424(b)(1)
Registration No. 333-82136
PROSPECTUS
34,109,696 AMERICAN DEPOSITARY SHARES
[COMPANHIA LOGO]
COMPANHIA VALE DO RIO DOCE
(VALLEY OF THE RIO DOCE COMPANY)
EACH AMERICAN DEPOSITARY SHARE
REPRESENTS ONE COMMON SHARE
----------------------
The Federative Republic of Brazil and Banco Nacional de Desenvolvimento
Economico e Social-BNDES, the selling shareholders, are each selling 34,255,582
common shares, for a total of 68,511,164 common shares, in a global offering.
BNDES is Brazil's national bank for economic and social development. A portion
of these shares will be in the form of American depositary shares, each
representing one common share. The offered shares represent 27.9% of our
outstanding common shares and 17.8% of our outstanding total capital. We will
not receive any proceeds from this offering.
The underwriters are offering 34,109,696 American depositary shares in the
United States, Canada, the United Kingdom and certain other jurisdictions. In
addition, the Brazilian underwriters are concurrently offering 34,401,468 common
shares to retail and institutional investors in Brazil.
The principal trading market for the common shares is the Sao Paulo stock
exchange, known as BOVESPA. The common shares trade on BOVESPA under the symbol
"VALE3." On March 20, 2002, the last sale price for the common shares on BOVESPA
was R$60.92, or US$26.06, per common share. Our American depositary shares have
been approved for listing on the New York Stock Exchange under the symbol "RIO,"
subject to official notice of issuance.
INVESTING IN AMERICAN DEPOSITARY SHARES OR COMMON SHARES INVOLVES RISKS
THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS
PROSPECTUS.
PER AMERICAN
DEPOSITARY SHARE TOTAL
---------------- -----
Public offering price............................. US$ 24.50 US$835,687,552
Underwriting discount............................. US$ .468 US$ 15,963,338
Proceeds, before expenses, to the selling
shareholders.................................... US$24.032 US$819,724,214
The underwriters may also purchase up to an additional 10,276,674 shares in
the form of American depositary shares from the selling shareholders on a pro
rata basis at the public offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover overallotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The American depositary shares will be ready for delivery on or about March
27, 2002.
----------------------
Joint Global Coordinators
MERRILL LYNCH & CO. ABN AMRO ROTHSCHILD
Sole Book-Running Manager
----------------------
MERRILL LYNCH & CO. ABN AMRO ROTHSCHILD LLC
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
JPMORGAN
MORGAN STANLEY
----------------------
The date of this prospectus is March 20, 2002.
Photographs depicting various aspects of our industrial operations.
TABLE OF CONTENTS
CERTAIN TERMS AND CONVENTIONS.......... i
PRESENTATION OF FINANCIAL
INFORMATION.......................... ii
PRESENTATION OF INFORMATION CONCERNING
RESERVES............................. ii
PROSPECTUS SUMMARY..................... 1
RISK FACTORS........................... 10
FORWARD-LOOKING STATEMENTS............. 18
USE OF PROCEEDS........................ 18
MARKET INFORMATION..................... 19
DIVIDEND POLICY........................ 22
EXCHANGE RATES......................... 24
CAPITALIZATION......................... 25
SELECTED CONSOLIDATED FINANCIAL DATA... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 28
INDUSTRY OVERVIEW...................... 50
BUSINESS............................... 59
MANAGEMENT............................. 103
MAJOR AND SELLING SHAREHOLDERS......... 109
RELATED PARTY TRANSACTIONS............. 115
DESCRIPTION OF CAPITAL STOCK........... 116
DESCRIPTION OF AMERICAN DEPOSITARY
SHARES............................... 124
TAXATION............................... 132
UNDERWRITING........................... 138
LEGAL MATTERS.......................... 143
EXPERTS................................ 143
ENFORCEMENT OF CIVIL LIABILITIES
AGAINST NON-U.S. PERSONS............. 143
WHERE YOU CAN FIND MORE INFORMATION.... 144
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE............................ 145
MINING TERMS........................... 146
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS........................... F-1
------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We and the selling shareholders have not, and the
underwriters have not, authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We and the selling shareholders are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information contained in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
No offer or sale of American depositary shares may be made to the public in
Brazil.
------------------------
CERTAIN TERMS AND CONVENTIONS
As used in this prospectus,
- "real," "reais" or "R$" refer to Brazilian reais (plural) and to the
Brazilian real (singular), the official currency of Brazil.
- "U.S. dollars," "dollars" or "US$" refer to United States dollars.
- units refer to units in the metric system, e.g., tons refer to metric
tons.
When we use "CVRD Group," or personal pronouns such as "we" "us" or "our,"
we mean Companhia Vale do Rio Doce, its consolidated subsidiaries and its joint
ventures and other affiliated companies. References to "affiliated companies"
are to companies in which Companhia Vale do Rio Doce has a minority investment,
and exclude controlled affiliates that are consolidated for financial reporting
purposes.
i
PRESENTATION OF FINANCIAL INFORMATION
We have prepared our financial statements appearing in this prospectus in
accordance with generally accepted accounting principles in the United States
(U.S. GAAP), which differ in certain respects from accounting principles in
Brazil (Brazilian GAAP). Brazilian GAAP is determined by the requirements of Law
No. 6,404, dated December 15, 1976, as amended (the Brazilian Corporation Law),
and the rules and regulations of the Comissao de Valores Mobiliarios, or CVM,
the Brazilian Securities Commission. We publish financial statements in Brazil,
known as the Brazilian Corporation Law financial statements, and prepare them in
accordance with Brazilian GAAP. We use our Brazilian Corporation Law financial
statements for:
- reports to Brazilian shareholders,
- filings with the CVM,
- determination of dividend payments, and
- determination of tax liability.
Our financial statements and the other financial information appearing in
this prospectus have been remeasured (translated) from Brazilian reais to U.S.
dollars on the basis explained in note 2(a) to our financial statements unless
we indicate otherwise.
Some of the figures included in this prospectus have been rounded.
PRESENTATION OF INFORMATION CONCERNING RESERVES
The estimates of proven and probable reserves at mines within the CVRD
Group and the estimates of mine life, at December 31, 2000, included in this
prospectus have been calculated according to the technical definitions required
by the U.S. Securities and Exchange Commission, as described in "Mining Terms."
We have derived estimates of mine life described in this prospectus from those
reserve estimates.
The National Mineral Research Department, Departamento Nacional de Pesquisa
Mineral, or DNPM, compiles domestic and foreign mining reserve estimates using
criteria which may differ from technical definitions required by the Commission.
We have adjusted ore reserve estimates for extraction losses and metallurgical
recoveries during extraction.
ii
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
investing in our American depositary shares. You should read this entire
prospectus carefully, especially the risks of investing in our American
depositary shares discussed under "Risk Factors" and the consolidated financial
statements and related notes beginning on page F-1, before making an investment
decision.
OUR COMPANY
We are one of the world's largest producers and exporters of iron ore. We
are the largest diversified mining company in the Americas by market
capitalization and one of the largest companies in Brazil. We hold exploration
claims that cover 7.0 million hectares (17.3 million acres). We operate two
large railway systems that are integrated with our mining operations and that,
taken together, transported approximately 58.5% of the rail tonnage shipped in
Brazil in the first nine months of 2001. Through joint ventures, we have major
investments in the production of aluminum.
For the nine months ended September 30, 2001, we had consolidated gross
operating revenues of US$3,099 million, 62.5% of which were attributable to
sales of iron ore and pellets, 15.0% of which were attributable to third-party
transportation, 7.2% of which were attributable to sales of aluminum sector
products and 3.2% of which were attributable to sales of gold. For the nine
months ended September 30, 2001, we recorded consolidated operating income of
US$707 million and consolidated net income of US$585 million. Our equity in
results of affiliates and joint ventures and provisions for losses and write-
downs on equity investments in aggregate totaled a loss of US$53 million over
that period.
For the year ended December 31, 2000, we had consolidated gross operating
revenues of US$4,069 million, 53.5% of which were attributable to sales of iron
ore and pellets, 18.7% of which were attributable to third-party transportation,
8.9% of which were attributable to sales of aluminum sector products and 3.8% of
which were attributable to sales of gold. For the year ended December 31, 2000,
we recorded consolidated operating income of US$984 million and consolidated net
income of US$1,086 million. Our equity in results of affiliates and joint
ventures and provisions for losses and write-downs on equity investments in
aggregate totaled US$322 million over that period.
Our main lines of business are mining, logistics and energy and are
generally grouped according to the business segments below:
- ferrous minerals: comprised of iron ore, pellets as well as manganese and
ferro alloys businesses,
- non-ferrous minerals: comprised of gold, kaolin, potash and copper
businesses,
- logistics: comprised of railroads, ports and terminals and shipping
businesses,
- energy: comprised of power generation businesses, and
- holdings: comprised of aluminum, steel, fertilizers and e-commerce
businesses.
MINING. Our primary mining activities involve iron ore. We operate two
world-class integrated systems in Brazil for producing and distributing iron
ore, each consisting of mines, railroads and port and terminal facilities. These
two systems contain aggregate estimated proven and probable iron ore reserves of
approximately 3.5 billion tons. We also operate nine pellet producing
facilities, six of which are joint ventures with international partners.
EXPLORATION ASSETS. We have extensive experience in exploration techniques
and processes specifically designed for use in tropical areas of the world. Our
current mineral exploration efforts are mainly in Brazil and focus on copper,
gold, nickel, manganese, and kaolin. Expenditures for our mineral exploration
program were US$31 million in the first nine months of 2001 and US$34 million in
the first nine months of 2000. We currently hold claims to explore approximately
7.0 million hectares (17.3 million acres).
1
LOGISTICS. In our logistics business, we provide our clients with various
forms of transportation and related support services, such as warehouse, port
and terminal services. We are a leading competitor in the Brazilian
transportation industry. Each of our iron ore complexes incorporates an
integrated railroad network linked to automated port and terminal facilities,
and is designed to provide iron ore freight and passenger rail transportation,
bulk terminal storage and ship loading services to us and third parties. For the
nine months ended September 30, 2001, our railroads transported approximately
58.5% of the total freight tonnage transported by Brazilian railroads. We have
two wholly-owned railroads, the Vitoria-Minas railroad and the Carajas railroad.
ENERGY. In 2001, we began to consider energy as a core business, although
at present energy production does not represent a significant component of our
activities. We currently hold stakes in nine hydroelectric power generation
projects, two of which have started operations. These nine projects have a total
projected capacity of 3,364 MW. Depending on market conditions, the power
generated by these plants will be sold in the market and/or used for our own
operations.
ALUMINUM OPERATIONS. Our integrated aluminum operations rank among the
largest in Latin America in terms of production volume. Through joint ventures,
our wholly owned subsidiary, Aluvale, conducts major operations in the
production of aluminum, which include bauxite mining, alumina refining and
aluminum metal smelting and marketing.
OUR STRENGTHS
WORLD-CLASS IRON ORE OPERATIONS. We are a leading producer and supplier of
iron ore to the world market. Although the worldwide iron ore industry is highly
competitive, we believe that we benefit from the following strengths in our
operations:
- large resource base,
- high quality iron ore deposits,
- ability to produce a broad range of iron ore products,
- production cost advantages, and
- reliable delivery and customer service.
WELL-POSITIONED TO MEET DEMAND IN A CHANGING STEEL INDUSTRY. Ongoing
structural changes in the production of iron and steel have stimulated increased
demand for pellets as a proportion of the global iron ore and pellet market. We
have developed substantial pellet production capacity because we believe that
the increase in pellet demand is a trend which will continue.
PIPELINE OF COPPER DEVELOPMENT PROJECTS. We expect our copper projects to
begin production in the next two to five years. Our Sossego mine project, with a
projected 2004 start-up date, has an estimated production capacity of 140,000
tons of copper per year. In addition, we have joint venture interests in four
Brazilian copper development projects. These five projects contain approximately
1.7 billion tons of mineral deposits with a weighted average grade of 1.02%. We
believe these projects provide a strong foundation for our strategy of seeking a
significant position in the growing world copper market.
LOW-COST INTEGRATED ALUMINUM ACTIVITIES. We operate integrated aluminum
operations primarily through joint ventures, involving bauxite mining, alumina
refining and the production of primary aluminum. We have lower cash costs in the
production of primary aluminum than many of our competitors.
2
STRONG POSITION IN MANGANESE ORE AND FERRO-ALLOYS. We are the world's
second leading producer of manganese ore and third leading producer of manganese
ferro-alloys. We believe that our main manganese mine, Igarape do Azul, is the
world's lowest cash cost producer, and that we have lower cash costs in our
manganese mining operations than many of our competitors. We have 20 years of
proven and probable manganese reserves based on 2000 production.
INTEGRATED LOGISTICS BUSINESS. We have extensive experience managing
complex logistics operations, based on our experience in our two wholly-owned
railroads, Vitoria-Minas and Carajas. We believe our transportation expertise
should improve the profitability and efficiency of the four railroads in which
we acquired ownership interests after our privatization, especially
Centro-Atlantica, which interconnects with our Vitoria-Minas railroad.
FINANCIAL RESOURCES. Our balance sheet and strong cash flows provide us
with the financial wherewithal to pursue growth and development opportunities.
The ratio of our long-term debt to shareholders' equity was 0.58:1 at September
30, 2001.
ENERGY. We believe that we can successfully compete in the Brazilian
energy market, mainly because of our successful track record in implementing and
managing large projects and dealing with environmental protection issues. In
addition, the balance between supply and demand and the Brazilian government's
privatization program of the industry lead us to believe that there is
significant growth potential in this market.
OUR STRATEGY
Since the first step of our privatization in 1997, we have become a more
efficient, diversified mining, logistics and energy company and are in the
process of divesting non-core assets that no longer have strategic importance
for us. Through organic, disciplined growth and selective acquisitions, we will
continually seek to develop our mining, logistics and energy capabilities and
increase scale while working to reduce costs. We are focusing on our core
businesses of mining, logistics and energy to achieve these goals, by:
MAINTAINING OUR LEADERSHIP POSITION IN THE WORLD IRON ORE MARKET. In 2000,
we produced 15% of the world's iron ore, more than any other producer. In 2001,
we acquired Ferteco and one half of the control of Caemi, which collectively
accounted for 7% of world iron ore production in 2000. We are committed to
maintaining our position in the world iron ore market by keeping close contact
with our customers, focusing our product line to capture industry trends and
controlling costs. We believe that our strong relationships with major
customers, tailored product line and logistical advantages will enable us to
achieve this goal.
EXPANDING OUR PELLETIZING FACILITIES TO ACCOMMODATE CURRENT MARKET
DEMANDS. We believe that in the long term, the growth rate of global demand for
pellets will continue to be higher than the growth rate of the overall iron ore
market, and therefore we plan to continue investing in the development of this
dynamic segment of the iron ore market. Upon completion of ongoing expansion
projects in our pellet operations, we and our joint ventures will have a total
of 56.2 million tons of annual production capacity.
GROWING OUR LOGISTICS BUSINESS. We believe that there is potential for
growth in our logistics business in the near term from the conversion of
existing truck haulage to rail, and in the longer term from increased bulk cargo
resulting from economic growth in Brazil. We believe that the quality of our
railway assets and our many years of experience as a railroad and port operator
position us to take advantage of this market and establish ourselves as a
leading Brazilian logistics company serving both domestic and export markets.
DEVELOPING OUR COPPER RESOURCES. Global demand for copper grew rapidly in
the 1990s and, despite a downturn in 2001, is expected to continue to grow,
primarily driven by the spending in the automotive, computer, telecommunications
and electrical appliance sectors of the world economy. We believe that our
copper projects can be among the most competitive in the world in terms of
investment cost per ton of ore. Nevertheless, all of our five copper projects
are in the prospecting and developmental phases, and mineral exploration is
speculative in nature and involves many risks which could lower our expected
returns.
3
INCREASING OUR ALUMINUM ACTIVITIES. We believe that global demand for
aluminum will continue to grow during the next decade, driven mainly by the
transportation and packaging industries. We therefore plan to develop and
increase production capacity in our integrated aluminum operations.
DEVELOPING POWER GENERATION PROJECTS. In 2001 and 2000, we consumed 12.5
TWh and 13.8 TWh of electricity, respectively. Energy management and supply has
become a priority for us, driven both by the Brazilian government's
privatization program of the industry and by the risk of rising electricity
prices and electricity rationing due to energy shortages, such as the one Brazil
experienced in the second half of 2001. We currently perceive favorable
investment opportunities in the Brazilian electricity sector and are taking
advantage of them to invest in hydroelectric power generation projects. Expected
further deregulation of this sector may also result in increased competition. As
we are a large consumer of electricity, we expect that investing in the energy
business will help protect us against electricity price volatility. As we
further enter this new line of business we will confront regulatory and business
challenges that we do not have a history of dealing with, and our efforts to
develop this business may not be successful.
RESTRUCTURING OUR PORTFOLIO OF JOINT VENTURES AND MINORITY INVESTMENTS. In
line with our focus on mining, logistics and energy, we have moved to reduce our
holdings of non-strategic assets, including our pulp and paper assets, and some
assets in the steel sector. We are also seeking to divest our dry-bulk cargo
shipping assets, due to the overall lack of profitability of this business.
------------------------
Our principal executive offices are located at Avenida Graca Aranha, No.
26, 20005-900, Rio de Janeiro, RJ, Brazil, and our telephone number is (011)
55-21-3814-4540. We maintain a website at www.cvrd.com.br. Information contained
in our website does not constitute a part of this prospectus.
4
THE OFFERING
Securities offered by the
selling shareholders.......... The Federative Republic of Brazil and BNDES
are selling a total of 68,511,164 shares in
the form of common shares or American
depositary shares in a global offering. Each
selling shareholder is selling 34,255,582
shares.
This offering................. 34,109,696 American depositary shares are
being offered initially through the
underwriters in the United States, Canada, the
United Kingdom and certain other
jurisdictions. Each American depositary share
represents one common share held on behalf of
JPMorgan Chase Bank as depositary. The
American depositary shares will be represented
by American depositary receipts. The
underwriters may also purchase up to an
additional 10,276,674 shares (in the form of
American depositary shares) from the selling
shareholders on a pro rata basis solely to
cover overallotments.
Brazilian offering............ 34,401,468 common shares are being offered
initially through the Brazilian underwriters
in the Brazilian offering. For a discussion of
the terms of the offering in Brazil, see
"Underwriting -- Brazilian Offering."
Shares outstanding before and
after the offering............ 245,267,973 common shares
138,571,161 preferred shares
1 golden share
-----------------------------
383,839,135 shares
Use of proceeds............... We will not receive any proceeds from this
offering.
Voting rights................. One vote per common share, or one vote per
American depositary share.
Dividend policy............... Since our privatization in 1997, and following
a recommendation from Valepar, our principal
shareholder, we have distributed a dividend
equal to at least 50% of the amount of profits
available for distribution with respect to
each fiscal year. For a discussion of our
dividend distribution policy, see "Dividend
Policy."
Risk factors.................. See "Risk Factors" and the other information
included in this prospectus for a discussion
of factors you should carefully consider
before deciding to invest in our American
depositary shares.
New York Stock Exchange symbol
for the American depositary
shares offered hereby....... RIO
BOVESPA trading symbol for the
common shares............... VALE3
5
TIMETABLE FOR THE OFFERING
Commencement of marketing of the offering................... February 26, 2002
Announcement of offer price................................. March 20, 2002
Allocation of American depositary shares and common
shares.................................................... March 20, 2002
Listing of the American depositary shares on the New York
Stock Exchange............................................ March 21, 2002
Settlement and delivery of American depositary shares and
common shares............................................. March 27, 2002
Depending on market conditions, this expected timetable may be modified.
You may contact the representatives of the underwriters for information on
how to purchase American depositary shares in this offering. You may contact
Merrill Lynch, Pierce, Fenner & Smith Incorporated at 4 World Financial Center,
250 Vesey Street, New York, New York, 10080 and ABN AMRO Rothschild LLC at 55
East 52nd Street, New York, New York, 10055.
6
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The tables below present summary consolidated financial and operating data
at and for the periods indicated. The data at and for the five years ended
December 31, 2000 has been derived from our consolidated financial statements,
which were audited by PricewaterhouseCoopers Auditores Independentes. The data
at and for the nine months ended September 30, 2000 and 2001 has been derived
from our unaudited interim financial statements, included elsewhere in this
prospectus, which, in the opinion of management, reflect all adjustments which
are of a normal recurring nature necessary for a fair presentation of the
results for such periods. The results of operations for the nine months ended
September 30, 2001 are not necessarily indicative of the operating results to be
expected for the entire year ended December 31, 2001. The data at and for the
five years ended December 31, 2000 and at and for the nine months ended
September 30, 2001 and 2000 have been restated to reflect the accounting changes
described in notes 21 and 19 to our consolidated financial statements and our
unaudited interim financial statements, respectively. You should read the
information below in conjunction with our audited and unaudited consolidated
financial statements and notes thereto included elsewhere in this prospectus, as
well as "Presentation of Financial Information," "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS OF US$)
STATEMENT OF INCOME DATA
Net operating revenues....... US$ 3,585 US$ 3,748 US$ 3,553 US$ 3,076 US$ 3,935 US$ 2,996 US$ 2,997
Cost of products and
services................... (2,724) (2,653) (2,272) (1,806) (2,429) (1,865) (1,715)
Selling, general and
administrative expenses.... (245) (207) (171) (138) (225) (140) (188)
Research and development..... (59) (51) (48) (27) (48) (34) (31)
Employee profit sharing
plan....................... (51) (46) (29) (24) (29) (31) (21)
Restructuring costs.......... -- (87) (9) -- -- -- --
Other income (expenses)...... 40 (67) (170) (161) (220) (231) (335)
--------- --------- --------- --------- --------- --------- ---------
Operating income............. 546 637 854 920 984 695 707
--------- --------- --------- --------- --------- --------- ---------
Non-operating income
(expenses):
Financial income
(expenses)............... (63) (3) 151 (33) (107) (68) (160)
Foreign exchange and
monetary gain/Translation
gain (loss).............. 14 7 (108) (213) (142) (10) (700)
Gain on sale of
investments.............. -- -- -- -- -- 54 784
Other...................... (56) (12) (5) (4) (4) (11) (43)
--------- --------- --------- --------- --------- --------- ---------
(105) (8) 38 (250) (253) (35) (119)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes,
equity results, minority
interests and extraordinary
items...................... 441 629 892 670 731 660 588
Income taxes benefit
(charge)................... 43 (32) -- (33) 32 1 43
Equity in results of
affiliates and joint
ventures................... 115 155 80 41 260 187 (8)
Change in provision for
losses and write-downs on
equity investments......... (21) (59) (273) (268) 62 53 (45)
Minority interests........... (4) (2) (1) 2 1 -- 7
Extraordinary items (net of
taxes)(1).................. -- (372) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................... US$ 574 US$ 319 US$ 698 US$ 412 US$ 1,086 US$ 901 US$ 585
========= ========= ========= ========= ========= ========= =========
Total cash distributions..... US$ 146 US$ 302 US$ 607 US$ 452 US$ 246 US$ 246 US$ 639
---------------
(1) Extraordinary items in 1997 relate to transactions in connection with the
first step of our privatization.
7
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- ------- -------- --------
(IN US$ EXCEPT RECORDED DIVIDENDS AND INTEREST
ON SHAREHOLDERS' EQUITY PER SHARE AND SHARE NUMBERS)
PER SHARE DATA
Basic earnings per common and
preferred share(2):
Income before extraordinary
items............................ US$1.48 US$1.06 US$1.80 US$1.07 US$2.82 US$2.34 US$1.52
Extraordinary items................ -- (0.96) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income......................... US$1.48 US$0.10 US$1.80 US$1.07 US$2.82 US$2.34 US$1.52
======= ======= ======= ======= ======= ======= =======
Recorded dividends and interest on
shareholders' equity per share in
US$(3)............................. US$0.64 US$1.20 US$1.58 US$1.28 US$1.70 US$1.11 US$1.72
Recorded dividends and interest on
shareholders' equity per share in
Brazilian reais(3)................. R$0.67 R$1.33 R$1.86 R$2.28 R$3.33 R$2.04 R$4.61
Weighted average number of shares
outstanding:
Common shares (in thousands)....... 249,983 249,983 249,983 249,983 249,983 249,983 249,864
Preferred shares(2) (in
thousands)....................... 138,576 138,563 137,965 134,917 134,917 134,917 135,042
------- ------- ------- ------- ------- ------- -------
Total............................ 388,559 388,546 387,948 384,900 384,900 384,900 384,906
======= ======= ======= ======= ======= ======= =======
AT DECEMBER 31, AT SEPTEMBER 30,
-------------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- -------- --------- -------- --------
(IN MILLIONS OF US$)
BALANCE SHEET DATA
Cash and cash
equivalents............. US$ 666 US$ 1,108 US$ 1,189 US$1,453 US$ 1,211 US$1,055 US$1,708
Total assets.............. 11,214 11,617 11,048 8,688 9,795 9,582 8,664
Current liabilities....... 1,846 2,057 2,030 2,072 2,136 2,169 2,175
Long-term debt(4)......... 1,256 1,428 1,389 1,321 2,020 1,525 2,111
Total shareholders'
equity.................. 6,942 6,906 6,392 4,691 4,569 4,887 3,613
---------------
(2) Each American depositary share represents one common share and each
preferred American depositary share represents one preferred share.
(3) Since 1997, all distributions have been in the form of interest on
shareholders' equity.
(4) Excludes current portion. At December 31, 2000, we had extended guarantees
for borrowings of joint ventures and affiliated companies in an aggregate
amount of US$788 million. These contingent liabilities do not appear on the
face of our consolidated balance sheets, but appear in note 15(a) to our
consolidated financial statements.
8
SUMMARY RESERVE AND PRODUCTION DATA
RESERVES PRODUCTION
----------------------------------------------------------------- -------------------------------------------------------
FOR THE NINE MONTHS
AT DECEMBER 31, 2000 FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------------------------------- ------------------------------- --------------------
PROVEN AND AVERAGE
PROBABLE ORE
MINERAL RESERVES GRADE(1) 1998 1999 2000 2000 2001
----------------------------- --------------------- --------- ------- ------- ------- ------- -------
(IN MILLIONS OF TONS) (PERCENT) (IN MILLIONS OF TONS EXCEPT GOLD PRODUCTION FIGURES)
Iron Ore
Southern System............ 2,337.0 55.0% 53.3 49.9 75.9 56.6 53.8
Northern System............ 1,167.4 65.4 45.8 44.0 47.6 33.7 38.8
------- ----- ----- ----- ----- -----
Total.................... 3,504.4 58.5 99.1 93.9 123.5 90.3 92.6
======= ===== ===== ===== ===== =====
Gold......................... 15.0 2.83 582.4(2) 552.1(2) 535.1(2) 400.2(2) 376.2(2)
Manganese.................... 39.4 46.2 1.6 1.1 1.7 1.4 1.3
Bauxite...................... 166.8 50.5 10.1 11.0 11.2 8.2 7.9
---------------
(1) Iron ore grade is expressed in terms of percentage of iron; gold ore grade
is expressed as the average of ore grade and metallurgical recovery rate,
and is expressed in grams per ton (one ton equals 32,150 troy ounces);
manganese ore grade is expressed in terms of percentage of manganese; and
bauxite ore grade is expressed in terms of percentage of aluminum oxide.
(2) In thousands of troy ounces. One troy ounce equals 31.103 grams.
9
RISK FACTORS
You should carefully consider the risks described below, as well as the
other information contained in this prospectus, in evaluating an investment in
our American depositary shares. The risks described below are not the only ones
facing our company. Additional risks may impair our business operations. Our
business, results of operations or financial condition could be harmed if any of
these risks materializes and, as a result, the trading price of the American
depositary shares could decline and you could lose a substantial portion of your
investment.
We have included information in these risk factors concerning Brazil to the
extent that information is publicly available to us. We believe this information
is reliable, but we cannot guarantee that it is accurate.
RISKS RELATING TO 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 AND THE MARKET PRICE OF OUR
SECURITIES.
The Brazilian government frequently intervenes in the Brazilian economy and
occasionally makes drastic changes in policy. The Brazilian government's actions
to control inflation and effect other policies have often involved wage and
price controls, currency devaluations, capital controls and limits on imports,
among other things. Our business, financial condition and results of operations
may be adversely affected by changes in policy involving tariffs, exchange
controls and other matters, as well as other factors outside of our control such
as:
- currency fluctuations,
- inflation,
- monetary policy and interest rates,
- fiscal policy,
- energy shortages, and
- other political, social and economic developments in or affecting Brazil.
INFLATION AND CERTAIN GOVERNMENT MEASURES TO CURB INFLATION MAY CONTRIBUTE
SIGNIFICANTLY TO ECONOMIC UNCERTAINTY IN BRAZIL AND TO HEIGHTENED VOLATILITY IN
THE BRAZILIAN SECURITIES MARKETS AND, CONSEQUENTLY, MAY ADVERSELY AFFECT THE
MARKET VALUE OF OUR SECURITIES.
Brazil has historically experienced extremely high rates of inflation.
Since the introduction of the real in July 1994 under the Real Plan, Brazil's
inflation rate has been substantially lower than in previous periods. Inflation,
as measured by the Indice Geral de Precos -- Mercado, the general market price
index in Brazil, or IGP-M, fell to 1.8% in 1998 before increasing to 20.1% in
1999 as a result of the devaluation of the real beginning in January 1999, and
decreasing again to 10.4% in 2001. There can be no assurance that recent lower
levels of inflation will continue. Future governmental actions, including
actions to adjust the value of the real, may trigger increases in inflation. If
Brazil experiences substantial inflation again in the future, our operating
expenses and borrowing costs may increase, our operating and net margins may
decrease and, if investor confidence decreases, the price of our securities may
fall. For a more detailed discussion about inflation, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Inflation."
Inflation itself and governmental measures to combat inflation have had
significant negative effects on the Brazilian economy. Since 1999, governmental
actions to curb inflation have included interest rate increases and intervention
in the foreign exchange market through the sale of U.S. dollars and government
bonds linked to the U.S. dollar. These actions may adversely affect the market
value of our securities.
10
FLUCTUATIONS IN THE VALUE OF THE REAL AGAINST THE VALUE OF THE U.S. DOLLAR MAY
RESULT IN UNCERTAINTY IN THE BRAZILIAN ECONOMY AND THE BRAZILIAN SECURITIES
MARKET AND COULD LOWER THE MARKET VALUE OF OUR SECURITIES.
The Brazilian currency has historically suffered frequent devaluations. In
the past, the Brazilian government has implemented various economic plans and
utilized a number of exchange rate policies, including sudden devaluations,
periodic mini-devaluations during which the frequency of adjustments has ranged
from daily to monthly, floating exchange rate systems, exchange controls and
dual exchange rate markets. Although over long periods devaluations of the
Brazilian currency generally have correlated with the rate of inflation in
Brazil, devaluations over shorter periods have resulted in significant
fluctuations in the exchange rate between the Brazilian currency and the U.S.
dollar and other currencies.
In 1999, the real devaluated 48% against the U.S. dollar, and in 2000 it
devaluated 9%. During 2001, the real experienced a period of significant
devaluation, in part due to the economic uncertainties in Argentina, the global
economic slowdown and the energy crisis in Brazil. The real depreciated 18.7%
against the U.S. dollar during 2001. There are no guarantees that the exchange
rate between the real and the U.S. dollar will stabilize at current levels or
that the real will appreciate against the U.S. dollar.
Devaluations of the real relative to the U.S. dollar would reduce the U.S.
dollar value of distributions and dividends on the American depositary shares
and may also reduce the market value of our securities. Devaluations also create
additional inflationary pressures in Brazil by generally increasing the price of
imported products and requiring recessionary government policies to curb
aggregate demand. On the other hand, appreciation of the real against the U.S.
dollar may lead to a deterioration of the current account and the balance of
payments, as well as dampen export-driven growth. For a more detailed discussion
about the floating exchange rate and Brazilian government measures aimed at
stabilizing the real, see "Exchange Rates."
DEVELOPMENTS IN OTHER EMERGING MARKET COUNTRIES MAY AFFECT THE BRAZILIAN
SECURITIES MARKETS.
International investors generally consider Brazil to be an emerging market.
As a result, economic and market conditions in other emerging market countries,
especially those in Latin America, influence the market for securities issued by
Brazilian companies. Since the fourth quarter of 1997, the international
financial markets have experienced significant volatility, and a large number of
market indices, including those in Brazil, have declined significantly. For
example, the Brazilian financial markets were adversely affected by the Asian
financial crisis at the end of 1997 and the Russian financial crisis in 1998.
After prolonged periods of recession, followed by political instability,
Argentina in 2001 announced that it would not service its public sector debt. In
order to address the worsening economic and social crisis, the Argentine
government abandoned its decade-old fixed dollar-peso exchange rate and created
a floating exchange rate regime in January 2002. Since Argentina is an important
trade partner of Brazil, the continuation of the Argentine crisis could affect
the revenues and profitability of Brazilian companies with important ties to
Argentina.
The Argentine crisis may also affect the perception of risk in Brazil by
foreign investors. The expectation of many that similar problems would follow in
Brazil, which did increase volatility in the market prices for Brazilian
securities in early 2001, has not materialized. Nonetheless, if events in
Argentina continue to deteriorate, they may adversely affect our ability to
borrow funds at an acceptable interest rate and raise equity capital when
needed. Since approximately 66.4% of our long-term debt at September 30, 2001 is
scheduled to mature in 2003 and 2004, these events could cause us to delay our
capital expenditure plans and adversely affect the price of our securities.
THE BRAZILIAN GOVERNMENT'S ENERGY RATIONING PROGRAM COULD ADVERSELY AFFECT US.
We are a significant consumer of Brazil's electricity production, and
accounted for 4.5% of total consumption in Brazil in 2000. Brazil faced a
shortage of energy during the second half of 2001 as a result of increased
demand due to economic growth, inadequate expansion of generation in past years
and unfavorable hydrological conditions. In response, the Brazilian government
imposed an energy rationing program to alleviate the energy shortage, which
aimed to decrease energy consumption by at least 20%.
11
This program had a negative impact upon the country's economic performance and
inflation levels. The required percentage of energy reduction, however, could be
higher than 20% depending on the type of activity. Aluminum and ferro-alloy
activities were categorized as electric-intensive activities and were required
to decrease their energy consumption by 25%. As a result of this program, we had
a temporary reduction of our aluminum and ferro-alloy production. By the end of
2001, climate conditions improved, reducing the immediate risk of energy
shortages. Therefore, the Brazilian government eliminated the restrictions on
the use of energy on March 1, 2002. However, there currently remain forecasted
shortfalls in generation capacity.
We are unable to assess the impact that the government rationing program or
future energy shortages may have on our operations.
YOU MAY NOT BE ABLE TO EFFECT SERVICE OF PROCESS UPON, OR TO ENFORCE JUDGMENTS
AGAINST, US, OUR DIRECTORS AND EXECUTIVE OFFICERS OR THE SELLING SHAREHOLDERS.
We and BNDES are organized under the laws of Brazil and substantially all
of our assets and of BNDES' assets are located outside of the United States. The
majority of our directors and executive officers and all of BNDES' directors and
executive officers reside outside of the United States. As a result, it may be
difficult for you to effect service of process upon us, BNDES or those persons
in the United States or to enforce against us, BNDES or those persons judgments
obtained in U.S. courts, including those based on the civil liability provisions
of the federal securities laws of the United States.
In addition, the Federative Republic of Brazil and BNDES, in its capacity
as administrator of the National Privatization Fund, have not waived their
sovereign immunity in connection with any action relating to the securities to
be sold by the Federative Republic of Brazil, including any action arising out
of or based on United States federal or state securities laws. As a result, it
may not be possible for you to effect service of process in the United States
upon Brazil, to obtain jurisdiction over Brazil or to enforce against Brazil
judgments obtained in U.S. courts, including those based on the civil liability
provisions of the federal securities laws of the United States.
RISKS RELATING TO OUR BUSINESSES
DUE TO OUR DEPENDENCE ON THE GLOBAL STEEL INDUSTRY, ANY FLUCTUATIONS IN THE
DEMAND FOR STEEL COULD ADVERSELY AFFECT OUR BUSINESS.
Sales prices and volumes in the worldwide iron ore mining industry depend
on the prevailing and expected level of demand for iron ore in the world steel
industry. The world steel industry is cyclical. A number of factors, the most
significant of these being the prevailing level of worldwide demand for steel
products, influence the world steel industry. During periods of sluggish or
declining regional or world economic growth, demand for steel products generally
decreases and leads to corresponding reductions in demand for iron ore. Global
steel output in 2001 decreased by 0.68% to 823,937 tons from 829,609 tons
produced during 2000. This may lead to decreases in the level of demand in the
iron ore market and have an adverse effect on world contract prices and sales
volumes for iron ore. Prolonged reductions or declines in world contract prices
or sales volumes for iron ore would have a material adverse effect on our
revenues. In addition, poor conditions in the global steel industry could result
in the bankruptcy of some of our customers, which would increase our bad debt
expenses.
THE MINING INDUSTRY IS AN INTENSELY COMPETITIVE INDUSTRY, AND WE CANNOT ASSURE
OUR ABILITY TO CONTINUE TO COMPETE EFFECTIVELY WITH OTHER MINING COMPANIES IN
THE FUTURE.
Intense competition characterizes the worldwide iron ore industry. We
compete with a number of large mining companies, including international mining
companies. Some of these competitors possess substantial iron ore mineral
deposits at locations closer to our principal Asian and European customers and
it is possible that competition from foreign or Brazilian iron ore producers in
the future will result in our losing market share and revenues. Our gold,
aluminum, manganese and other activities are also subject to intense
competition.
12
COMPETITION IN THE ENERGY GENERATION BUSINESS TENDS TO INTENSIFY.
As a result of the Brazilian government's privatization and restructuring
of the regulatory framework for the power industry, we expect an increase in
competition in the generation of electricity, which could result in declining
energy prices. Beginning on January 1, 2003, the provision of electricity
services will be subject to further deregulation and competition may increase
even further with the entry of new competitors. A sustained decrease in energy
prices would lower the returns that we are expecting from our investments in the
energy business.
WE ARE SUBJECT TO CYCLICALITY AND PRICE VOLATILITY FOR IRON ORE, ALUMINUM AND
OTHER MINERALS.
Cyclical and other uncontrollable changes in world market prices affect our
iron ore, aluminum, gold and other mining activities. In particular, aluminum
and gold are sold in an active world market and traded on exchanges, such as the
London Metals Exchange and the Commodity Exchange, Inc. Therefore, the prices
for these metals are more volatile than iron and pellet prices, as they respond
to daily changes in supply and demand. Prolonged declines in world market
prices, in nominal and real terms, for our products would have a material
adverse effect on our revenues.
OUR MINING ACTIVITIES DEPEND ON AUTHORIZATIONS OF REGULATORY AGENCIES. CHANGES
IN REGULATIONS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
Our mining activities in Brazil depend on authorizations and concessions by
regulatory agencies of the Brazilian government. Our exploration, mining and
mineral processing activities are also subject to Brazilian laws and regulations
which change from time to time. If these laws and regulations change in the
future, modifications to our technologies and operations could be required, and
we may be required to make unbudgeted capital expenditures which could lead to
an increase in our borrowing costs. For a more detailed discussion about the
authorizations and concessions by regulatory agencies of the Brazilian
government upon which our mining activities depend, see "Business -- Regulatory
Matters -- Mining."
OUR ENERGY BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION.
The Brazilian power generation business depends on concessions granted by
the government and is regulated and supervised by the Brazilian electricity
regulatory governmental agency, ANEEL. Given that Brazil may face future energy
shortages like the one experienced in the second half of 2001, the Brazilian
government has announced its intention to issue further regulations applicable
to the power system. Changes in the laws, regulations or governmental policies
regarding the power generation industry, the marketing of energy in the
wholesale market or concession requirements could lower the returns we are
expecting from our investments in this business. For more information on the
regulations governing our energy business, see "Business -- Regulatory
Matters -- Energy."
OUR OPERATIONS ARE ALSO REGULATED BY BRAZILIAN ENVIRONMENTAL LAWS. CHANGES TO
THESE LAWS IN THE FUTURE MAY ADVERSELY AFFECT OUR MINING AND ENERGY BUSINESSES.
Our operations often involve using, handling, disposing and discharging
hazardous materials into the environment, or the use of natural resources, and
are therefore subject to the environmental laws and regulations of Brazil.
Environmental regulation in Brazil has become stricter in recent years, and it
is possible that more regulation or more aggressive enforcement of existing
regulations will adversely affect us through imposing restrictions on our
activities, creating new requirements for the issuance or renewal of
environmental licenses, raising our costs, or requiring us to engage in
expensive reclamation efforts. We are currently a defendant in an action brought
by the municipality of Itabira, which is in the state of Minas Gerais, on the
basis of environmental laws. If we do not prevail in this lawsuit, we could
incur a substantial expense. For more information on environmental laws and the
legal challenges we face, see "Business -- Environmental Matters" and
"Business -- Legal Proceedings."
13
OUR RESERVE ESTIMATES MAY BE MATERIALLY DIFFERENT FROM MINERAL QUANTITIES THAT
WE MAY ACTUALLY RECOVER AND MARKET PRICE FLUCTUATIONS AND CHANGES IN OPERATING
AND CAPITAL COSTS MAY RENDER CERTAIN ORE RESERVES OR MINERAL DEPOSITS
UNECONOMICAL TO MINE.
Our reported ore reserves and mineral deposits are estimated quantities of
ore and minerals that under present and anticipated conditions have the
potential to be economically mined and processed by the extraction of their
mineral content. There are numerous uncertainties inherent in estimating
quantities of reserves and in projecting potential future rates of mineral
production, including many factors beyond our control. In addition, reserve
engineering is a subjective process of estimating underground deposits of
minerals that cannot be measured in an exact manner and the accuracy of any
reserve estimate is a function of the quality of available data and engineering
and geological interpretation and judgment. Estimates of different engineers may
vary and results of our mining and production subsequent to the date of an
estimate may justify revision of estimates. Reserve estimates may require
revision based on actual production experience and other factors. For example,
fluctuations in the market price of metals, reduced recovery rates or increased
production costs due to inflation or other factors may render proven and
probable reserves containing relatively lower grades of mineralization
uneconomic to exploit and may ultimately result in a restatement of reserves.
WE FACE A NUMBER OF RISKS WHICH COULD LEAD TO ECONOMICALLY HARMFUL
CONSEQUENCES TO US.
Our businesses are generally subject to a number of risks and hazards,
including:
- industrial accidents,
- labor disputes,
- unexpected geological conditions,
- slope failures,
- environmental hazards,
- electricity stoppages,
- equipment or vessel failures, and
- weather and other natural phenomena.
These occurrences could result in damage to, or destruction of, mineral
properties, production facilities, transportation facilities, equipment or
vessels. They could also result in personal injury or death, environmental
damage, waste of resources or intermediate products, delays or interruption in
mining, production or transportation activities, monetary losses and possible
legal liability. The insurance we maintain against these risks may not provide
adequate coverage. Insurance against some risks (including liabilities for
environmental pollution or certain hazards or interruption of certain business
activities) may not be available at a reasonable cost or at all. Therefore,
accidents or other negative developments involving our mining, production or
transportation facilities could have a material adverse effect on our
operations.
OUR MINERAL EXPLORATION EFFORTS MAY NOT LEAD TO A REPLENISHMENT OF OUR GOLD
RESERVES, WHICH COULD ADVERSELY AFFECT OUR MINING PROSPECTS.
We engage in mineral exploration, principally related to copper and gold.
Mineral exploration is highly speculative in nature, involves many risks and
frequently is nonproductive. With respect to our gold operations, it is possible
that our exploration programs will not result in the expansion or replacement of
reserves depleted by current production. If we do not develop new reserves, we
may not be able to sustain our current level of production beyond the remaining
life of existing mines.
14
EVEN IF WE DISCOVER MINERALS, WE REMAIN SUBJECT TO DRILLING AND PRODUCTION
RISKS, WHICH COULD ADVERSELY AFFECT THE MINING PROCESS.
Once we discover mineralization, it may take us a number of years from the
initial phases of drilling until production is possible, during which the
economic feasibility of production may change. It takes substantial time and
expenditures to:
- establish ore reserves through drilling,
- determine appropriate metallurgical processes for optimizing the recovery
of metal contained in ore,
- obtain the ore or extract the metals from the ore, and
- construct mining and processing facilities for greenfield properties.
It is possible that a project will prove uneconomical by the time we are
able to exploit it, in which case we may incur substantial write-offs.
WE FACE RISING EXTRACTION COSTS AS OUR DEPOSITS DECREASE.
Ore reserves gradually decrease in the ordinary course of a given mining
operation. As reserves decrease, it becomes necessary for mining companies to
use more expensive processes to extract remaining ore. As a result, mining
companies, over time, usually experience rising unit extraction costs with
respect to a particular mine. Several of our mines have operated for long
periods, and we will likely experience rising extraction costs per unit in the
future at these operations.
RISKS RELATING TO THE CVRD GROUP
SOME OF OUR OPERATIONS DEPEND ON JOINT VENTURES AND COULD BE ADVERSELY
AFFECTED IF OUR JOINT VENTURE PARTNERS DO NOT OBSERVE THEIR COMMITMENTS.
We currently operate important parts of our pelletizing, copper
exploration, logistics, energy, and aluminum businesses through joint ventures
with other companies. Our forecasts and plans for these joint ventures assume
that our joint venture partners will fulfill their obligations to contribute
capital, purchase products and, in some cases, provide managerial talent. If any
of our joint venture partners does not observe its commitments, it is possible
that the affected joint venture would not be able to operate in accordance with
its business plans or that we would have to increase the level of our investment
to give effect to these plans. For more information on our joint ventures, see
"Business -- Our Lines of Business -- Ferrous Minerals -- Pellets,"
"Business -- Our Lines of Business -- Non-Ferrous Minerals -- Current Copper
Prospects," "Business -- Our Lines of Business -- Logistics" and
"Business -- Our Lines of Business -- Holdings -- Aluminum Business."
OUR ALBRAS JOINT VENTURE IS SUBJECT TO SUBSTANTIAL ELECTRICITY COST INCREASES.
Electricity costs are a significant component of the cost of producing
aluminum. Our aluminum plant, Albras -- Aluminio Brasileiro S.A., or Albras,
obtains electric power at competitive rates from Eletronorte, a state-owned
electric power utility. The contract through which Albras purchases electricity
from this utility expires in 2004. It is not likely that Albras will continue to
benefit from below-market electricity costs following expiration of the
contract. Albras is currently trying to negotiate a new contract and is
examining other alternatives. We cannot predict the impact that this will have
on Albras's cost structure.
AN ELECTRICITY STOPPAGE THAT AFFECTS OUR ALUMINUM OPERATIONS COULD CAUSE
SUBSTANTIAL DAMAGE.
A single 300-kilometer power line supplies electricity to Albras. Any
interruption in the supply of electrical power to Albras lasting longer than six
hours can cause substantial damage to cells at the Albras facility. Cells are
equipment used in the process of transforming alumina into aluminum. Cells will
cool off if they are deprived of energy for six consecutive hours and may
experience serious damage as a result of the cooling off process. Albras
experienced an outage of four hours and several outages of less than one hour in
1996 because of a faulty Tucurui substation, which has since been repaired.
Interruptions in the supply of electricity to Albras lasting more than six hours
may occur in the future.
15
WE ARE VULNERABLE TO ADVERSE DEVELOPMENTS AFFECTING OTHER ECONOMIES.
In the first nine months of 2001, 9.7% of our consolidated gross operating
revenues were attributable to sales to Japanese customers, 14.2% were
attributable to sales to other Asian customers and 25.9% were attributable to
sales to European customers. A number of important Asian economies, including
Japan and South Korea, have experienced difficulties in recent periods.
Continuing economic difficulties in the Asian market could reduce local demand
for iron ore and pellets, which, in turn, could have a material adverse effect
on us. Asian economies could be harmed by a weak U.S. economy, and a slow U.S.
economy could have an adverse effect on the European economy. A weakened economy
in Asia or Europe could reduce demand for our products in our primary markets.
OUR PRINCIPAL SHAREHOLDER AND THE BRAZILIAN GOVERNMENT COULD HAVE A GREAT DEAL
OF INFLUENCE ON OUR COMPANY.
Valepar, our principal shareholder, currently owns 43.0% of our outstanding
common stock and 27.5% of our total outstanding capital. Litel Participacoes
S.A. holds 42% of Valepar's stock and directly owns 10% of our outstanding
common shares. For a description of our share ownership, see "Major and Selling
Shareholders." As a result of their stock ownership, Valepar and Litel have
significant influence in determining the outcome of any action requiring
shareholder approval, such as the election of our directors. BNDESPAR, a
wholly-owned subsidiary of BNDES, has a golden share in Valepar, giving the
Brazilian government special voting rights over certain actions of Valepar.
Further, the Brazilian government, in addition to its ownership stake in us,
owns a golden share in us, which gives it veto powers over certain actions that
we could propose to take. For a detailed description of the veto powers granted
to the Brazilian government by virtue of its ownership of this golden share, see
"Description of Capital Stock -- General."
OUR RISK MANAGEMENT STRATEGY MAY NOT BE EFFECTIVE.
We are exposed to fluctuations in interest rates, foreign currency exchange
rates, and commodity prices relating to our iron ore, aluminum and gold
production. In order to partially protect ourselves against unusual market
volatility, we periodically enter into hedging transactions to manage these
risks. We do not hedge risks relating to iron ore price fluctuations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Market Risk." However, our hedging strategy may not be successful
in minimizing our exposure to these fluctuations. In addition, to the extent we
hedge our commodity price exposure, we forego the benefits we would otherwise
experience if commodity prices were to increase.
RISKS RELATING TO THE AMERICAN DEPOSITARY SHARES
RESTRICTIONS ON THE MOVEMENT OF CAPITAL OUT OF BRAZIL MAY HINDER YOUR ABILITY
TO RECEIVE DIVIDENDS AND DISTRIBUTIONS ON AMERICAN DEPOSITARY SHARES, AND THE
PROCEEDS FROM ANY SALE OF AMERICAN DEPOSITARY SHARES.
From time to time the Brazilian government may impose restrictions on
capital outflow that would hinder or prevent the custodian who acts on behalf of
the depositary for the American depositary shares from converting proceeds from
the common shares underlying the American depositary shares into U.S. dollars
and remitting those proceeds abroad. Brazilian law permits the government to
impose these restrictions whenever there is a serious imbalance in Brazil's
balance of payments or reasons to foresee a serious imbalance.
The Brazilian government imposed remittance restrictions for approximately
six months in 1989 and early 1990. If enacted, similar restrictions would hinder
or prevent the conversion of dividends, distributions or the proceeds from any
sale of common shares from reais into U.S. dollars and the remittance of the
U.S. dollars abroad. In such a case, the custodian, acting on behalf of the
depositary, will hold the reais it cannot convert for the account of the holders
of American depositary receipts who have not been paid. The depositary will not
invest the reais and will not be liable for interest on those amounts.
Furthermore, any reais so held will be subject to devaluation risk.
16
IF YOU EXCHANGE OUR AMERICAN DEPOSITARY SHARES FOR COMMON SHARES, YOU RISK
LOSING THE ABILITY TO REMIT FOREIGN CURRENCY ABROAD AND BRAZILIAN TAX
ADVANTAGES.
The Brazilian custodian for the common shares will obtain a certificate of
registration from the Central Bank of Brazil to be entitled to remit U.S.
dollars abroad for payments of dividends and other distributions relating to the
common shares or upon the disposition of the common shares. If you decide to
exchange your American depositary shares for the underlying common shares, you
will be entitled to continue to rely, for five business days from the date of
exchange, on the custodian's certificate of registration. Thereafter, you may
not be able to obtain and remit U.S. dollars abroad upon the disposition of, or
distributions relating to, the common shares unless you obtain your own
certificate of registration by registering your investment in the common shares
under Law No. 4,131 or Resolution No. 2,689 of the National Monetary Council,
which entitles foreign investors to buy and sell securities on the Sao Paulo
stock exchange. For more information regarding these exchange controls, see
"Market Information -- Exchange Controls and Other Limitations Affecting
Security Holders." If you attempt to obtain your own certificate of
registration, you may incur expenses or suffer delays in the application
process, which could delay your ability to receive dividends or distributions
relating to the common shares or the return of your capital in a timely manner.
We cannot assure you that the custodian's certificate of registration or any
certificate of foreign capital registration obtained by you will not be affected
by future legislative changes, or that additional restrictions applicable to
you, the disposition of the underlying common shares or the repatriation of the
proceeds from disposition will not be imposed in the future.
BECAUSE WE ARE NOT OBLIGATED TO FILE A REGISTRATION STATEMENT WITH RESPECT TO
PREEMPTIVE RIGHTS RELATING TO OUR COMMON SHARES, YOU MIGHT BE UNABLE TO EXERCISE
THOSE PREEMPTIVE RIGHTS.
Holders of American depositary receipts that are residents of the United
States may not be able to exercise preemptive rights, or exercise other types of
rights, with respect to the common shares. Your ability to exercise preemptive
rights is not assured unless a registration statement is effective with respect
to those rights or an exemption from the registration requirements of the
Securities Act is available. We are not obligated to file a registration
statement relating to preemptive rights with respect to the common shares and we
cannot assure you that we will file any registration statement. If a
registration statement is not filed and an exemption from registration does not
exist, JPMorgan Chase Bank, as depositary, will attempt to sell the preemptive
rights, and you will be entitled to receive the proceeds of the sale. However,
the preemptive rights will expire if the depositary cannot sell them. For a more
complete description of preemptive rights with respect to the common shares, see
"Description of Capital Stock -- Preemptive Rights."
HOLDERS OF OUR AMERICAN DEPOSITARY RECEIPTS MAY ENCOUNTER DIFFICULTIES IN THE
EXERCISE OF VOTING RIGHTS.
You may encounter difficulties in the exercise of some of your rights as a
shareholder if you hold our American depositary shares rather than common
shares. For example, under some circumstances, such as our failure to provide
the depositary with voting materials on a timely basis, you may not be able to
vote by giving instructions to the depositary on how to vote for you. For a
detailed description of your rights as an American depositary receipt holder,
see "Description of American Depositary Shares."
17
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and in other sections of this prospectus that
are forward-looking statements. Many of the forward looking statements contained
in this prospectus are identified by the use of forward-looking words such as
"anticipate," "believe," "could," "expect," "should," "plan," "estimate," and
"potential," among others. These statements appear in a number of places in this
prospectus and include statements regarding our intent, belief or current
expectations with respect to:
- our direction and future operations,
- the implementation of our principal operating strategies, including our
potential participation in privatization, acquisition or joint venture
transactions or other investment opportunities,
- our divestiture plans,
- the implementation of our financing strategy and capital expenditure
plans,
- the exploration of mineral reserves and development of mining facilities,
- depletion and exhaustion of mines and mineral reserves,
- the declaration or payment of dividends,
- other factors or trends affecting our financial condition or results of
operations, and
- the factors discussed under "Risk Factors" beginning on page 10.
We caution that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those in the forward looking statements as a result
of various factors, including competition in the iron ore industry, the
cyclicality and price volatility of our business, the instability of the real
and global economic conditions. The information in this prospectus identifies
important factors that could cause these differences.
USE OF PROCEEDS
We will not receive any proceeds from the sale of American depositary
shares or common shares offered by the selling shareholders in this offering.
18
MARKET INFORMATION
GENERAL
Our publicly traded share capital consists of common shares and preferred
shares, each without par value. Our common shares and our preferred shares are
publicly traded in Brazil on the Sao Paulo stock exchange, known as BOVESPA,
under the ticker symbols VALE3, and VALE5, respectively. Our preferred shares
also trade on the LATIBEX, under the ticker symbol XVALP. The LATIBEX is an
electronic market created in 1999 by the Madrid stock exchange in order to
enable trading of Latin American equity securities in euro denomination.
Our American depositary shares (each representing one common share) offered
in this offering have been approved for listing on the New York Stock Exchange
under the symbol "RIO," subject to official notice of issuance.
Our preferred American depositary shares, each representing one preferred
share, have traded on the New York Stock Exchange since June 2000, under the
ticker symbol RIOPR. Prior to June 20, 2000, the preferred American depositary
shares traded in the over-the-counter market. JPMorgan Chase Bank serves as the
depositary for the preferred American depositary shares. At December 31, 2001,
there were 57,754,261 preferred American depositary shares outstanding,
representing 41.7% of our preferred shares or 14.9% of our total share capital.
The table below shows the geographic distribution of our share ownership
based on information available to us at December 31, 2001.
COMMON PREFERRED VOTING ECONOMIC
SHARES SHARES INTEREST INTEREST
----------- ----------- -------- --------
Brazilian residents.............................. 244,517,906 43,847,940 97.8% 31.6%
U.S. residents(1)................................ 2,918,053 79,979,085 1.2 57.7
Other............................................ 2,547,184 14,748,888 1.0 10.6
----------- ----------- ---- ----
Total............................................ 249,983,143 138,575,913 100% 100%
=========== =========== ==== ====
---------------
(1) Includes the depositary for our preferred American depositary shares.
MARKET PRICE INFORMATION
The table below sets forth trading information for our preferred shares and
our common shares, as reported by BOVESPA, and for our preferred American
depositary shares, as reported by the New York Stock Exchange (and for periods
prior to June 2000, reported by the National Quotations Bureau, Inc.) for the
periods indicated.
U.S. DOLLARS PER
REAIS PER AVERAGE DAILY REAIS PER PREFERRED AVERAGE DAILY PREFERRED AMERICAN
COMMON SHARE TRADING VOLUME CLASS A SHARE TRADING VOLUME DEPOSITARY SHARE
----------------- OF OUR COMMON ------------------- OF OUR PREFERRED -------------------
HIGH LOW SHARES HIGH LOW CLASS A SHARES HIGH LOW
------- ------- -------------- -------- -------- ---------------- -------- --------
1997................. R$33.00 R$17.00 17,227 R$31.50 R$18.40 549,491 US$28.51 US$16.87
1998................. 27.00 10.00 17,552 29.10 13.00 443,502 25.13 11.38
1999................. 42.00 9.80 47,102 50.00 13.80 432,848 26.50 10.87
2000................. 52.40 33.00 27,401 59.00 38.82 384,018 33.13 19.75
2001................. 55.00 42.70 51,185 58.70 44.00 388,551 26.98 18.65
1Q00................. 52.40 33.00 29,777 59.00 42.00 399,410 33.13 22.75
2Q00................. 46.00 35.00 34,885 53.50 40.01 360,174 29.00 22.62
3Q00................. 49.00 41.21 23,131 54.00 44.97 374,269 29.75 24.44
4Q00................. 46.50 37.00 21,767 47.80 38.82 403,152 25.56 19.75
1Q01................. 51.00 42.70 31,636 53.60 44.00 382,541 26.98 23.05
2Q01................. 54.00 46.50 30,760 58.60 49.05 350,103 25.70 22.05
3Q01................. 55.00 46.40 101,921 55.00 45.50 426,802 23.15 18.65
AVERAGE DAILY
TRADING VOLUME
OF OUR PREFERRED
AMERICAN
DEPOSITARY SHARES
-----------------
1997................. 284,210
1998................. 359,076
1999................. 358,157
2000................. 268,654
2001................. 243,240
1Q00................. 496,090
2Q00................. 164,398
3Q00................. 125,397
4Q00................. 288,732
1Q01................. 311,879
2Q01................. 186,697
3Q01................. 215,020
19
U.S. DOLLARS PER
REAIS PER AVERAGE DAILY REAIS PER PREFERRED AVERAGE DAILY PREFERRED AMERICAN
COMMON SHARE TRADING VOLUME CLASS A SHARE TRADING VOLUME DEPOSITARY SHARE
----------------- OF OUR COMMON ------------------- OF OUR PREFERRED -------------------
HIGH LOW SHARES HIGH LOW CLASS A SHARES HIGH LOW
------- ------- -------------- -------- -------- ---------------- -------- --------
4Q01................. 54.00 47.00 38,892 58.70 49.60 394,228 23.61 19.00
August 2001.......... 53.99 50.80 24,635 52.88 51.01 296,417 21.25 20.11
September 2001....... 52.50 46.40 75,395 53.79 45.50 534,632 20.11 18.65
October 2001......... 54.00 50.60 33,441 56.40 51.40 438,423 20.92 19.00
November 2001........ 53.60 47.00 38,155 58.70 49.60 360,900 22.65 20.20
December 2001........ 53.40 48.00 46,372 55.00 51.48 377,244 23.61 21.35
January 2002......... 55.40 50.00 21,686 56.50 50.70 349,095 23.45 21.52
February 2002........ 62.50 52.01 122,022 61.49 52.60 489,544 25.45 22.40
AVERAGE DAILY
TRADING VOLUME
OF OUR PREFERRED
AMERICAN
DEPOSITARY SHARES
-----------------
4Q01................. 258,419
August 2001.......... 119,026
September 2001....... 393,673
October 2001......... 399,187
November 2001........ 203,033
December 2001........ 154,690
January 2002......... 206,805
February 2002........ 391,053
REGULATION OF THE BRAZILIAN SECURITIES MARKETS
The Brazilian securities markets are regulated by Comissao de Valores
Mobiliarios, or CVM, the Brazilian securities commission, which has regulatory
authority over stock exchanges and securities markets generally, and by the
Central Bank, which has, among other powers, licensing authority over brokerage
firms and regulates foreign investment and foreign exchange transactions.
Under the Brazilian Corporation Law, a company is either public, a
companhia aberta, or private, a companhia fechada. All public companies,
including us, are registered with the CVM and are subject to reporting
requirements. Our shares are listed and traded on BOVESPA and may be traded
privately subject to limitations.
We have the option to ask that trading in our securities on BOVESPA be
suspended in anticipation of a material announcement. Trading may also be
suspended on the initiative of BOVESPA or the CVM, among other reasons, based on
or due to a belief that a company has provided inadequate information regarding
a material event or has provided inadequate responses to inquiries of the CVM or
the BOVESPA.
The Brazilian securities laws and the Brazilian Corporation Law provide
for, among other things, disclosure requirements, restrictions on insider
trading and price manipulation and protection of minority shareholders. However,
the Brazilian securities markets are not as highly regulated and supervised as
the U.S. securities markets or markets in other jurisdictions.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no restrictions on ownership of our capital stock by individuals
or legal entities domiciled outside Brazil. Foreign investors may register their
investment under Law No. 4,131 of September 3, 1962 or Resolution No. 2,689 of
January 26, 2000 of the National Monetary Council. Registration under Law No.
4,131 or under Resolution No. 2,689 generally enables foreign investors to
convert into foreign currency dividends, other distributions and sales proceeds
received in connection with registered investments and to remit such amounts
abroad. Resolution No. 2,689 affords favorable tax treatment to foreign
investors who are not resident in a tax haven jurisdiction as defined by
Brazilian tax laws (i.e., a country that does not impose taxes or where the
maximum income tax rate is lower than 20%).
20
Under Resolution No. 2,689, foreign investors may invest in almost all
financial assets and engage in almost all transactions available in the
Brazilian financial and capital markets, provided that certain requirements are
fulfilled. In accordance with Resolution No. 2,689, the definition of foreign
investor includes individuals, legal entities, mutual funds and other collective
investment entities, domiciled or headquartered abroad.
Under Resolution No. 2,689, a foreign investor must:
- appoint at least one representative in Brazil, with powers to perform
actions relating to its investment,
- appoint an authorized custodian in Brazil for its investment,
- register as a foreign investor with the CVM, and
- register its foreign investment with the Central Bank.
Securities and other financial assets held by foreign investors pursuant to
Resolution No. 2,689 must be registered or maintained in deposit accounts or
under the custody of an entity duly licensed by the Central Bank or the CVM. In
addition securities trading is restricted to transactions carried out on the Sao
Paulo stock exchange or through organized over-the-counter markets licensed by
the CVM, except for transfers resulting from a corporate reorganization, or
occurring upon the death of an investor by operation of law or will.
Resolution No. 1,927 of the National Monetary Council, which is the
restated and amended Annex V to Resolution No. 1,289, or the Annex V
Regulations, provides for the issuance of depositary shares in foreign markets
in respect of shares of Brazilian issuers. The proceeds from the sale of
American depositary shares by holders of American depositary receipts outside
Brazil are free of Brazilian foreign investment controls and holders of the
American depositary receipts who are not resident in a tax haven jurisdiction
will be entitled to favorable tax treatment.
The right to convert dividend payments and proceeds from the sale of our
capital stock into foreign currency and to remit these amounts outside Brazil is
subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investment be registered with
the Central Bank. Restrictions on the remittance of foreign capital abroad could
hinder or prevent the custodian for the common shares represented by American
depositary shares, or holders who have exchanged American depositary shares for
common shares from converting dividends, distributions or the proceeds from any
sale of common shares, as the case may be, into U.S. dollars and remitting such
U.S. dollars abroad. Delays in, or refusal to grant any required government
approval for conversions of Brazilian currency payments and remittances abroad
of amounts owed to holders of American depositary shares could adversely affect
holders of American depositary receipts.
The custodian will obtain a certificate of registration in the name of
JPMorgan Chase Bank, the depositary. Pursuant to the certificate, the custodian
and the depositary are able to convert dividends and other distributions with
respect to the common shares represented by American depositary shares into
foreign currency and to remit the proceeds outside Brazil. In the event that a
holder exchanges American depositary shares for common shares, the holder will
be entitled to rely on the custodian's certificate of registration for five
business days after the exchange. After that, the holder must seek to obtain its
own certificate of registration by registering its investment directly with the
Central Bank under Law No. 4,131 or Resolution No. 2,689. Thereafter, unless the
holder has registered its investment with the Central Bank, the holder may not
convert into foreign currency and remit outside Brazil the proceeds from the
disposition of, or distributions with respect to, the common shares. The holder
generally will be subject to less favorable Brazilian tax treatment than a
holder of American depositary shares. For a more detailed description of
Brazilian tax treatment of holders of American depositary receipts as compared
to holders of our common shares, see "Taxation -- Brazilian Tax Considerations."
21
DIVIDEND POLICY
Under the Brazilian Corporation Law, shareholders are generally entitled to
receive an annual mandatory dividend set forth in the company's by-laws, which
may not be lower than 25% of adjusted net income for the relevant year,
calculated in accordance with the Brazilian Corporation Law. Accordingly, our
by-laws prescribe that we must distribute to our shareholders an amount equal to
not less than 25% of the amount of profits available for distribution with
respect to each fiscal year, unless the board of directors advises our
shareholders at the general shareholders' meeting that payment of the required
distributions for the preceding fiscal year is inadvisable in light of our
financial condition. The fiscal council must review any such determination and
report to the shareholders and to the CVM. The shareholders must also approve
the recommendation of the board of directors with respect to any required
distributions. To date, our board of directors has never determined that a
payment of the required distribution amount was inadvisable.
In addition to any required distributions, the board of directors may
recommend to the shareholders the payment of distributions from other funds that
are legally available.
Since our privatization in 1997, and following a recommendation from
Valepar, our principal shareholder, we have distributed a dividend equal to at
least 50% of the amount of profits available for distribution with respect to
each fiscal year.
Holders of preferred class A shares and the golden share are entitled to
receive an amount equal to 6% of their pro rata share of our paid-in capital
prior to any distribution to holders of preferred class B shares, if any are
issued, or to holders of common shares. Holders of preferred class B shares, if
any are issued, are entitled to receive an amount equal to 6% of their pro rata
share of our paid-in capital prior to any distribution to holders of common
shares and to any additional distribution to holders of preferred class A shares
and the golden share. After holders of common shares receive distributions per
share in an amount equal to the preferential dividend of holders of preferred
shares, all holders of shares receive the same additional distribution amount
per share.
Since our privatization, we have had sufficient distributable amounts to be
able to distribute equal amounts to both common and preferred shareholders. For
a discussion on our preferred class A and preferred class B shares, see
"Description of Capital Stock."
According to Law No. 10,303, the recently enacted law that amended the
Brazilian Corporation Law, we may be required to amend our by-laws in order to
modify the rights granted to holders of preferred shares. For a detailed
description of this requirement, see "Description of the Capital Stock -- New
Provisions in the Brazilian Corporation Law."
We may make distributions either in the form of dividends or in the form of
interest on shareholders' equity. Dividends with respect to the American
depositary shares, and to non-resident holders of common shares, will not be
subject to Brazilian withholding tax, except for dividends declared based on
profits generated prior to December 31, 1995. These dividends will be subject to
a 15% Brazilian withholding tax. Distributions of interest on shareholders'
equity to shareholders, including holders of American depositary receipts, are
currently subject to Brazilian withholding tax of 15%. We pay distributions in
Brazilian currency.
We are required to hold an annual shareholders' meeting by April 30 of each
year at which an annual dividend may be declared. Additionally, our board of
directors may declare interim dividends. Under the Brazilian Corporation Law,
dividends are generally required to be paid to the holder of record on a
dividend declaration date within 60 days following the date the dividend was
declared, unless a shareholders' resolution sets forth another date of payment,
which, in either case, must occur prior to the end of the fiscal year in which
the dividend was declared. A shareholder has a three-year period from the
dividend payment date to claim dividends (or payments of interest on
shareholders' equity) in respect of its shares, after which we will have no
liability for such payments. Since 1997, all cash distributions we have made
have been in the form of interest on shareholders' equity.
22
We will make cash distributions on common shares underlying the American
depositary shares in Brazilian currency to the custodian on behalf of the
depositary. The custodian will then convert such proceeds into U.S. dollars and
will cause such U.S. dollars to be delivered to the depositary for distribution
to holders of American depositary receipts. Under current Brazilian law,
dividends paid to shareholders who are not Brazilian residents, including
holders of the American depositary receipts, will not be subject to Brazilian
withholding tax. For more information on Brazilian tax policies regarding
dividend distributions, see "Taxation -- Brazilian Tax Considerations."
The table below sets forth the dollar equivalent of cash distributions we
paid to holders of common shares and preferred shares for the periods indicated.
For your convenience, we have calculated U.S. dollar conversions using both the
commercial market rate in effect on the date of payment and the exchange rate at
March 20, 2002 of R$2.338 per US$1.00. We stated amounts gross of any applicable
withholding tax.
U.S. DOLLARS U.S. DOLLARS
PER SHARE AT PER SHARE AT
YEAR PAYMENT DATE PAYMENT DATE MARCH 20, 2002
---- ------------ ------------ --------------
1997 May 30..................................................... 0.48 0.21
September 2................................................ 0.30 0.14
1998 May 8...................................................... 0.88 0.43
August 31.................................................. 0.64 0.32
1999 January 15................................................. 0.44 0.28
March 31................................................... 0.29 0.21
August 20.................................................. 0.57 0.47
2000 March 1.................................................... 0.66 0.50
2001 February 20................................................ 1.66 1.42
2001 December 10................................................ 0.98 0.99
23
EXCHANGE RATES
There are two principal foreign exchange markets in Brazil:
- the commercial rate exchange market, and
- the floating rate exchange market.
Most trade and financial foreign-exchange transactions are carried out on
the commercial rate exchange market. These transactions include the purchase or
sale of shares or the payment of dividends or interest with respect to shares.
Foreign currencies may only be purchased through a Brazilian bank authorized to
operate in these markets. In both markets, rates are freely negotiated but may
be strongly influenced by Central Bank intervention. In 1999, the Central Bank
unified the exchange positions of the Brazilian banks in the floating rate
exchange market and commercial exchange market, which led to a convergence in
the pricing and liquidity of both markets. Since February 1, 1999, the floating
market rate has been the same as the commercial market rate. However, there is
no guarantee that the rates will continue to be the same in the future. Despite
the convergence in the pricing and liquidity of both markets, each market
continues to be regulated differently.
From its introduction on July 1, 1994 through March 1995, the real
appreciated against the U.S. dollar. In 1995, the Central Bank announced that it
would intervene in the market and buy or sell U.S. dollars, establishing a band
in which the exchange rate between the real and the U.S. dollar could fluctuate.
This policy resulted in a gradual devaluation of the real relative to the U.S.
dollar. On January 13, 1999, the band was set between R$1.20 and R$1.32 per
US$1.00. Two days later, on January 15, 1999, due to market pressures, the
Central Bank abolished the band system and allowed the real/U.S. dollar exchange
rate to float freely. As a result, the exchange rate dropped to R$2.1647 per
US$1.00 on March 3, 1999. Since then, the real/U.S. dollar exchange rate has
been established by the interbank market, and has fluctuated considerably. In
the past, the Central Bank has intervened occasionally to control unstable
movements in the foreign exchange rate. It is not possible to predict whether
the Central Bank will continue to let the real float freely or whether the real
will remain at its present level. Accordingly, it is not possible to predict
what impact the Brazilian government's exchange rate policies may have on us.
The Brazilian government could impose a band system in the future or the real
could devalue or appreciate substantially. For more information on these risks,
see "Risk Factors -- Risks Relating to Brazil."
The following table sets forth the commercial selling rate, expressed in
reais per U.S. dollar (R$/ US$) for the periods indicated.
AVERAGE FOR
PERIOD-END PERIOD LOW HIGH
---------- ----------- ----- -----
YEAR ENDED
December 31, 1997....................................... 1.116 1.088(1) 1.040 1.116
December 31, 1998....................................... 1.209 1.168(1) 1.117 1.209
December 31, 1999....................................... 1.789 1.851(1) 1.208 2.165
December 31, 2000....................................... 1.955 1.835(1) 1.723 1.985
December 31, 2001....................................... 2.320 2.353(1) 1.936 2.801
MONTH ENDED
September 30, 2001...................................... 2.671 2.678(2) 2.559 2.801
October 31, 2001........................................ 2.707 2.735(2) 2.687 2.783
November 30, 2001....................................... 2.529 2.571(2) 2.460 2.682
December 31, 2001....................................... 2.320 2.380(2) 2.293 2.467
January 31, 2002........................................ 2.418 2.366(2) 2.293 2.438
February 28, 2002....................................... 2.348 2.409(2) 2.348 2.469
---------------
(1) Average of the rates on the last day of each month in the period.
(2) Average of the high and low exchange rates for each month.
Source: Central Bank.
On March 20, 2002, the commercial selling rate was R$2.338 per US $1.00.
24
CAPITALIZATION
The table below sets forth our current liabilities and capitalization at
September 30, 2001. You should read the table together with our consolidated
financial statements and the notes thereto appearing elsewhere in this
prospectus. The sale of common shares, either directly or in the form of
American depositary shares, in this offering by the selling shareholders will
not change our capitalization.
AT SEPTEMBER 30,
2001
----------------
(IN MILLIONS OF
US$)
Current liabilities:
Current portion of long-term debt......................... US$ 260
Short-term debt........................................... 649
Other..................................................... 1,266
--------
Total current liabilities......................... 2,175
--------
Long-term liabilities:
Long-term debt:
Secured................................................ 495
Unsecured(1)........................................... 1,616
--------
Total long-term debt.............................. 2,111
Loans from related parties................................ 4
Other..................................................... 753
--------
Total long-term liabilities....................... 2,868
--------
Minority interest........................................... 8
--------
Shareholders' equity:
Preferred shares -- 600,000,000 shares authorized and
138,575,913 issued..................................... 820
Common shares -- 300,000,000 shares authorized and
249,983,143 issued..................................... 1,479
Treasury shares -- 4,249,970 common and 91 preferred
shares................................................. (79)
Additional paid-in capital.................................. 498
Retained earnings:
Appropriated.............................................. 2,321
Unappropriated............................................ 2,473
Other cumulative comprehensive income....................... (3,889)
--------
Total shareholders' equity........................ 3,613
--------
Total capitalization.............................. US$8,664
========
---------------
(1) We issued approximately US$300 million in debt during the first quarter of
2002, which matures in 2007.
25
SELECTED CONSOLIDATED FINANCIAL DATA
The tables below present selected consolidated financial and operating data
at and for the periods indicated. The data at and for the five years ended
December 31, 2000 has been derived from our consolidated financial statements,
which were audited by PricewaterhouseCoopers Auditores Independentes. The data
at and for the nine months ended September 30, 2000 and 2001 has been derived
from our unaudited interim financial statements, included elsewhere in this
prospectus, which, in the opinion of management, reflect all adjustments which
are of a normal recurring nature necessary for a fair presentation of the
results for such periods. The results of operations for the nine months ended
September 30, 2001 are not necessarily indicative of the operating results to be
expected for the entire year ended December 31, 2001. The data at and for the
five years ended December 31, 2000 and at and for the nine months ended
September 30, 2001 and 2000 have been restated to reflect the accounting changes
described in notes 21 and 19 to our consolidated financial statements and our
unaudited interim financial statements, respectively. You should read the
information below in conjunction with our audited and unaudited consolidated
financial statements and notes thereto included elsewhere in this prospectus, as
well as "Presentation of Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS OF US$)
STATEMENT OF INCOME DATA
Net operating revenues........................ US$ 3,585 US$ 3,748 US$ 3,553 US$ 3,076 US$ 3,935 US$ 2,996 US$ 2,997
Cost of products and services................. (2,724) (2,653) (2,272) (1,806) (2,429) (1,865) (1,715)
Selling, general and administrative
expenses.................................... (245) (207) (171) (138) (225) (140) (188)
Research and development...................... (59) (51) (48) (27) (48) (34) (31)
Employee profit sharing plan.................. (51) (46) (29) (24) (29) (31) (21)
Banco Nacional de Desenvolvimento Economico e
Social (BNDES) -- cost reimbursement under
Mineral Risk Contract....................... -- 37 -- -- -- -- --
Restructuring costs........................... -- (87) (9) -- -- -- --
Other income (expenses)....................... 40 (104) (170) (161) (220) (231) (335)
--------- --------- --------- --------- --------- --------- ---------
Operating income.............................. 546 637 854 920 984 695 707
--------- --------- --------- --------- --------- --------- ---------
Non-operating income (expenses):
Financial income............................ 167 235 394 200 208 136 80
Financial expenses.......................... (230) (238) (243) (233) (315) (204) (240)
Foreign exchange and monetary gain (loss)... 15 15 (108) (213) (142) (10) (700)
Gain on sale of investments................. -- -- -- -- -- 54 784
Translation gain (loss)..................... (1) (8) -- -- -- -- --
Other....................................... (56) (12) (5) (4) (4) (11) (43)
--------- --------- --------- --------- --------- --------- ---------
(105) (8) 38 (250) (253) (35) (119)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes, equity results,
minority interests and extraordinary
items....................................... 441 629 892 670 731 660 588
Income taxes benefit (charge)................. 43 (32) -- (33) 32 1 43
Equity in results of affiliates and joint
ventures.................................... 115 155 80 41 260 187 (8)
Change in provision for losses and write-downs
on equity investments....................... (21) (59) (273) (268) 62 53 (45)
Minority interests............................ (4) (2) (1) 2 1 -- 7
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary items............. 574 691 698 412 1,086 901 585
Extraordinary items (net of taxes)(1)......... -- (372) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income.................................... US$ 574 US$ 319 US$ 698 US$ 412 US$ 1,086 US$ 901 US$ 585
========= ========= ========= ========= ========= ========= =========
Total cash distributions...................... US$ 146 US$ 302 US$ 607 US$ 452 US$ 246 US$ 246 US$ 639
---------------
(1) Extraordinary items in 1997 relate to transactions in connection with the
first step of our privatization.
26
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1996 1997 1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN US$ EXCEPT RECORDED DIVIDENDS AND INTEREST ON
SHAREHOLDERS' EQUITY PER SHARE AND SHARE NUMBERS)
PER SHARE DATA
Basic earnings per common and
preferred share(2):
Income before extraordinary
items......................... US$ 1.48 US$ 1.06 US$ 1.80 US$ 1.07 US$ 2.82 US$ 2.34 US$ 1.52
---------- ---------- ---------- ---------- ---------- ---------- ----------
Extraordinary items............. -- (0.96) -- -- -- -- --
Net income...................... US$ 1.48 US$ 0.10 US$ 1.80 US$ 1.07 US$ 2.82 US$ 2.34 US$ 1.52
========== ========== ========== ========== ========== ========== ==========
Recorded dividends and interest on
shareholders' equity per share
in US$(3)....................... US$ 0.64 US$ 1.20 US$ 1.58 US$ 1.28 US$ 1.70 US$ 1.11 US$ 1.72
Recorded dividends and interest on
shareholders' equity per share
in Brazilian reais(3)........... R$ 0.67 R$ 1.33 R$ 1.86 R$ 2.28 R$ 3.33 R$ 2.04 R$ 4.61
Weighted average number of shares
outstanding (in thousands):
Common shares................... 249,983 249,983 249,983 249,983 249,983 249,983 249,864
Preferred shares(2)............. 138,576 138,563 137,965 134,917 134,917 134,917 135,042
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total......................... 388,559 388,546 387,948 384,900 384,900 384,900 384,906
========== ========== ========== ========== ========== ========== ==========
AT DECEMBER 31, AT SEPTEMBER 30,
------------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- -------- -------- -------- --------
(IN MILLIONS OF US$)
BALANCE SHEET DATA
Current assets............................... US$2,469 US$2,603 US$2,845 US$2,490 US$2,502 US$2,318 US$2,995
Property, plant and equipment, net........... 5,451 5,557 5,261 3,943 3,955 4,024 3,320
Investments in affiliated companies and joint
ventures and other investments............. 1,714 1,666 1,557 1,203 1,795 1,709 818
Other assets................................. 1,580 1,791 1,385 1,052 1,543 1,531 1,531
--------- --------- --------- -------- -------- -------- --------
Total assets............................. 11,214 11,617 11,048 8,688 9,795 9,582 8,664
========= ========= ========= ======== ======== ======== ========
Current liabilities.......................... 1,846 2,057 2,030 2,072 2,136 2,169 2,175
Long-term liabilities........................ 1,099 1,157 1,169 601 1,061 975 757
Long-term debt(4)............................ 1,256 1,428 1,389 1,321 2,020 1,525 2,111
Minority interest............................ 71 69 68 3 9 26 8
--------- --------- --------- -------- -------- -------- --------
Total liabilities........................ 4,272 4,711 4,656 3,997 5,226 4,695 5,051
--------- --------- --------- -------- -------- -------- --------
Stockholders' equity:
Capital stock.............................. 1,313 1,288 1,740 1,927 1,927 1,927 2,220
Additional paid-in capital................. 180 498 498 498 498 498 498
Reserves and retained earnings............. 5,449 5,120 4,154 2,266 2,144 2,462 895
--------- --------- --------- -------- -------- -------- --------
Total stockholders' equity............... US$6,942 US$6,906 US$6,392 US$4,691 US$4,569 US$4,887 US$3,613
--------- --------- --------- -------- -------- -------- --------
Total liabilities and stockholders'
equity................................. US$11,214 US$11,617 US$11,048 US$8,688 US$9,795 US$9,582 US$8,664
========= ========= ========= ======== ======== ======== ========
---------------
(2) Each American depositary share represents one common share and each
preferred American depositary share represents one preferred share.
(3) Since 1997, all distributions have been in the form of interest on
shareholders' equity.
(4) Excludes current portion. At December 31, 2000, we had extended guarantees
for borrowings of joint ventures and affiliated companies in an aggregate
amount of US$788 million. These contingent liabilities do not appear on the
face of our consolidated balance sheets, but appear in note 15(a) to our
consolidated financial statements.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is based on and should be read in conjunction with
our consolidated financial statements and notes thereto and other financial
information included elsewhere in this prospectus.
OVERVIEW
Several factors will affect our results of operations, liquidity and
capital resources, including, but not limited to:
- contract prices for iron ore and pellets and world market prices for
aluminum and gold,
- the level of demand for our iron ore and pellets,
- the level of demand for our third-party transportation services,
- the relationship between the real and the U.S. dollar, in which most of
our sales are denominated,
- the results of operations of joint ventures and affiliated companies (in
particular our aluminum operations and pellet joint ventures) recorded
under the equity method in our financial statements,
- Brazil's electricity shortage, and
- Brazilian tax legislation.
Prices
The prices for our core mineral products fluctuate, although iron ore and
pellet prices are less volatile than those of aluminum and gold. We expect these
fluctuations to continue.
The table below sets forth our quarterly sinter feed reference prices in
U.S. dollars for iron ore and pellet export sales and world quarterly market
prices for gold and aluminum for the periods indicated.
IRON ORE
-------------------------------------
ASIAN EUROPEAN
MARKET(1) MARKET(1)(2) PELLETS(3) GOLD ALUMINUM
--------- ------------ ---------- --------- --------------
(PER TROY
(PER TON) OUNCE)(4) (PER POUND)(5)
1Q98........................................ US$15.82 US$19.21 US$34.66 US$301 US$0.66
2Q98........................................ 15.78 19.21 34.66 296 0.60
3Q98........................................ 15.78 19.21 34.66 294 0.61
4Q98........................................ 15.78 19.21 34.66 288 0.57
1Q99........................................ 15.78 17.10 30.07 279 0.62
2Q99........................................ 14.48 17.10 30.07 261 0.60
3Q99........................................ 14.48 17.10 30.07 299 0.68
4Q99........................................ 14.48 17.10 30.07 290 0.71
1Q00........................................ 14.48 17.82 31.87 277 0.75
2Q00........................................ 15.35 17.82 31.87 288 0.68
3Q00........................................ 15.35 17.82 31.87 274 0.72
4Q00........................................ 15.35 17.82 31.87 274 0.67
1Q01........................................ 15.35 18.68 32.46 258 0.69
2Q01........................................ 16.01 18.68 32.46 269 0.67
3Q01........................................ 16.01 18.68 32.46 293 0.62
4Q01........................................ 16.01 18.68 32.46 278 0.61
28
---------------
(1) Represents our quarterly standard sinter feed reference prices for export
sales for periods indicated (FOB Tubarao -- Asian market and FOB Sao
Luis -- European market) and not actual prices realized on sales.
(2) Brazilian iron ore prices are generally based on the European market
reference price.
(3) Represents our quarterly standard pellet reference prices for export sales
for period indicated (FOB Tubarao) and not actual prices realized on sales.
(4) Represents London Gold Market prices.
(5) Represents London Metals Exchange prices (cash/three-month average
quotations).
Iron Ore. Our iron ore export sales are generally made pursuant to
long-term supply contracts which provide for annual price adjustments. Cyclical
changes in the world demand for steel products affect sales prices and volumes
in the world iron ore market. Different factors, such as the iron content of
specific ore deposits, the various beneficiation and purifying processes
required to produce the desired final product, particle size, moisture content,
and the type and concentration of contaminants (such as phosphorus, alumina and
manganese) in the ore, influence contract prices for iron ore. Contract prices
also depend on transportation costs. Fines, lump ore and pellets typically
command different prices. We generally conduct annual price negotiations from
November to February of each year, with separate prices established for the
Asian and European iron ore markets. In the Asian market, the renegotiated
prices are effective from April of the current year until March of the following
year. In the European market, the renegotiated prices are effective for the
calendar year. Because of the wide variety of iron ore and pellet quality and
physical characteristics, iron ore and pellets are less commodity-like than
other minerals. This factor combined with the structure of the market has
prevented the development of an iron ore futures market. We do not hedge our
exposure to iron ore price volatility.
Gold. We sell gold in an active world market in which prices respond to
daily changes in supply and demand. We generally seek to manage the risks
associated with changes in gold prices through hedging. For more information
about our gold hedging activities, see "-- Market Risk."
Aluminum. We sell our aluminum in an active world market where prices are
determined by reference to prices prevailing on terminal markets, such as the
London Metals Exchange and the Commodity Exchange, Inc., or COMEX, at the time
of delivery. We sell aluminum purchased from the Albras aluminum joint venture
pursuant to a take-or-pay commitment for 51% (representing our proportional
ownership interest) of the joint venture's annual aluminum production. Although
our annual purchase commitment can be substantial, approximately US$241 million
in the first nine months of 2001 and US$280 million in 2000, prevailing world
market prices for aluminum (subject to discount in accordance with the terms of
our joint venture agreements) determine our aluminum purchase prices. Albras
seeks to manage the risks associated with changes in aluminum prices by hedging.
For more information about aluminum hedging, see "-- Market Risk."
Demand
Demand for our iron ore products is a function of worldwide demand for
steel, which is, in turn, heavily influenced by worldwide economic activity.
Worldwide demand for steel had a downward trend in 2001 from 2000. A slowdown in
economic activity in Europe or Asia will directly affect demand for our iron ore
products, although there will typically be a lag effect. Demand for our other
mineral products is also influenced to varying degrees by worldwide economic
activity.
Demand for our third party transportation services is influenced by
Brazilian economic growth as well as by Brazilian exports and imports of goods.
29
Inflation
The following table sets forth the Brazilian inflation rate as measured by
the IGP-M Index, published by the Fundacao Getulio Vargas.
FOR THE NINE
MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------
1997 1998 1999 2000 2001 2000 2001
---- ---- ---- --------- ---- ----- -----
(PERCENT)
Brazilian inflation rate........................... 7.7 1.8 20.1 9.9 10.4 8.2 7.8
Before July 1, 1997, Brazil was considered to have a highly inflationary
economy. For periods before July 1, 1997, we remeasured (translated) our
financial statements into U.S. dollars from financial statements presented in
reais, in accordance with the provisions of Statement of Financial Accounting
Standards 52 -- Foreign Currency Translation, or SFAS 52. Under the financial
statement remeasurement procedures we adopted, we translated non-monetary items
(inventories, property, plant and equipment and accumulated depreciation and
depletion, as well as shareholders' equity accounts) at historical exchange
rates. We translated monetary assets and liabilities denominated in Brazilian
currency at period-end exchange rates. We included the translation gain or loss
resulting from this restatement process in the then-current statements of
operations.
At July 1, 1997, we concluded that the Brazilian economy had ceased to be
highly inflationary for purposes of SFAS 52 and changed our functional currency
from the reporting currency, U.S. dollars, to the local currency, Brazilian
reais. Therefore, on July 1, 1997, we translated the U.S. dollar amounts of
non-monetary assets and liabilities into reais at the then-current exchange
rate. These translated amounts became the new accounting bases for such assets
and liabilities. At each period ended after July 1, 1997, we have remeasured all
assets and liabilities into U.S. dollars at the then-current exchange rate and
all accounts in the statements of operations and cash flows at the average rates
prevailing during the applicable period. We included the translation gain or
loss resulting from this translation process in the cumulative translation
adjustments component of shareholders' equity.
Currency Fluctuations
Most of our sales will continue to be U.S. dollar-denominated while most of
our costs, other than debt expenses, will continue to be denominated in
Brazilian currency. As a result, when the real is relatively strong against the
U.S. dollar, this tends to have a negative effect on our reported financial
results from operations, and vice versa. On the other hand, because most of our
debt, and debt at the joint venture and affiliate level, is U.S.
dollar-denominated, a relatively weak real causes us to record monetary and
foreign-exchange losses.
Effects of Certain Equity Method Affiliates and Investments Carried at Cost
The financial condition and results of operations of our joint ventures,
affiliated companies and investments have had a significant effect on our
results of operations and financial condition in the past. Our steel and pulp
and paper divestitures should limit this effect in future periods, although the
activities of our aluminum and pellet joint ventures will remain important. See
note 10 to our consolidated financial statements for information on these
effects.
Rising Unit Extraction Costs
Several of our mines, such as Caue, Conceicao and Capanema, have operated
for long periods and may experience rising extraction costs per unit as more
expensive processes become necessary to extract remaining ore in these mines.
Increases in extraction costs at each of theses mines did not materially affect
our results of operations during the historical periods discussed under
"-- Results of Operations" as such increases were offset by productivity gains
and by the favorable foreign exchange effects on these costs.
30
Electricity Costs
Electricity costs are a significant component of the cost of producing
aluminum. Our aluminum plant, Albras, entered into a 20-year contract with
Eletronorte, a state-owned power utility, pursuant to which Albras purchases
electricity at rates which are lower than the prevailing market rates in the
region. For the first nine months of 2001 and for the years ended December 31,
2000, 1999 and 1998, the prevailing market rate was US$22.99, US$24.48, US$23.36
and US$36.06 per MWh, respectively. The average price paid by Albras for the
same periods was US$11.51, US$11.93, US$10.56 and US$11.39 per MWh,
respectively. The Eletronorte contract is scheduled to expire in May 2004.
Effects of the Energy Shortage in Brazil
On June 1, 2001, the Brazilian government, as part of its energy rationing
program, required energy consumption to decrease by at least 20% relative to
average consumption for May, June and July 2000. Aluminum and ferro-alloy
activities were categorized as electricity-intensive activities and energy
consumption relating to these activities was required to decrease by 25%
relative to average consumption for May, June and July 2000. Our total expected
energy consumption for 2001 was 14.5 TWh. However, due to this rationing
program, our actual energy consumption for 2001 was 12.5 TWh. In 2000, our total
energy consumption was 13.8 TWh. As a result, we reduced our ferro-alloy
production in the six-month period ending November 30, 2001 by 46,000 tons, from
the previously planned 220,000 tons to 174,000 tons. We also reduced 2001
aluminum production at Albras by 46,000 tons to 333,000 tons from the previously
planned 379,000 tons, and at Valesul by 13,000 tons to 80,000 tons from the
previously planned 93,000 tons. By the end of 2001, climate conditions in Brazil
improved, reducing the immediate risk of energy shortages. Therefore, in January
2002, the Brazilian government eliminated the restrictions on the use of energy
in the north region of Brazil, where most of our aluminum production is located.
On March 1, 2002, the Brazilian government eliminated the restrictions on the
use of energy in the rest of the country. For a discussion about the possible
consequences and risks associated with energy shortages, see "Risk
Factors -- Risks Relating to Brazil -- The Brazilian government's energy
rationing program could adversely affect us" and "Business -- Our Lines of
Business -- Holdings -- Aluminum Business -- Aluminum."
Divestitures
In line with our focus on mining, logistics and energy, we have moved to
pare down our holdings of non-strategic assets. We are pursuing the disposition
of our pulp and paper assets and are also disposing of assets in the steel and
transportation sectors that are not strategically connected to our core
businesses.
In the pulp and paper industry, in March 2001, we concluded the sale of our
interest in Bahia Sul Celulose S.A., known as Bahia Sul, for approximately
US$320 million. In September 2001, we concluded the sale of our stake in
Celulose Nipo Brasileira, S.A., known as Cenibra, to our former partner for
US$670.5 million.
In the steel industry, we disposed of our 2.3% stake in Acominas in
December 2000 for US$10 million worth of preferred shares of Gerdau S.A., a
publicly listed steel company, which we intend to sell in the future. In
addition, in March 2001, we disposed of our 10.3% stake in Companhia Siderurgica
Nacional or CSN. We transferred our interest in CSN, valued at US$249 million to
Fundacao Vale do Rio Doce de Seguridade Social, known as VALIA, our employee
pension fund, in order to satisfy a funding obligation that we owed VALIA. For
more information on this contribution to VALIA see "Business -- Employees." We
continue to explore the divestiture of Celmar S.A. and of our forestry
subsidiary, Florestas Rio Doce S.A. See "Business -- Our Lines of
Business -- Pulp and Paper Division." Finally, we have begun the process of
divesting our dry-bulk cargo shipping assets. In September 2001, we reached an
agreement to sell six of Docenave's carrier vessels, with a total capacity of
592,240 DWT, to Empresa Naviera Elcano, S.A., a Spanish company, for US$53
million. This transaction closed in February 2002. We intend to sell Docenave's
remaining dry-bulk assets in the future, but have reached no agreement regarding
this sale to date.
31
Past divestitures include Bahia Sul (pulp and paper), Cenibra (pulp and
paper), Acominas (steel), and CSN (steel). Divestitures currently in progress
include our dry-bulk cargo business and our forestry activities.
The following table shows the effects of both past divestitures and those
currently in progress on our gross revenues, net income and total assets:
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------ -------------------
2000 1999 1998 2001
---- ---- ---- -------------------
Decrease in gross revenues............................... 6.3% 4.9% 5.6% 5.1%
---- ---- ---- -----
Decrease (increase) in net income........................ 7.4 (6.8) 1.3 (10.9)
---- ---- ---- -----
Decrease in total assets................................. 7.4 7.8 -- 1.6
---- ---- ---- -----
Unwinding of Our Cross-Holding Relationships with CSN
We acquired a stake in CSN, during its privatization process in 1993. CSN,
in turn, acquired a 6.8% stake in us during the first step of our privatization
process in 1997, through its indirect participation in Valepar, our principal
shareholder. In line with our strategy to consolidate and focus on mining,
logistics and energy, in the first quarter of 2001, we implemented a program to
unwind our cross-holding relationships with CSN.
In March 2001, CSN concluded the sale of its shares in Valepar to Litel
Participacoes S.A., Bradesplan Participacoes S.A. and Bradespar S.A. Bradesplan
and Bradespar subsequently transferred their shares in Valepar to Babie
Participacoes, S.A. Babie is a holding company owned by Bradesplan and
Bradespar.
In March 2001, we transferred our 10.3% stake in CSN, valued at US$249
million, to VALIA, our employee pension fund. For more information on this
contribution to VALIA, see "Business -- Employees."
As part of the unwinding transaction, CSN granted us the following rights
of first refusal relating to CSN's Casa de Pedra mine, each of which lasts for a
period of 30 years:
- the right to purchase any iron ore produced by the mine beyond CSN's
internal requirements,
- the right to purchase or to rent the mine should CSN decide to sell or
lease it, and
- the right to become a joint venture partner should CSN decide to form a
pelletizing joint venture with a third party with iron ore produced by
the mine.
In return, we have granted CSN a right of first refusal to participate with
us in the construction of any new steel producing facilities that we undertake
in the next five years.
This transaction, as a whole, is subject to review by the Brazilian
antitrust authorities.
We do not expect the unwinding of our cross-holding relationships with CSN
to have any significant impact on our operations and financial results.
Brazilian Taxes
We are subject to a number of Brazilian taxes in addition to corporate
income tax. Brazilian tax legislation changes, which are frequent, can have an
impact on our results of operations. Some Brazilian taxes are described below.
Value-Added Tax. Our revenues consist of total revenues from sales, net of
discounts, returns and allowances, together with amounts we collect in respect
of value-added tax. Net operating revenues represent revenues less value-added
tax, which we collect on behalf of, and must remit to, state taxing authorities.
Export sales are currently exempt from value-added tax.
32
Social Contribution on Profits. Social contribution on profits is a
federal income tax. The rate has fluctuated in the past three years from 8% to
12% and is currently at 9%. Before 1997, this tax was deductible for income tax
purposes; beginning in 1997, the tax is no longer deductible. After December
2002, the applicable rate is scheduled to be 8%.
Social Integration Program and Social Contribution on Gross Sales. The
Social Integration Program, or PIS, aims to finance special social programs
through the collection of a 0.65% revenues tax. Social contribution on gross
sales, or COFINS, finances special social programs through the collection of a
3% revenues tax. Export sales are currently exempt from both of these taxes.
Provisional Tax on Bank Accounts. The provisional tax, known as CPMF, is
imposed on every transaction involving the debit of money from a bank account.
The CPMF rate has fluctuated from 0.2% to 0.38% since its creation in 1997. For
the period between March 18, 2001 and June 17, 2002, the rate is 0.38%.
Financial Compensation for the Exploration of Mineral Resources. We owe a
government royalty on net revenues derived from the production and sale of
mineral resources. The annual rates on our products are:
- iron ore, 2%,
- bauxite, manganese and potash, 3%, and
- gold, 1%.
Federal Tax on Industrialized Products. Manufacturers pay this federal tax
on behalf of their customers at the time of sale, either to another manufacturer
to further the manufacturing process or to the retailer of the ultimate
customer. Export operations are currently excluded. The tax on our aluminum
production is at the rate of 4%.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues
Net operating revenues remained stable at US$2,997 million in the nine
months ended September 30, 2001 compared to US$2,996 million in the same period
of 2000, with an increase in our iron ore and pellets revenues offset by
decreases in revenues in other lines of business.
Revenues from iron ore and pellets increased 18.5% to US$1,937 million in
the nine months ended September 30, 2001 from US$1,635 million in the same
period of 2000, reflecting a 13.6% increase in volume sold to 110.8 million tons
in 2001 from 97.5 million tons in 2000, a 4.4% increase in average selling
prices and a 0.5% increase due to changes in product mix. In 2001, there was an
increase in demand from the growing market in China, and therefore our exports
to this country increased to 11.5 million tons in the nine months ended
September 30, 2001 compared to 6.6 million tons in the same period of 2000. Our
acquisition of Ferteco in April 2001 added US$157 million to our revenues in the
nine months ended September 30, 2001, representing 8.5 million tons.
Revenues from gold sales decreased 11.5% to US$100 million in the nine
months ended September 30, 2001 from US$113 million in the same period of 2000,
representing a 8.8% decrease in volume sold and a 2.7% decrease in average
selling prices. The reduction in volume sold was due to the closure of our Almas
and Caete mines at the end of 2000 and operational problems at two other mines
during the first quarter of 2001, which have now been resolved.
Revenues from other mining products decreased 11.0% to US$291 million in
the nine months ended September 30, 2001 from US$327 million in the same period
of 2000. This decrease is mainly due to a reduction in sales of our ferro-alloys
subsidiary, Sibra, to US$100 million in the nine months ended September 30, 2001
from US$112 million in the same period of 2000, reflecting a decrease in average
prices. Potash and kaolin sales also decreased as a result of lower demand.
33
Revenues from transportation services decreased 19.6% to US$464 million in
the nine months ended September 30, 2001 from US$577 million in the same period
of 2000. The reduction partly reflects services billed to Ferteco and Samitri in
2000, which as a result of our acquisition of these companies, are now
eliminated in our consolidated financial statements. Such services included in
revenues for the nine months ended September 30, 2000 (prior to our acquisition
of Samitri in May 2000) totaled US$86 million and in the nine months ended
September 30, 2001 (prior to our acquisition of Ferteco in April 2001) totaled
US$22 million. Volumes in our other transportation activities were stable during
the two periods compared, while prices of domestic transport declined some 12.4%
as a result of the devaluation of the real in 2001. We intend to sell 15 ships
in the period between 2001 and 2002. These ships generated revenues of US$160
million in the nine months ended September 30, 2001.
Revenues from aluminum products (bauxite, alumina and aluminum) decreased
20.0% to US$224 million in the nine months ended September 30, 2001 from US$280
million in the same period of 2000. The total decrease of US$56 million
comprises US$35 million related to a reduction of 15.0% in aluminum sales and
US$21 million related to lower resales of alumina as a result of higher direct
sales to other shareholders in our alumina affiliate, Alunorte.
Revenues from other products and services decreased 48.1% to US$83 million
in the nine months ended September 30, 2001 from US$160 million in the same
period of 2000, primarily representing decreases in sales volumes of pulp and
paper products following the divestment of our investment in Cenibra and the
consequent termination of our purchases from this former affiliate.
Operating Costs and Expenses
Overall costs and expenses decreased 0.5% to US$2,290 million in the nine
months ended September 30, 2001 from US$2,301 million in the same period of
2000. This variation includes US$109 million, or 4.8%, in 2001 relating to
Ferteco.
In the nine months ended September 30, 2001 our costs and expenses, as
expressed in U.S. dollars, were favorably affected by the significant
devaluation of the real against the U.S. dollar during the period (from R$1.9554
to US$1.00 at December 31, 2000 to R$2.6713 to US$1.00 at September 30, 2001, or
36.6%), because the majority of these costs and expenses are denominated in
reais. In terms of comparison between the first nine months of 2001 and 2000,
the average rate of exchange was R$2.2854 to US$1.00 in the 2001 period and
R$1.7975 to US$1.00 in the 2000 period, or an increase of 27.1%.
Cost of ores and metal sold increased 4.3% to US$1,155 million in the nine
months ended September 30, 2001 from US$1,107 million in the same period of
2000, including US$85 million relating to costs of Ferteco. The favorable impact
of exchange rate movements between the two periods compared is estimated at
US$90 million.
Cost of transportation services decreased 24.4% to US$270 million in the
nine months ended September 30, 2001 from US$357 million in the same period of
2000, principally as a result of the 19.6% reduction of revenues from
transportation services, as the majority of transportation costs are variable
costs. Cost of transportation services related to Samitri are now recovered as
part of the sales price for Samitri's products.
Cost of aluminum products decreased 17.4% to US$214 million in the nine
months ended September 30, 2001 from US$259 million in the same period of 2000
as a result of lower levels of activity. The favorable effect of exchange rate
movements on the cost of aluminum products is small, since they are primarily
determined by the international market.
Cost of other products and services decreased 46.5% to US$76 million in the
nine months ended September 30, 2001 from US$142 million in the same period of
2000, reflecting principally the decreases in volumes of pulp and paper
purchases.
Selling, general and administrative expenses increased 34.3% to US$188
million in the nine months ended September 30, 2001 from US$140 million in the
same period of 2000. Ferteco added US$24 million or 17.1% to these expenses in
2001. Excluding this effect, expenses increased by 17.2% due to increased
business activity and services from third-parties, partially offset by the
effects of exchange rate movements.
34
Research and development, employee profit sharing and other costs and
expenses increased 30.7% to US$387 million in the nine months ended September
30, 2001 from US$296 million in the same period of 2000. This increase is mainly
attributable to asset impairment provisions made in 2001, including losses on
the sale of ships expected to take place in 2002 (US$25 million) and the
amortization of remaining goodwill relative to our affiliates Centro-Atlantica
and GIIC (US$42 million), the calculation of which was based on our revised
profit expectations and other economic factors.
Non-Operating Income (Expenses)
Net non-operating expenses were US$119 million in the nine months ended
September 30, 2001 compared to US$35 million in the same period of 2000. The
aggregate unfavorable change of US$84 million includes US$92 million of
additional net financial expenses in 2001 resulting from increased average net
debt balances during the period because of our acquisitions, capital
expenditures and payment of interest (dividends) to our shareholders. In
addition the change includes the negative effect of exchange rate movements
(US$690 million) on our U.S. dollar denominated liabilities, mainly short and
long-term debt, and gains on sales of investments (US$730 million) upon
divestment of our interests in Bahia Sul, CSN and Cenibra in 2001. In September
2000, the gain on sale of investments was reclassified to non-operating income
for comparative purposes.
Income Taxes
In the nine months ended September 30, 2001 we have estimated that we will
record a tax benefit for the calendar year and this has been proportionally
reflected in the interim financial statements. The final determination of the
tax benefit depends on the amount of tax-deductible dividends that we pay in the
form of interest on shareholders' equity, and the tax savings obtained under our
Carajas tax exemption (a tax incentive relative to our iron ore and manganese
operations in Carajas), among other factors.
Affiliates and Joint Ventures
Our equity in the results of affiliates and joint ventures and provision
for losses and write-downs on equity investments in aggregate totaled a loss of
US$53 million in the nine months ended September 30, 2001 compared to a gain of
US$240 million in the same period of 2000.
In 2001, our affiliates in the aluminum sector recorded losses due to the
effects of the devaluation of the real on their foreign currency denominated
debt. Albras reported a loss for the nine months ended September 30, 2001 of
US$72 million, of which we recognized our portion of US$37 million through the
provision for losses on equity investments and Alunorte reported a loss of US$79
million, of which we recognized our portion of US$37 million through equity
accounting. In the same period of 2000, our portion of gains reported by Albras
and Alunorte were US$55 million and US$8 million, respectively.
In addition to exchange rate effects, the operating results of our major
aluminum sector affiliates and joint ventures in the nine months ended September
30, 2001 compared to the same period of 2000, were influenced by the following
factors:
Albras -- Aluminum sales volume decreased 5.1% to 262,000 tons in 2001 from
276,000 tons in 2000 and average sales prices decreased 3.2% to US$1,468.08 per
ton in 2001 from US$1,516.41 per ton in 2000.
Alunorte -- Alumina sales volume increased 0.3% to 1,180,000 tons in 2001
from 1,177,000 tons in 2000 and the average sales prices decreased by 1.9%
US$192.04 per ton in 2001 as compared to US$195.84 per ton in 2000.
MRN -- Bauxite sales volume decreased 7.6% to 7,777,000 tons in 2001 from
8,416,000 tons in 2000 and average sales prices decreased 1.3% to US$20.95 per
ton in 2001 from US$21.23 per ton in 2000.
Also in 2001, we sold our interest in Bahia Sul and Cenibra, which had
contributed US$34 million and US$50 million, respectively, to our consolidated
net income in the nine months ended September 30,
35
2000. In 2001, the equity in results of these affiliates until the date of their
respective sale totaled the aggregate amount of only US$11 million. However, the
sale of Bahia Sul and Cenibra resulted in one-time gains of US$170 million and
US$507 million, respectively, which are included in non-operating income
(expenses).
Our steel sector affiliates were affected by a weaker market for steel
products which resulted in decreased average sales prices and volumes in 2001.
Our U.S. affiliate, CSI, was also affected by higher costs resulting from the
energy crisis in California and earnings of our Brazilian affiliate CST were
reduced by the impact of the devaluation of the real. In the nine months ended
September 30, 2001 we recorded a gain of US$19 million in respect of these
affiliates against a gain of US$44 million in the same period of 2000.
Our 45.65%-owned railroad affiliate, Centro-Atlantica, performed very
poorly in the nine months ended September 30, 2001 and we recorded an equity
loss of US$28 million against a loss of US$14 million in the same period of
2000. We and the other shareholders of Centro-Atlantica are currently examining
various plans to restructure this business.
In the first nine months of 2001, the results of our other equity
investments were generally lower than those in the same period of 2000 due to
the effects of the devaluation of the real and difficult trading conditions.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1999
Revenues
Net operating revenues increased 27.9% to US$3,935 million in 2000 from
US$3,076 million in 1999, reflecting improvements in most areas of our business,
as discussed below.
Revenues from iron ore and pellets increased 28.5% to US$2,177 million in
2000 from US$1,694 million in 1999, representing an increase in volume sold of
29.3% to 124.5 million tons in 2000 from 96.3 million tons in 1999, partially
offset by changes in product mix. Our acquisitions of Samitri and Mineracao
Socoimex S.A., known as Socoimex, in May 2000 added US$101 million to our
revenues in the period, representing increased volume of 7.4 million tons.
Demand was strong in all of our major markets, notably Europe, Asia and Brazil.
A portion of increased revenues is due to the termination of tolling
arrangements with our pelletizing joint ventures. Currently, we sell ore to
these joint ventures and buy pellets back from them. As a result, both revenues
and costs of ores and metals sold have increased.
Revenues from gold sales increased 0.6% to US$156 million in 2000 from
US$155 million in 1999, reflecting a 1.2% increase in volume sold, offset by a
0.6% decrease in average gold prices.
Revenues from other mining products, such as kaolin, manganese and potash,
increased 135.4% to US$412 million in 2000 from US$175 million in 1999. This
increase includes US$207 million due to the consolidation in 2000 of our
ferro-alloy and kaolin subsidiaries upon acquiring control from our former
partners in these enterprises, but volumes and average prices also improved in
our manganese business.
Revenues from transportation services increased 18.4% to US$760 million in
2000 from US$642 million in 1999, mainly due to a 67.3% increase in the revenues
of our shipping subsidiary to US$271 million in 2000 from US$162 million in
1999, reflecting a 37.2% increase in average prices and a 23.2% increase in
tonnage carried.
Revenues from aluminum products (bauxite, alumina and aluminum) remained
virtually unchanged at US$362 million in 2000 and US$363 million in 1999.
Aluminum sales volumes decreased 21% in 2000 as compared to 1999, primarily due
to the termination of our tolling arrangement with Valesul, which is an
unconsolidated subsidiary, whereby that company now sells its production
directly into the market rather than through our wholly-owned subsidiary
Aluvale, offset by increases in average prices and increased alumina sales.
36
Revenues from other products and services increased 57.8% to US$202 million
in 2000 from US$128 million in 1999, primarily resulting from increases in the
international prices for pulp and paper products. We are currently in the
process of divesting our pulp and paper business.
Operating Costs and Expenses
Overall costs and expenses increased 36.9% to US$2,951 million in 2000 from
US$2,156 million in 1999. This increase includes US$234 million or 10.9% in
2000, relating to newly acquired subsidiaries which in total generated US$308
million of additional consolidated revenues (US$101 million relating to the
acquisition of Samitri and Socoimex and US$207 million relating to the
consolidation of ferro-alloy and kaolin subsidiaries).
Cost of ores and metal sold increased 42.9% to US$1,423 million in 2000
from US$996 million in 1999, or 7.3% more than the increase in revenues. This
mainly reflects increased costs of acquiring pellets due to the termination of
tolling arrangements with affiliates and increased fuel costs.
Cost of transportation services sales increased 30.7% to US$481 million in
2000 from US$368 million in 1999 or 12.3% more than the increase in revenues.
The most important factors in this increase were the continuing upward trend in
fuel costs (primarily determined by the international market) and the increase
in volumes, partially offset in terms of revenues by lower prices in
transportation services other than shipping.
Cost of aluminum products sold increased 3.4% to US$334 million in 2000
from US$323 million in 1999, reflecting increases in the purchase price of these
products, substantially offset by decreases in volumes purchased.
Cost of other products sold increased 60.5% to US$191 million in 2000 from
US$119 million in 1999, primarily due to increases in the prices for pulp and
paper products.
Selling, general and administrative expenses increased 63.0% to US$225
million in 2000 from US$138 million in 1999. Newly acquired subsidiaries added
US$36 million to these costs, or 26.1%, in 2000. General and administrative
costs further increased by US$28 million in 2000 compared to 1999 as a result of
transferring various accounting, control, legal and information technology
functions from the operating divisions to the corporate center and outsourcing
data processing activities. The remaining increase of US$23 million is
attributable to the effect of increased business activity on selling and general
expenses.
Research and development, employee profit sharing and other costs and
expenses increased 40.1% to US$297 million in 2000 from US$212 million in 1999
mainly due to increased geological research activity targeting copper deposits,
and to provisions for labor-related and tax contingencies, which were US$24
million higher in 2000 than in 1999.
Non-Operating Income (Expenses)
Net non-operating expenses increased to US$253 million in 2000 from US$250
million in 1999. Although the rate of devaluation of the real against the U.S.
dollar in 2000 was lower than in 1999, thereby reducing our net foreign exchange
and monetary loss (mainly on our foreign currency debt) by US$71 million, this
positive impact was offset by an increase in financial expenses of US$82
million, most of which was related to increased borrowing (US$53 million) and to
taxes on financial transactions (US$25 million).
Income Taxes
In 2000, we obtained approval for certain tax incentives relative to our
iron ore and manganese operations in Carajas, which resulted in a tax saving of
US$31 million. As a result, our income tax benefit was US$32 million in 2000
compared to an expense of US$33 million in 1999. We also continue to pay
tax-deductible dividends in the form of interest on shareholders' equity, which
reduced our taxes payable by US$222 million in 2000 compared to US$181 million
in 1999.
37
Affiliates and Joint Ventures
Our equity in the results of affiliates and joint ventures and provisions
for losses and write-downs on equity investments in aggregate totaled a gain of
US$322 million in 2000 as compared to a loss of US$227 million in 1999.
In 1999, most of our affiliates and joint ventures in Brazil recorded
losses due to the effects of the devaluation of the real on their foreign
currency debt. Our affiliates in the aluminum sector were especially affected.
Albras reported a loss of US$203 million, of which we recognized US$104 million
through equity accounting. Alunorte reported a loss of US$137 million, of which
we recognized US$89 million through equity accounting. In 2000, with a more
stable exchange rate and price improvements, all our affiliates and joint
ventures recorded positive results except for Centro-Atlantica and CFN, our
railroad investments.
The operating results of our major affiliates and joint ventures in 2000 as
compared with 1999 were influenced by the following major factors:
Albras -- Albras contributed US$66 million to our net income in 2000.
Aluminum sales volume increased 2.8% to 366,000 tons in 2000 from 356,000 tons
in 1999 and average prices increased 16.0% to US$1,508.42 per ton in 2000 from
US$1,300.35 per ton in 1999.
Alunorte -- Alunorte contributed US$11 million to our net income in 2000.
Alumina sales volume rose 14.8% to 1,628,000 tons in 2000 from 1,418,000 tons in
1999 and average prices increased 16.9% to US$196.63 per ton in 2000 from
US$168.17 per ton in 1999.
MRN -- MRN contributed US$36 million to our net income in 2000. Bauxite
sales volume increased 3.3% to 11,242,000 tons in 2000 from 10,884,000 tons in
1999 and average prices increased 3.2% to US$21.18 per ton in 2000 from US$20.53
per ton in 1999.
Bahia Sul -- Bahia Sul contributed US$42 million to our net income in 2000,
compared to US$13 million in 1999. Pulp sales volume decreased 8.7% to 367,000
tons in 2000 from 402,000 tons in 1999 and average pulp prices increased 31.5%
to US$618 per ton in 2000 from US$470 per ton in 1999. Paper sales volume
decreased 2.3% to 211,000 tons in 2000 from 216,000 tons in 1999 and average
paper prices increased 28.8% to US$824 per ton in 2000 from US$640 per ton in
1999. In the first half of 2001, we sold our interest in Bahia Sul for
approximately US$320 million, US$2.4 million of which corresponded to unpaid
dividends relating to 2000.
Cenibra -- Cenibra contributed US$66 million to our net income in 2000.
Pulp sales volume decreased 2.5% to 789,000 tons in 2000 from 809,000 tons in
1999 and average prices increased 38.0% to US$587.54 per ton in 2000 from
US$425.79 per ton in 1999. On July 6, 2001, our former partner in Cenibra agreed
to buy our stake in Cenibra for US$670.5 million. The closing of this
transaction took place in September 2001.
Steel sector affiliates -- Increases in volumes and prices, plus
productivity gains, produced a contribution of US$59 million to our net income
in 2000. Of this total, US$13 million relates to investments that we disposed of
in 2000 or 2001. We are pursuing the sale of most of our remaining steel
interests. In 1999, the devaluation of the real substantially affected the
results of these affiliates, producing a contribution of only US$7 million to
our consolidated earnings in that year.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1998
Revenues
Net operating revenues decreased 13.4% to US$3,076 million in 1999 from
US$3,553 million in 1998, reflecting decreases in substantially all of our major
products and services.
Revenues from iron ore and pellets decreased 12.2% to US$1,694 million in
1999 from US$1,930 million in 1998, representing a decrease in volume sold of
3.3% to 96.3 million tons in 1999 from 99.6 million tons in 1998 and a decrease
in the average selling prices of 11.7%, partially offset by a
38
change in the mix of the products sold. Our iron ore and pellet prices are 96%
linked to the U.S. dollar. The decrease in average selling prices was due to a
less favorable scenario for steel production at the time of the 1999 price
negotiations and consequent unfavorable results for iron ore producers. In terms
of our two major markets, sales volume increased in Asia (including Japan) by
7.1%, whereas in Europe sales volume decreased by 17.2% due to the decrease in
steel production. Average selling prices in both markets fell 11% in 1999
compared to 1998.
Revenues from gold sales decreased 7.7% to US$155 million in 1999 from
US$168 million in 1998, due to a decrease in quantity sold of 2.8% and a 5.1%
decline in average selling prices in 1999 compared to 1998. International market
prices quoted in U.S. dollars declined on average 5.4% in the period.
Revenues from other mining products (manganese, potash and ferro-alloys),
decreased 12.5% to US$175 million in 1999 from US$200 million in 1998.
Reductions in sales volumes and average selling prices on both manganese and
potash, caused by reduction in demand and market inventory levels, as well as
competition with imports in the case of potash strongly influenced these revenue
decreases. Improved ferro-alloy volumes and prices partially offset these
declines.
Revenues from transportation services decreased 24.3% to US$642 million in
1999 from US$848 million in 1998. The volume of general cargo handled on our
transportation system (railroads, ports and ships) decreased on average 7.6% in
1999 compared to 1998, due mainly to a drop in industrial production in Brazil.
Average selling prices decreased 18.1% in 1999 compared to 1998. The devaluation
of the real significantly affected these average selling price decreases since
32% of prices in the transportation services area are not linked to the U.S.
dollar. We estimate that the weakening of the real resulted in an overall
reduction in average selling prices, when expressed in U.S. dollars, of 12%, and
the remaining 6.1% substantially relates to reductions in international freight
prices.
Revenues from aluminum products decreased 10.8% to US$363 million in 1999
from US$407 million in 1998. Average selling prices remained stable in 1999 as
compared to 1998 and the decrease in revenues of US$44 million resulted from the
cession of a portion of our take from Alunorte and Albras which would otherwise
have been sold to third parties.
Revenues from other products and services increased 21.9% to US$128 million
in 1999 from US$105 million in 1998 primarily because of increased sales of
pulp.
Operating Costs and Expenses
Overall costs and expenses decreased 20.1% to US$2,156 million in 1999 from
US$2,699 million in 1998. The most significant factor contributing to this
decrease was the devaluation of the real beginning in mid-January 1999, because,
other than for imported materials and services, we primarily incur our costs and
expenses in reais. Local currency operating costs and expenses (when expressed
in U.S. dollars) decrease when the rate of devaluation of the real against the
U.S. dollar exceeds the rate of inflation, as occurred in 1999. The weighted
average of devaluation in 1999 as compared with 1998 was 36.0% and the weighted
average of inflation was 10.9% compared with the same period.
Cost of ores and metal sold decreased 26.1% to US$996 million in 1999 from
US$1,348 million in 1998, since we incur 71.1% of our costs in reais. The level
of costs in reais remained stable in 1999 as compared to 1998 following the
major cost reduction and productivity programs implemented subsequent to our
privatization.
Cost of transportation services sales decreased 16.4% to US$368 million in
1999 from US$440 million in 1998. This decrease was less than the decrease in
overall cost and expenses due mainly to increased fuel costs reflecting
international trends in 1999.
Cost of aluminum products sold decreased 16.5% to US$323 million in 1999
from US$387 million in 1998, primarily due to a decrease of 15.7% in quantities
sold. Translation effects arising from costs denominated in reais caused the
higher decrease in cost.
39
Selling, general and administrative expenses decreased 19.3% to US$138
million in 1999 from US$171 million in 1998 in line with the decrease in overall
costs and expenses.
Other operating costs and expenses decreased 10.1% to US$161 million in
1999 from US$179 million in 1998, which was lower than the decrease in overall
costs and expenses due primarily to additional charges in 1999 arising from
ongoing reviews of estimates relative to provisions for contingencies.
Non-Operating Income (Expenses)
Net non-operating expenses in 1999 totaled US$250 million as compared to
net non-operating income in 1998 of US$38 million. Non-operating expenses in
1999 included exchange losses of US$774 million on debt denominated in U.S.
dollars, compared with US$188 million in 1998. The major portion of the exchange
losses in 1999 does not represent a short-term cash outflow since it relates to
medium and long-term debt. Exchange gains on cash equivalents denominated in
U.S. dollars totaled US$285 million in 1999, compared with US$21 million in
1998.
From September 1998 through December 1999, we concentrated our short-term
financial holdings in U.S. dollar-denominated instruments which resulted in a
reduction of interest income as compared with the previous policy of investing
in high interest bearing Brazilian instruments. This policy, however, resulted
in increased exchange gains upon the devaluation of the real in 1999.
Income Taxes
An income tax expense of US$33 million was recorded in 1999 compared to no
expense in 1998, mainly due to the recognition of an income tax benefit of US$96
million in 1998 related to the write-downs of investments. In 1999, we continued
the practice of paying tax-deductible dividends to our shareholders in the form
of interest on shareholders' equity, thereby reducing our effective tax rate.
For more information on our income taxes, see note 3 to our consolidated
financial statements.
Affiliates and Joint Ventures
Our equity in results of affiliates and joint ventures and provisions for
losses and write-downs on equity investments in aggregate totaled a loss of
US$227 million in 1999 as compared to a loss and write-downs of US$193 million
in 1998.
The losses recorded in 1999 relate mainly to the effects of exchange losses
in Albras, Alunorte and Bahia Sul, all of whose affiliates and joint ventures
have significant U.S. dollar denominated debt, as well as operating losses in
the joint venture Vale Usiminas Participacoes S.A., or VUPSA. In 1999, Bahia Sul
recorded a US$93 million tax valuation allowance reversal.
The following table provides a comparison of the pre-tax results of the
major affiliates as adjusted for the effects of exchange losses.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998
------------------------------------------- ------------------------------------
(IN MILLIONS OF US$)
PRE-TAX INCOME PRE-TAX INCOME
BEFORE PRE-TAX EXCHANGE (LOSS) BEFORE PRE-TAX EXCHANGE
EXCHANGE LOSSES LOSS LOSSES EXCHANGE LOSSES LOSS LOSSES
--------------- ------- --------------- --------------- ------- --------
Albras............... US$82 US$296 US$378 US$19 US$83 US$102
Alunorte............. 20 193 213 18 18 36
Bahia Sul............ 56 71 127 (58) 92 34
The improved results of Albras reflect the increase of 6% in quantity of
aluminum sold reaching 356,013 tons, of which 346,630 tons went to the foreign
market.
40
Alunorte achieved a result in 1999 similar to that reported in 1998.
Although alumina production increased by 5.8% to 1.5 million tons in 1999, a
decrease in average selling prices largely offset this improvement.
The improved results of Bahia Sul reflect a 20.0% increase in sales volume
to 402,000 tons of pulp and 216,000 tons of paper together with a strong
increase in international prices for its products.
Due to a sharp and prolonged decline in the quoted market prices of our
investments in CST and Usiminas, which fell below their adjusted book value, we
recorded a write-down of US$294 million against these investments as at December
31, 1998.
Production and sales of our steel affiliates in 1999 were higher than 1998
levels. However, the devaluation of the real substantially affected our
affiliates in Brazil. Therefore, this sector contributed only US$7 million to
our consolidated earnings in 1999 as compared to US$82 million in 1998.
In December 1999, we purchased the remaining 50% of VUPSA. We have
consolidated VUPSA at December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our principal sources of liquidity have consisted of cash generated from
operations and short-term and long-term secured and unsecured borrowings. We
believe these sources will continue to be adequate to meet our currently
anticipated uses of funds, which include working capital, investment capital,
capital expenditures, debt repayment and dividend payments.
From time to time, we review acquisition and investment opportunities and
will, if a suitable opportunity arises, make an investment. We can make any
future investments either directly or through subsidiaries, joint ventures or
affiliated companies, and we may fund these investments through internally
generated funds, the issuance of debt or equity or a combination of these
methods.
As a result of our acquisitions in 2000, we generated a net decrease in
cash and cash equivalents of US$242 million compared to net increases of US$264
million in 1999 and US$81 million in 1998. At September 30, 2001, we had cash
and cash equivalents of US$1,708 million.
Sources of Funds
Operating activities provided net cash flows of US$1,090 million in the
nine months ended September 30, 2001 compared to US$967 million in the nine
months ended September 30, 2000, and net cash flows of US$1,424 million in 2000,
compared to US$1,336 million in 1999 and US$1,372 million in 1998.
Financing activities (before distributions to shareholders), which include
short-term and long-term secured and unsecured borrowings and debt repayments,
provided net cash flows of US$161 million in the nine months ended September 30,
2001 compared to net cash flows of US$66 million in the nine months ended
September 30, 2000, and provided net cash flows of US$176 million in 2000
compared to using net cash flows of US$41 million in 1999 and providing net cash
flows of US$32 million in 1998. In 2000, our principal source of borrowed funds
was a US$300 million asset securitization.
At September 30, 2001, our aggregate outstanding debt was US$3,092 million,
consisting of short-term debt of US$1,024 million, including US$121 million in
loans from joint ventures and affiliated companies in connection with our cash
management system, and long-term debt (excluding current portion) of US$2,068
million, including US$4 million in loans from related parties. Our short-term
debt consists primarily of U.S. dollar-denominated trade financing, documented
mainly in the form of export prepayments and export sales advances with
Brazilian and foreign financial institutions.
41
Uses of Funds
Investing activities before proceeds from total of investments, primarily
including acquisitions, other capital expenditures and investments in and loans
to joint ventures and affiliated companies, consumed net cash flows of US$955
million in the nine months ended September 30, 2001 compared to US$1,179 million
in the nine months ended September 30, 2000, and net cash flows of US$1,533
million in 2000, compared to US$469 million in 1999.
Other significant uses of cash included:
- repayment of debt, which consumed US$353 million, US$353 million, US$444
million, US$347 million and US$326 million for the nine months ended
September 30, 2001 and 2000 and for the years ended December 31, 2000,
1999 and 1998, respectively.
- payment of dividends and interest on shareholders' equity, which consumed
US$639 million, US$246 million, US$246 million, US$452 million and US$607
million for the nine months ended September 30, 2001 and 2000 and for the
years ended December 31, 2000, 1999 and 1998, respectively.
DEBT
Our long-term debt consists principally of U.S. dollar-denominated notes
and borrowings. At September 30, 2001, approximately US$495 million of our debt
was secured by liens on some of our assets.
Except for the perpetual notes, which have no scheduled maturity date, all
of our currently outstanding long-term debt is likely to mature by 2011 in
accordance with the schedule below:
THROUGH SEPTEMBER 30, (IN MILLIONS OF US$)(1)
2002...................................................... US$ 55
2003...................................................... 689
2004...................................................... 713
2005...................................................... 192
2006...................................................... 129
2007 and thereafter....................................... 277(2)
No due date (perpetual notes)............................. 56
--------
Total.................................................. US$2,111
========
---------------
(1) Excludes US$4 million in loans from related parties.
(2) We issued US$300 million in debt during the first quarter of 2002, which
matures in 2007. We intend to use the net proceeds of this issuance for our
general corporate purposes.
We often use joint venture and affiliated company ownership structures with
domestic and foreign partners to finance our large-scale projects. On occasion,
we provide guarantees to support the debt of these joint ventures and affiliated
companies. At September 30, 2001, we had extended guarantees for borrowings of
joint ventures and affiliated companies in an aggregate amount of US$801
million, of which US$614 million was denominated in U.S. dollars and the
remaining US$187 million was denominated in Brazilian currency. These guarantees
do not appear in the table above.
At September 30, 2001, US$308 million of our total long-term debt was
guaranteed by non-CVRD Group entities pursuant to a transaction which arose out
of our privatization.
We use derivative instruments to manage our exposure to interest rate
fluctuations. For a detailed description on these derivative instruments, see
"-- Market Risk." Giving effect to these instruments, at September 30, 2001, our
weighted average effective interest rate on long-term debt was 7.43%.
42
Some of our long-term debt instruments contain restrictive financial
covenants. We believe that we will be able to operate within the terms of these
financial covenants for the foreseeable future. None of these covenants
restrains our ability to pay dividends on equity securities at the parent
company level.
CAPITAL EXPENDITURES
The table below sets forth our capital expenditures by business area for
the periods indicated. Our capital expenditures have historically been more
intensive in the second half of the year.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- -------------------
BUSINESS AREA 1998 1999 2000 2000 2001
------------- --------- --------- --------- -------- --------
(IN MILLIONS OF US$)
Ferrous..................................... US$346 US$183 US$354 US$157 US$310
Non-ferrous................................. 32 56 50 29 36
Logistics................................... 1 4 14 12 17
Energy...................................... 20 18 19 11 72
Corporate center............................ 13 4 10 5 9
------ ------ ------ ------ ------
Total.................................. US$412 US$265 US$447 US$214 US$444
====== ====== ====== ====== ======
Structural changes in the production of iron ore and steel have been
generating a growing global demand for pellets and reducing the volatility of
the pellet market. See "Business -- Our Strengths -- Well-Positioned to Meet
Demand in a Changing Steel Industry." In the belief that this trend will
continue over the next few years, we have been investing heavily in our pellet
operations. For the nine months ended September 30, 2001, we invested US$66
million in the Sao Luis pelletizing plant construction project. This plant is
designed to have an annual production capacity of 6 million tons. We estimate
its total investment cost to be approximately US$181 million, the equivalent of
US$39 per annual ton of pellet production capacity. We expect to complete this
project in the first quarter of 2002. In addition, we and our partners in the
Tubarao pelletizing complex have approved a capacity expansion from the current
25 million tons to 28.2 million tons of pellets per year. For the nine months
ended September 30, 2001, we invested US$1 million in the Tubarao pelletizing
complex expansion project. We estimate the total cost of this expansion to be
approximately US$81 million, or US$25.3 per ton. The completion of this project
is scheduled for 2003.
For the nine months ended September 30, 2001, capital expenditures for the
maintenance of ferrous products were US$129 million. At September 30, 2001,
capital expenditures relating to ferrous product projects were US$139 million.
This was due to the investment in the construction of the Sao Luis pelletizing
plant (US$66 million), the infrastructure for the Sao Luis pelletizing plant
(US$40 million), the acquisition of locomotives and wagons (US$21 million), and
the construction of a new stockyard and pier at the Ponta da Madeira marine
terminal (US$5 million).
We expect to allocate most of our 2002 capital expenditures budget to the
Southern System, mainly to modernize and increase the capacity of our mines and
the Vitoria-Minas railroad. We intend to modernize the control and maintenance
systems of the Vitoria-Minas railroad. We also intend to replace a number of
processing systems in our Southern System mines. We will finance these
expenditures principally with cash flow from operations.
For the nine months ended September 30, 2001, capital expenditures for the
maintenance of non-ferrous products were US$21 million, and capital expenditures
for non-ferrous projects were US$3 million due to an increase in the production
capacity of potash.
For the nine months ended September 30, 2001, capital expenditures for the
maintenance of logistics were US$5 million, and capital expenditures for
logistics projects were US$14 million. Our main projects were the enlargement of
the Praia Mole marine terminal (US$2 million) and the acquisition of locomotives
and wagons (US$8 million).
43
Energy generation has become a priority for us, driven both by the
Brazilian government's privatization program of the industry and by the risks of
rising electricity prices and electricity rationing due to energy shortages,
such as the one Brazil experienced in the second half of 2001. We currently
perceive favorable investment opportunities in the Brazilian electricity sector
and are taking advantage of them to invest in hydroelectric power generation
projects. As we are a large consumer of electricity, we expect that investing in
the energy business will help protect us against electricity price volatility.
New investments will be absorbed by our ongoing projects at Aimores, Candonga,
Funil, Capim Branco I and II, Foz do Chapeco and Santa Isabel. For a more
detailed description of our hydroelectric generation projects, see
"Business -- Our Lines of Business -- Energy."
For the nine months ended September 2001, capital expenditures for energy
were US$72 million due to investments in the construction of hydroelectric power
plants.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Our mineral exploration activities are currently focused on identifying
copper and gold deposits for future exploitation. We incurred geological
exploration expenses of US$31 million in the nine months ended September 30,
2001 compared to US$34 million in the nine months ended September 30, 2000, and
US$48 million, US$27 million and US$48 million in 2000, 1999 and 1998,
respectively.
MARKET RISK
The principal market risks we face are interest rate risk, exchange rate
risk and commodity price risk. We manage some of these risks through the use of
derivative instruments. Our policy has been to settle all contracts in cash,
without physical delivery of product.
Our risk management activities follow policies and guidelines that our
board of directors reviewed and approved. These policies and guidelines
generally prohibit speculative trading and short selling and require
diversification of transactions and counter-parties. We monitor and evaluate our
overall position daily in order to evaluate financial results and impact on our
cash flow. We also periodically review the credit limits and creditworthiness of
our hedging counter-parties. We report the results of our hedging activities to
senior management on a monthly basis.
Interest Rate and Exchange Rate Risk
The table below sets forth our floating and fixed rate long-term debt,
categorized by local and foreign currency, and as a percentage of our total
long-term debt portfolio at the dates indicated, including loans from both
related and unrelated parties, as reflected in our consolidated financial
statements.
AT DECEMBER 31, AT SEPTEMBER 30,
--------------------------------- -----------------
1999 2000 2001
--------------- --------------- -----------------
(IN MILLIONS OF US$, EXCEPT PERCENTAGES)
Floating rate debt
Real-denominated..................... US$ 196 14.8% US$ 167 8.3% US$ 34 1.6%
Foreign currency denominated......... 537 40.7 1,070 52.9 1,136 53.8
Fixed rate debt
Real-denominated..................... -- -- -- -- 116 5.5
Foreign currency denominated......... 588 44.5 783 38.8 825 39.1
-------- ---- -------- ---- -------- ----
Total.................................. US$1,321 100% US$2,020 100% US$2,111 100%
======== ==== ======== ==== ======== ====
44
The table below provides information about our debt obligations at
September 30, 2001, which are sensitive to changes in interest rates and
exchange rates. The table presents the principal cash flows and related
weighted-average interest rates of these obligations by expected maturity date.
Weighted-average variable interest rates are based on the applicable reference
rate (LIBOR or TJLP) at September 30, 2001. The debt obligations' actual cash
flows are denominated in U.S. dollars or Brazilian reais, as indicated.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FAIR VALUE FAIR VALUE
---------------------------------------------------- CASH FLOW AT ACCOUNTING AT
2007 TO SEPTEMBER 30, SEPTEMBER 30,
2002 2003 2004 2005 2006 2012 TOTAL 2001 2001
------ ------ ------ ------ ------ ------- -------- ------------- -------------
(1) (2)
(IN THOUSANDS OF US$)
U.S. dollar-denominated
Fixed rate
Bonds.............. 9.375% US$ 0 US$201 US$ 0 US$ 0 US$ 0 US$ 0 US$ 201 US$ 201 US$ 201
Bonds.............. 10.000% 0 0 301 0 0 0 301 301 301
Loans.............. up to 7.000% 0 0 1 2 1 1 5 5 4
Loans.............. over 7.000% 15 26 44 64 40 132 321 321 323
------ ------ ------ ------ ------ ------ -------- -------- --------
US$ 15 US$227 US$346 US$ 66 US$ 41 US$133 US$ 828 US$ 828 US$ 829
------ ------ ------ ------ ------ ------ -------- -------- --------
Floating rate
Loans.............. up to 7.000% 70 378 280 111 60 191 1,090 1,090 1,042
Loans.............. over 7.000% 0 16 10 11 10 17 64 64 55
------ ------ ------ ------ ------ ------ -------- -------- --------
70 394 290 122 70 208 1,154 1,154 1,097
------ ------ ------ ------ ------ ------ -------- -------- --------
US$ 85 US$621 US$636 US$188 US$111 US$341 US$1,982 US$1,982 US$1,926
====== ====== ====== ====== ====== ====== ======== ======== ========
Real-denominated
Fixed rate
Loans.............. up to 7.000% US$ 15 US$ 13 US$ 12 US$ 16 US$ 15 US$ 3 US$ 74 US$ 74 US$ 75
Loans.............. over 7.000% 5 18 15 7 2 0 47 47 41
------ ------ ------ ------ ------ ------ -------- -------- --------
US$ 20 US$ 31 US$ 27 US$ 23 US$ 17 US$ 3 US$ 121 US$ 121 US$ 116
------ ------ ------ ------ ------ ------ -------- -------- --------
Floating rate
Loans.............. over 7.000% 22 1 11 0 0 0 34 34 34
------ ------ ------ ------ ------ ------ -------- -------- --------
22 1 11 -- -- -- 34 34 34
------ ------ ------ ------ ------ ------ -------- -------- --------
US$ 42 US$ 32 US$ 38 US$ 23 US$ 17 US$ 3 US$ 155 US$ 155 US$ 150
------ ------ ------ ------ ------ ------ -------- -------- --------
Total................ US$127 US$653 US$674 US$211 US$128 US$344 US$2,137 US$2,137 US$2,076
====== ====== ====== ====== ====== ====== ======== ======== ========
---------------
(1) Includes future payments of interest.
(2) Based on the values recorded in our consolidated financial statements, which
include prorated interest up to September 30, 2001.
Interest Rate Risk
We are exposed to interest rate risk in our floating-rate debt. Our
long-term floating-rate debt consists principally of U.S. dollar denominated
notes and borrowings which we have incurred primarily in connection with capital
expenditures, and investments in and loans to joint ventures and affiliated
companies. Our short-term floating-rate debt consists principally of U.S. dollar
denominated trade financing. In general, our foreign currency floating rate debt
is principally subject to changes in the London Interbank Offered Rate, or
LIBOR. Our floating rate debt denominated in reais is principally subject to
changes in the TJLP (Long Term Interest Rate), as fixed by the Central Bank.
Our interest rate derivatives portfolio generally consists of option trades
which aim to cap our exposure to interest rate fluctuations. A cap is the
maximum rate we will be required to pay on the notional amount of the debt.
Conversely, a floor is the minimum rate we will be required to pay on the
notional amount of the debt. Certain caps are subject to knock-out provisions
which, if triggered, eliminate the protection provided by the cap.
45
The table below sets forth certain information with respect to our interest
rate derivatives portfolio at September 30, 2001 and 2000:
AT SEPTEMBER 30, 2001
---------------------------------------------
UNREALIZED GAIN
TYPE NOTIONAL VALUE RATE RANGE (LOSS)
---- -------------- ---------- ---------------
(IN MILLIONS OF US$, EXCEPT RATE RANGES)
Cap.................. US$1,375 5-8% US$ 1.8
Floor................ 1,000 5-6.5 (31.3)
Swap................. 125 5.5-7.5 (11.8)
---------
US$ (41.3)
=========
AT SEPTEMBER 30, 2000
---------------------------------------------
UNREALIZED GAIN
TYPE NOTIONAL VALUE RATE RANGE (LOSS) FINAL MATURITY
---- -------------- ---------- --------------- --------------
(IN MILLIONS OF US$, EXCEPT RATE RANGES)
Cap.................. US$1,200 5-8% US$ 7.3 11/2006
Floor................ 850 5-6.5 (3.4) 11/2006
Swap................. -- -- -- 10/2007
-------
US$ 3.9
=======
The table below sets forth certain information with respect to our interest
rate derivatives portfolio at December 31, 2000 and 1999.
AT DECEMBER 31, 2000
---------------------------------------------
UNREALIZED GAIN
TYPE NOTIONAL VALUE RATE RANGE (LOSS)
---- -------------- ---------- ---------------
(IN MILLIONS OF US$, EXCEPT RATE RANGES)
Cap.................. US$1,200 5-8% US$ 3
Floor................ 850 5-6.5 (7)
Swap................. 125 5.5-7.5 (4)
-----
US$(8)
=====
AT DECEMBER 31, 1999
---------------------------------------------
UNREALIZED GAIN
TYPE NOTIONAL VALUE RATE RANGE (LOSS) FINAL MATURITY
---- -------------- ---------- --------------- --------------
(IN MILLIONS OF US$, EXCEPT RATE RANGES)
Cap.................. US$1,200 5-8% US$10 12/2004
Floor................ 850 5-6.5 (4) 12/2004
Swap................. -- -- -- 10/2007
-----
US$ 6
=====
The unrealized losses and gains represent the amounts payable or receivable
if the transactions had been settled on the dates indicated.
Exchange Rate Risk
Our long-term debt is primarily denominated in foreign currencies,
principally the U.S. dollar. Because our revenues are primarily
dollar-denominated, we do not believe that the high incidence of
dollar-denominated debt in our long-term debt portfolio exposes us to an undue
amount of exchange rate risk.
However, a portion of our indebtedness is also denominated in euros and in
Japanese yen, and we use derivative instruments to protect ourselves against
specific risks associated with exchange rate movements in these foreign
currencies.
The table below sets forth certain information with respect to our exchange
rate derivatives portfolio at September 30, 2001 and 2000:
AT SEPTEMBER 30, 2001
----------------------------------------------------
UNREALIZED GAIN
TYPE NOTIONAL VALUE PRICE RANGE (LOSS)
---- -------------- ----------------- ---------------
(IN MILLIONS OF US$, EXCEPT RATE RANGES)
Yen Purchased........ US$31.44 Y70-110 per US$ US$ (0.7)
Euros Purchased...... 12.35 E1.10-1.30 per (3.3)
Euros Sold........... 4.07 E0.90-1.2 per US $ 0.8
BRL Sold............. 0
--------
US$ (3.2)
========
AT SEPTEMBER 30, 2000
---------------------------------------------------
UNREALIZED GAIN
TYPE NOTIONAL VALUE PRICE RANGE (LOSS) FINAL MATURITY
---- -------------- ---------------- --------------- --------------
(IN MILLIONS OF US$, EXCEPT RATE RANGES)
Yen Purchased........ US$ 17.4 Y70-110 per US$ US$ 0.2 4/2005
Euros Purchased...... 13.3 E1.10-1.30 (2.7) 4/2005
Euros Sold........... -- -- -- 10/2001
BRL Sold............. 120.00 1.0 11/2000
--------
US$ (1.5)
========
46
The table below sets forth certain information with respect to our exchange
rate derivatives portfolio at December 31, 2000 and 1999. These derivatives are
structured forwards that we have purchased, which will require us to purchase
foreign currencies as specified below:
AT DECEMBER 31, 2000
----------------------------------------------------
NOTIONAL UNREALIZED GAIN
TYPE VALUE PRICE RANGE (LOSS)
---- -------------- ----------------- ---------------
(IN MILLIONS OF US$, EXCEPT PRICE RANGES)
Yen.................. US$15.0 Y90-100 per US$ US$(2.0)
Euro................. 12.0 US$0.9-1.2 per E (2.0)
----------
US$(4.0)
==========
AT DECEMBER 31, 1999
----------------------------------------------------
NOTIONAL UNREALIZED GAIN FINAL
TYPE VALUE PRICE RANGE (LOSS) MATURITY
---- --------------- ---------------- --------------- --------
(IN MILLIONS OF US$, EXCEPT PRICE RANGES)
Yen.................. US$8 Y90-100 per US$ US$0.6 4/2005
Euro................. 13.3 US$0.9-1.2 per E US$(1.1) 4/2005
-----------
US$(0.5)
===========
The unrealized losses and gains represent the amounts payable or receivable
if the transactions had been settled on the dates indicated.
Commodity Price Risk
We are also exposed to various market risks relating to the volatility of
world market prices for:
- iron ore, which represented 53.5% of our 2000 consolidated revenues,
- aluminum, which represented 8.9% of our 2000 consolidated revenues, and
- gold, which represented 3.8% of our 2000 consolidated revenues.
We do not enter into derivatives transactions to hedge our iron ore
exposure. For information on how our iron ore export sales are priced, see
"-- Overview -- Prices."
To manage the risk associated with fluctuations in aluminum prices, our
affiliates Albras and Alunorte engage in hedging transactions involving put and
call options, as well as forward contracts. These derivative instruments allow
Albras and Alunorte to establish minimum average profits for their future
aluminum production in excess of their expected production costs and therefore
ensure stable cash generation. However, they also have the effect of reducing
potential gains from price increases in the spot market for aluminum.
We have a 51% voting capital interest and a 51% total capital interest in
Albras. The table below sets forth certain information with respect to Albras's
derivatives portfolio at September 30, 2001 and 2000:
AT SEPTEMBER 30, 2001 AT SEPTEMBER 30, 2000
------------------------------------------------ ------------------------------------------------
UNREALIZED GAIN UNREALIZED GAIN
TYPE NOTIONAL VALUE PRICE RANGE (LOSS) NOTIONAL VALUE PRICE RANGE (LOSS)
---- -------------- ------------- --------------- -------------- ------------- ---------------
(IN TONS OF (US$ PER TON) (IN MILLIONS (IN TONS OF (US$ PER TON) (IN MILLIONS
ALUMINUM) OF US$) ALUMINUM) OF US$)
Puts purchased........... 67,500 1,400-1,600 US$10.1 45,000 1,400-1,500 US$ 2.5
Forwards sold............ 54,750 1,400-1,600 9.6 39,750 1,500-1,700 (0.7)
Calls sold............... 54,750 1,600-1,800 (0.3) 101,250 1,500-1,700 (7.2)
Hybrid instruments(1).... 108,187 (1.4) 97,455 (5.4)
------- --------
US$18.0 US$(10.8)
======= ========
TYPE FINAL MATURITY
---- --------------
Puts purchased........... 12/2003
Forwards sold............ 12/2006
Calls sold............... 6/2004
Hybrid instruments(1).... 6/2004
---------------
(1) The payoff of these instruments depends, at least partly, on the manner in
which the price of the underlying asset behaves during the life of the
transaction.
47
The table below sets forth certain information with respect to Albras's
derivatives portfolio at December 31, 2000 and 1999:
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
------------------------------------------------ ------------------------------------------------
NOTIONAL UNREALIZED GAIN UNREALIZED GAIN
TYPE VALUE PRICE RANGE (LOSS) NOTIONAL VALUE PRICE RANGE (LOSS)
---- -------------- ------------- --------------- -------------- ------------- ---------------
(IN TONS OF (US$ PER TON) (IN MILLIONS (IN TONS OF (US$ PER TON) (IN MILLIONS
ALUMINUM) OF US$) ALUMINUM) OF US$)
Puts purchased....... 42,000 1,450-1,650 US$ 2.0 39,000 1,450-1650 US$ (5.3)
Forwards sold........ 85,189 1,500-1,700 (1.4) 168,000 1,500-1700 (20)
Calls sold........... 105,000 1,500-1,700 (5.5) 90,000 1,500-1700 (13.8)
------- --------
US$(4.9) US$(39.1)
======= ========
TYPE FINAL MATURITY
---- --------------
Puts purchased....... 12/2001
Forwards sold........ 12/2006
Calls sold........... 12/2003
We have a 50.3% voting capital interest and a 49.3% total capital interest
in Alunorte. The table below sets forth certain information with respect to
Alunorte's derivatives portfolio at September 30, 2001 and 2000:
AT SEPTEMBER 30, 2001 AT SEPTEMBER 30, 2000
------------------------------------------------ ------------------------------------------------
NOTIONAL UNREALIZED GAIN UNREALIZED GAIN
TYPE VALUE PRICE RANGE (LOSS) NOTIONAL VALUE PRICE RANGE (LOSS)
---- -------------- ------------- --------------- -------------- ------------- ---------------
(IN TONS OF (US$ PER TON) (IN MILLIONS (IN TONS OF (US$ PER TON) (IN MILLIONS
ALUMINUM) OF US$) ALUMINUM) OF US$)
Puts purchased............ 26,250 1,400-1,600 US$ 4.6 42,000 1,400-1,600 US$ 4.1
Forwards sold............. 30,500 1,400-1,600 3.2 5,250 1,600-1,800 0.3
Calls sold................ 38,000 1,600-1,800 (0.1) 43,500 1,600-1,800 (2.4)
Hybrid instruments(1)..... 272,000 0.5 162,000 (2.9)
-------- --------
US$ 8.2 US$ (0.9)
======== ========
TYPE FINAL MATURITY
---- --------------
Puts purchased............ 12/2002
Forwards sold............. 3/2003
Calls sold................ 12/2003
Hybrid instruments(1)..... 12/2003
---------------
(1) The payoff of these instruments depends, at least partly, on the manner in
which the price of the underlying asset behaves during the life of the
transaction.
The table below sets forth certain information with respect to Alunorte's
derivatives portfolio at December 31, 2000 and 1999:
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
--------------------------------------------------- ------------------------------------------------
NOTIONAL UNREALIZED GAIN UNREALIZED GAIN
TYPE VALUE PRICE RANGE (LOSS) NOTIONAL VALUE PRICE RANGE (LOSS)
---- -------------- ---------------- --------------- -------------- ------------- ---------------
(IN TONS OF (IN MILLIONS (IN TONS OF (IN MILLIONS
ALUMINUM) (US$ PER TON) OF US$) ALUMINUM) (US$ PER TON) OF US$)
Puts purchased....... 60,000 1,450-1,650 US$ 3.8 US$ --
Forwards sold........ 24,000 1,500-1,700 (0.3) 15,000 1,500-1,700 0.8
Calls sold........... 163,500 1,500-1,700 (5.1) 60,000 1,500-1,700 2.9
1,450-1,550
(puts purchased)
Collars
conditional........ 36,000 1,550-1,750
(calls sold) 0.2
------- --------
US$(1.4) US$ 3.7
======= ========
TYPE FINAL MATURITY
---- --------------
Puts purchased....... 12/2002
Forwards sold........ 12/2002
Calls sold........... 12/2002
Collars
conditional........
12/2003
To manage the risk associated with fluctuations in gold prices, we enter
into derivative instruments which allow us to establish a minimum profit level
for future gold production. However, they may also have the effect of
eliminating potential gains on certain price increases in the spot market for
gold.
48
The table below sets forth certain information with respect to our gold
derivatives portfolio at September 30, 2001 and 2000:
AT SEPTEMBER 30, 2001 AT SEPTEMBER 30, 2000
------------------------------------------------ ------------------------------------------------
UNREALIZED GAIN UNREALIZED GAIN
TYPE QUANTITY PRICE RANGE (LOSS) QUANTITY PRICE RANGE (LOSS)
---- -------------- ------------- --------------- -------------- ------------- ---------------
(IN MILLIONS (IN MILLIONS
(OZ.) (US$ PER OZ.) OF US$) (OZ.) (US$ PER OZ.) OF US$)
Puts purchased......... 479,500 270-340 US$10.79 552,000 302-372 US$13.42
Calls sold............. 845,500 308-366 (4.79) 1,224,800 308-366 (7.11)
Hybrid
instruments(1)....... 25,000 0.10
-------- --------
US$ 6.10 US$ 6.31
======== ========
TYPE FINAL MATURITY
---- --------------
Puts purchased......... 12/2005
Calls sold............. 12/2005
Hybrid
instruments(1)....... 12/2005
---------------
(1) The payoff of these instruments depends, at least partly, on the manner in
which the price of the underlying asset behaves during the life of the
transaction.
The table below sets forth certain information with respect to our gold
derivatives portfolio at December 31, 2000.
DECEMBER 31, 2000
-------------------------------------------------------------
UNREALIZED GAIN
TYPE QUANTITY PRICE RANGE (LOSS) FINAL MATURITY
---- -------- ----------- --------------- --------------
(OZ.) (US$ PER OZ.) (IN MILLIONS
OF US$)
Puts purchased.................................. 479,500 300-345 US$13 12/2004
Calls sold...................................... 999,800 330-390 (5) 12/2004
300-315
(puts
purchased)
Collars conditional............................. 30,000 330-350
(calls sold) 1 11/2002
-----
US$ 9
=====
The unrealized gain in the amount of US$9 million represents the amount
receivable if all transactions had been settled on December 31, 2000.
The table below sets forth certain information with respect to our gold
derivatives portfolio at December 31, 1999.
DECEMBER 31, 1999
-------------------------------------------------
TYPE QUANTITY UNREALIZED GAIN FINAL MATURITY
---- --------- -------------------- --------------
(OZ.) (IN MILLIONS OF US$)
Forwards sold...................................... 20,000 US$ -- 12/2000
Puts purchased..................................... 374,500 7 12/2004
Calls sold......................................... 1,446,000 (17) 12/2004
------
US$(10)
======
49
INDUSTRY OVERVIEW
IRON ORE INDUSTRY
INTRODUCTION
Iron ore is the primary component of the world's production of iron and
steel with essentially all iron ore produced worldwide consumed in steelmaking.
Iron ore demand, and therefore pricing, depend on the global steel industry.
Conditions in the steel industry generally reflect global economic conditions,
but, since demand for steel is driven by basic components of industrial and
economic growth (e.g., heavy construction and automotive industries), from time
to time regional differences exist in steel and, therefore, in iron ore demand.
Since 1960, world pig iron production has grown at an average rate of 2.2%
per year to 576 million tons in 2000. Pig iron is a high carbon primary iron
made by smelting iron ore in blast furnaces using carbonaceous materials.
Production and growth trends in pig iron are representative of trends in iron
ore. This growth is consistent with the growth in global steel production over
the same period, with both largely influenced by economic development in the
East Asian and Southeast Asian regions. Iron ore production is expected to grow
at an average rate of 1.2% per year over the next five years according to Grant
Samuel Independent Valuation of North Limited.
[LINE GRAPH OF WORLD PRODUCTION OF PIG IRON AND CRUDE STEEL]
CRUDE STEEL PIG IRON
----------- --------
1960 347.00 242.00
1961 347.00 251.00
1962 354.00 257.00
1963 379.00 272.00
1964 430.00 308.00
1965 452.00 326.00
1966 471.00 336.00
1967 493.00 352.00
1968 524.00 378.00
1969 571.00 408.00
1970 595.00 427.00
1971 582.00 423.00
1972 630.00 447.00
1973 696.00 494.00
1974 704.00 503.00
1975 644.00 470.00
1976 675.00 489.00
1977 675.00 486.00
1978 717.00 501.00
1979 747.00 528.00
1980 716.00 508.00
1981 707.00 497.00
1982 645.00 453.00
1983 663.00 458.00
1984 710.00 491.00
1985 719.00 500.00
1986 714.00 496.00
1987 736.00 509.00
1988 780.00 538.00
1989 786.00 545.00
1990 770.00 532.00
1991 734.00 504.00
1992 720.00 499.00
1993 728.00 528.00
1994 725.00 509.00
1995 752.00 524.00
1996 751.00 517.00
1997 799.00 547.00
1998 777.00 539.00
1999 788.00 541.00
2000 847.00 576.00
Source: Australian Bureau of Agricultural and Resource Economics -- ABARE.
Worldwide, iron ore is mined in about 50 countries, with the seven largest
of these producing countries -- Brazil, Australia, former USSR republics, China,
India, the United States and South Africa -- accounting for approximately
three-quarters of total world production.
While most of the seven major iron ore production countries are also major
steel producers, nearly half of estimated world iron ore production in 2000
(between 490 million and 495 million tons) changed hands via seaborne
export-import trade. Brazil and Australia together dominate the world's seaborne
trade in iron ore exports, with a 39% and 33% share of seaborne tonnage,
respectively, according to ABN AMRO research.
50
The following table presents iron ore production for 1985, 1990 and the
1998-2000 period in millions of tons by the seven largest producers worldwide,
and the percentage change for the 1999-2000 and 1990-2000 periods.
WORLD IRON PRODUCTION BY COUNTRY
2000 1999 1998 1990 1985 2000/1999 2000/1990
----- ----- ----- ----- ----- --------- ---------
(IN MILLIONS OF TONS) (IN PERCENTAGES)
COUNTRY
Brazil..................................... 200.4 188.7 183.1 152.3 128.2 6.2% 31.6%
Australia.................................. 171.3 153.0 163.3 113.5 96.2 12.0 50.9
Former Soviet Union........................ 157.0 138.1 132.1 236.2 247.6 13.7 (33.5)
China...................................... 99.9 92.2 97.1 80.0 62.1 8.4 24.9
India...................................... 75.4 70.2 71.7 53.7 44.2 7.4 40.4
USA........................................ 63.0 57.8 62.9 56.4 49.5 9.0 11.7
Canada..................................... 35.9 34.0 38.7 36.7 40.4 5.6 (2.2)
Others..................................... 134.4 124.7 131.2 156.2 172.0 7.8 (14.0)
----- ----- ----- ----- ----- ---- -----
World.................................... 937.3 858.7 880.1 885.0 840.2 9.2% 5.9%
===== ===== ===== ===== ===== ==== =====
As a percentage of world production:
Top two.................................... 39.7% 39.8% 39.4% 30.0% 26.7%
Top four................................... 67.1 66.6 65.4 65.8 63.6
---------------
Source: Iron Ore Manual, 2001-2002.
Globally, the iron ore industry is currently undergoing a period of
consolidation, reflecting a tendency by iron ore producers toward economies of
scale to accelerate efficiency improvements and improve earnings. Following the
latest round of consolidation in 2000 and 2001, the three primary companies in
the global iron ore industry are CVRD, Rio Tinto and BHP. During this period,
our acquisitions of Socoimex, Samitri, Ferteco and Caemi have sustained our
leading position in the iron ore marketplace, even as Rio Tinto's acquisition of
North Limited in 2000 moved Rio Tinto ahead of BHP into second place in terms of
annual production. Global producer rankings are presented in the following
chart:
MANAGED IRON ORE PRODUCTION BY COMPANY (2000)
[GLOBAL IRON ORE PRODUCTS GRAPH]
CVG 20.00
LKAB 21.00
Ferteco 23.00
Iscor 26.00
Caemi 35.00
Cleveland Cliffs 42.00
BHP 76.00
Rio Tinto 115.00
CVRD 129.00
PRODUCTION (IN MILLIONS OF TONS)
Source: Iron Ore 2002, AME Mineral Economics.
Notes:
CVRD includes = CVRD + Samitri + Socoimex + Samarco (50%)
BHP = BHP + Samarco (50%)
CAEMI = MBR + QCM (50%)
RIO TINTO = Hameraley + Robe River + IOC + Corumbense
51
IRON ORE MARKETS
Geographically, the primary iron ore import markets can be broadly divided
into three regions: Asia, Europe and North America. The competition among
producers and exporters to supply steel mill customers in these regions is
primarily dictated by freight costs. A secondary competitive factor is the
demand for particular iron ore products, which also tends to vary along regional
lines. For example, steel mills in North America generally are configured to
process predominantly iron pellets, while blast furnace steel makers in Asia are
configured to process predominantly sinter fines and lump ore. However, the
ability to provide iron ore products tailored to individual customers'
specifications, such as high-grade, low-impurity blending ores, pellets, etc.,
and/or the metallurgical properties of particular ores permit producers to
increase their presence in more distant markets.
The following table illustrates the distribution of world import demand for
1985, 1990 and the 1998-2000 period in millions of tons for the seven largest
importers of iron ore worldwide, and the percentage change for the 1999-2000 and
1990-2000 periods.
WORLD IMPORTS BY COUNTRY
2000 1999 1998 1990 1985 2000/1999 2000/1990
----- ----- ----- ----- ----- --------- ---------
(IN MILLIONS OF TONS) (IN PERCENTAGES)
COUNTRY
Japan........................................ 131.7 120.1 120.8 125.3 124.5 9.7% 5.1%
China........................................ 70.0 55.3 51.8 14.3 10.0 26.6 389.5
Germany...................................... 47.6 39.2 46.8 43.7 45.1 21.4 8.9
South Korea.................................. 39.0 35.5 33.6 22.6 13.2 9.9 72.6
France....................................... 19.7 20.2 19.8 18.8 16.2 (2.5) 4.8
Italy........................................ 17.6 15.6 15.7 17.2 -- 12.8 2.3
United Kingdom............................... 16.7 17.0 20.8 17.6 15.4 (1.8) (5.1)
Others....................................... 142.7 130.6 142.5 140.6 -- 9.3 1.5
----- ----- ----- ----- ----- ---- -----
World...................................... 485.0 433.5 451.8 400.1 377.5 11.9% 21.2%
===== ===== ===== ===== ===== ==== =====
As a percentage of world imports:
Top two...................................... 41.6% 40.5% 38.2% 34.9% 35.6%
Top four..................................... 59.4 57.7 56.0 51.5 51.1
---------------
Source: Iron Ore Manual, 2001-2002.
STEEL INDUSTRY
Demand for iron ore is dictated by the global steel industry, which
consumes substantially all (98%) of the iron ore produced worldwide. Demand for
crude steel is correlated primarily to the automotive and construction
industries, both of which are affected by the general state of the world
economy. Therefore, demand for iron ore depends ultimately on global economic
conditions.
The steel industry worldwide produced over 800 million tons of crude steel
in 2000. The largest producing countries are China, Japan and the United States,
each of which produces approximately 100 million tons annually. Germany and
Korea follow, each of which produces approximately 40-50 million tons annually.
World crude steel production has grown by an average of 2.3% per year since
1960. Over the next five years, global production is forecasted to grow at a
rate of 1.6% per year. Regional growth rates are expected to vary in line with
regional economic growth. Steel consumption in North America is expected to grow
at about 0.5% per year while developing countries are expected to achieve growth
in excess of 2% per year, according to Grant Samuel Independent Valuation of
North Limited. In particular, steel
52
consumption in Asia is expected to grow at a higher rate as a result of high
rates of investment in industry, transportation, infrastructure, construction
and an overall improvement in standards of living.
STEEL MANUFACTURING PROCESSES
There are two basic manufacturing processes that account for the vast
majority of modern steelmaking:
Integrated Process -- The integrated process is the blast furnace/basic
oxygen furnace process, which currently accounts for approximately 60% of world
steel production. Lump ore and processed fines are fed directly into a
coke-fired blast furnace, together with coke and limestone, to produce pig iron.
Pig iron, together with some scrap steel, is then integrated with oxygen in a
basic oxygen furnace to produce crude steel.
EAF Process -- According to the Institute for Steel and Iron, the electric
arc furnace, or EAF process, currently accounts for approximately 34% of world
steel production. Scrap steel is melted in an electric arc furnace and then
alloyed in a ladle furnace to produce crude steel. EAF and "mini-mills" (steel
making plants that consume primarily scrap metal and use single-stage,
continuous casting technology to produce end-user ready steel products) have
gained popularity over the last decade as a result of their lower capital cost
and reduced environmental impact.
According to CRU International the proportion of world steel production
using the EAF process is expected to grow from 34% to 40% over the next few
years, increasing demand for direct reduced iron, or DRI, a clean iron feed
material produced by a high-temperature, solid-state process that removes oxygen
from iron ore. High-quality, low-impurity iron ore can be processed to produce
DRI, which can, in turn, be further treated to make hot briquetted iron, or HBI,
essentially DRI compacted at high temperature into briquettes. Each of these
higher value-added, intermediate iron products benefits from significantly lower
transportation and re-handling costs per delivered tonne of iron content
compared to unprocessed iron ore. DRI and HBI are mainly used to supplement
steel scrap in electric arc furnaces where low levels of metallic impurities are
required. The increasing demand for DRI is expected to result in greater demand
for direct reduction grade pellets. However, the blast furnace segment of the
market currently remains the most important consumer of iron ore products.
IRON ORE PRODUCTS
Demand for pellet feed is steadily increasing, due to a combination of
customer specification and environmental preference for the pelletizing process
versus the sintering process. Sinter feed products have become less desirable
due to the amount of greenhouse gases emitted during the sintering process.
Demand for pellet feed is correlated to pellet demand. According to our
estimates, demand for pellets in the seaborne market has increased by 59% from
1990 to 2000 and 28% from 1995 to 2000.
In addition, significant worldwide reserves of iron ore fines suitable for
pelletizing exist, which provide producers with the ability to convert an
increasing volume of production into pellets. As a result, global trade in
pellets is expected to grow at a rate higher than that of other iron ore
products. The principal constraint on growth of the pellet market is the
installed base of world pellet production capacity, which is currently
approximately 319 million tons per year, according to the U.S. Geological Survey
Minerals Yearbook for 1999.
IRON ORE PRICES
The majority of the international iron ore trade is conducted pursuant to
frame-type contract arrangements, in which annual tonnages are specified for the
term of the contract, but prices are negotiated annually. Contract prices for
iron ore are influenced by a range of factors, including iron content of
specific ore deposits, the various beneficiation processes required to produce
the desired final product, particle size, moisture content, type and
concentration of contaminants in the ore, and other metallurgical properties.
Contract prices also depend on the geographic location of the relevant ore
deposit. Fines, lump
53
ore and pellets each typically command different prices. Iron ore prices are
specified in U.S. dollars per metallic unit in dry metric tons (tons) or dry
long tons. The base price quoted for a particular tonne of ore depends
principally on its iron content (grade) and moisture content.
Lump ore has historically traded at a higher price than that of sinter fines,
reflecting its use as a direct feed to blast furnaces. Iron concentrates
typically trade at a level similar to that of sinter fines. Pellets trade at a
significant premium over the rates of both lump ore and sinter fines.
Iron ore price negotiations for 2001 were settled at higher prices than
those of the previous year. The table below sets forth the percentage change in
the prices of our iron ore products sold to Europe and Japan over the 2000-2001
period.
PERCENTAGE CHANGE IN IRON ORE PRICES FOR 2000-2001
EUROPE(1) JAPAN(2)
--------- --------
(IN PERCENTAGES)
FINES:
Southern System Standard Sinter Feed........................ 4.52% 4.30%
Carajas Sinter Feed......................................... 4.31 4.21
LUMPS:
New Tubarao A............................................... -- 3.23
Special Lump Rio Doce....................................... -- 3.23
PELLETS:
Blast Furnace Pellets....................................... 1.75 --
---------------
Source: CVRD.
(1) Percentage change of prices for Europe is based on prices valid on a
calendar year basis (January to December 2001). The prices were based on the
U.S. dollar price per dry metric tonne.
(2) Percentage change of prices for Japan is based on prices valid on a fiscal
year basis (April 2001 to March 2002). The prices were based on the U.S.
dollar price per dry long tonne.
COPPER INDUSTRY
Refined copper is a primary material used in a range of industries,
including automotive and other durable consumer goods (e.g., fine wire, magnet
wire and certain specialty brass mill products), as well as construction (e.g.,
tubing), electrical products and transmission (e.g., wire), and general
industrial (e.g., wire rod and other milled brass). Copper demand is cyclical,
generally varying in line with changes in global and regional economic
conditions. The industrial sectors consuming copper, however, can follow
divergent cycles in some regions during certain periods, including where demand
for consumer durables slows but basic infrastructure construction, such as
electricity transmission, is ongoing. Copper products are priced by reference to
benchmark spot and futures prices on the London Metals Exchange, or LME (or
other major commodities exchanges). Spot and future prices in turn are
influenced by both the general level and trend of end-user demand and the level
of LME or other exchange physical inventories of refined copper metal.
The international trade in copper involves products in various stages of
refinement:
- Copper concentrates -- An intermediate mine product, where ore mined is
processed to create a bulk concentrate with copper content (grade)
typically ranging between 30% and 35% by volume; sold to smelters which
further process and refine the material into blister or cathode;
- Blister/anode copper -- Depending upon the smelter technology employed,
blister or anode copper may be the final smelter product, requiring an
additional stage of refining to produce copper cathode; and
54
- Copper cathode -- Cathode is copper metal refined to 99.9% purity, the
copper product quoted by the LME and other major commodities exchanges
generally acceptable to manufacturers; it is sold directly to mills or
foundries or delivered to the warehouses of the LME or other major
commodities exchanges.
While the growth in worldwide demand for copper has varied in recent years,
ranging between 2.5% and 6.4% in the period from 1997 through 2000, the
long-term world demand growth trend has ranged from 2.5% to 3.5% per year.
WORLD COPPER CONSUMPTION GROWTH RATES
[BAR CHART] (1994 TO 2001E)
1994 5.20
1995 3.20
1996 5.10
1997 4.10
1998 2.50
1999 5.50
2000 6.90
2001E
Source: CRU International Ltd. -- July 2001.
The current economic slowdown in the U.S., Europe and, to a lesser extent,
Asia, was expected to result in effectively zero copper demand positive growth
for 2001, with a return to a positive growth trend in the 2003-2005 period,
according to CRU in July 2001.
The supply side of the copper market is affected by developments in two
segments of the supply chain. First, mine production tends to be added in
significant increments as a result of the scale required to generate economic
returns on the large capital investment required by new mine construction or the
expansion of existing mines. Moreover, cyclical highs in the copper price, such
as those in the late 1980s and early 1990s, tend to lead to new mine
developments. In addition to conventional concentrate-producing mines, the
advent of copper leaching -- SX/EW technology, where copper is leached from ore
using solvents and then electrolytically recovered from the resulting solution
as cathode, bypassing the concentrate stage, has rendered the exploitation of
lower grade orebodies economic, adding to the volume of copper mine production
brought to market. These two developments converged during the 1995-2000 period,
when the annual rate of mine production grew by more than three million tons of
contained copper according to the International Copper Study Group of the
American Bureau of Metals Statistics. Low levels of growth in mine production
were expected in 2001, substantially all coming from leaching -- SX/EW
operations, while smelter capacity expands by more than 6.0%, to continue
catching up with the new mine developments and expansions of the 1990s.
Thereafter, during the 2001 through 2005 period, mine production and
smelter capacity are expected to continue to seek equilibrium as the most recent
mine capacity additions work their way into the market. In 2001, refined
production was projected to grow by 4.6%, and thereafter to grow by an average
of 3.2% annually through 2005, roughly in line with the trend growth rate of
world copper consumption according to CRU in July 2001.
55
COPPER PRICES
Most international trade in copper concentrates occurs under long-term
contracts, with annual tonnages specified for the term of the contract, but
price and treatment and refining charges, or TC/RCs, determined annually by
quoted benchmark prices such as the LME spot or forward price.
The miner typically sells copper concentrates FOB "net smelter return" and
the title passes to the smelter. Some concentrates, however, are smelted and
refined on a "tolling" basis, where title remains with the miner; the smelter
receives only the TC/RC and some metal deduction as compensation for processing
the miner's concentrates.
Blister or anode copper is sold to or toll-refined by refiners on behalf of
the blister or anode producer, with prices and refining charges set by
prevailing copper prices. Market prices for refined copper are set by the bid
and ask for metal of certain specification (e.g., LME Grade A copper) on major
commodities exchanges.
Producers of finished metal sell their product either through direct
transactions with consumers (e.g., rod, wire or brass mills) or on the open
market through the LME.
COPPER PRICE HISTORY
JANUARY 6, 1995 TO JANUARY 25, 2002 (WEEKLY)
[COPPER PRICE HISTORY LINE GRAPH]
01/06/95 136.08
01/13/95 137.37
01/20/95 138.66
01/27/95 136.19
02/03/95 130.01
02/10/95 131.56
02/17/95 130.73
02/24/95 129.64
03/03/95 132.04
03/10/95 131.88
03/17/95 131.23
03/24/95 134.54
03/31/95 134.88
04/07/95 134.58
04/13/95 132.31
04/21/95 130.16
04/28/95 128.10
05/05/95 123.29
05/12/95 125.00
05/19/95 124.40
05/26/95 128.96
06/02/95 130.91
06/09/95 132.72
06/16/95 137.35
06/23/95 142.20
06/30/95 139.07
07/07/95 140.07
07/14/95 145.42
07/21/95 132.40
07/28/95 135.44
08/04/95 138.53
08/11/95 136.65
08/18/95 141.52
08/25/95 137.76
09/01/95 133.31
09/08/95 133.38
09/15/95 129.72
09/22/95 132.93
09/29/95 132.79
10/06/95 128.64
10/13/95 127.96
10/20/95 124.83
10/27/95 126.33
11/03/95 134.31
11/10/95 137.35
11/17/95 135.81
11/24/95 135.81
12/01/95 134.04
12/08/95 135.26
12/15/95 131.07
12/22/95 129.86
12/29/95 128.91
01/05/96 124.33
01/12/96 116.12
01/19/96 115.53
01/26/96 113.49
02/02/96 116.89
02/09/96 116.62
02/16/96 112.99
02/23/96 115.71
03/01/96 116.71
03/08/96 118.66
03/15/96 115.89
03/22/96 114.74
03/29/96 115.53
04/04/96 112.67
04/12/96 117.53
04/19/96 121.43
04/26/96 122.79
05/02/96 123.24
05/03/96 124.38
05/10/96 126.13
05/17/96 116.53
05/24/96 115.12
05/31/96 115.89
06/07/96 112.58
06/14/96 93.65
06/21/96 90.27
06/28/96 89.81
07/03/96 88.81
07/12/96 87.50
07/19/96 89.00
07/26/96 95.26
08/02/96 92.53
08/09/96 92.81
08/16/96 90.14
08/23/96 90.31
08/30/96 95.21
09/06/96 88.27
09/13/96 85.64
09/20/96 85.64
09/27/96 88.79
10/04/96 86.95
10/11/96 89.44
10/18/96 89.63
10/25/96 93.62
11/01/96 91.08
11/08/96 94.53
11/15/96 102.42
11/22/96 106.69
11/29/96 112.58
12/06/96 103.69
12/13/96 101.24
12/20/96 102.38
12/27/96 100.93
01/03/97 104.55
01/10/97 109.08
01/17/97 111.49
01/24/97 114.58
01/31/97 109.59
02/07/97 111.13
02/14/97 106.28
02/21/97 110.77
02/28/97 110.50
03/07/97 112.17
03/14/97 109.40
03/21/97 110.04
03/27/97 110.18
04/04/97 108.00
04/11/97 104.67
04/18/97 105.96
04/25/97 117.35
05/02/97 110.18
05/09/97 110.90
05/16/97 115.25
05/23/97 118.07
05/30/97 117.64
06/06/97 115.64
06/13/97 121.88
06/20/97 122.11
06/27/97 116.76
07/04/97 115.69
07/11/97 109.79
07/18/97 111.36
07/25/97 110.18
08/01/97 106.14
08/08/97 105.05
08/15/97 100.36
08/22/97 99.59
08/29/97 99.75
09/05/97 98.16
09/12/97 93.87
09/19/97 95.64
09/26/97 93.99
10/03/97 93.01
10/10/97 93.67
10/17/97 94.87
10/24/97 90.99
10/31/97 91.13
11/07/97 88.81
11/14/97 87.93
11/21/97 83.71
11/28/97 83.90
12/05/97 80.54
12/12/97 80.94
12/19/97 79.31
12/24/97 78.27
12/31/97 78.00
01/09/98 74.37
01/16/98 76.76
01/23/98 78.00
01/30/98 78.72
02/06/98 76.44
02/13/98 75.80
02/20/98 74.53
02/27/98 76.42
03/06/98 79.66
03/13/98 81.55
03/20/98 78.82
03/27/98 78.31
04/03/98 75.93
04/09/98 80.01
04/17/98 83.82
04/24/98 84.37
05/01/98 83.37
05/08/98 79.94
05/15/98 78.34
05/22/98 76.23
05/29/98 76.84
06/05/98 76.34
06/12/98 76.04
06/19/98 76.18
06/26/98 73.73
07/03/98 72.55
07/10/98 71.89
07/17/98 76.26
07/24/98 79.81
07/31/98 76.19
08/07/98 74.08
08/14/98 72.92
08/21/98 73.23
08/28/98 74.96
09/04/98 75.01
09/11/98 75.74
09/18/98 74.40
09/25/98 74.71
10/02/98 72.47
10/09/98 71.94
10/16/98 73.66
10/23/98 71.86
10/30/98 72.09
11/06/98 72.92
11/13/98 70.82
11/20/98 72.13
11/27/98 70.89
12/04/98 68.04
12/11/98 65.72
12/18/98 65.43
12/24/98 65.20
12/31/98 66.47
01/08/99 65.36
01/15/99 65.83
01/22/99 65.16
01/29/99 63.65
02/05/99 65.66
02/12/99 65.23
02/19/99 62.57
02/26/99 62.38
03/05/99 62.64
03/12/99 62.18
03/19/99 61.81
03/26/99 64.55
04/01/99 62.20
04/09/99 63.66
04/16/99 68.18
04/23/99 69.03
04/30/99 70.75
05/07/99 70.78
05/14/99 70.16
05/21/99 66.42
05/28/99 62.10
06/04/99 61.90
06/11/99 63.85
06/18/99 63.92
06/25/99 66.88
07/02/99 74.34
07/09/99 75.59
07/16/99 77.03
07/23/99 73.69
07/30/99 72.94
08/06/99 76.16
08/13/99 76.34
08/20/99 72.71
08/27/99 74.10
09/03/99 78.34
09/10/99 79.97
09/17/99 81.74
09/24/99 78.29
10/01/99 79.04
10/08/99 75.25
10/15/99 78.70
10/22/99 79.95
10/29/99 79.06
11/05/99 78.70
11/12/99 75.73
11/19/99 77.63
11/26/99 79.10
12/03/99 78.59
12/10/99 77.75
12/17/99 81.47
12/24/99 83.25
12/30/99 84.14
01/07/00 83.53
01/14/00 83.92
01/21/00 85.37
01/28/00 82.58
02/04/00 80.82
02/11/00 83.27
02/18/00 82.10
02/25/00 81.33
03/03/00 78.60
03/10/00 78.29
03/17/00 80.45
03/24/00 79.38
03/31/00 78.65
04/07/00 75.05
04/14/00 74.30
04/21/00 75.66
04/28/00 78.34
05/05/00 81.04
05/12/00 82.15
05/19/00 82.28
05/26/00 81.56
06/02/00 78.21
06/09/00 78.09
06/16/00 80.78
06/23/00 79.65
06/30/00 80.42
07/07/00 79.16
07/14/00 80.55
07/21/00 83.55
07/28/00 84.10
08/04/00 83.76
08/11/00 83.60
08/18/00 84.44
08/25/00 84.44
09/01/00 84.44
09/08/00 84.44
09/15/00 84.44
09/22/00 90.08
09/29/00 89.68
10/06/00 88.36
10/13/00 87.41
10/20/00 84.57
10/27/00 82.78
11/03/00 82.49
11/10/00 81.49
11/17/00 80.73
11/24/00 81.07
12/01/00 82.86
12/08/00 86.19
12/15/00 85.55
12/22/00 82.86
12/29/00 81.78
01/05/01 81.78
01/12/01 81.78
01/19/01 82.69
01/26/01 82.69
02/02/01 81.42
02/09/01 81.42
02/16/01 81.42
02/23/01 81.42
03/02/01 81.42
03/09/01 81.21
03/16/01 78.43
03/23/01 77.16
03/30/01 75.31
04/06/01 74.25
04/12/01 75.85
04/20/01 76.52
04/27/01 75.27
05/04/01 76.68
05/11/01 76.68
05/18/01 76.98
05/25/01 78.13
06/01/01 75.05
06/08/01 73.89
06/15/01 72.25
06/22/01 72.48
06/29/01 70.33
07/06/01 70.15
07/13/01 69.96
07/20/01 68.89
07/27/01 67.04
08/03/01 67.52
08/10/01 65.25
08/17/01 67.48
08/24/01 67.73
08/31/01 67.00
09/07/01 64.55
09/14/01 64.59
09/21/01 64.05
09/28/01 64.57
10/05/01 62.80
10/12/01 63.08
10/19/01 61.30
10/26/01 62.37
11/02/01 60.74
11/09/01 57.29
11/16/01 67.09
11/23/01 66.30
11/30/01 70.38
12/07/01 68.86
12/14/01 65.84
12/21/01 66.32
12/28/01 66.25
01/04/02 65.57
01/11/02 68.63
01/18/02 68.81
01/25/02 69.51
01/25/02 62.89
Source: LME spot prices.
Since 1995, copper prices have generally had a downward trend, from highs in the
range of US$1.35/lb to the current price level, which is at or below US$0.70/lb.
This trend reflects both the bulge in new mine supply developed in the 1990s and
the demand interruptions caused by the Asian and Russian economic crises of the
late 1990s.
The long term supply/demand balance outlook, with deficits in 2002-2003
followed by long-term demand growth outstripping supply, is expected by most
analysts to stimulate a recovery in copper prices in 2002-2003, and result in
long-term copper prices in the range of US$0.90/lb to US$1.00/lb.
ALUMINUM INDUSTRY
Refined aluminum is a primary material used in a range of industries,
including containers and packaging, transportation (e.g., aircraft, railroad
cars, automobiles), building and construction, and electrical equipment that
make use of aluminum's light weight, high strength-to-weight ratio and/or high
conductivity (e.g., long-distance power transmission). In addition, a wide
variety of coating alloys and wrought alloys are produced to improve the
structural strength of lightweight aluminum and/or take
56
advantage of its corrosion-resistant properties. Aluminum demand is cyclical,
generally varying in line with global and regional economic conditions. The
industrial and consumer products sectors which consume aluminum, however, can
follow divergent cycles in given regions during certain periods, for example,
where demand for consumer goods lags behind other segments of the economy. The
amenability of aluminum to recycling has enabled primary producers to
incorporate scrap as an important element of their feed stock chain,
substantially reducing their overall cost of producing refined aluminum.
Aluminum produced from recycled scrap saves approximately 95% of the energy
costs incurred in producing aluminum from bauxite. Aluminum products are priced
by reference to benchmark spot and futures prices on the LME or other major
commodities exchanges.
The international trade in aluminum principally involves products in two
stages of refinement:
- Alumina -- Bauxite ore is aluminum's principal raw material, and is
refined by chemical and electrolytic processes into alumina or aluminum
oxide and sold to smelters which further process and refine the material
into refined aluminum metal. Most primary aluminum producers control
their own reserves of bauxite and alumina refining capacity.
- Aluminum -- Primary aluminum producers smelt and refine alumina and/or
recycle scrap aluminum to 99.9% purity, the aluminum product quoted by
the LME and other major commodities exchanges generally acceptable to
manufacturers. Most of the major primary aluminum producers are
vertically integrated and produce some range of semi-finished aluminum
products for sale to industrial customers, which may include flat-rolled
products (e.g., rigid container sheet and foil for packaging, sheet and
plate mill products for transportation and construction), engineered
products (extrusions, aluminum and alloy forgings and castings, and
fasteners), or finished packaging products for sale to beverage or food
manufacturers.
Annual growth in the worldwide demand for aluminum has historically varied
widely from year to year. However, the compound annual growth rate (CAGR) of
demand for the 15-year period ending in the year 2000 was 3.0%. During the
initial five-year period (1985-1990) and the final five-year period (1995-2000),
the CAGR accelerated to 3.9%. The rate slowed 1.3% in the middle five-year
period (1990-1995), due to the adverse impact of the U.S. recession in early
1991 according to World Metals Statistics, WMS. Merrill Lynch Research has
estimated the long-term annual rate of consumption growth to be 3.25%, resulting
from increasing intensity of use in the automotive segment, as well as organic
growth in world industrial output.
WORLD ALUMINUM CONSUMPTION GROWTH RATES
[BAR CHART] (1998 TO 2001E)
1998 0.50
1999 5.70
2000 6.10
2001E -0.80
Source: CRU -- July 2001.
World aluminum consumption was expected to have increased by 1.1% during
2001, with continued strength in China offsetting weakness in the United States,
Europe, and Japan. Western world demand was expected to have decreased by as
much as 1% during 2001. In the United States, the manufacturing recession has
led to an inventory correction, with a similar pattern having emerged in Europe.
However, a
57
recovery is forecasted in 2002, with world growth increasing approximately 3.5%,
in line with the current GDP forecast of Merrill Lynch economists.
The supply of aluminum over the past ten years has adjusted to the influx
of material after the fall of the Soviet Union in 1991. As a result of the
ensuing period of strong economic growth, aluminum demand in the Western World
has increased to where it is now dependent on Russia's imports. China has also
emerged as a sizeable producer of aluminum, more than tripling its production
during 2000 from a level of 850,000 mt in 1990. However, because China's
consumption has more than quadrupled over the same time period, it remains a net
importer of alumina and aluminum. Depending upon its short-term needs, China has
entered the market as a seller, as well as buyer of these materials.
A wave of consolidation among aluminum suppliers followed the Asian
economic crisis in 1998, prompted by low prices and rising inventories, with
some rationalization of aluminum production. The more recent period has seen
considerable supply curtailments related mainly to rising power costs and/or a
lack of power availability in the United States, Pacific Northwest, Western
Canada, and Brazil. Approximately 1.8 million tons have been curtailed (7% of
world production), with continued high power prices and lower aluminum prices
(US$0.62/lb as of the second quarter of 2001) providing a disincentive for any
near-term restarts of significance. As of the second quarter of 2001, CRU
estimated that idle world capacity totaled 2.15 million annual tons, with
further power-related shutdowns possible elsewhere in the world (e.g., Brazil)
in 2001. Over the next few years, world capacity growth and higher utilization
rates are expected to increase world aluminum production to over 29 million tons
per year by 2005 according to CRU for July 2001.
ALUMINUM PRICES
As shown in the chart below, since 1995 the aluminum price has generally
had a downward trend, from highs in the range of US$0.90/lb to the current price
level, at or around US$0.55/lb. This trend reflects primarily the change in
Russian production from internal consumption to export markets, with the trend
exacerbated by the Asian economic crisis beginning in 1998.
Forecast supply/demand balances in 2002-2003, followed by a long-term
supply picture better-managed by a consolidated primary producer industry, is
expected by most analysts to stimulate a recovery in the aluminum price in
2002-2003, and result in long-term aluminum prices of greater than US$0.70/lb.
ALUMINUM PRICE HISTORY
[LINE GRAPH] JANUARY 6, 1995 TO JANUARY 25, 2002 (WEEKLY)
ALUMINUM SPOT USC/LB
--------------------
01/06/95 91.80
01/13/95 92.25
01/20/95 96.77
01/27/95 95.00
02/03/95 93.84
02/10/95 86.67
02/17/95 85.40
02/24/95 83.18
03/03/95 85.01
03/10/95 82.29
03/17/95 79.81
03/24/95 83.63
03/31/95 84.08
04/07/95 83.99
04/13/95 82.99
04/21/95 86.58
04/28/95 81.86
05/05/95 79.92
05/12/95 78.77
05/19/95 79.00
05/26/95 81.86
06/02/95 81.74
06/09/95 80.59
06/16/95 80.37
06/23/95 82.49
06/30/95 81.37
07/07/95 81.46
07/14/95 86.62
07/21/95 85.81
07/28/95 84.88
08/04/95 87.27
08/11/95 85.84
08/18/95 86.78
08/25/95 85.57
09/01/95 80.13
09/08/95 80.43
09/15/95 79.57
09/22/95 80.81
09/29/95 79.70
10/06/95 79.19
10/13/95 75.90
10/20/95 73.56
10/27/95 74.55
11/03/95 76.53
11/10/95 74.79
11/17/95 74.31
11/24/95 76.19
12/01/95 75.19
12/08/95 74.61
12/15/95 75.99
12/22/95 75.82
12/29/95 76.25
01/05/96 73.92
01/12/96 73.62
01/19/96 70.42
01/26/96 69.70
02/02/96 72.05
02/09/96 73.63
02/16/96 73.46
02/23/96 72.16
03/01/96 72.64
03/08/96 72.65
03/15/96 73.15
03/22/96 74.37
03/29/96 74.56
04/04/96 72.50
04/12/96 72.28
04/19/96 70.93
04/26/96 72.17
05/02/96 73.32
05/03/96 73.38
05/10/96 74.34
05/17/96 72.08
05/24/96 70.77
05/31/96 71.19
06/07/96 68.28
06/14/96 67.13
06/21/96 67.37
06/28/96 66.87
07/03/96 66.86
07/12/96 65.31
07/19/96 65.76
07/26/96 67.04
08/02/96 67.10
08/09/96 66.83
08/16/96 66.20
08/23/96 65.62
08/30/96 67.12
09/06/96 65.83
09/13/96 63.65
09/20/96 62.56
09/27/96 62.41
10/04/96 60.17
10/11/96 59.28
10/18/96 60.33
10/25/96 63.86
11/01/96 63.45
11/08/96 64.90
11/15/96 64.32
11/22/96 68.63
11/29/96 68.22
12/06/96 68.00
12/13/96 67.22
12/20/96 69.00
12/27/96 68.76
01/03/97 69.19
01/10/97 71.12
01/17/97 71.52
01/24/97 73.37
01/31/97 72.65
02/07/97 71.48
02/14/97 69.52
02/21/97 72.59
02/28/97 73.84
03/07/97 74.66
03/14/97 74.25
03/21/97 73.77
03/27/97 73.05
04/04/97 72.14
04/11/97 69.46
04/18/97 69.03
04/25/97 72.03
05/02/97 72.39
05/09/97 74.50
05/16/97 74.78
05/23/97 73.68
05/30/97 72.81
06/06/97 71.39
06/13/97 70.84
06/20/97 70.60
06/27/97 70.54
07/04/97 71.88
07/11/97 70.55
07/18/97 71.87
07/25/97 76.54
08/01/97 79.15
08/08/97 79.97
08/15/97 78.70
08/22/97 78.07
08/29/97 73.22
09/05/97 72.64
09/12/97 72.99
09/19/97 74.25
09/26/97 74.14
10/03/97 74.80
10/10/97 74.41
10/17/97 72.81
10/24/97 70.90
10/31/97 73.03
11/07/97 72.35
11/14/97 74.37
11/21/97 72.44
11/28/97 71.55
12/05/97 70.37
12/12/97 69.83
12/19/97 68.93
12/24/97 67.93
12/31/97 69.44
01/09/98 66.48
01/16/98 66.87
01/23/98 69.30
01/30/98 68.79
02/06/98 68.08
02/13/98 67.58
02/20/98 65.22
02/27/98 65.93
03/06/98 64.55
03/13/98 65.58
03/20/98 65.00
03/27/98 65.08
04/03/98 62.94
04/09/98 64.08
04/17/98 64.62
04/24/98 65.19
05/01/98 63.90
05/08/98 62.47
05/15/98 60.94
05/22/98 62.71
05/29/98 61.07
06/05/98 59.81
06/12/98 58.89
06/19/98 60.38
06/26/98 58.21
07/03/98 57.82
07/10/98 57.31
07/17/98 60.25
07/24/98 62.65
07/31/98 60.10
08/07/98 59.97
08/14/98 59.37
08/21/98 59.96
08/28/98 60.97
09/04/98 63.00
09/11/98 62.56
09/18/98 59.81
09/25/98 59.78
10/02/98 59.22
10/09/98 60.37
10/16/98 60.26
10/23/98 58.74
10/30/98 58.85
11/06/98 58.80
11/13/98 59.57
11/20/98 58.79
11/27/98 59.04
12/04/98 57.45
12/11/98 56.37
12/18/98 55.80
12/24/98 56.10
12/31/98 56.11
01/08/99 56.01
01/15/99 55.68
01/22/99 55.42
01/29/99 54.34
02/05/99 55.04
02/12/99 54.10
02/19/99 53.45
02/26/99 53.02
03/05/99 51.58
03/12/99 52.04
03/19/99 55.54
03/26/99 56.17
04/01/99 55.20
04/09/99 56.56
04/16/99 58.93
04/23/99 58.59
04/30/99 61.07
05/07/99 60.39
05/14/99 61.35
05/21/99 59.63
05/28/99 56.72
06/04/99 57.94
06/11/99 59.55
06/18/99 60.60
06/25/99 61.12
07/02/99 62.56
07/09/99 63.06
07/16/99 64.74
07/23/99 64.70
07/30/99 62.65
08/06/99 65.33
08/13/99 65.45
08/20/99 64.59
08/27/99 65.32
09/03/99 66.86
09/10/99 68.10
09/17/99 68.83
09/24/99 66.99
10/01/99 67.42
10/08/99 66.01
10/15/99 66.97
10/22/99 67.45
10/29/99 66.89
11/05/99 66.97
11/12/99 65.29
11/19/99 66.42
11/26/99 68.71
12/03/99 69.62
12/10/99 68.81
12/17/99 71.21
12/24/99 73.08
12/30/99 73.88
01/07/00 74.82
01/14/00 75.05
01/21/00 78.56
01/28/00 78.28
02/04/00 77.91
02/11/00 77.36
02/18/00 74.66
02/25/00 74.64
03/03/00 72.27
03/10/00 71.75
03/17/00 73.01
03/24/00 71.12
03/31/00 69.26
04/07/00 66.47
04/14/00 65.04
04/21/00 65.17
04/28/00 66.40
05/05/00 66.11
05/12/00 65.92
05/19/00 67.94
05/26/00 66.83
06/02/00 64.37
06/09/00 66.10
06/16/00 71.07
06/23/00 70.11
06/30/00 70.80
07/07/00 70.07
07/14/00 71.26
07/21/00 71.19
07/28/00 70.43
08/04/00 70.05
08/11/00 68.97
08/18/00 68.97
08/25/00 68.97
09/01/00 68.97
09/08/00 68.97
09/15/00 68.97
09/22/00 72.50
09/29/00 71.72
10/06/00 69.31
10/13/00 69.20
10/20/00 67.80
10/27/00 65.81
11/03/00 67.04
11/10/00 66.05
11/17/00 65.84
11/24/00 67.99
12/01/00 68.51
12/08/00 72.01
12/15/00 73.06
12/22/00 70.80
12/29/00 71.22
01/05/01 71.22
01/12/01 71.22
01/19/01 74.82
01/26/01 74.82
02/02/01 76.59
02/09/01 76.59
02/16/01 76.59
02/23/01 76.59
03/02/01 76.59
03/09/01 69.46
03/16/01 66.97
03/23/01 67.62
03/30/01 66.82
04/06/01 65.97
04/12/01 67.77
04/20/01 69.42
04/27/01 70.09
05/04/01 71.57
05/11/01 71.57
05/18/01 70.30
05/25/01 69.47
06/01/01 68.09
06/08/01 67.82
06/15/01 66.39
06/22/01 66.09
06/29/01 65.77
07/06/01 64.72
07/13/01 64.82
07/20/01 64.26
07/27/01 62.98
08/03/01 62.57
08/10/01 61.88
08/17/01 63.40
08/24/01 63.93
08/31/01 62.86
09/07/01 61.15
09/14/01 61.79
09/21/01 60.43
09/28/01 59.81
10/05/01 58.72
10/12/01 58.19
10/19/01 57.32
10/26/01 57.99
11/02/01 56.89
11/09/01 60.81
11/16/01 62.68
11/23/01 60.63
11/30/01 66.00
12/07/01 63.02
12/14/01 59.79
12/21/01 60.75
12/28/01 60.81
01/04/02 60.65
01/11/02 62.40
01/18/02 62.28
01/25/02 62.89
Source: LME spot prices.
58
BUSINESS
OVERVIEW
We are one of the world's largest producers and exporters of iron ore. We
are the largest diversified mining company in the Americas by market
capitalization and one of the largest companies in Brazil. We hold exploration
claims that cover 7.0 million hectares (17.3 million acres). We operate two
large railway systems that are integrated with our mining operations and that,
taken together, transported approximately 58.5% of the rail tonnage shipped in
Brazil in the first nine months of 2001. Through joint ventures, we have major
investments in the production of aluminum.
Our main lines of business are mining, logistics and energy and are
generally grouped according to the business segments below:
- ferrous minerals: comprised of iron ore, pellets as well as manganese and
ferro alloys businesses,
- non-ferrous minerals: comprised of gold, kaolin, potash and copper
businesses,
- logistics: comprised of railroads, ports and terminals and shipping
businesses,
- energy: comprised of power generation businesses, and
- holdings: comprised of aluminum, steel, fertilizers and e-commerce
businesses.
Mining. Our primary mining activities involve iron ore. We operate two
world-class integrated systems in Brazil for producing and distributing iron
ore, each consisting of mines, railroads and port and terminal facilities. The
Southern System, based in the states of Minas Gerais and Espirito Santo,
contains aggregate estimated proven and probable iron ore reserves of
approximately 2.3 billion tons. The Northern System, based in the states of Para
and Maranhao, contains aggregate estimated proven and probable iron ore reserves
of approximately 1.2 billion tons. We also operate nine pellet producing
facilities, six of which are joint ventures with international partners. We have
a 50% stake in Samarco Mineracao S.A., in Ponta do Ubu, which owns and operates
two pelletizing plants.
Exploration Assets. As part of our mineral prospecting and development
activities in Brazil, we have acquired extensive experience in exploration
techniques and processes specifically designed for use in tropical areas of the
world. Our current mineral exploration efforts are mainly in Brazil and focus on
copper, gold, nickel, manganese, and kaolin. Expenditures for our mineral
exploration program were US$31 million in the first nine months of 2001 and
US$34 million in the first nine months of 2000. We currently hold claims to
explore approximately 7.0 million hectares (17.3 million acres).
Logistics. In our logistics business, we provide our clients with various
forms of transportation and related support services, such as warehouse, port
and terminal services. We are a leading competitor in the Brazilian
transportation industry. Each of our iron ore complexes incorporates an
integrated railroad network linked to automated port and terminal facilities,
and is designed to provide iron ore freight and passenger rail transportation,
bulk terminal storage and ship loading services to us and third parties. For the
nine months ended September 30, 2001, our railroads transported approximately
58.5% of the total freight tonnage transported by Brazilian railroads, or
approximately 125.9 million tons of cargo, of which 100.4 million tons were our
iron ore and pellets. Of the total amount transported, 48% was for third parties
and 52% was for ourselves. Our two wholly-owned railroads, the Vitoria-Minas
railroad and the Carajas railroad, serve primarily to transport our iron ore
products from interior mines to coastal port and terminal facilities. In
addition, the Vitoria-Minas railroad carries significant amounts of third party
cargo as well as passengers.
Energy. In 2001, we began to consider energy as a core business, although
at present energy production does not represent a significant portion of our
activities. We currently hold stakes in nine hydroelectric power generation
projects (Igarapava, Porto Estrela, Funil, Candonga, Aimores, Capim Branco I,
Capim Branco II, Foz do Chapeco and Santa Isabel) which have a total projected
capacity of 3,364 MW. The Igarapava and the Porto Estrela power plants started
operations in September 1999 and
59
September 2001, respectively. Our remaining power generation projects are
scheduled to start operations within the next six years, except for Santa
Isabel, which does not have a scheduled date to start operations yet. Depending
on market conditions, the power generated by these plants will be sold in the
market and/or used for our own operations.
Aluminum Operations. Through joint ventures, our wholly owned subsidiary,
Aluvale, conducts major operations in the production of aluminum. They include
bauxite mining, alumina refining and aluminum metal smelting and marketing.
Aluvale conducts its bauxite mining activities through its 40.0% interest in
MRN, which holds substantial bauxite reserves with a low strip ratio and high
recovery rate. MRN, one of the largest bauxite producers in the world, produced
11.2 million tons of bauxite in 2000 and 7.9 million tons in the first nine
months of 2001. Aluvale currently holds a 50.3% voting interest in our alumina
refining joint venture, Alunorte, which has a nominal production capacity of 1.5
million tons of alumina per year and produced 1.2 million tons in the first nine
months of 2001. Aluvale participates in two aluminum smelting joint ventures,
Albras, in which it has a 51.0% interest, and Valesul, in which it has a 54.5%
interest. These two joint ventures have a combined production capacity of
500,000 tons of aluminum per year, and produced a total of 322,000 tons of
aluminum in the first nine months of 2001. Our integrated aluminum operations
rank among the largest in Latin America in terms of production volume.
OUR STRENGTHS
World-Class Iron Ore Operations
We are a leading producer and supplier of iron ore to the world market. Our
iron ore operations are the foundation for our skill in prospecting and
exploring mineral deposits, developing and operating large-scale mines and
industrial facilities, managing complex logistics systems and marketing minerals
and metals. We benefit from the following strengths in our iron ore operations:
- Large resource base. We hold large iron ore resources in our principal
mining sites, the Northern System (Carajas) and the Southern System.
Based on 2000 production levels, we have approximately 20 years of proven
and probable iron ore reserves, and more than 300 years of additional
mineral resources.
- High quality iron ore deposits. Our iron ore deposits have high metal
content compared to those of many of our competitors. Our Northern System
reserves average 65.4% iron content and our Southern System reserves
average 55.0% iron content. Our ores also have low impurity levels and
good metallurgical characteristics, which yield high levels of
productivity in our customers' furnaces.
- Ability to produce a broad range of iron ore products. Our mines offer
varying types of ore characteristics, which allow us to produce a broad
range of iron ore products. Our ability to reconcile large-scale
production with the capacity to produce specialized, high quality ore
products, which have high iron content, low impurity levels and
complement the needs of our customers' furnaces, has allowed us to become
a major supplier to significant Asian customers, despite their greater
proximity to some of our competitors.
- Production cost advantages. We have competitive production and delivery
cost advantages in our iron ore business. We have the ability to
transport iron ore to our customers efficiently and reliably at low costs
through our own mine-to-port systems. We operate an integrated railroad
and marine terminal network in both the Southern System and the Northern
System. These networks transport our iron ore from interior mining
locations to the port terminals and to our domestic clients. In addition,
the high iron content in the Northern System eliminates the need to
operate a concentration plant at Carajas.
- Reliable delivery and customer service. We believe our dependable
mine-to-port system and emphasis on customer service have earned us a
reputation for reliability. Through our sales support offices in Rio de
Janeiro, New York, Brussels, Tokyo and Shanghai, we stay in close contact
with our customers, monitor their requirements and our contract
performance, and ensure that our customers receive deliveries on
schedule.
60
Well-Positioned to Meet Demand in a Changing Steel Industry
Ongoing structural changes in the production of iron and steel have
stimulated increased demand for pellets as a proportion of the global iron ore
and pellet market. These changes are driven by tightening environmental
restrictions that have led to the closing of sintering machines, the
construction of new blast furnaces without sintering machines and the more
extensive use of pulverized coal injection, each of which increases the need for
high quality ore in the form of pellets. We believe these industry changes will
also reduce the volatility of the demand for pellets, which has decreased by as
much as 2% and increased by as much as 17% on a year-over-year basis since 1996.
We have developed substantial pellet production capacity because we believe
that the increase in pellet demand is a trend which will continue. Our six
pelletizing joint ventures have a combined annual production capacity of 35.8
million tons (of which 17.9 million tons constitute the production capacity
attributable to our equity ownership in the pelletizing joint ventures). Our
wholly-owned pelletizing operations, including our Ferteco plant, have an
additional combined annual production capacity of 9.2 million tons. For
information on our ownership percentages in these pelletizing joint ventures,
see "-- Our Lines of Business -- Ferrous Minerals -- Pellets."
Pipeline of Copper Development Projects
We own 100% of the Sossego mine project, which is located in Carajas and
has an estimated production capacity of 140,000 tons of copper per year. In
addition, we have joint venture interests in four Brazilian copper development
projects. These five projects contain approximately 1.7 billion tons of mineral
deposits with a weighted average grade of 1.02%. An independent study indicates
that these are among the most competitive development-stage copper projects in
the world in terms of investment cost per ton of ore, in part because of the
existence of a gold byproduct and open pit mines. Each project is located in
Carajas and will therefore benefit from efficiencies provided by our existing
mine-to-port system. We believe these projects provide a strong foundation for
our strategy of seeking a significant position in the growing world copper
market.
Low-Cost Integrated Aluminum Activities
We operate integrated aluminum operations primarily through joint ventures,
involving bauxite mining, alumina refining and the production of primary
aluminum. Our bauxite joint venture owns 166.8 million tons of proven and
probable bauxite reserves and 626.4 million tons of other mineral deposits. Our
alumina refinery is modern and is directly adjacent to one of our aluminum
smelting facilities. An independent study indicates that Albras is among the top
5% lowest cash cost producers of primary aluminum in the industry. As a result,
we have lower cash costs in the production of primary aluminum than many of our
competitors.
Strong Position in Manganese Ore and Ferro-Alloys
We are the world's second leading producer of manganese ore and third
leading producer of manganese ferro-alloys. We believe that our main manganese
mine, Igarape do Azul, is the world's lowest cash cost producer, and that we
have lower cash costs in our manganese mining operations than many of our
competitors. We continue to consolidate our position as an integrated manganese
ore and ferro-alloy producer. Having recently acquired our former partner's
interests in CPFL and SIBRA, both leading producers of ferro-alloys, we now have
450,000 tons of attributable annual production capacity. We are self-sufficient
in manganese ore to supply this production capacity. At December 31, 2000, we
had 39.4 million tons of proven and probable manganese reserves, or more than 20
years of supply at 2000 production rates.
61
Integrated Logistics Business
We have extensive experience managing complex logistics operations. Built
originally to serve our iron ore business, our logistics system includes our 905
km Vitoria-Minas railroad and Tubarao and Praia Mole ports in the Southern
System, and our 892 km Carajas railroad and Ponta da Madeira marine terminal in
the Northern System. In addition, in the last five years we have acquired stakes
in four privatized railroads, including Centro-Atlantica, which interconnects
with the Vitoria-Minas railroad using the same track gauge, and therefore
increases its available transportation volume. We made these investments to
further expand our cargo business. We believe our extensive transportation
expertise should improve their profitability and efficiency.
Financial Resources
Our balance sheet and strong cash flows provide us with the financial
wherewithal to pursue growth and development opportunities. We generated
operating cash flows of US$1,090 million in the first nine months of 2001 on
operating revenues of US$3,030 million. The ratio of our long-term debt to
shareholders' equity at September 30, 2001 was 0.58:1, and we therefore believe
that we have additional debt capacity. Substantially all of our iron ore sales
are made under long-term contracts, a factor that minimizes our exposure to
year-to-year volume fluctuations. We hedge a major part of aluminum and gold
production against price volatility in order to avoid volatility in our cash
flow.
Energy
We believe that we can successfully compete in the Brazilian energy market,
mainly because of our successful track record in implementing and managing large
projects and dealing with environmental protection issues. In addition, the
balance between supply and demand and the Brazilian government's privatization
program of the industry lead us to believe that there is significant growth
potential in this market.
OUR STRATEGY
Before 1997, we were a traditional state-owned conglomerate with the aim of
promoting national economic development, sometimes through investments in
economic sectors that had no clear synergies with our main business. Since our
privatization in 1997, we have become a more efficient, diversified mining,
logistics and energy company and are in the process of divesting non-core assets
that no longer have strategic importance for us. Through organic, disciplined
growth and selective acquisitions, we will continually seek to develop our
mining, logistics and energy capabilities and increase scale while working to
reduce costs. We aim to achieve earnings growth and increase cash generation,
while maximizing our return on capital employed and the total return to our
shareholders. We are focusing on our core businesses of mining, logistics and
energy to achieve these goals, by:
- maintaining our leadership position in the world iron ore market,
- expanding our pelletizing facilities to accommodate current market
demands,
- growing our logistics business,
- developing our copper resources,
- increasing our aluminum activities,
- developing power generation projects, and
- restructuring our portfolio of joint ventures and minority investments.
Maintaining Our Leadership Position in the World Iron Ore Market
In 2000, we produced 15% of the world's iron ore, more than any other
producer. In 2001, we acquired Ferteco, which accounted for 3% of world iron ore
production in 2000, and we acquired one half
62
of the control of Caemi, which accounted for 4% of world iron ore production in
2000. We are committed to maintaining our position in the world iron ore market
by keeping close contact with our customers, focusing our product line to
capture industry trends and controlling costs. We believe that our strong
relationships with major customers, tailored product line and logistical
advantages will enable us to achieve this goal.
Expanding Our Pelletizing Facilities to Accommodate Current Market Demands
We believe that, in the long term, the growth rate of global demand for
pellets will continue to be higher than the growth rate of the overall iron ore
market, and therefore we plan to continue investing in the development of this
dynamic segment of the iron ore market. We are investing US$181 million to
construct a new pelletizing plant at Sao Luis and are expanding production
capacity at our Tubarao and Samarco pellet operations. When these investments
are completed, we and our joint ventures will have an additional 11.2 million
tons of annual production capacity, and a total of 56.2 million tons of annual
production capacity.
Growing Our Logistics Business
The privatization and deregulation of transportation facilities has
revitalized the Brazilian logistics market. We believe there is potential for
growth in the near term from the conversion of existing truck haulage to rail,
and in the longer term from increased bulk cargo resulting from economic growth
in Brazil. We believe that the quality of our railway assets and our many years
of experience as a railroad and port operator position us to take advantage of
this market and establish ourselves as a leading Brazilian logistics company
serving both domestic and export markets. We plan to focus on the physical and
commercial integration of our transportation assets, and also to take advantage
of new e-business technology. Our subsidiary Valepontocom has launched two
Internet sites, Solostrata and Multistrata, to help the sale of logistics
services.
Developing Our Copper Resources
Global demand for copper grew rapidly in the 1990s. From 1993 to 2001,
global consumption of copper increased from 10,967,000 tons to 15,281,000 tons
per year. Although growth was adversely affected by the global economic slowdown
in 2001, we expect strengthening of the growth trend over the next decade,
driven by the spending in the automotive, computer, telecommunications and
electrical appliance sectors of the world economy. We believe that our copper
projects, which are all situated in the Carajas region, can be among the most
competitive in the world in terms of investment cost per ton of ore. When our
copper mines enter production, they will benefit from our transportation
facilities serving the Northern System. Additionally, in March 1997, we and
BNDES, a selling shareholder, entered into a Mineral Risk Contract providing for
the joint development of certain unexplored mineral resources in approximately
two million identified hectares of land in the Carajas region, as well as
proportional participation in any financial benefits earned from the development
of those resources. For more detailed information on the Mineral Risk Contract,
see "-- Our Lines of Business -- Non-Ferrous Minerals -- Exploration -- Mineral
Risk Contract."
Increasing Our Aluminum Activities
We believe that global demand for aluminum will continue to grow during the
next decade, driven mainly by the transportation and packaging industries. We
therefore plan to develop and increase production capacity in our integrated
aluminum operations. Our bauxite joint venture, MRN, is increasing annual
production capacity from 11.0 to 16.3 million tons by 2003. Our alumina joint
venture, Alunorte, is increasing annual production capacity from 1.5 to 2.3
million tons per year by 2002. Our aluminum joint venture, Albras, increased its
production capacity by 40,000 tons in 2001. In addition, we own large unexplored
deposits of high quality bauxite in the states of Para and Maranhao that will
allow us to pursue further growth opportunities in the aluminum sector.
63
Developing Power Generation Projects
In 2001 and 2000, we consumed 12.5 TWh and 13.8 TWh of electricity,
respectively. Energy management and supply has become a priority for us, driven
both by the Brazilian government's privatization program of the industry, and by
the risk of rising electricity prices and electricity rationing due to energy
shortages, such as the one Brazil experienced in the second half of 2001. We
currently perceive favorable investment opportunities in the Brazilian
electricity sector and are taking advantage of them to invest in hydroelectric
power generation projects. These projects will sell their production to third
parties in the power market, and, as a result, our energy department will be
engaged in wholesale marketing activities. Our energy business is comprised of
the sale but not the delivery of electricity. We may use some of the electricity
from these projects for our internal needs. As we are a large consumer of
electricity, we expect that investing in the energy business will help protect
us against electricity price volatility.
In the first nine months of 2001, we spent US$72 million on investments in
power projects. We currently hold stakes in two hydroelectric power plants
(Igarapava and Porto Estrela), which have already started operations. Both are
located in the state of Minas Gerais. We are also investing in the construction
of five hydroelectric power plants and developing the economical and
environmental feasibility studies for two other hydroelectric projects for which
we and our joint venture partners have obtained a concession. When completed,
these projects will provide us with the equivalent of approximately half of our
2000 electricity consumption (approximately 14 TWh, which represented 4.5% of
Brazil's electricity consumption). We are also analyzing other hydroelectric
power plant projects that will require additional investments.
Restructuring Our Portfolio of Joint Ventures and Minority Investments
In line with our focus on mining, logistics and energy, we have moved to
reduce our holdings of non-strategic assets. We are pursuing the disposition of
our pulp and paper assets and are also disposing of assets in the steel and
transportation sectors that are not strategically connected to our core
business. In March 2001, we concluded the sale of our interest in the pulp and
paper producer Bahia Sul for approximately US$320 million. In September 2001, we
concluded the sale of our stake in Cenibra to our former partner for US$670.5
million. In the steel industry, we disposed of our 2.3% stake in Acominas in
December 2000 and, in March 2001, we disposed of our 10.3% stake in CSN.
Finally, we have begun the process of divesting our dry-bulk cargo shipping
assets.
OUR LINES OF BUSINESS
Our principal lines of business consist of mining, logistics and energy.
For internal management purposes, we group our aluminum operations together with
our other significant equity participations in steel and pulp and paper. We are
in the process of divesting our pulp and paper activities and have divested some
of our steel assets. For information about this divestiture process, see
"-- Holdings."
FERROUS MINERALS
Our ferrous minerals business segment is comprised of iron ore mining and
pellet production, as well as transportation facilities in the Northern and
Southern Systems (including railroads, ports and terminals) as they relate to
mining operations. Manganese mining and ferro-alloys are also part of our
ferrous minerals business.
64
The table below sets forth our ferrous minerals revenues by geographic
market and by category for the periods indicated as reflected in our
consolidated financial statements.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- -------------------
1998 1999 2000 2000 2001
--------- --------- --------- -------- --------
(IN MILLIONS OF US$)
REVENUES CLASSIFIED BY GEOGRAPHIC
DESTINATION
Export sales:
Latin America..................... US$177 US$149 US$224 US$161 US$194
United States..................... 185 147 252 169 154
Europe............................ 751 621 969 660 1,015
Middle East....................... 135 146 209 135 149
Japan............................. 299 351 544 409 191
Asia, other than Japan............ 456 575 651 446 867
Other............................. 1 -- -- -- --
-------- -------- -------- -------- --------
2,004 1,989 2,849 1,980 2,570
-------- -------- -------- -------- --------
Domestic sales...................... 776 639 1,000 748 805
-------- -------- -------- -------- --------
Total.......................... US$2,780 US$2,628 US$3,849 US$2,728 US$3,375
======== ======== ======== ======== ========
REVENUES CLASSIFIED BY CATEGORY
Iron ore............................ US$1,970 US$1,859 US$2,710 US$1,904 US$2,468
Pellets............................. 683 632 769 557 637
Manganese and ferro-alloys.......... 127 137 370 267 270
-------- -------- -------- -------- --------
Total.......................... US$2,780 US$2,628 US$3,849 US$2,728 US$3,375
======== ======== ======== ======== ========
65
Iron Ore
We conduct our iron ore business primarily at the parent company level.
System Structure
The table below sets forth information regarding our proven and probable
iron ore reserves as of December 31, 2000. The estimates of mineral reserves
have been audited and verified by Mineral Resources Development, Inc., or MRDI,
experts in geology, mining and ore reserve determination.
PROVEN AND PROBABLE
RESERVES
--------------------------
MINE ORE TONNAGE GRADE(1)
---- --------------- --------
(IN MILLIONS OF (% FE)
TONS)
SOUTHERN SYSTEM
Itabira District
Caue................................................... 25.0 51.3%
Conceicao.............................................. 338.8 56.7
Dois Corregos(2)....................................... 423.9 59.4
-------
Total Itabira District................................. 787.7 58.0
-------
Timbopeba(3)................................................ 78.2 53.2
Gongo Soco Complex(4)....................................... 494.4 54.9
Capanema/Ouro Fino.......................................... 29.7 59.5
Fazendao.................................................... 238.2 50.7
Samitri
Alegria Complex(5)..................................... 631.6 54.0
Agua Limpa Complex(6).................................. 68.8 45.5
Corrego do Meio Complex(7)............................. 8.4 60.3
-------
Total Samitri.......................................... 708.8 53.2
-------
Subtotal.................................................. 2,337.0 55.0
-------
NORTHERN SYSTEM
Carajas(8).................................................. 1,167.4 65.4
-------
Total CVRD Group....................................... 3,504.4 58.5%
=======
---------------
(1) The subtotal and total figures include weighted-average ore grades.
(2) Dois Corregos consists of several mines.
(3) Reserves are based on 1997 model. A new model is in progress to support a
feasibility study for expansion of the project.
(4) The Gongo Soco Complex consists of the Gongo Soco, Brucutu, Bau and Gralhos
deposits.
(5) The Alegria Complex consists of the Alegria, Fabrica Nova and Morro da Mina
deposits.
(6) The Agua Limpa Complex consists of the Agua Limpa and Cururu deposits.
(7) The Corrego do Meio Complex consists of the Corrego do Meio and Segredo
deposits.
(8) Includes four active mines.
In May 2000, we acquired 100% of Mineracao Socoimex S.A., known as
Socoimex, a mining company located in Minas Gerais, for approximately US$55
million. Socoimex's main activity is the production and sale of iron ore
extracted from Gongo Soco mine, with proven and probable reserves of
approximately 106 million tons and a capacity to produce 7 million tons per
year. We began operating the Gongo Soco mine in August 2000. In August 2000,
Socoimex was merged into our parent company.
66
In May 2000, we acquired a controlling interest in Samitri for
approximately US$520 million. In September 2000, through a public tender, we
acquired additional shares to bring our ownership to 99.3% of the voting capital
and 99.2% of the total capital of Samitri. In February 2001, we increased our
ownership interest in Samitri to 100% by exchanging 140,023 of our preferred
class A shares for the shares in Samitri that we did not already own. In October
2001, we merged Samitri into the CVRD Group. The total cost of the Samitri
acquisition was US$710.5 million, which we principally financed with operating
cash flow. Samitri operates the Alegria, Agua Limpa and Corrego do Meio iron ore
mining complexes in the state of Minas Gerais, and is one of Brazil's largest
producers of iron ore. Its production capacity is 17.5 million tons per year,
and it has proven and probable reserves of 709 million tons of high grade
hematite and other mineral deposits of 11.6 billion tons of itabirites. The
Samitri acquisition allowed us to acquire a 50% interest in the pelletizing
operations of Samarco Mineracao S.A.
In April 2001, we acquired 100% of Ferteco Mineracao S.A. from Thyssen
Krupp Stahl AG, for approximately US$523 million. Ferteco is one of the largest
producers of iron ore in Brazil, with a production capacity of 15 million tons
per year. It has other mineral deposits of 263 million tons of hematite and
itabirite ores, with a quality similar to our Southern System reserves. It
operates two open pit iron ore mines, Fabrica and Feijao, and a pellet plant in
the Iron Quadrangle region in the state of Minas Gerais which has a production
capacity of 4 million tons per year.
In August 2001, we agreed to supply Shanghai Baosteel Group Corporation, a
steel company located in the People's Republic of China, with approximately 6
million tons of iron ore annually for a 20-year term. In addition, we and
Baosteel agreed to form a joint venture, Baovale Mineracao S.A. In October 2001,
we ceded our mining rights in the Agua Limpa mining complex located in the
Southern System to Baovale, which resulted in a decrease of 68.8 million tons in
our proven and probable reserves. In return, Baosteel paid us US$18.9 million
for its 50% interest in Baovale's total capital. In exchange for a monthly fee,
Baovale leases us its rights in the mining deposit which we continue to operate.
We expect that this transaction will increase our presence in the Asian market.
In September 2001 we acquired a 99.99% stake in Belem Administracoes e
Participacoes Ltda., from Bethlehem Steel Corporation and Bethlehem Steel
International Corporation, for approximately US$25 million. Belem is a holding
company which owns 9.9% of Empreendimentos Brasileiros de Mineracao S.A., a
privately held company controlled by Caemi Mineracao e Metalurgia S.A., a
Brazilian producer of iron ore and pellets, as well as kaolin and refractory
bauxite.
In December 2001, we acquired 50% of Caemi's voting shares for
approximately US$278 million. We completed the acquisition after receiving the
approval of the European Commission, which required as a condition that Caemi
sell its 50% interest in Quebec Cartier Mining Company, known as QCM, a Canadian
iron ore and pellets producer. Caemi has been following all the procedures
required by the European Commission and is in the process of disposing of its
stake in QCM but has not entered into a definitive agreement to do so. We
currently own 50% of the voting capital and 17% of the total capital of Caemi.
Mitsui & Co., Ltd. holds the remaining 50% of Caemi's voting capital. We are
obligated to indemnify the seller from whom we purchased our interest in Caemi
against certain liabilities in connection with the transaction. In a pending
arbitration, other former shareholders of Caemi who also sold their shares in
the transaction have alleged that the seller should have closed the transaction
earlier, and that certain actions by the seller resulted in a lower sale price
for their shares. This arbitration proceeding is in its early stages and we are
unable to predict its outcome, although we do not expect that any liability
under the indemnity would be material.
67
The table below sets forth information regarding our mines. The projected
exhaustion dates are based on 2000 production levels.
COMMENCEMENT PROJECTED OUR OWNERSHIP
OF OPERATIONS EXHAUSTION DATE INTEREST PRODUCTION
------------- --------------- ------------- -----------------------------------
FOR THE NINE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
MINE 1998 1999 2000 2000 2001
---- ---- ---- ----- ----- -----
(PERCENT) (IN MILLIONS OF TONS)
SOUTHERN SYSTEM
Itabira District
Caue...................... 1942 2014 100% 19.9 17.8 20.1 14.9 15.2
Conceicao................. 1957 2014 100 19.3 18.8 19.8 14.8 14.6
Dois Corregos............. -- -- -- -- -- -- -- --
Total Itabira District.... -- -- -- 39.2 36.6 39.9 29.7 29.8
---- ---- ----- ---- ----
Timbopeba................... 1984 2006 100 7.5 7.4 7.6 5.7 4.1
Gongo Soco Complex(1)....... 2000 2010 100 0.2 0.7 6.6 4.5 5.2
Capanema/Ouro Fino.......... 1982 2003 51 4.6 3.7 5.3 4.1 3.1
Fazendao.................... 1997 -- 100 1.1 0.9 1.2 0.9 0.9
Samitri
Alegria Complex(2)........ 2000 2040 100 -- -- 9.4 7.1 7.7
Agua Limpa Complex(3)..... 2000 2009 100 -- -- 3.7 2.9 1.6
Corrego do Meio
Complex(4).............. 2000 2006 100 -- -- 1.5 1.2 1.0
---- ---- ----- ---- ----
Total Samitri............... -- -- -- -- -- 14.6 11.2 10.3
---- ---- ----- ---- ----
Urucum(5)................... 1993 -- 100 0.7 0.6 0.7 0.5 0.4
---- ---- ----- ---- ----
Total Southern System..... -- -- -- 53.3 49.9 75.9 56.6 53.8
---- ---- ----- ---- ----
NORTHERN SYSTEM
Carajas(6).................. 1986 2021 100 45.8 44.0 47.6 33.7 38.8
---- ---- ----- ---- ----
Total CVRD Group............ 99.1 93.9 123.5 90.3 92.6
==== ==== ===== ==== ====
---------------
(1) The Gongo Soco Complex consists of the Gongo Soco, Brucutu, Bau and Gralhos
deposits.
(2) The Alegria Complex consists of the Alegria, Fabrica Nova and Morro da Mina
deposits.
(3) The Agua Limpa Complex consists of the Agua Limpa and Cururu deposits.
(4) The Corrego do Meio Complex consists of the Corrego do Meio and Segredo
deposits.
(5) There are no proven and probable reserves at Urucum.
(6) Includes four active mines.
68
Integrated Systems
[Integrated Systems Chart]
Our iron ore mining and related operations are concentrated in two regions
in Brazil, the Southern System and the Northern System. The Southern System is
located in the states of Minas Gerais and Espirito Santo, and the Northern
System is located in the states of Para and Maranhao. Each system includes iron
ore reserves and other mineral deposits, mines, ore processing facilities and
integrated railroad and terminal transportation facilities. Our railroads
connect the systems and bring products from the mines to our marine terminals,
located at Tubarao and Praia Mole in the Southern System, and Sao Luis in the
Northern System. The operation of two separate systems, each with transportation
capability under our control, enhances reliability and consistency of service to
our customers.
Southern System
[Southern System Map]
The Southern System is an integrated system consisting of iron ore mines,
the Vitoria-Minas railroad, and the ports of Tubarao and Praia Mole (located in
Vitoria, in the state of Espirito Santo). The iron ore mines of the Southern
System are located in a region called the Iron Quadrangle in the state of Minas
69
Gerais, in the southeast of Brazil. Nine mining complexes compose this system:
Caue and Conceicao in the Itabira District, Timbopeba, Gongo Soco Complex,
Alegria Complex, Agua Limpa Complex, Corrego do Meio Complex, Capanema and
Fazendao. The Southern System is accessible by road or by spur tracks of the
Vitoria-Minas railroad, which transports iron ore concentrate, lump, and natural
pellet ore to the Tubarao marine terminal (located approximately 600 kilometers
away) and domestic steelmakers, as well as third party general cargo.
Iron ore in the Southern System is mined by open pit methods. These ore
reserves have high ratios of itabirite ore relative to hematite ore. Itabirite
is a quartz-hematite rock with an average iron content ranging from 35% to 60%,
requiring concentration to achieve shipping grade, which is above a 64% average
iron content. Mines in the Southern System generally process their run-of-mine
by means of standard crushing, classification and concentration steps, producing
sinter feed, lump ore and pellet feed.
Our Vitoria-Minas railroad transports Southern System iron ore to the
Tubarao marine terminal located at Vitoria in the state of Espirito Santo. The
Southern System has train-loading facilities with a daily carrying capacity of
300,000 tons of iron ore. A train composed of two diesel-electrical locomotives
and up to 240 gondola ore-cars makes a roundtrip to the marine terminal every 43
hours. The Tubarao/ Praia Mole marine terminal complex has a storage capacity of
4.5 million tons of iron ore and pellets. The storage capacity in connection
with the complex's two piers, which are 25 meters deep and 600 meters wide,
ensures access for ships of up to 365,000 DWT. Our loading system consists of a
bucket-wheel reclaimer, conveyor belts and a ship-loader for each pier, which
represents a total loading capacity of 32,000 tons per hour to the terminal.
Northern System
[Northern System Map]
The Northern System is an integrated mine, railroad and port system,
including open pit mines and an ore processing complex. The Northern System is
located in the Carajas region, in the states of Para and Maranhao in the north
of Brazil (in the Amazon River basin), on public lands for which we hold mining
concessions. The Northern System's reserves are among the largest iron ore
deposits in the world, with a life of more than 21 years at 2000 output levels.
These reserves are divided into two main ranges (north and south), situated
approximately 35 kilometers apart. Iron ore mining activities in the Northern
System are currently being conducted in the north range, which is divided into
four main mining bodies (N4E, N4WC, N4WN and N5).
70
The N4E deposit is the largest operational pit in the Northern Region.
Industrial scale mining operations began at this mine in 1985. We selected the
N4E mine as the first iron body to be developed in the Northern System because
development of the N4E would facilitate access to the N4W and N5 deposits, which
could share the N4E beneficiation complex and train loading terminal. We began
mining operations at N4W in 1994, opening two pits (N4WC and N4WN). We completed
the construction of two in-pit crushing systems located at N4E and N4WN mines in
late December 1998. The N4E and N4W mines use conventional open pit benching,
with drilling and blasting to open a free face followed by shovel loading.
During 1998, we also started operations in the N5 mines (N5W and N5E).
Because of the high iron content (65.4% on average) in the Northern System,
we do not have to operate a concentration plant at Carajas. The beneficiation
process for creating marketable sinter feed, pellet feed, special fines for
direct reduction processes and lump ore consists simply of sizing operations,
including screening, hydrocycloning, crushing and filtration. We can therefore
produce marketable iron ore in the Northern System at a lower cost than in the
Southern System. Output from the beneficiation process consists of sinter feed,
pellet feed, special fines for direct reduction processes and lump ore, which is
sampled regularly before storage at the Carajas stockyard by automatic sampling
systems that conform to ISO 9002 standards. After the beneficiation process, our
Carajas railroad transports Northern System iron ore to the Ponta da Madeira
marine terminal located at Sao Luis in the state of Maranhao, on the Atlantic
Ocean. The Northern System has train-loading facilities with an aggregate
nominal loading capacity of 14,000 tons per hour. A train composed of three
diesel-electrical locomotives and up to 206 gondola ore-cars, each car having a
net capacity of 105 tons, makes each 54.5-hour round-trip to the marine
terminal. At the Ponta da Madeira marine terminal, a 100 kilometer long natural
channel (at least 23 meters deep and 500 meters wide) ensures access for ships
of up to 420,000 DWT. With a storage capacity of 3.5 million tons, a loading
system consisting of bucket-wheel reclaimers, conveyor belts and single boom
ship-loaders at two piers, the marine terminal can handle vessels from 20,000 to
420,000 DWT with no repositioning.
Our complex in Carajas is accessible by road, air and rail. It obtains
electrical power at market rates from regional utilities. To support our Carajas
operations and to reduce turnover of mining personnel, we provide housing and
other facilities for our workers in a nearby township.
Pellets
We conduct our pellet business as follows:
[CVRD FLOW CHART]
71
The table below sets forth information regarding attributable pellet
production capacity by us and our joint ventures for the periods indicated.
FOR THE NINE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- ----------------
PELLET PRODUCER 1998 1999 2000 2000 2001
--------------- ----- ----- ----- ------ ------
(IN MILLIONS OF TONS, EXCEPT PERCENTAGES)
CVRD.................................................... 4.7 4.8 5.0 3.9 3.7
Itabrasco............................................... 3.4 3.4 3.3 2.6 2.4
Hispanobras............................................. 3.9 3.6 3.8 2.8 2.7
Nibrasco................................................ 7.5 6.1 8.5 6.4 5.8
Kobrasco................................................ 0.4 3.8 4.4 3.2 3.2
Samarco................................................. -- -- 12.7 9.3 8.2
GIIC.................................................... -- -- 3.6 2.7 2.1
---- ---- ---- ---- ----
Total.............................................. 19.9 21.7 41.3 31.3 28.1
==== ==== ==== ==== ====
Percentage DR pellets................................... 29.1% 25.9% 23.5% 25% 25%
Except for GIIC, which is located in Bahrain, and Samarco, which is in
Ponta do Ubu, all of our pelletizing operations are in the Southern System at
our Tubarao complex. We acquired Samarco in May 2000, and GIIC in October 2000.
In April 2001, we acquired an additional 4 million tons of annual
production capacity of pellets through our acquisition of Ferteco Mineracao
S.A., known as Ferteco.
We have completed the first phase of the construction of our new Sao Luis
pelletizing plant, and we expect to complete the plant by March 2002. At
September 30, 2001, we had invested approximately US$120 million in the Sao Luis
plant and expect to spend an additional US$61 million through March 2002. The
plant will be located in our Northern System.
Our pellet activities increase our market for fine and ultrafine iron ore
products. We sell pellet feed to our pellet joint ventures at market-based
prices. Historically, we have supplied all of the iron ore requirements of our
joint ventures located in the Southern System.
The table below sets forth information regarding iron ore shipments to our
pellet joint ventures for the periods indicated.
FOR THE NINE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------
JOINT VENTURE 1998(1) 1999(1) 2000(1) 2000 2001
------------- -------- -------- -------- ----- -----
(IN MILLIONS OF TONS)
Kobrasco.......................................... 0.4 4.1 4.7 3.5 3.4
Itabrasco......................................... 3.6 3.6 3.6 2.7 2.6
Hispanobras....................................... 4.3 4.0 4.1 3.0 2.9
Nibrasco.......................................... 8.2 6.6 9.3 7.0 6.4
Samarco........................................... -- -- 1.9 1.4 1.6
GIIC.............................................. -- -- 2.0 1.5 1.4
---- ---- ---- ---- ----
Total........................................ 16.5 18.3 25.6 19.1 18.3
==== ==== ==== ==== ====
---------------
(1) Shipments in 1999 and 1998 represent iron ore sold and iron ore delivered to
the joint ventures on a tolling basis. Shipments in 2000 represent iron ore
sold to the joint ventures.
72
Customers, Sales and Marketing (Iron Ore and Pellets)
We use all of our iron ore and pellets (including our share of joint-venture
pellet production) to supply the steelmaking industry. Prevailing and expected
levels of demand for steel products affect demand for our iron ore and pellets.
Demand for steel products is influenced by many factors, such as expected rates
of economic growth.
Historically, we have exported more than two-thirds of our iron ore
shipments. We export iron ore products primarily to Asia and Europe, with
customers in Japan, China, South Korea and Germany accounting for approximately
54.8% of our total export shipments in the first nine months of 2001 and 52.6%
in 2000. In the first nine months of 2001, our 10 largest customers collectively
purchased 30.5 million tons of iron ore and pellets from us, representing 46.3%
of our iron ore and pellet shipments and approximately 27.3% of our total
revenues. No individual customer accounted for more than 7.0% of our sales of
iron ore products for any of the three years ended December 31, 2000.
We strongly emphasize customer service in order to improve our
competitiveness. We work with our customers to understand their principal
objectives and then tailor our iron ore to meet specific customer needs. To
provide a tailored product, we take advantage of our large number of iron ore
mines in order to produce multiple iron ore products possessing different grades
of iron, silica and alumina, and varying physical properties, including grain
size. We believe that we offer our customers more variety than our competitors
in Australia and Canada. This variety helps us offset any disadvantages in
relation to competitors who may be more conveniently located geographically. In
addition to offering technical assistance to our customers, we operate sales
support offices in Tokyo, Brussels, New York and Shanghai. These offices allow
us to stay in close contact with our customers, monitor their requirements and
our contract performance, and ensure that our customers receive deliveries on
schedule. Our central sales office in Rio de Janeiro coordinates the activities
of these offices.
Distribution (Iron Ore and Pellets)
Our ownership and operation of transportation systems designed for the efficient
transportation of iron ore products complements our iron ore mining business. We
operate an integrated railroad and terminal network in each of our Northern and
Southern Systems. This network transports our iron ore products from interior
mining locations to the marine terminal and domestic customers. The
Vitoria-Minas railroad provides the rail link for the Southern System and has a
daily carrying capacity of 300,000 tons of iron ore. The Carajas railroad
provides the rail link for the Northern System and has a daily carrying capacity
of 130,000 tons of iron ore.
Our port and terminal facilities in the Southern and Northern Systems
receive iron ore and pellets from our railroads for dispatch onto ocean-going
vessels. We shipped a total of 85.6 million tons of iron ore and pellets for the
first nine months of 2001 and 117.2 million tons of iron ore and pellets in
2000. The Tubarao/Praia Mole marine terminal complex, located near the port of
Vitoria in the state of Espirito Santo, serves the Southern System. The
Vitoria-Minas railroad transports ore from iron ore mines in the Southern System
directly to the Tubarao terminal and its ship-loading facilities. The Ponta da
Madeira marine terminal complex, located near the port of Sao Luis in the state
of Maranhao, serves the Northern System. The Carajas railroad transports iron
ore from the Northern System mines directly to the Ponta da Madeira terminal and
its ship-loading facilities.
We are currently seeking to divest our interests in our dry-bulk shipping
business due to its overall lack of profitability and to the significant
investment we would have to undertake to replace our existing dry-bulk shipping
fleet in the future. See "-- Logistics -- Shipping."
Competition (Iron Ore and Pellets)
The international iron ore market is highly competitive. Several large producers
dominate this market. The principal factors affecting competition are price,
quality, range of products offered, reliability and transportation costs. In
2000, the Asian market (primarily Japan, South Korea and China) and the European
market were the primary markets for our iron ore.
73
Our biggest competitors in the Asian market are located in Australia and
include affiliates of Broken Hill Proprietary Company Limited, or BHP, and The
Rio Tinto Corporation Plc. Although the transportation costs of delivering iron
ore from Australia to Asian customers are generally lower than ours as a result
of Australia's geographical proximity, we believe we are able to remain
competitive in the Asian market for two principal reasons. First, steel
producers generally seek to obtain the types (or blends) of iron ore which can
produce the intended final product in the most economic and efficient manner.
Our iron ore has low impurity levels which generally lead to lower processing
costs. For example, the alumina content of our iron ore is very low compared to
Australian ore. Second, steel mills often develop sales relationships based on a
reliable supply of a specific mix of iron ore. We have an aggressive marketing
policy of meeting our clients' needs to the extent possible, including placing
specialized personnel in direct contact with our clients to determine the blend
that best suits each particular client. We sell our products FOB from our ports,
which means that the invoice price includes delivery at our expense to our ports
and no further. In general, our ownership of the process of producing and
transporting iron ore to our ports helps ensure that our products get to our
ports on schedule and at competitive costs. Consequently, we believe that the
sale of our shipping dry-bulk assets will not affect our competitiveness as we
have not subsidized shipping costs for those customers who have used our fleet.
We believe that third party carriers are available to serve our customers.
We are competitive in the European market for the reasons we described
above, as well as the quality of our Carajas iron ore and the proximity of the
Ponta da Madeira port facilities to European customers. Our principal
competitors in Europe are:
- Iron Ore Co. (Canada),
- Quebec Cartier Mining Co. (Canada),
- Luossavaara Kiirunavaara AB (Sweden),
- Societe Nationale Industrielle et Miniere (Mauritania),
- Kumba Resources (South Africa), and
- affiliates of BHP (Australia) and Rio Tinto (UK).
The Brazilian iron ore market is highly competitive with a wide range of smaller
producers. Although pricing is a relevant factor, quality and reliability are
important competitive factors as well. We believe that our integrated
transportation systems, high-quality ore and technical services make us a strong
competitor in domestic sales. Prevailing export market prices, with adjustments
negotiated to compensate for lower transport costs to domestic customers,
influence iron ore sales in the domestic market.
74
Manganese and Ferro-Alloys
We conduct our manganese and ferro-alloy business as follows:
[CVRD BUSINESS CHART]
We are the largest Brazilian manganese ore producer, with total production
in the first nine months of 2001 of approximately 1.3 million tons. We had
US$270 and US$267 million in gross revenues in the first nine months of 2001 and
2000, respectively, from manganese ore and ferro-alloy sales.
We produce manganese ore products from the Azul mine in the Carajas region
in the state of Para and from the Urucum mine in the Pantanal region in the
state of Mato Grosso do Sul. We operate on-site beneficiation plants at both the
Azul and Urucum mines. Both mines are accessible by road and obtain electrical
power at market rates from regional electric utilities.
Our manganese mines produce three types of manganese products:
- metallurgical ore used primarily for the production of ferro-alloys,
- natural manganese dioxide suitable for the manufacture of electrolytic
batteries, and
- chemical ore used in several industries for the production of fertilizer,
pesticides and animal food and used as a pigment in the ceramics
industry.
The production of ferro-alloys consumes significant amounts of electricity. On
June 1, 2001, the Brazilian government, as part of its energy rationing program,
required a decrease of energy consumption by 25% for ferro-alloy related
activities. In response to these governmental measures, we immediately began a
plan to reduce our ferro-alloy output in the six-month period ending November
30, 2001, by 46,000 tons, from the previously planned 220,000 tons to 174,000
tons. This reduction represents a revenue loss of US$26 million. We believe that
the remaining production will be sufficient to supply our clients in Brazil and
the rest of Latin America, our main ferro-alloys markets. Despite this mandatory
temporary reduction, we continue to pursue our long-term plan to expand our
ferro-alloy operations. For information on the risks associated with the
Brazilian government's rationing program, see "Risk Factors -- Risks Relating to
Brazil -- The Brazilian government's energy rationing program could adversely
affect us."
75
The table below sets forth information regarding our manganese reserves at
December 31, 2000. The estimates of mineral reserves have been audited and
verified by MRDI.
PROVEN AND PROBABLE RESERVES
-------------------------------------------------
MINE TYPE ORE TONNAGE GRADE(3)
---- -------------- --------------------- --------
(IN MILLIONS OF TONS) (% MN)
Azul............................................. Open pit(1) 22.1 44.6
S/P(1) 0.8 47.3
---- ----
22.9 44.7
==== ====
Urucum........................................... Underground(2) 13.1 47.9
---- ----
Total....................................... 36.0 45.9
==== ====
---------------
(1) Reported as product wet tons (14.5% moisture content).
(2) Reported as product dry tons.
(3) Reported as recoverable product grade.
The table below sets forth information regarding our manganese mines and
recent manganese ore production for the periods indicated. The projected
exhaustion dates are based on 2000 production levels.
COMMENCEMENT PROJECTED OUR OWNERSHIP
MINE OF OPERATIONS EXHAUSTION DATE INTEREST PRODUCTION
---- ------------- --------------- ------------- ------------------------------------------
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------ -------------------
1998 1999 2000 2000 2001
---- ---- ---- ------ ------
(IN MILLIONS OF TONS)
Azul................. 1986 2014 100% 1.3 0.9 1.4 1.2 1.1
Urucum............... 1976 2035 100% 0.3 0.2 0.3 0.2 0.2
--- --- --- --- ---
Total............ 1.6 1.1 1.7 1.4 1.3
=== === === === ===
The table below sets forth information regarding our ferro-alloy
production.
PRODUCTION PRODUCTION IN
PLANT CAPACITY 2000
----- ---------------- ----------------
(IN THOUSANDS OF (IN THOUSANDS OF
TONS PER YEAR) TONS)
RDME........................................................ 140.0 119.7
CPFL/SIBRA.................................................. 311.6 273.9
NES......................................................... 45.0 37.5
---------------
Prior to December 1999, we owned 50% of Vale Usiminas Participacoes, S.A.,
or VUPSA. In December 1999, we agreed to acquire, for a nominal sum, the 50%
stake in VUPSA that we did not already own from our former partner, Usinas
Siderurgicas de Minas Gerais S.A., known as Usiminas. In exchange for our
agreement to acquire the Usiminas interest in VUPSA, Usiminas was released from
some of its obligations with respect to the debt of Companhia Paulista de Ferro
Ligas, or CPFL, and Sibra Eletrosiderurgica Brasileira S.A., or SIBRA, two
leading Brazilian producers of ferro-alloys, which were owned by Ferro Ligas do
Norte S.A., a subsidiary of VUPSA. This acquisition enables us to integrate our
manganese mining operations with ferro-alloy producing plants. On December 31,
2000, after a corporate reorganization, we became the direct owner of SIBRA,
which in turn owns CPFL.
NON-FERROUS MINERALS
Our non-ferrous minerals business segment includes the production of gold
and other non-ferrous minerals, such as kaolin and potash. We also include our
copper exploration efforts in the non-ferrous category.
76
The table below sets forth information regarding our non-ferrous revenues
and sales by geographic market for the periods indicated.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- -------------------
1998 1999 2000 2000 2001
--------- --------- --------- -------- --------
(IN MILLIONS OF US$)
REVENUES CLASSIFIED BY GEOGRAPHIC
DESTINATION
Export sales:
Latin America............................. US$ -- US$ -- US$ -- US$ -- US$ 4
United States............................. 145 139 156 113 100
Europe.................................... -- -- 35 28 27
Japan..................................... -- -- 4 2 --
Asia, other than Japan.................... -- 4 3 -- 2
------ ------ ------ ------ ------
145 143 198 143 133
Domestic sales.............................. 124 96 90 70 58
------ ------ ------ ------ ------
Total.................................. US$269 US$239 US$288 US$213 US$191
====== ====== ====== ====== ======
REVENUES CLASSIFIED BY CATEGORY
Gold........................................ US$168 US$155 US$156 US$113 US$100
Potash...................................... 101 84 85 66 58
Other minerals.............................. -- -- 47 34 33
------ ------ ------ ------ ------
Total.................................. US$269 US$239 US$288 US$213 US$191
====== ====== ====== ====== ======
Gold
We conduct our gold business primarily at the parent company level and each
of our gold mines is wholly owned.
We started gold operations in 1984 and currently operate three gold mines.
We are one of the largest gold producers in Latin America, with a total gold
production of 376,200 troy ounces of refined gold for the first nine months of
2001. We were responsible for approximately 32% of all gold produced on an
industrial scale in Brazil during 2000. Gold sales generated US$100 million of
gross operating revenues in the first nine months of 2001.
77
The table below sets forth information regarding estimated gold proven and
probable reserves at December 31, 2000. The estimates of mineral reserves have
been audited and verified by MRDI.
PROVEN AND PROBABLE RESERVES
---------------------------------------------------
ORE ORE CONTAINED METAL
MINE(1) TYPE TONNAGE GRADE(3) GOLD RECOVERY(3) RECOVERABLE GOLD
------- ----------- ------------ ---------- --------- ----------- ---------------------------
(IN MILLIONS (IN MILLIONS OF
OF TONS) (GRAM/TON) (IN TONS) (PERCENT) (IN TONS) TROY OUNCES)(4)
Igarape Bahia(2)......... CIP Ore 3.12 3.70 11.54 91% 10.51 0.338
CIP Stock 0.23 2.96 0.68 91 0.62 0.020
HL Ore 4.23 1.31 5.54 81 4.49 0.144
HL Stock 3.07 1.09 3.35 81 2.71 0.087
----- ---- ----- ----- -----
Subtotal............... 10.65 1.98 21.11 87 18.32 0.589
----- ---- ----- ----- -----
Fazenda Brasileiro....... Sulfide CIP 3.79 5.36 20.31 93 18.89 0.607
----- ---- ----- ----- -----
Itabira.................. CIL in situ 0.27 3.22 0.86 96 0.83 0.027
S/P HL 0.26 0.60 0.15 60 0.09 0.003
----- ---- ----- ----- -----
Subtotal............... 0.53 1.90 1.01 91 0.92 0.030
----- ---- ----- ----- -----
Total.................... 14.97 2.83 42.43 90 38.13 1.226
===== ==== ===== ===== =====
---------------
(1) The Almas and Caete deposits listed with reserves at December 1999 were
depleted in 2000.
(2) Igarape Bahia includes the Acampamento Sul, Furo Trinta and Acampamento
Norte deposits.
(3) The subtotal and total figures include weighted-average ore grades and
metallurgical recovery rates.
(4) One troy ounce equals 31.103 grams.
The table below sets forth information regarding our gold mines and recent
gold production. The projected exhaustion dates are based on 2000 production
levels.
PRODUCTION
---------------------------------------------------
FOR THE NINE
MONTHS ENDED
COMMENCE- PROJECTED FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
MENT OF EXHAUSTION --------------------------------- ---------------
MINE OPERATIONS DATE 1998 1999 2000 2000 2001
---- ---------- ---------- --------- --------- --------- ------ ------
(IN THOUSANDS OF TROY OUNCES)(2)
Igarape Bahia........... 1991 2002 359.4 357.5 333.9 243.5 241.4
Fazenda Brasileiro...... 1984 2009 170.4 141.2 154.6 122.0 119.5
Almas(1)................ 1985 2000 16.4 16.0 13.2 10.4 0.6
Caete(1)................ 1996 2000 13.3 17.4 11.0 8.2 0.4
Itabira................. 1984 2002 22.9 20.0 22.4 16.1 14.3
------ ------ ------ ------ ------
Total....................................... 582.4 552.1 535.1 400.2 376.2
====== ====== ====== ====== ======
Average total cash cost
of production (US$ per
troy ounce)(2)........ US$175 US$143 US$165 US$167 US$150
---------------
(1) Exhausted at December 31, 2000.
(2) One troy ounce equals 31.103 grams.
Our gold mines are located in the states of Minas Gerais, Bahia, and Para.
All gold mines are open-pit, except for Fazenda Brasileiro, which is
underground. Each mine includes an on-site processing facility to produce dore
bars from raw ore. We ship dore bars to a third party refinery for remelting and
chemical treatment, which yields gold bars with a 99.99% purity degree. Our gold
is insured from the time we place it in its mine vaults until it reaches the
customer.
78
At December 31, 2000, our proven and probable gold reserves represented
three years of production at 2000 output levels. We had expenditures of US$7.8
million for gold exploration and resource development for the first nine months
of 2001 and expenditures of US$8.5 million for gold exploration and resource
development in 2000, including US$1.6 million related to prospecting for new
deposits and US$5.9 million directed to the extension of existing reserves. Of
these expenses, US$0.8 million and US$1.0 million were reimbursed under the
Mineral Risk Contract for the first nine months of 2001, and for 2000,
respectively. For a further discussion about the Mineral Risk Contract, see
"-- Exploration -- Mineral Risk Contract."
Kaolin
We conduct our kaolin business through our stake in Para Pigmentos S.A.,
which began operations in August 1996. Our total and voting interests in Para
Pigmentos are 80.1% and 84.9%, respectively. Our partners in Para Pigmentos are
Mitsubishi Corporation and International Finance Corporation.
Kaolin is a fine white aluminum silicate clay used in the paper, ceramic
and pharmaceutical industries as a coating agent and filler. In the first nine
months of 2001, Para Pigmentos reported revenues of US$33 million and a net loss
of US$37 million. In 2000, Para Pigmentos reported revenues of US$34 million and
a net loss of US$9.0 million. At September 30, 2001, Para Pigmentos had
approximately US$61 million of long-term debt outstanding, of which we guarantee
US$50 million. Para Pigmentos is conducting a four phased investment program to
increase production capacity in response to an expected increase in the demand
for kaolin.
The table below sets forth the schedule for the investment program which
Para Pigmentos expects to carry out through 2007.
EXPECTED
INVESTMENT PHASE PRODUCTION TOTAL INVESTMENT DATE OF COMPLETION
---------------- ---------- -------------------- ------------------
KT/YEAR (IN MILLIONS OF US$)
I............................................... 320 US$140.0 2000
II.............................................. 600 29.0 2001
III............................................. 800 24.4 2003
IV.............................................. 1,000 26.3 2007
Phases I and II were completed as scheduled.
Potash
Potash is an important raw material used in the production of fertilizers.
We lease a potash mine in the state of Sergipe from Petroleo Brasileiro S.A.,
the Brazilian oil company. It is the only mine of this type in Brazil and has a
current capacity of 600,000 tons per year. We had gross revenues of US$58
million from potash sales in the first nine months of 2001 and US$84.9 million
from potash sales in 2000.
79
Current Copper Prospects
We conduct our copper development and exploration projects as follows:
[CVRD COPPER FLOW CHART]
The table below sets forth information regarding the status and potential
productivity of our copper (Cu) prospects, all but one of which features a gold
(Au) byproduct.
TOTAL EXPECTED
CAPITAL PROJECTED
PROJECT STATUS OTHER MINERAL DEPOSITS EXPENDITURES START-UP DATE
------- ------------------ ---------------------- -------------- -------------
(IN MILLIONS OF TONS) (IN MILLIONS
OF US$)
Sossego....................... Feasibility 313 at 1.02% Cu and US$ 394 2004
concluded 0.3 g/t Au
Salobo........................ Pre-feasibility in 784 at 0.96% Cu 1,005 2007
progress and 0.6 g/t Au
Project 118................... Pre-feasibility in 100 at 0.80% Cu 140 2004
progress
Alemao........................ Pre-feasibility in 170 at 1.60% Cu 550 2006
progress and 0.90 g/t Au
Cristalino.................... Pre-feasibility in 300 at 0.90% Cu 500 2006
progress and 0.2 g/t Au
In addition, we and BNDES are prospecting the Carajas region for new copper
exploration projects. For more information on this joint venture, see
"-- Exploration -- Mineral Risk Contract."
In October 2001, we acquired the 50% stake in the Sossego joint venture
which we did not already own from our former partner, Phelps Dodge, for US$42.5
million.
In November 2001, we agreed to form a 50/50 joint venture to explore new
opportunities to produce and process copper with Corporacion Nacional del Cobre
de Chile, or Codelco, the world's largest copper producer.
Exploration
As part of our mineral prospecting and development activities in Brazil, we
have acquired extensive experience in exploration techniques and processes
specifically designed for use in tropical areas of the world. Our current
mineral exploration efforts are in Brazil and focus primarily on copper.
Expenditures for our mineral exploration program in the first nine months of
2001 and 2000 were US$31 million and US$34 million, respectively.
Since 1998, we have focused our exploration efforts on areas where
geological knowledge was more advanced, focusing primarily on gold and copper,
and let lapse those claims we did not consider economically attractive. As a
result, our undeveloped acreage claims decreased from approximately 31.2 million
hectares at December 31, 1997, to approximately 7.0 million hectares at December
31, 2001.
80
Mineral Risk Contract. We and BNDES entered into a Mineral Risk Contract
in March 1997, relating to prospecting authorizations for mining regions where
drilling and exploration are still in their early stages. The Mineral Risk
Contract provides for the joint development of certain unexplored mineral
resources in approximately two million identified hectares of land in the
Carajas region, which is part of the Northern System, as well as proportional
participation in any financial benefits earned from the development of such
resources. Iron ore and manganese deposits already identified and subject to
development were specifically excluded from the Mineral Risk Contract.
Pursuant to the Mineral Risk Contract, we and BNDES each agreed to provide
US$205 million, which represents half of the US$410 million in expenditures
estimated as necessary to complete geological exploration and mineral resource
development projects in the region over a period of five years. Under certain
circumstances, this period may be extended for an additional two years. We will
oversee these projects and BNDES will advance us half of our costs on a
quarterly basis. Under the Mineral Risk Contract, at December 31, 2001, we and
BNDES each had remaining commitments to contribute an additional US$77.5 million
toward exploration and development activities. In the event that either one of
us wishes to conduct further exploration and development after having spent such
US$205 million, the contract provides that each party may either choose to match
the other party's contributions, or may choose to have its financial interest
proportionally diluted. If a party's participation in the project is diluted to
an amount lower than 40% of the amount invested in connection with exploration
and development projects, then the Mineral Risk Contract provides that the
diluted party will lose (1) all the rights and benefits provided for in the
Mineral Risk Contract and (2) any amount previously contributed to the project.
Under the Mineral Risk Contract, BNDES has agreed to compensate us for our
contribution of existing development and ownership rights in the Carajas region
through a finder's fee production royalty on mineral resources that are
discovered and placed into production. This finder's fee is equal to 3.5% of the
revenues derived from the sale of gold, silver and platinum group metals and
1.5% of the revenues derived from the sale of other minerals, including copper,
except for gold and other minerals discovered at Serra Leste, for which the
finder's fee is equal to 6.5% of revenues.
81
LOGISTICS
We conduct our logistics business, which comprises the transportation of
third party products and passengers, together with related support services, as
follows:
[FLOW CHART]
The table below sets forth information regarding our third party logistics
revenues and sales by geographic market for the periods indicated.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- -------------------
1998 1999 2000 2000 2001
--------- --------- --------- -------- --------
(IN MILLIONS OF US$)
Export market
Latin America............................. US$ 5 US$ 13 US$ 30 US$ 16 US$ 52
United States............................. 36 34 64 53 15
Europe.................................... 40 31 75 56 43
Middle East............................... 2 3 6 3 3
Japan..................................... 31 9 15 8 9
Asia, other than Japan.................... 15 9 5 7 3
Others...................................... 6 1 -- -- --
------ ------ ------ ------ ------
135 100 195 143 125
Domestic sales.............................. 396 318 403 295 269
------ ------ ------ ------ ------
US$531 US$418 US$598 US$438 US$394
====== ====== ====== ====== ======
Railroads
Vitoria-Minas Railroad. The Vitoria-Minas railroad, in the Southern
System, originates near the city of Belo Horizonte and our Itabira mines in the
state of Minas Gerais. We operate this railroad under a 30-year renewable
concession granted by the Brazilian government in July 1997. This railroad
extends 905 kilometers to our Tubarao marine terminal located near the port of
Vitoria in the state of Espirito Santo. The Vitoria-Minas railroad consists of
two lines of track extending for a distance of 601 kilometers to permit
continuous railroad travel in opposite directions, and single-track branches of
304 kilometers.
82
Industrial manufacturers are located near this area and major agricultural
regions are adjacent and accessible to the Vitoria-Minas railroad. The
Vitoria-Minas rolling stock fleet consists of approximately 204 locomotives,
7,603 ore-cars, 5,879 cars for general cargo and 61 passenger cars. The
Vitoria-Minas railroad carried a total of 83.4 million tons of iron ore and
other cargo in the first nine months of 2001 (of which 55.7 million tons
consisted of cargo transported for third parties). The Vitoria-Minas railroad
also carried approximately 1.1 million passengers in the first nine months of
2001.
The principal cargo of the Vitoria-Minas railroad consists of:
- iron ore, carried for us,
- steel, coal and pig iron, carried for steel manufacturers located along
the railroad, and
- limestone, carried for steel mills located in the states of Minas Gerais
and Espirito Santo.
We charge market rates for third party freight, including pellets, aluminum
and pulp and paper originating from joint ventures and other enterprises in
which we do not own 100% of the equity interest. Market rates vary based upon
the distance traveled, the kind of product and the weight of the freight in
question.
The table below sets forth information regarding the cargo that the
Vitoria-Minas railroad transported for the periods indicated.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- --------------------
CARGO 1998 1999 2000 2000 2001
----- -------- -------- -------- -------- --------
(IN THOUSANDS OF TONS)
Third Party
Iron ore and pellets..................... 57,033 53,292 56,986 43,269 37,377
Steel.................................... 5,042 4,745 5,542 3,976 4,038
Coal..................................... 4,236 4,223 4,905 3,654 3,679
Pig iron................................. 2,016 2,042 2,585 2,056 2,009
Limestone and dolomite................... 1,932 2,149 2,609 1,935 2,035
Grain.................................... 1,752 1,655 2,410 1,882 1,896
Coking coal.............................. 779 525 854 588 788
Oil...................................... 362 285 334 204 432
Other.................................... 3,523 4,143 4,284 3,114 3,456
------- ------- ------- ------ ------
Third party subtotal.................. 76,675 73,059 80,509 60,678 55,710
------- ------- ------- ------ ------
CVRD Group
Iron ore................................. 26,473 26,322 29,338 21,944 26,250
Wood pulp................................ 708 726 756 582 567
Other.................................... 925 722 1,281 994 844
------- ------- ------- ------ ------
CVRD Group subtotal................... 28,106 27,770 31,375 23,520 27,661
------- ------- ------- ------ ------
Total................................. 104,781 100,829 111,884 84,198 83,371
======= ======= ======= ====== ======
Carajas Railroad. We operate the Carajas railroad under a 30-year
renewable concession granted by the Brazilian government in June 1997. This
railroad, located in the Northern System, starts at our Carajas iron ore mines
in the state of Para, and extends 892 kilometers to our Ponta da Madeira marine
terminal facilities located near the port of Sao Luis in the state of Maranhao.
The Carajas railroad consists of one line of track, with spur tracks and
turn-outs to permit the passage of trains in opposite directions. The Carajas
fleet consists of approximately 88 locomotives, 4,006 ore-cars, 745 cars for
general cargo and 37 passenger cars. The Carajas railroad carried a total of
42.5 million tons of iron ore and other cargo in the first nine months of 2001
(of which 4.7 million tons, or 11.0%, consisted of cargo transported for third
parties). The Carajas railroad also carried approximately 326,000 passengers in
the first nine months of 2001 and 475,000 passengers in 2000.
83
The table below sets forth information regarding the cargo the Carajas
railroad transported for the periods indicated.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- --------------------
CARGO 1998 1999 2000 2000 2001
----- -------- -------- -------- -------- --------
(IN THOUSANDS OF TONS)
Iron ore
CVRD Group.................................. 43,881 41,683 45,353 32,626 36,705
Third party................................. 2,242 2,246 2,544 1,734 2,368
Manganese ore
CVRD Group.................................. 898 807 1,339 975 1,097
Pig iron...................................... 1,243 1,321 1,526 1,027 1,303
Vehicles...................................... 306 120 142 103 75
Fuels......................................... 399 383 394 276 341
Soy beans..................................... 357 426 491 491 507
Other......................................... 120 114 127 79 119
------ ------ ------ ------ ------
Total.................................... 49,446 47,100 51,916 37,311 42,515
====== ====== ====== ====== ======
Other Investments. We hold a 20% interest in the voting capital of
Centro-Atlantica, which operates the central east regional railway network of
the Brazilian national railway system under a 30-year renewable concession
granted by the government in August 1996. The central east network contains
approximately 7,000 kilometers of track extending into the states of Sergipe,
Bahia, Espirito Santo, Minas Gerais, Goias, Rio de Janeiro and Distrito Federal.
It connects with our Vitoria-Minas railroad near the cities of Belo Horizonte
and Vitoria. Centro-Atlantica currently operates on the same track gauge as our
Vitoria-Minas railroad. Centro-Atlantica reported net revenues of US$81 million
and a net loss of US$60 million in the first nine months of 2001 and net
revenues of US$120 million and a net loss of US$40.7 million in 2000.
We also hold a 30% stake in the Malha Nordeste railroad through Companhia
Ferroviaria do Nordeste, known as CFN. The Malha Nordeste railroad operates
under a 30-year concession granted by the Brazilian government in December 1997.
Malha Nordeste is an existing rail line with 4,342 kilometers of track extending
into the states of Maranhao, Piaui, Ceara, Rio Grande do Norte, Paraiba,
Pernambuco, Alagoas and Sergipe. The Malha Nordeste line comes close to our
Carajas line in the Northern System but is built on a narrower gauge. The Malha
Nordeste line requires significant modernization, and the owners are currently
discussing the amount of investment required to effect the modernization. CFN
reported net revenues of US$5 million and a net loss of US$10 million in the
first nine months of 2001 and net revenues of US$9.8 million and a net loss of
US$17.7 million in 2000.
We are part of a consortium which won the auction for a 30-year concession
for the Malha Paulista railroad in November 1998. We currently hold 18.7% of the
total capital in this consortium, which was incorporated as Ferrovias
Bandeirantes S.A., or Ferroban. We entered into this concession for a price of
US$205.7 million. Ferroban is a 4,236 kilometer railroad linking the states of
Sao Paulo, Minas Gerais and Parana. Ferroban reported net revenues of US$50
million and a net loss of US$34 million in the first nine months of 2001 and net
revenues of US$65.7 million and a net loss of US$38.3 million in 2000.
In April 2001, we acquired 100% of Ferteco Mineracao S.A. Ferteco owns 9.6%
of the total capital and 17.2% of the voting capital of MRS Logistica S.A. MRS
is a 1,612 kilometer railroad which links the states of Rio de Janeiro, Sao
Paulo and Minas Gerais, and has a capacity to transport 80 million tons per
year. MRS operates under a 30-year renewable concession granted by the Brazilian
government in November 1996.
84
The Brazilian government has the option to extend our railroad concessions
when they expire. The table below sets forth the expiration date for each of our
concessions:
CONCESSION
RAILROAD EXPIRATION DATE
-------- ---------------
Centro-Atlantica............................................ August 2026
MRS......................................................... December 2026
Vitoria-Minas............................................... June 2027
Carajas..................................................... June 2027
CFN......................................................... December 2027
Ferroban.................................................... December 2028
Ports and Terminals
We operate ports and terminals principally as a means to complete the
distribution of our iron ore and pellets to ocean-going vessels serving the
export market. For a detailed description of this distribution process, see
"-- Ferrous Minerals -- Distribution." We also use our ports and terminals to
handle third party cargo. In the first nine months of 2001, based on weight, 22%
of the cargo handled by our ports and terminals represented cargo handled for
third parties. In 2000, based on weight, 32% of the cargo handled by our ports
and terminals represented cargo handled for third parties.
Tubarao/Praia Mole Marine Terminal. The Tubarao/Praia Mole marine terminal
complex, which covers an area of approximately 18 square kilometers, is located
near the port of Vitoria in the state of Espirito Santo and has two piers. Pier
I can accommodate two vessels at a time, one of up to 80,000 DWT on the southern
side and one of up to 120,000 DWT on the northern side. Pier II can accommodate
one vessel of up to 300,000 DWT at a time. In Pier I there are two shiploaders
which can load up to a combined total of 14,000 tons per hour. In Pier II there
are two shiploaders that work alternately and can each load up to 16,000 tons
per hour. We operate a grain terminal, accessible by highway in the Tubarao
area, with an annual capacity of 1.5 million tons and a maximum loading speed of
1,500 tons per hour. We also operate a bulk liquid terminal with a capacity of
2.0 million cubic meters. There are two berths in the Tubarao terminal: one is
for transportation of grains, with a capacity of 3 million tons a year, and the
other is for transportation of general cargo and fertilizers.
The table below sets forth information on cargo shipped through our
Tubarao/Praia Mole marine terminal by tonnage for the periods indicated.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- --------------------
CARGO 1998 1999 2000 2000 2001
----- -------- -------- -------- -------- --------
(IN THOUSANDS OF TONS)
Iron ore and pellets
CVRD Group.................................. 37,768 42,017 39,397 34,813 42,479
Third party................................. 34,065 23,433 31,629 17,087 6,661
Coal.......................................... 7,160 7,497 8,252 5,857 6,310
Grain......................................... 1,327 1,302 1,889 1,379 1,577
Cooking coal.................................. 973 603 999 627 835
Pig iron...................................... 1,774 1,867 2,081 1,662 1,433
Fertilizers................................... 292 405 334 180 358
Other......................................... 1,339 3,023 4,770 4,485 3,858
------ ------ ------ ------ ------
Total.................................... 84,698 80,147 89,351 66,090 63,511
====== ====== ====== ====== ======
85
Ponta da Madeira Marine Terminal. The Ponta da Madeira marine terminal
complex is located near the port of Sao Luis in the state of Maranhao. The Ponta
da Madeira port facilities can accommodate two vessels. Pier I can accommodate
vessels displacing up to 420,000 DWT. Pier II can accommodate vessels of up to
155,000 DWT. The two berths have a maximum loading rate of 16,000 tons per hour
at Pier I and 8,000 tons per hour at Pier II.
The table below sets forth information on cargo shipped through our Ponta
da Madeira marine terminal by tonnage for the periods indicated.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- --------------------
CARGO 1998 1999 2000 2000 2001
----- -------- -------- -------- -------- --------
(IN THOUSANDS OF TONS)
CVRD Group
Iron ore.................................... 42,921 41,531 46,178 34,068 36,420
Manganese ore............................... 920 787 1,293 985 1,153
Third Party
Pig iron.................................... 1,197 1,223 1,533 1,036 1,283
Soy beans................................... 372 451 561 534 607
------ ------ ------ ------ ------
Total.................................... 45,410 43,992 49,565 36,623 39,463
====== ====== ====== ====== ======
Other Investments. In September 1994, we licensed the Inacio Barbosa
marine terminal, located in the state of Sergipe, near our potash mine. Under
the terms of the ten-year agreement we entered into with Sergiportos, a
state-owned port company, we receive 40% of the net operating profit of the
terminal and must manage the terminal.
In May 1998, we entered into a 25-year lease for the Capuaba marine
terminal in Vitoria, in the state of Espirito Santo. We shipped 789,000 tons of
cargo during the first nine months of 2001 from Capuaba, and 1,833,000 tons of
cargo during 2000.
In September 1998, we acquired a 50% indirect interest in the lease of the
Sepetiba container terminal, operated by Sepetiba Tecon S.A. Companhia
Siderurgica Nacional, or CSN, holds the remaining 50% of Sepetiba Tecon. The
lease has a term of 25 years and we can renew it for an additional period of 25
years. The price for the concession was approximately US$79 million, of which we
have already paid US$33 million. The remainder is due in 276 monthly
installments starting after the completion of certain investments by Companhia
Docas do Rio de Janeiro required under the concession contract. We expect
payments to start in January 2003.
Divestitures. In August 2001, we sold our 50% interest in the Rio Doce
Pasha marine terminal, located in the port of Los Angeles in Los Angeles,
California, to our partner in the joint venture, the Pasha Group, for
approximately US$10 million. This marine terminal principally handles imports of
steel slabs for California Steel Industries, Inc., or CSI, our steelmaking joint
venture located approximately 60 miles inland from the terminal.
Shipping
Navegacao Vale do Rio Doce S.A., known as Docenave, and its affiliated
companies conduct our principal shipping activities. Founded in 1962 to support
iron ore distribution, Docenave has since expanded its transportation
capabilities to serve foreign and domestic third party customers.
We are currently seeking to divest our interests in our dry-bulk shipping
business. In September 2001, we reached an agreement to sell six of Docenave's
carrier vessels, with a total capacity of 592,240 DWT, to Empresa Naviera
Elcano, S.A., a Spanish company, for US$53 million. This transaction closed in
February 2002. We intend to sell Docenave's remaining dry-bulk assets in the
future, but have reached no agreement regarding this sale to date. Although
Docenave's revenues increased by 67% in 2000 compared to 1999, this increase was
largely offset by increased operating costs. Docenave reported an operating gain
86
of US$18 million for the first nine months of 2001, and operating loss of US$18
million in 2000, compared to an operating loss of US$35 million in 1999. In
addition to Docenave's overall lack of profitability, our decision to sell our
dry-bulk shipping fleet is also a result of the significant investment we would
have to undertake to replace our existing fleet in the future. In addition to
its dry-bulk activities, Docenave regularly operates charter vessels on short
and medium-term charters, including an average of approximately 14 vessels in
2001.
The table below sets forth information on the cargo our shipping operations
transported for the periods indicated.
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------- --------------------
CARGO 1998 1999 2000 2000 2001
----- -------- -------- -------- -------- --------
(IN THOUSANDS OF TONS)
Iron ore
CVRD Group.................................. 3,317 1,328 3,058 6,296 5,575
Third party................................. 13,780 12,514 15,608 7,203 6,865
Coal.......................................... 7,986 6,541 7,452 5,117 3,729
Other......................................... 7,175 8,142 9,031 7,019 5,798
------ ------ ------ ------ ------
Total.................................... 32,258 28,525 35,149 25,635 21,967
====== ====== ====== ====== ======
Major customers of Docenave include steelmakers (iron ore exports),
Alunorte (domestic bauxite purchases) and Brazilian steelmakers (coal imports).
Competition in the logistics industry
The lower costs of rail transport compared to road transport costs in the
routes served by the Carajas railroad restrict the competition. Competition with
the Vitoria-Minas railroad is limited with respect to its principal minerals and
bulk products cargo due to the comparative cost advantage of rail transport over
road transport for the same routes. The local trucking industry provides
competition for the Vitoria-Minas railroad with respect to non-bulk cargo. The
Centro-Atlantica railroad competes primarily with an established trucking
industry to carry freight in the region it serves.
The Ponta da Madeira marine terminal does not face any significant
competition due to its geographic distance from other comparable marine
terminals and to its direct link with the Carajas railroad. The Tubarao/Praia
Mole marine terminal faces limited competition for most types of cargo due to
its direct link with the Vitoria-Minas railroad. However, with respect to some
types of cargo and origins, it encounters competition from the port of Rio de
Janeiro and the port of Santos.
Our shipping services compete with a wide variety of international bulk
shipping companies. Competition for tonnage can be quite intense. It depends
principally on price, as well as the size, age, condition and acceptability of a
vessel and its operator to the customer. Varying economic factors can cause wide
swings in freight rates and sudden shifts in traffic patterns. Vessel
redeployment and new vessel construction can also lead to an overcapacity of
vessels offering the same service or operating in the same market.
87
ENERGY
In 2001 and 2000, we consumed 12.5 TWh and 13.8 TWh of electricity,
respectively. Energy management and supply has become a priority for us, driven
both by the Brazilian government's privatization program of the industry, and by
the risk of rising electricity prices and electricity rationing due to energy
shortages, such as the one Brazil experienced in the second half of 2001. We
currently perceive favorable investment opportunities in the Brazilian
electricity sector and are taking advantage of them to invest in the
hydroelectric power generation projects discussed below. These projects will
sell their production to third parties in the power market, and, as a result,
our energy department will be engaged in wholesale marketing activities. Our
energy business is comprised of the sale but not the delivery of electricity. We
may use some of the electricity from these projects for our internal needs. As
we are a large consumer of electricity, we expect that investing in the energy
business will help protect us against electricity price volatility.
We are entering the energy business through the following investments:
[CVRD ENERGY FLOW CHART]
Among our partners in these investments, Companhia Energetica de Minas
Gerais, known as Cemig and Companhia Estadual de Energia Eletrica, known as
CEEE, are state-government controlled companies. Cemig Capim Branco Energia S.A.
is an affiliate of Cemig. Alcan Aluminio do Brasil Ltda., known as Alcan, is an
affiliate of Alcan Inc. Comercial e Agricola Paineiras Ltda., known as
Paineiras, is an affiliate of Suzano Participacoes S.A. Petroleo Brasileiro
S.A., known as Petrobras, is controlled by the Brazilian government. Billiton
Metais S.A. is a wholly-owned subsidiary of BHP Billiton. Serra de Mesa Energia
S.A., known as Serra da Mesa, is an affiliate of the VBC Group, which includes
Votorantim Participacoes S.A., Banco Bradesco S.A. and Camargo Correa S.A.
Companhia Mineira de Metais, known as CMM, and Votorantim Cimentos S.A. are
affiliates of Votorantim Participacoes S.A. Alcoa Aluminio S.A., known as Alcoa,
is an affilate of Alcoa Inc. Mineracao Morro Velho Ltda., known as MMV, is an
affiliate of Anglo American Brasil Ltda., which in turn is affiliated with Anglo
American PLC. Companhia de Tecidos do Norte de Minas, known as Coteminas, is
affiliated with Coteminas International Ltd.
88
The table below sets for the information regarding our power generation
projects.
OUR TOTAL OUR TOTAL PROJECTED
OUR OWNERSHIP PROJECTED INVESTMENT AS OF INVESTMENT AS OF
PROJECT COMMENCEMENT OF OPERATIONS INTEREST CAPACITY SEPTEMBER 30, 2001 DECEMBER 31, 2002
------- -------------------------- ------------- --------- ------------------ -------------------
(PERCENT) (IN MW) (IN MILLIONS OF US$)
Igarapava(1)............. January 1999 38.1% 210 US$87.94 US$88.07
Porto Estrela(2)......... September 2001 33.3 112 19.05 19.71
Aimores(3)............... December 2003(6) 51.0 330 14.07 75.40
Candonga(3).............. November 2003(6) 50.0 140 6.60 25.65
Funil(1)................. December 2002(6) 51.0 180 15.96 41.62
Capim Branco I(4)........ September 2004(6) 48.4 240 0.092 15.06
Capim Branco II(4)....... February 2005(6) 48.4 210 0.131 7.55
Foz do Chapeco(5)........ July 2006(6) 40.0 855 -- 18.18
Santa Isabel............. July 2006(6) 43.9 1,087 -- --
---------------
(1) Located in Rio Grande, on the border between Sao Paulo and Minas Gerais.
(2) Located in Santo Antonio river, in the state of Minas Gerais.
(3) Located in Rio Doce basin, in the state of Minas Gerais.
(4) Located in Araguari river, in the state of Minas Gerais.
(5) Located in Uruguai river, on the border of the states of Santa Catarina and
Rio Grande do Sul.
(6) Projected date of commencement of operations of the first unit of the
project.
Our total investment in the hydroelectric projects at Igarapava, Porto
Estrela, Funil, Candonga, Aimores, Capim Branco I, Capim Branco II and Foz do
Chapeco is estimated at US$504 million. We cannot assure you that the aggregate
cost will not escalate or that the projects will be completed on schedule.
Due to the energy shortage in the second half of 2001, and in response to
the Brazilian government's energy rationing program, we temporarily reduced our
aluminum and ferro-alloy production. For a description of these measures, see
"Risk Factors -- Risks Relating to Brazil -- The Brazilian government's energy
rationing program could adversely affect us," "-- Ferrous Minerals -- Manganese
and Ferro-Alloys," "-- Holdings -- Aluminum Business -- Aluminum -- Albras" and
"-- Holdings -- Aluminum Business -- Aluminum -- Valesul."
HOLDINGS
Our holdings are comprised primarily of our aluminum operations, our pulp
and paper business and our interests in the steel industry. We are currently
selling our pulp and paper business, as well as some of our interests in the
steel industry.
89
The table below sets forth information regarding our holdings revenues and
sales by geographic market for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1999 2000
----------------- ----------------- -------------------------
PULP & PULP & PULP &
PAPER ALUMINUM PAPER ALUMINUM PAPER ALUMINUM STEEL
------ -------- ------ -------- ------ -------- -----
Export market
Latin America....... US$-- US$105 US$ -- US$ 5 US$ -- US$ 23 US$--
Europe.............. 43 269 39 146 48 237 --
Middle East......... -- -- -- -- -- 16 --
Japan............... -- -- -- 94 -- 34 --
United States....... 37 44 62 23 73 39 --
Asia, other than
Japan............. -- -- -- 50 -- 2 --
Others............... -- 1 -- -- -- -- --
----- ------ ------ ------ ------ ------ ----
80 419 101 318 121 351 --
Domestic sales....... 8 65 10 62 21 12 1
----- ------ ------ ------ ------ ------ ----
US$88 US$484 US$111 US$380 US$142 US$363 US$1
===== ====== ====== ====== ====== ====== ====
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------
2000 2001
------------------------- -------------------------
PULP & PULP &
PAPER ALUMINUM STEEL PAPER ALUMINUM STEEL
------ -------- ----- ------ -------- -----
Export market
Latin America....... US$ -- US$ 17 US$-- US$-- US$ 8 US$--
Europe.............. -- 172 -- 7 161 --
Middle East......... -- 16 -- -- -- --
Japan............... -- 34 -- -- -- --
United States....... 114 34 -- 42 33 --
Asia, other than
Japan............. -- 1 -- -- 23 --
Others............... -- -- -- -- -- --
------ ------ ---- ----- ------ ----
114 274 -- 49 225 --
Domestic sales....... 9 11 1 7 1 --
------ ------ ---- ----- ------ ----
US$123 US$285 US$1 US$56 US$226 US$--
====== ====== ==== ===== ====== ====
Aluminum Business
We conduct our aluminum business as follows:
[CVRD ALUMINUM FLOW CHART]
Our wholly-owned subsidiary, Aluvale, manages our aluminum operations
through participation in joint ventures that engage in:
- mining bauxite,
- refining bauxite into alumina, and
- using alumina to produce primary aluminum and aluminum alloys.
90
Aluvale's principal operating activity consists of marketing the aluminum
produced by Albras -- Aluminio Brasileiro S.A., or Albras, and Valesul Aluminio
S.A., or Valesul. Gross revenues from aluminum products totaled US$224 million
in the first nine months of 2001, and US$362 million in 2000.
Bauxite
MRN, the largest bauxite producer in Latin America and one of the largest in the
world, produces bauxite for sale to its joint venture partners. Excess
production may be sold to third parties. MRN operates two open-pit bauxite mines
which produce high quality bauxite. In addition, MRN controls substantial
additional high quality bauxite resources which it believes can be produced
economically in the future. MRN had net revenues of US$148 million and net
income of US$53 million in the first nine months of 2001, and net revenues of
US$217 million and net income of US$91 million in 2000.
MRN's mines are located in the northern region of the state of Para. The
table below sets forth information regarding MRN's bauxite reserves at December
31, 2000. The estimates of mineral reserves have been audited and verified by
MRDI.
PROVEN AND PROBABLE
RESERVES(1)
------------------------
MINE TYPE ORE TONNAGE GRADE
---- -------- ------------ ---------
(IN MILLIONS (% AL203)
OF TONS)
Mineracao Rio do Norte(2)................................... Open pit 166.8 50.5
---------------
(1) Reported as recoverable product.
(2) Includes two active mines.
Operations at MRN's mines commenced in 1979 and are projected to exhaust in
2016 at 2000 production levels. For the first nine months of 2001 and 2000, and
for the years 2000, 1999, and 1998, production equaled 7.9 million, 8.2 million,
11.2 million, 11.0 million, and 10.1 million tons, respectively.
MRN operates ore beneficiation facilities at its mines, which are connected
by rail to a loading terminal and port facilities on the Trombetas River. The
Trombetas River is a tributary of the Amazon River, and MRN's port facilities
can handle vessels of up to 50,000 DWT. MRN owns and operates the rail and the
port facilities serving its mines. The MRN bauxite mines are accessible by road
from the port area and obtain electricity from their own thermoelectric power
station.
MRN is undertaking an expansion of its capacity from 11.0 million tons to
16.3 million tons in 2003. The cost of this expansion is estimated at US$206
million.
Alumina
Alunorte began operations in July 1995 and produces alumina by refining bauxite
which MRN supplies. The Alunorte plant has a production capacity of 1.5 million
tons of alumina per year. In the first nine months of 2001 and in 2000, it
produced 1.2 million and 1.6 million tons, respectively. Alunorte sells the
major portion of its production to Albras, Valesul and Aluvale for the
production of aluminum. The Alunorte plant is located near Belem in the state of
Para next to Albras's aluminum production facilities. This allows Alunorte and
its principal customer to share infrastructure and other resources. Alunorte had
net revenues of US$227 million and a net loss of US$79 million in the first nine
months of 2001 and net revenues of US$322 million and net income of US$23
million in 2000.
With the exception of MRN, each Alunorte joint venture partner must
purchase on a take-or-pay basis all alumina produced by Alunorte in proportion
to its respective interest. MRN also has the right, but not the obligation, to
purchase its share of Alunorte's production. The joint venturers each pay the
same price, which is determined by a formula based on prevailing world market
prices of alumina and aluminum. In the aggregate, we are committed to
take-or-pay 465,816 metric tons per year of alumina produced by Alunorte, which
at a market price of US$194.17 per metric ton at September 30, 2001, represents
an annual commitment of US$90 million.
91
In 2000, Alunorte's partners agreed to contribute an additional US$126
million in equity capital to expand Alunorte's capacity from 1.5 million tons of
alumina per year to 2.3 million tons by 2002, a project which is expected to
cost approximately US$280 million. Our share of this contribution is US$42
million to be paid over six installments. Due to this contribution, our equity
interest in Alunorte will be diluted to 44.4% of the total capital by 2002,
although our voting interest will remain unchanged at 50.3%.
Aluminum
Albras and Valesul each produce aluminum using alumina which Alunorte
supplies. Alunorte has supplied all of Albras's alumina requirements since
October 1995. Albras produces aluminum ingots and Valesul produces aluminum
ingots, slabs, bars, billets and alloys. Aluminum is produced from alumina by
means of a continuous electro-chemical process which requires substantial
amounts of electricity.
Albras
The Albras plant is one of the largest aluminum plants in Latin America,
with a capacity of approximately 406,000 tons per year. Albras started its
operations in 1985 at a plant located near Belem in the state of Para. Albras
had net revenues of US$383 million and a net loss of US$72 million in the first
nine months of 2001, and net revenues of US$551 million and net income of US$129
million in 2000.
The Albras joint venture partners must purchase on a take-or-pay basis all
aluminum produced by Albras in proportion to their ownership interests which
represents an annual commitment from us of US$275 million. See note 15(d) to our
consolidated financial statements. We generally market our share of Albras's
output in international export markets.
The table below sets forth information regarding Albras's recent aluminum
production and our recent purchases from Albras.
FOR THE
FOR THE YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
ALUMINUM 1998 1999 2000 2000 2001
-------- ----- ----- ----- ----- -----
(IN THOUSANDS OF TONS)
Albras production.............................. 342.0 358.0 366.0 275 261
Our purchases from Albras...................... 174.0 183.0 187.0 140 133
At September 30, 2001, Albras had US$583 million of long term outstanding
debt, of which US$210 million was denominated in Japanese yen (approximately 57%
of which was hedged into U.S. dollars). To reduce the impact of price
fluctuations and to assure adequate cash flow, Albras engages in hedging
activities from time to time, usually through one-year forward sales. For more
information on these hedging activities, see "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Market
Risk -- Commodity Price Risk."
In 2001, Albras obtained a financing package with BNDES aimed at financing
the expansion of the Albras plant from a capacity of approximately 366,000 tons
per year to a capacity of approximately 406,000 tons per year. In 2001, Albras
invested US$25.5 million in this expansion project, which was completed in the
fourth quarter of 2001. The total cost of this project was US$55 million.
Consequently, Albras' production capacity increased by 40,000 tons.
Electricity. The production of aluminum requires a continuous flow of
substantial amounts of electricity. Albras purchases electrical power from
Eletronorte, a state-owned electric power utility. Eletronorte generates
electricity at the Tucurui hydroelectric power plant located on the Tocantins
river. This plant is the sole source of electrical power in the region in the
quantities required for Albras's operations. Albras consumes approximately
one-quarter of the constant (year round) output of the Eletronorte plant.
92
We currently benefit from a contract between Albras and Eletronorte
pursuant to which Albras is able to purchase electricity at favorable rates.
This contract is scheduled to expire in 2004. We cannot assure you that we will
be able to renew this contract on the same or similarly favorable terms. We,
together with other aluminum producers in the region, are currently
investigating alternative electricity sources. For a detailed description of our
investments in alternative electricity sources, see "-- Our Lines of Business --
Energy."
Due to the energy shortage and the Brazilian government's energy rationing
program which required an energy consumption decrease of 25% for aluminum
related activities, we reduced 2001 aluminum production at Albras by 46,000 tons
to 333,000 tons from the previously planned 379,000 tons. Despite this mandatory
temporary reduction, we continue to pursue our long-term plan to expand our
aluminum operations. In January 2002, Albras began operating at full production
capacity, which has increased to 406,000 tons following the completion of the
Albras plant expansion project. For information on the risk associated with the
Brazilian government's energy rationing program, see "Risk Factors -- Risks
relating to Brazil -- The Brazilian government's energy rationing program could
adversely affect us."
Valesul
Valesul started its operations in 1982 and operates a plant located in the
state of Rio de Janeiro. Valesul produces primary aluminum and aluminum alloys
in the form of ingots, slabs, bars and billets. Valesul's aluminum is sold
primarily in the domestic Brazilian market on a spot basis. Valesul had net
revenues of US$103 million and a net income of US$15 million in the first nine
months of 2001, and net revenues of US$148 million and net income of US$21
million in 2000.
The table below sets forth information regarding Valesul's primary aluminum
production, third party scrap recycled by Valesul and our recent tolling
acquisitions from Valesul.
FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ------------------
ALUMINUM 1998 1999 2000 2000 2001
-------- ---- ---- ---- ----- -----
(IN THOUSANDS OF TONS)
Valesul production............................... 93.6 91.7 93.8 68.5 61.2
Third party scrap recycled....................... 15.4 20.1 19.5 14.4 15.3
Our acquisitions from Valesul.................... 59.8 50.7 -- -- --
At the end of 1999, Aluvale and Billiton, Valesul's shareholders, decided
to terminate the tolling agreement in force since 1987. Consequently, since
January 1, 2000, Valesul independently purchases its raw material requirements
and operates as a company in its own right.
Electricity. Valesul currently obtains approximately 20% of its electrical
energy requirements from four of our hydroelectric power plants located in the
state of Minas Gerais and the remainder from a third party power company at
market rates. The Brazilian federal power system uses a two-tiered (peak and
off-peak) rate structure, with electricity during peak hours costing
considerably more than off-peak electricity. Valesul has invested substantial
amounts to reduce its electricity cost during peak hours. If its initiatives are
successful, Valesul could realize substantial cost savings in producing
aluminum. To address Valesul's need for reliable electrical power sources, we
have built a ten megawatt hydroelectric power plant at Rio Preto in the state of
Minas Gerais, which began operations in October 1997. Valesul is also a
participant in another power plant, known as Machadinho, that will be
operational in 2002 and will ensure a self-sufficient power supply in peak
hours.
Due to the energy shortage and the Brazilian government's energy rationing
program which required an energy consumption decrease of 25% for aluminum
related activities, we reduced 2001 aluminum production at Valesul by 13,000
tons to 80,000 tons from the previously planned 93,000 tons. Valesul decreased
the production of ingots, a commodity traded on the London Metal Exchange.
Valesul did not alter the production of higher value added products, such as
alloys and billets, that are sold under contracts with customers. Despite this
mandatory temporary reduction, we continue to pursue our long-
93
term plan to expand our aluminum operations. For information on the risks
associated with the Brazilian government's energy rationing program, see "Risk
Factors -- Risks Relating to Brazil -- The Brazilian government's energy
rationing program could adversely affect us."
Competition in the Aluminum Business
Competition in the bauxite export market is based primarily on two key
factors: quality of bauxite and reliability of purchasers. We believe that MRN
remains competitive in this market because of:
- the high quality of Brazilian bauxite, and
- our aluminum production system which ensures internal use of our bauxite
production.
Quality, price and reliability of supply drive competition in the alumina
market. We believe that Alunorte is competitive in the alumina market because
of:
- its proximity to MRN's bauxite mines,
- its newly developed refinery facilities,
- its efficient port facilities, and
- the on-going support of its owners in committing to purchase a
substantial portion of its annual production.
Aluminum is a commodity and competition is based primarily on the economics
of transportation and the costs of production. We believe that Albras is
competitive in the aluminum market because of:
- its relatively efficient and accessible port facilities, and
- its generally prevailing lower costs of production.
Pulp and Paper Division
We conduct our pulp and paper business as follows:
[CVRD PAPER FLOW CHART]
In the first half of 2001, we sold our 32% ownership interest in Bahia Sul
Celulose S.A., known as Bahia Sul, to our joint venture partner Companhia Suzano
de Papel e Celulose, or Suzano, for approximately US$320 million. Under the
terms of the acquisition agreement, Suzano agreed to guarantee Bahia Sul's debt
of US$116 million.
94
On September 14, 2001, we concluded the sale of our 51.5% stake in Celulose
Nipo-Brasileira S.A., known as Cenibra, to the Japanese consortium which held
the other 48.5% stake in Cenibra, for US$670.5 million.
Our remaining interests in the pulp and paper industry currently consist of
our Celmar S.A. joint venture with Japanese partners, and our forestry
subsidiary, Florestas Rio Doce S.A. We continue to explore the divestiture of
these businesses in order to concentrate on our core mining, logistics and
energy businesses.
Steel Business
We conduct our steel business as follows:
[CVRD STEEL FLOW CHART]
In line with our strategy to consolidate and focus on mining, logistics and
energy, on December 31, 2000 we reached an agreement to unwind our cross
holdings with CSN, which we completed in March 2001. Additionally, in December
2000 we exchanged our 2.28% interest in Aco Minas Gerais S.A., or Acominas, a
privately held steel company for US$10 million worth of preferred shares of
Gerdau S.A., a publicly listed steel holding company, which shares we intend to
sell in the future. We might cease owning shares in Usiminas in the future, in
which case, our steel investments will be in CST, Siderar, and one steelmaker in
the United States, CSI. CSI is the principal purchaser of slabs from CST, with
whom we have an exclusive supply contract for iron ore and pellets. In addition,
our participation in CSI gives us access to and experience dealing with the U.S.
market, where we currently have a very small market share. For these reasons, we
intend to hold our investment in CSI.
The following table sets forth information on our continuing interests in
makers of steel products.
2000 NET
INVESTMENT LOCATION 2000 PRODUCTION REVENUES PRINCIPAL PRODUCTS
---------- ------------- --------------- --------------- --------------------------
(IN MILLIONS OF (IN MILLIONS OF
TONS)(1) US$)(2)
CSI........................ United States 1.8 721 Hot-rolled steel; cold-
rolled steel; galvanized
steel; steel tubes
CST(3)..................... Brazil 4.9 1,008 Steel slabs
Usiminas................... Brazil 4.5 1,224 Hot-rolled steel; cold-
rolled steel; heavy steel
plates; electro galvanized
steel
Siderar.................... Argentina 2.3 928 Hot-rolled steel; cold-
rolled steel; galvanized
steel; tin plates
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(1) Production in million of tons of crude steel for all steelmakers except CSI,
and in millions of tons of finished products for CSI.
(2) Represents amounts translated from local financial statements and converted
into U.S. dollars (where applicable) at prevailing year-end exchange rates.
(3) We are party to a shareholders' agreement which permits us to participate in
a control group.
The market value of our investments in CST, Usiminas, and Siderar, all of
which have publicly traded equity, was US$135 million at September 30, 2001. The
aggregate net book value of these investments was US$79 million at September 30,
2001. The aggregate net book value of our total investments in steel producing
companies (including CSI, a privately held company) was US$194 million at
September 30, 2001. We earned US$27 million in dividends from these investments
in 2000, and US$26 million in the first nine months of 2001.
Fertilizers
We conduct our fertilizer business primarily through our stake in
Fertilizantes Fosfatados S.A., or Fosfertil, a company that produces and sells
nitrate and phosphate based fertilizers. Our total and voting interest in
Fosfertil is 11.0%. Our main partner in Fosfertil is Fertifos-Administracao e
Participacoes S.A.
E-Business
In 2000, we acquired an ownership interest in Quadrem International Holding
Ltd., which operates a global procurement website for the mining and
metallurgical industries. Quadrem was launched in the last quarter of 2001.
The table below sets forth information regarding share ownership by each
company owning more than 5% of the shares in Quadrem:
SHARES PERCENT OF
NAME OWNED COMPANY
---- ------- ----------
Alcan Finances (Bda) Ltd. .................................. 118,782 9%
Anglo American Luxembourg S.A. ............................. 118,782 9
BHP Holdings (Resources) Inc. .............................. 118,782 9
Itabira Rio Doce Company Ltd. .............................. 118,782 9
Rio Tinto Overseas Holdings Limited......................... 118,782 9
Alcoa International Holdings Company........................ 79,188 6
Codelco International Limited............................... 79,188 6
Compagnie Generale de Participation Industrielle et
Financiere................................................ 79,188 6
Phelps Dodge Corporation.................................... 79,188 6
WMC Resources International Pty Ltd. Corp. ................. 79,188 6
Each of the remaining eleven companies that participate in Quadrem holds 3%
or less of the total shares.
We have committed to provide US$9 million in funding for Quadrem. All of
our partners have also committed to provide funds in proportional amounts
relative to their share in Quadrem.
In September 2000, we incorporated Valepontocom S.A., a vehicle for
development of and participation in e-business. With an initial investment of
US$50 million to be made up to the end of 2001, Valepontocom plans to
participate in both vertical (industry-specific) and horizontal (goods and
services common to all industries) websites, in order to provide negotiation and
delivery services to customers using our transportation assets and those of
third-parties.
In February 2001, Valepontocom launched Solostrata (www.solostrata.com.br),
a website that provides a virtual marketplace in which farmers may buy and sell
their products. Solostrata seeks to facilitate input and product transactions as
well as logistics services. Presently, Solostrata is 100% owned by Valepontocom,
but, in the future, it may have additional shareholders. In 2001, we invested
US$4.9 million in this new venture.
96
In April 2001, Valepontocom launched Multistrata. Multistrata was designed
to create an electronic marketplace for logistics services, particularly
railroads, in the Mercosur region. Multistrata operates a website
(www.multistrata.com.br) which provides a link between providers of logistics
services and their clients, and also provides consulting services relating to
logistics. The Multistrata website also provides daily news on the logistics
business. During its initial phase, Multistrata will be dealing with the
following sectors: agriculture, mining, chemical, steel, cement, pulp and paper
and containers logistics. In later stages, it intends to render services to the
beverage, food, pharmaceutical and electronics sectors. In Brazil, the Internet
industry is not subject to any specific regulation.
At September 30, 2001, we had invested US$23 million in our e-business
ventures. All e-business related projects are still in the implementation phase
and have not generated any revenue to date. We have begun to restructure our
e-business. Among other things, we plan to merge Valepontocom into our parent
company. Due to the evolving and uncertain nature of e-commerce, we are unable
to predict if and when these operations will be profitable.
REGULATORY MATTERS
MINING
Under the Brazilian Constitution, all mineral resources in Brazil belong to
the Brazilian government. The Brazilian Constitution requires that mining
companies incorporate in accordance with Brazilian law.
The Brazilian Constitution and Mining Code impose on mining companies
various regulatory restrictions relating to, among other things:
- the manner in which mineral deposits are exploited,
- the health and safety of workers,
- the protection and restoration of the environment,
- the prevention of pollution, and
- the promotion of local communities where mines are located.
Mining companies in Brazil can only prospect and mine for mineral resources
pursuant to prospecting authorizations or mining concessions granted by the
National Mineral Production Department, Departamento Nacional de Producao
Mineral, or DNPM, an agency of the Ministry of Mines and Energy of the Brazilian
government. DNPM grants prospecting authorizations to a requesting party for an
initial period of three years. These authorizations are renewable at DNPM's
discretion for another period of one to three years, provided that the
requesting party is able to show that the renewal is necessary for proper
conclusion of prospecting activities. On-site prospecting activities must start
within 60 days of official publication of the issuance of a prospecting
authorization. Upon completion of prospecting activities and geological
exploration at the site, the grantee must submit a final report to DNPM. If the
geological exploration reveals the existence of a mineral deposit that is
economically exploitable, the grantee will have one year (which DNPM may extend)
from approval of the report by DNPM to apply for a mining concession or to
transfer its right to apply for a mining concession to a third party. When a
mining concession is granted, the holder of the concession must begin on-site
mining activities within six months. DNPM grants mining concessions for an
indeterminate period of time lasting until the exhaustion of the mineral
deposit. Extracted minerals that are specified in the concession belong to the
holder of the concession. With the prior approval of DNPM, the holder of a
mining concession can transfer it to a third party that is qualified to own
concessions. In some cases, mining concessions are challenged by third parties.
The Brazilian government taxes mining companies on the basis of minerals
extracted. It also imposes other financial obligations. For example, mining
companies must compensate both private property owners for damage and loss of
income caused by use and occupation of land and state or municipal governments
97
where the mine is located. In the case of mining on private lands, mining
companies must share production with landowners. A substantial majority of our
mines and mining concessions are on lands owned by us or on public lands for
which we hold mining concessions.
ENERGY
Under the present regulatory structure, the power industry in Brazil is
comprehensively regulated by the Brazilian government, acting through the
Ministry of Mines and Energy and ANEEL, the Brazilian electricity regulatory
governmental agency. The role of the Ministry of Mines and Energy is to develop
policies and regulations aimed at organizing and regulating the electricity
sector. ANEEL's main function is to ensure the efficient and economical supply
of energy to consumers by monitoring prices and promoting market competition.
Under Law No. 8,987, concessions grant exclusive rights to generate and
transmit or to distribute electricity in a particular area for a period of time
that, in the opinion of ANEEL, is sufficient for the concessionaire to recover
its investment, up to a limit of 35 years in the case of concessions for power
generation. Concessions may be renewed at ANEEL's discretion for an additional
period of equal duration. Concessionaires are required to supply electricity for
public services at the established prices, on a continuing basis, in sufficient
quantity and within approved standards of quality.
To mitigate the potential volatility of revenues for hydroelectric
generators, ANEEL has implemented regulations that create the Energy
Reallocation Mechanism, known as ERM, a mechanism for sharing hydrological risk
among all generators.
In order to implement the ERM, ANEEL designates a level of energy
production, known as Assured Energy, for each generator, every five years.
Assured Energy is calculated in accordance with a statistical model based on
average rainfalls in the relevant region, water flows of rivers and water levels
in each plant's reservoir over a multi-year time frame. Each generator is
promised payment for the amount of its Assured Energy, as long as ERM members as
a whole are able to meet ERM Assured Energy levels. To the extent a generator
has signed contracts for the sale of its Assured Energy, it receives payments
based on these contractual terms, regardless of its level of actual generation.
Each generator is allowed to enter into contracts to sell up to 100% of its
Assured Energy. If all ERM members meet their contracted energy and there is
still produced energy remaining, then there will be an allocation of the net
regional surplus generation among generators in different regions.
Energy will be traded in the wholesale energy market, or MAE, at the price
prevailing in the region in which the energy has been generated. MAE is the
legal entity responsible for the operation of the wholesale energy market and
seeks to ensure that purchases of energy in the short-term market are settled
and cleared in an efficient manner. Originally created as a self-regulatory
body, on February 22, 2002, MAE became a legal entity under supervision and
regulation by ANEEL, due to MAE's failure in implementing a self-regulated
energy market. MAE is expected to compute the spot price for energy according to
guidelines that are currently in use and available to the public. The spot price
is determined by the marginal cost of production according to market conditions
and a number of policy and operational considerations, including the optimal use
of resources, transmission bottlenecks, the costs of an energy deficit, the
self-restraint of customers caused by a high spot price and projected energy
requirements.
The concepts of Assured Energy and the ERM, together with bilateral
contracts between generators and distributors, determine the annual revenues for
each generator. Initial contracts between generators and distributors are power
purchase agreements in which the parties agree to purchase and sell energy at
tariffs set forth by ANEEL. Initial contracts will be valid and binding during a
transition period until price deregulation is completed, when they will be fully
replaced by bilateral contracts. Bilateral contracts between generators and
distributors may be freely negotiated at any price level and with any form of
pricing adjustment, subject to compliance with certain Brazilian legal
requirements governing generally permissible indexation mechanisms in contracts.
98
ENVIRONMENTAL MATTERS
Federal, state and municipal legislation contain provisions for the control
and protection of the environment in Brazil. These laws oversee the use of
natural resources, the reclamation and restoration of mined areas, the control
of atmospheric emissions, the treatment of industrial effluents, as well as the
use, handling and final disposal of hazardous materials. It is possible that
current environmental regulations will become more strict in the future. The
strengthening of these laws may lead to greater costs for environmental
compliance.
In order to conduct our mining, energy generation and industrial
activities, we must prepare environmental impact assessments and submit them to
authorities who oversee the granting of environmental permits. We are committed
to complying with all legal requirements and to achieving the best relationship
with the interested parties, especially the communities located near its
operational activities. The implementation of the environmental management
system in all of our installations and operations provides a systematic approach
for the improvement of the legal compliance and the environmental performance of
our activities.
Under Brazilian Federal Law No. 9,605, non-compliance with environmental
laws and regulations can result in criminal penalties, such as imprisonment and
other restrictions on personal rights for individuals (including directors,
officers and managers of companies), and fines and the mandatory rendering of
public services by companies. Administrative penalties range from warnings and
fines to the suspension of corporate activities, and may also include the loss
or reduction of the incentives, or the cancellation or interruption of credit
facilities granted by governmental institutions.
Issuance of Environmental Licenses. We must obtain environmental licenses
in order to build, install, expand and operate facilities that use natural
resources or may pollute the environment. Our environmental policies aim to
obtain the legally required licenses for each of our facilities and activities.
We have entered into agreements with the appropriate environmental authorities
with respect to facilities where environmental non-compliance has been detected
in order to make these facilities compliant.
Prevention and Environmental Control Measures. Our environmental policies
also aim to prevent, control and reduce the environmental impact caused by our
business operations. To that end, we have made significant
environmentally-related investments in our facilities and in employee training
programs (approximately US$22.7 million in 2000). We are also investing in the
development of environmental projects directed at the communities located near
our operational facilities (approximately US$1.6 million in 2000).
In 1996, we developed an environmental management program which will be
implemented in all of our installations and operations. This program provides a
systematic approach to the improvement of the legal compliance and the
environmental performance of our activities, and further acknowledges our
commitment to high environmental standards. The following operational facilities
have obtained the International Standards Organization ("ISO") certification No.
14001:
- Mineral Development Center, located in the state of Minas Gerais;
- iron and manganese mines located in Carajas, in the state of Para;
- mining complex of Timbopeba, located in Mariana, in the state of Minas
Gerais; and
- Ponta de Madeira marine terminal, located in the state of Sao Luis.
Principal Environmental Projects. From 1994 to 2000, we developed an
environmental program involving more than 70 projects, with a total investment
of approximately US$120 million, of which US$50 million were financed by the
World Bank. One of these projects, intended to reduce the atmospheric emissions
from the Tubarao Marine terminal complex, has resulted in an enhancement of the
air quality of the region (in the state of Espirito Santo), by reducing the
total emission of particles by 62%.
99
With respect to improvements in water quality, we are currently developing
several projects, including:
- control of the pollutants disposed into the sea and into the local rivers
as well as proper use, handling and final disposal of hazardous materials
into the Tubarao/Praia Mole marine terminal;
- collection and treatment of the industrial effluents created by the
washing and maintenance of cars and wagons operated in the Vitoria Minas
and in the Carajas railroads; and
- collection and treatment of industrial effluents disposed in the sea in
the Ponta da Madeira marine terminal.
Our environmental program also includes reforestation projects which are
intended to protect the soil against erosion processes, such as the Green Aisle
Program (Programa Corredor Verde) at our Vitoria Minas railroad.
We are also pursuing other legally-required projects in connection with the
restoration of lands degraded in the course of our mining operations.
Environmental laws require us to spend at least 0.5% of the total cost of each
venture with a material environmental impact to create and maintain protected
sites.
PATENTS AND TRADEMARKS
We hold a significant number of patents, registered with the U.S. Patent
and Trademark Office, and with the Brazilian Instituto Nacional de Propriedade
Industrial, or INPI, governmental agencies responsible for the granting and
registration of patent and trademarks rights in the United States and in Brazil,
respectively. The majority of our patents relate to proprietary ore dressing
processes. One of our most successful patents relates to a concentration process
for lower grade iron ore, generally known as itabirite, which is widely used by
other iron ore mining companies around the world. We are currently conducting
technological research to permit commercial exploitation of our deposits of hard
itabirites.
We have registered the "CVRD" trademark and our proprietary logo with the
INPI related to the following categories:
- minerals in general,
- geology, prospecting, topography, photogrammetry, oceanography and land
survey services,
- processing, treatment and dressing services in general,
- cargo transport services,
- ancillary services to transportation and warehousing, and
- research and analysis services of material for industrial purposes.
We renew our trademark registrations with the INPI every ten years.
INSURANCE
We carry insurance covering various types of risks, such as general
liability, liability of officers and directors, automotive vehicles, fire,
operational risks, operational risks of marine terminals and transportation of
precious minerals, as well as group life insurance policy, insuring our
employees. The policies are currently in full force and the related premiums
were duly paid. We believe that our insurance coverage is adequate for the scope
of our operations.
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EMPLOYEES
The table below sets forth the number of our employees by category at the
dates indicated.
AT DECEMBER 31,
------------------------
1999 2000 2001
------ ------ ------
Mining (other than gold).................................... 4,478 4,948 6,141
Transportation.............................................. 4,514 4,525 4,605
Gold........................................................ 588 555 528
Other operational(1)........................................ 504 511 608
Administrative.............................................. 659 903 1,522
------ ------ ------
Total.................................................. 10,743 11,442 13,404
====== ====== ======
---------------
(1) Does not include pelletizing, aluminum, or pulp and paper joint venture
employees.
We establish our annual wage and benefits programs in July of each year
following negotiations with our unions. In July 2001, our final proposals to our
unions included a 6% salary increase, additions to the list of available
medications, provisions for college materials for employees and annual bonus
amounts. The provisions of our collective bargaining agreements with our unions
also apply to our non-union employees. We have not suffered any material
economic loss as a result of labor strikes or stoppages.
Since 1973 we have sponsored a defined benefit pension plan, known as the
old plan, covering substantially all employees, with benefits based on years of
service, salary and social security benefits. This plan is administered by
VALIA, and is funded by monthly contributions we and our employees make,
calculated based on periodic actuarial appraisals.
In May 2000, we implemented a new pension plan, which is primarily a
defined contribution plan with a benefit feature relative to service prior to
May 2000, known as the new plan, and offered our active employees opportunity to
transfer to the new plan. Over 98% of our active employees opted to transfer to
the new plan. The old plan will continue in existence, covering almost
exclusively retired participants and their beneficiaries. In the first nine
months of 2001 and 2000, we contributed approximately US$17 million and US$37
million, respectively, to VALIA to fund the new plan and the old plan. In
addition, on March 9, 2001 we transferred our 10.3% interest in shares of
Companhia Siderurgica Nacional to the new plan, as a special contribution valued
at US$249 million, equivalent to the value of such shares (determined based on
their weighted average price in the last thirty trading sessions on the Sao
Paulo Stock Exchange during the period ended on March 9, 2001). We also provide
scholarships and apprenticeships at our corporate vocational centers. We believe
our relations with our union employees and other employees are good.
Our employees have an equity stake in our business. On May 20, 1997, in
connection with our ongoing privatization, the Brazilian government completed
the sale of 11,120,919 common shares and 8,744,308 preferred shares to
Investvale, an association of our current and retired employees and certain
affiliates, at per share prices representing substantial discounts to prevailing
market prices.
LEGAL PROCEEDINGS
We and our subsidiaries are defendants in numerous legal actions in the
normal course of business, including civil, administrative, tax, social security
and labor proceedings. We have set aside or deposited in court amounts to cover
estimated contingency losses due to adverse legal judgments. Based on the advice
of our legal counsel, we believe that the provision made against contingent
losses is sufficient to cover probable losses in connection with such actions.
Conselho Administrativo de Defesa Economica, known as CADE, the Brazilian
antitrust regulator, has been conducting inquiries into our principal lines of
business to determine whether undue concentration exists in our respective
industries. One of such inquiries that CADE made was in the context of our
101
privatization and involved our railroad system. In November 2001, CADE issued a
favorable opinion regarding this matter, on condition that we periodically
provide certain financial information to CADE and to the Ministry of
Transportation.
Numerous lawsuits challenging the legality of our privatization are
pending, including a number of class-action lawsuits. We do not believe that,
individually or in the aggregate, these actions will adversely affect the course
of the privatization process or otherwise have a material adverse effect on us.
We are currently a defendant in two separate actions brought by the
municipality of Itabira, in the state of Minas Gerais. It alleges that our
Itabira iron ore mining operations have caused environmental and social damages.
In one of the actions, filed in August 1996, the municipality of Itabira alleges
that our Itabira iron ore mining operations have caused environmental and social
damages and claims damages with respect to the degradation of the site of one of
our mines, as well as the immediate restoration of the affected ecological
complex and the performance of compensatory environmental programs in the
region. The damages sought, as adjusted from the date of the claim, amount to
approximately US$535 million. We believe that this amount is significantly
higher than the amount we would actually be responsible for in the event that we
were found liable. We have requested the annulment of this action as it
represents no actual controversy. In fact, on June 5, 2000, the local
environmental authorities granted an operating license to our Itabira iron ore
mining operations. This license sets forth conditions regarding the
environmental restoration of the degraded site and the performance of
compensatory environmental programs. We intend to continue complying with these
conditions. In the other action, the municipality of Itabira is claiming the
right to be reimbursed for expenses it has incurred in connection with public
services rendered as a consequence of our mining activities. We believe that
this action is without merit. We are vigorously defending both pending actions.
We have been subpoenaed as a defendant in a public civil action seeking to
annul the concession agreement through which we and certain other defendants
operate the Praia Mole port terminal. The case is in its initial stages and we
believe that the claim is without merit.
102
MANAGEMENT
EXECUTIVE OFFICERS
The executive officers are our legal representatives and are responsible
for our internal organization and day-to-day operations and the implementation
of the general policies and guidelines set forth by the board of directors. Our
by-laws provide for a minimum of three and a maximum of six executive officers.
The board of directors appoints executive officers for three-year terms and may
remove them at any time. According to the Brazilian Corporation Law and to our
by-laws, executive officers must be Brazilian residents. The executive officers
hold regularly scheduled meetings on a weekly basis and hold additional meetings
when called by any executive officer.
We are in the process of revising our corporate governance model in order
to, among other things, improve the efficiency of our decision-making process.
We are also defining metrics of value creation, which will improve the
transparency in our communications with our investors. On April 7, 1999, the
general meeting approved an amendment to our by-laws to alter the structure of
the executive officers' board. As a result, we now have one chief executive
officer and up to five executive officers, each responsible for business areas
that the board of directors assigns to them. On October 24, 2001, the board of
directors approved a new management structure with the following areas:
- Ferrous Minerals,
- Non-Ferrous,
- Holdings and Business Development (including energy),
- Logistics,
- Finance and Investor Relations,
- Planning and Control, and
- Human Resources and Corporate Services.
The table below lists our current executive officers.
YEAR OF
NAME APPOINTMENT POSITION AGE
--------------------------------------- ----------- ------------------------------------ ---
Roger Agnelli.......................... 2001 Chief Executive Officer 42
Armando de Oliveira Santos Neto........ 2001 Executive Officer (Ferrous Minerals) 51
Antonio Miguel Marques................. 2001 Executive Officer (Holdings and 44
Business Development and
Non-Ferrous)
Guilherme Rodolfo Laager............... 2001 Executive Officer (Logistics) 45
Gabriel Stoliar........................ 2001 Executive Officer (Finance, Investor 47
Relations and Planning and Control)
Carla Grasso........................... 2001 Executive Officer (Human Resources 40
and Corporate Services)
We have summarized below the experience, areas of expertise, and principal
outside business interests of our current executive officers.
Roger Agnelli. Since July 2001, Mr. Agnelli has been our chief
executive officer. He served as chairman of our board of directors from May
2000 to July 2001. He also served as a member of the board of directors of
VBC Energia S.A., Companhia Paulista de Forca e Luz, Companhia Siderurgica
Nacional (CSN), Brasmotor S.A., Globo Cabo S.A. and Latas de Aluminio S.A.
He also served as the chief executive officer of Bradespar S.A. from March
2000 to July 2001. Mr. Agnelli worked for 22 years with Banco Bradesco
S.A., where he started his career as an investment analyst and served as
Executive Director from 1992 to 2000. Mr. Agnelli has a degree in Economics
from Fundacao Alvares Penteado.
103
Armando de Oliveira Santos Neto. Mr. Santos was appointed as an
executive officer of our ferrous minerals area in October 2001. Since 1970,
Mr. Santos has held many different positions within the CVRD Group,
including trainee at the railway division, assistant to the chief executive
officer, marketing manager and executive officer at Rio Doce America, Inc.,
or RDA, sales manager of the Far East area, coordinator for planning and
sales promotion, general manager and director of Rio Doce International
S.A., or RDI, general sales manager and executive officer of the iron ore
division, commercial officer and executive officer of RDA and member of the
board of directors of CSI. Mr. Santos has a degree in civil engineering
from the Universidade Federal do Espirito Santo (UFES).
Antonio Miguel Marques. Mr. Marques was appointed as an executive
officer of our holdings, business development and non-ferrous minerals area
in October 2001. Currently, Mr. Marques is Chief Executive Officer of
Aluvale and a member of the board of directors of Celmar, Albras, Alunorte,
MRN and Valesul. Prior to that, Mr. Marques has held various positions at
Caraiba Metais S.A. Industria e Comercio, DuPont do Brasil S.A., Billiton
Metais S.A., Paranapanema Group and Votorantim Group. Mr. Marques has a
degree in engineering from the Universidade Federal de Ouro Preto. He
received his post-graduate degree in Mineral Treatment at the Universidade
Federal de Minas Gerais (UFMG) and obtained an MBA from COPPEAD, at
Universidade Federal do Rio de Janeiro (UFRJ).
Guilherme Rodolfo Laager. Mr. Laager was appointed as an executive
officer of our logistics area in September 2001. Mr. Laager served as
logistics, supplying and technological information director for AMBEV,
Companhia de Bebidas das Americas from 1989 until August 2000. Mr. Laager
has a degree in civil engineering from the Universidade Federal do Rio de
Janeiro (UFRJ) and obtained an MBA in business administration from COPPEAD,
also at UFRJ.
Gabriel Stoliar. Since April 14, 1999, Mr. Stoliar has served as our
chief financial officer and as our chief accounting officer. In September
1997, he was appointed as an executive officer of the corporate center and
investor relations area. In 1994, he was appointed director of BNDESPAR. In
1991, Mr. Stoliar assumed the position of superintendent of the operational
division responsible for the areas of mining, metallurgy, chemicals,
petrochemicals, pulp and paper. He was hired by BNDESPAR in 1988 as manager
of operations in the area of capital, electronic and consumer goods. In
1982, he was promoted to manager of BNDES for the project area of
FINSOCIAL. In 1978, he was hired by BNDES as an analyst in the area of
pulp, paper and petrochemicals. Mr. Stoliar began his career as a business
organization consultant at the Institute of Economic and Management
Development of the Federation of Industries of Rio de Janeiro. Mr. Stoliar
obtained an engineering degree from Universidade Federal do Rio de Janeiro,
a post-graduate degree in production engineering and an MBA from
PDG/EXEC-SDE in Rio de Janeiro.
Carla Grasso. Mrs. Grasso was appointed as an executive officer of
the human resources and corporate services area in October 2001. Prior to
joining us, Mrs. Grasso served as an economic assistant to the President of
Brazil. She has also been deputy coordinator of fiscal policy at the
Ministry of the Economy and has held a variety of positions at the Ministry
of Social Security. In 1997, she was appointed as an executive officer of
Fundacao Vale de Rio Doce de Habitacao e Desenvolvimento Social (FVRD).
Mrs. Grasso has both a degree in Economics and a master in Economics from
Universidade de Brasilia (UNB).
BOARD OF DIRECTORS
The conselho de administracao, the board of directors, is our
decision-making body responsible for determining general guidelines and policies
for our business, our wholly-owned subsidiaries and controlled companies, and
for formulating and expressing our policies. The board of directors is
responsible for supervising the executive officers. It also monitors the
executive officers' implementation of the general guidelines and policies. The
board of directors holds regularly scheduled meetings on a monthly basis and
holds additional meetings when called by its chairman, vice-chairman or any two
directors. Decisions of the board of directors require a quorum of a majority of
the directors and are taken by majority vote.
104
Under the Brazilian Corporation Law, the board of directors must have at
least three members. Each director and his or her respective alternate are
elected at a general shareholders' meeting and are subject to removal at any
time. Our by-laws state that the board of directors must consist of nine
members. Our current employees have the right to appoint one member of the board
of directors and his respective alternate. According to our by-laws, members of
the board of directors must be Brazilian residents who are both shareholders of
CVRD and have managerial experience. Members of the board of directors are
elected for three-year terms and can be re-elected. Each alternate director
serves on behalf of a specific board member. In the absence of the director for
whom an alternate director is acting, that alternate director may attend and
vote at meetings of the board of directors.
Six of our current directors and five of our current alternate directors
were appointed to their positions directly by Valepar, our principal
shareholder, pursuant to Valepar's shareholders' agreement and the provisions of
the Brazilian Corporation Law. These appointments were approved at our annual
general shareholders' meeting held in April 2001. For a description of Valepar's
shareholders' agreement, see "Major and Selling Shareholders -- Major
Shareholders -- Principal Shareholder."
The table below lists the current members of the board of directors.
YEAR FIRST
NAME ELECTED POSITION AGE
----------------------------------------------------- ----------- --------------------- ---
Luiz Tarquinio Sardinha Ferro(1)..................... 1999 Chairman of the Board 41
Joao Moises de Oliveira(1)........................... 2001 Board Member 56
Erik Persson(1)...................................... 2001 Board Member 47
Jose Marques de Lima(1).............................. 2000 Board Member 44
Octavio Lopes Castello Branco Neto................... 2001 Board Member 43
Romeu do Nascimento Teixeira(1)...................... 2001 Board Member 69
Renato da Cruz Gomes(1).............................. 2001 Board Member 49
Fabio de Oliveira Barbosa............................ 2000 Board Member 41
Francisco Valadares Povoa(2)......................... 1997 Board Member 56
---------------
(1) Appointed by Valepar.
(2) Appointed by our employees.
The table below lists the alternate members of the board of directors. One
additional alternate director is to be appointed by Valepar.
YEAR FIRST
NAME ELECTED POSITION AGE
----------------------------------------------------- ----------- --------------------- ---
Jose Ricardo do Carmo(1)............................. 2000 Board Member 49
Ricardo Carvalho Giambroni(1)........................ 2001 Board Member 45
Octavio Mauro Muniz Freire Alves(1).................. 2001 Board Member 40
Eleazar de Carvalho Filho............................ 2001 Board Member 44
Antonio Joao Martins Torres(1)....................... 2001 Board Member 61
Romulo de Mello Dias(1).............................. 2001 Board Member 40
Renato Augusto Zagallo Villela dos Santos............ 2001 Board Member 46
Otto de Souza Marques Junior(2)...................... 1997 Board Member 53
---------------
(1) Appointed by Valepar.
(2) Appointed by our employees.
105
We have summarized below the business experience, areas of expertise, and
principal outside business interests of our current directors:
Luiz Tarquinio Sardinha Ferro. Mr. Ferro was appointed chairman of
our board of directors in July 2001. From May 1999 to July 2001, he served
as vice-chairman of our board of directors. From 1996 to 1998, he was
President of PREVI -- Caixa de Previdencia dos Funcionarios do Banco do
Brasil and executive superintendent of the financial department of Banco do
Brasil S.A. In 1995, he was appointed general coordinator of the public
accounts management unit, at the Secretariat of the National Treasury. From
1994 to 1995, he participated in an international management program of
Banco do Brasil. From 1992 to 1994, Mr. Ferro worked at the Secretariat of
the National Treasury.
Joao Moises de Oliveira. Mr. Oliveira has served as a member of our
board of directors since 2001. From 1962 to 2000, he worked at Banco
Bradesco S.A. and at several companies in which Banco Bradesco S.A. has a
direct or indirect ownership interest. Since 2000, Mr. Oliveira has been an
executive officer at Bradespar S.A. He has served as a member of the board
of directors of many companies in which Banco Bradesco or Bradespar have or
had a direct or indirect ownership interest, including Companhia
Siderurgica Belgo Mineira, Companhia Siderurgica Nacional and Sao Paulo
Alpargatas S.A.
Erik Persson. Mr. Persson has served as a member of our board of
directors since April 2001. Since June 2000, he has been working as a
planning director of PREVI. He has been at PREVI since 1977.
Jose Marques de Lima. Mr. Lima has served as a member of our board of
directors since April 2000. Currently, he also serves as general manager of
the risk management unit at Banco do Brasil. In June 1999, he was appointed
as an executive officer of PREVI. From 1984 to 1998, he worked for Banco do
Brasil holding a variety of positions, including team work coordinator and
executive manager of the investor relations department, manager of the
market and shareholders division and manager of the financial analysis
department.
Octavio Lopes Castello Branco Neto. Mr. Castello Branco was appointed
as a member of our board of directors in April 2001. He is also a managing
director of BNDES. In 1995, he joined J.P. Morgan as head of the investment
banking group in Brazil. From 1990 to 1995, Mr. Castello Branco worked at
Caemi as the chief financial officer and member of the executive committee.
Mr. Castello Branco started his career at J.P. Morgan's Sao Paulo Office in
1983 and has developed an extensive experience in mergers and acquisitions,
having managed projects across a number of sectors since the inception of
J.P. Morgan's mergers and acquisitions group in Brazil.
Romeu do Nascimento Teixeira. Mr. Teixeira has served as a member of
our board of directors since April 2001. Mr. Teixeira was also appointed as
an executive officer of IESA, Internacional de Engenharia S.A., from 1986
to 1993. Since 1960, he has held many different positions within the CVRD
Group. From 1958 to 1960 he worked as an engineer at DNER, Departamento
Nacional de Estradas de Rodagem.
Renato da Cruz Gomes. Mr. Gomes joined our board of directors in
April 2001. He has also been an executive officer of Valepar since April
2001. In 2000, he was appointed as an executive officer of Bradespar. From
1976 through 2000, Mr. Gomes held a variety of positions within BNDES and
participated on the boards of directors of many companies, namely Elebra
Eletronica, Globo Cabo, Aracruz, Iochpe, Bahia Sul and Latasa. He is also a
member of the consulting board of Factor Sinergia, a securities investment
fund, and the investments committee of Bradesco Templeton Value and
Liquidity Fund.
Fabio de Oliveira Barbosa. Mr. Barbosa has served as a member of our
board of directors since April 2000. Currently, he also serves as member of
the board of directors of Valepontocom. Prior to joining us, Mr. Barbosa
served as an assistant secretary at the National Treasury Ministry and
became secretary in July 1999. He has also served as a member of the board
of directors of the following companies: Banespa -- Banco de Estado de Sao
Paulo S.A., Caixa Economica Federal and Banco do
106
Brasil. From 1996 to 1999, he served as a member on the audit committee of
Banco do Brasil and all of its subsidiaries. From 1992 to 1995, he served
as an executive director at the World Bank. From 1990 to 1992, he was
Deputy Coordinator of Fiscal Policy in the Ministry of the Economy, and,
from 1989 to 1990, he was coordinator for economic analysis at SEPLAN-PR.
From 1988 to 1989, he served as assistant to the chief planning minister to
the President of Brazil. Prior to that time, Mr. Barbosa held a variety of
positions at the Ministry of Industry and Commerce, the Parana State
Development Institute, the Ministry of Labor and the Institute for Applied
Economic Research.
Francisco Valadares Povoa. Mr. Povoa has served as a member of our
board of directors since May 1997. Since December 1994, Mr. Povoa has
served as Chief Executive Officer of Investvale. He also sits on the board
of Valepar, Valepontocom, Rio Doce Manganese Europe, or RDME, Salobo
Metais, CSI and Nova Era Silicon. Until March 2001, he was also a member of
the board of directors of CSN and was previously an alternate member of the
board of CSN. Mr. Povoa joined us as a mining engineer in 1972 and has held
a variety of positions within the CVRD Group.
COMMITTEES OF THE BOARD OF DIRECTORS
Recently, our board of directors approved a resolution creating five
non-permanent committees and appointing their respective members, as permitted
under our by-laws. These committees are advisory committees and therefore have
no decision capacity.
The strategy committee will be advising our board with regard to our
corporate strategy and to its formulation and will assist in assuring the
alignment with our board's strategic guidelines, in order to preserve economic
value and adherence to our strategic plan. The strategic committee will consist
of five members, including our Chief Executive Officer, our Executive Officer in
charge of Planning and Control, and three external members. The audit committee
will be advising our board in its monitoring of our financial integrity and
appointment of independent and internal auditors in order to guarantee the
transparency and efficiency of our internal control systems. The audit committee
will consist of three members, including Jose Ricardo do Carmo, Antonio Joao
Martins Torres, and one external member. The ethics and governance committee
will assist in promoting the effectiveness of our board of directors' corporate
governance practices and operations, as well as our ethical behavior, legal
compliance, and institutional responsibility, in order to promote our board's
transparency and independence, as well as the efficiency of the conflict
management system and our internal policies with respect to environmental,
health, safety and social matters. The ethics and governance committee will
consist of three members, including Luiz Tarquinio Sardinha Ferro, Renato da
Cruz Gomes, and one external member. The finance committee will advise on the
definition of capital structure and risk management financial policies, in order
to promote consistency between our financial policies, our strategic guidelines,
and our shareholders' risk-return profile. The finance committee will consist of
five members, including our Chief Executive Officer, our Chief Financial
Officer, Ricardo Carvalho Giambroni, Romulo de Mello Dias, and one external
member. The executive development committee will advise our board on the
selection, appraisal, development and remuneration of our senior management as
well as on our human resources policies. The executive development committee
will consist of four members, including Paulo Pavarini, Francisco Valadares
Povoa, Joao Moises de Oliveira, and one external member.
FISCAL COUNCIL
Under the Brazilian Corporation Law, we may appoint the conselho fiscal, a
fiscal council, as a corporate body independent of our management and external
auditors. The primary responsibility of the fiscal council is to review
management's activities and the financial statements, and report its findings to
the shareholders. We amended our by-laws on June 18, 1997 in order to provide
for the establishment of a five-member permanent fiscal council. On April 25,
2001, the shareholders appointed the current members and their respective
alternates. Holders of preferred shares and the golden share together may elect
one member of the fiscal council and the respective alternate. Non-controlling
holders of common shares comprising at least 10% of the common shares
outstanding may also elect one member of the fiscal
107
council and the respective alternate. The terms of the members of the fiscal
council expire at the next general shareholders' meeting following their
election.
The table below lists the current members of the fiscal council.
YEAR OF
NAME APPOINTMENT
---- -----------
Luis Carlos Angelotti....................................... 2001
Ronaldo Camillo............................................. 2000
Marcos Fabio Coutinho....................................... 1999
Eliseu Martins.............................................. 1997
Claudia Torres Teixeira..................................... 2000
The table below lists the alternate members of the fiscal council.
YEAR OF
NAME APPOINTMENT
---- -----------
Antonio Jose da Barbara..................................... 2001
Eduardo Coutinho Guerra..................................... 2001
Vicente Barcelos............................................ 2001
Luiz Otavio Nunes West...................................... 1998
Mercia Maria Nascimento Pimentel............................ 2001
COMPENSATION
According to our by-laws, our shareholders are responsible for establishing
the aggregate compensation we pay to the members of our board of directors and
our executive officers. Our shareholders determine this aggregate compensation
at the annual shareholders' meeting each year. In order to establish aggregate
director and officer compensation, we believe that our shareholders usually take
into account various factors which range from age, experience and skills of our
directors and officers to the recent performance of our operations. Once
aggregate compensation is established, the members of our board of directors are
then responsible for distributing such aggregate compensation individually in
compliance with our by-laws. Our board of directors does not have a compensation
committee.
In 2001 and in 2000, we paid approximately R$5.0 and R$4.5 million,
respectively, in aggregate (including benefits in kind granted) to the members
of our board of directors and to the executive officers for services in all
capacities.
In 2001 and in 2000, the monthly amount we paid to the members of the
fiscal council was the higher of (1) R$4,200 or (2) the equivalent of 10% of the
amount paid to a director, excluding benefits. In addition, the members of the
fiscal council receive reimbursement for expenses they incur in connection with
transportation and accommodation, whenever such expenses are necessary for the
performance of their functions. In 2000 and in 2001, none of our board members
and executive officers acting in their individual capacities had any financial
or other interests in transactions involving us which were not in the ordinary
course of business.
108
MAJOR AND SELLING SHAREHOLDERS
MAJOR SHAREHOLDERS
The table below sets forth information regarding beneficial share ownership
before and after this offering, by each person who we know to be the beneficial
owner of more than 5% of any class of our outstanding capital stock, and by all
directors and executive officers as a group.
BEFORE THIS OFFERING AFTER THIS OFFERING(1)
------------------------- -------------------------
PERCENT OF PERCENT OF
SHARES OWNED CLASS SHARES OWNED CLASS
------------ ---------- ------------ ----------
COMMON SHARES
Valepar S.A.................................... 105,443,070 43.0% 105,443,070 43.0%
Federative Republic of Brazil (National
Treasury)(1)(2).............................. 39,393,919 16.1 -- --
BNDES(1)(2).................................... 39,394,922 16.1 1,003 --
BNDESPAR(2).................................... 11,672,271 4.8 11,672,271 4.8
Litel Participacoes S.A.(3):
Shares owned directly........................ 25,272,641 10.3 25,272,641 10.3
Shares owned by Valepar S.A. ................ 105,443,070 43.0 105,443,070 43.0
----------- ----- ----------- -----
Total beneficial ownership by Litel....... 130,715,711 53.3 130,715,711 53.3
Directors and executive officers as a group.... 17 -- 17 --
PREFERRED SHARES(4)
Directors and executive officers as a group.... 209 -- 209 --
GOLDEN SHARE
Federative Republic of Brazil.................. 1 100.0 1 100.0
---------------
(1) Assumes full exercise of the underwriters' overallotment option. If the
underwriters do not exercise their overallotment option, after this
offering, the Federative Republic of Brazil (National Treasury) will own
5,138,337 common shares, representing 2.1% of our outstanding common shares
and BNDES will own 5,139,340 common shares, representing 2.1% of our
outstanding common shares.
(2) Excludes common shares owned directly by Valepar, in which this shareholder
has a direct or indirect ownership interest. See note 3 below, and see the
table below for information on Valepar's shareholders.
(3) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In general, a person who has or shares
voting power or investment power with respect to securities is treated as a
beneficial owner of those securities. It does not necessarily imply that the
named person has the economic or other benefits of ownership. Litel owns 42%
of Valepar. See the table below for more information on Valepar's
shareholders.
(4) The Federative Republic of Brazil (National Treasury) owns 5,075,341
preferred shares, representing 3.7% of our outstanding preferred shares and
BNDESPAR owns 1,251,980 preferred shares, representing 0.9% of our
outstanding preferred shares. These ownership amounts will not change as a
result of this offering.
109
The table below sets forth information regarding Valepar share ownership
and Litel share ownership. These amounts will not change by virtue of this
offering.
PERCENT OF
TOTAL SHARES
SHARES OWNED OWNED
------------ ------------
VALEPAR S.A.
Litel Participacoes S.A................................... 43,985,949 42%
Babie(1).................................................. 15,019,621 14
Eletron(2)................................................ 21,875,000 21
Sweet River Investments Ltd.(3)........................... 12,187,500 11
BNDESPAR.................................................. 11,250,000 11
Investvale(4)............................................. 1,125,000 1
----------- ----------
Total.................................................. 105,443,070 100%
=========== ==========
LITEL PARTICIPACOES S.A.
BB Carteira Ativa 0(5).................................... 129,528,472 52.41%
BB Carteira Ativa I(5).................................... 64,211,703 25.98
BB Carteira Ativa II(5)................................... 53,388,022 21.60
Others.................................................... 875 --
Directors and Executive Officers as a group............... 3 --
----------- ----------
Total.................................................. 247,129,075 100.00%
=========== ==========
---------------
(1) Babie is a holding company owned by Bradesplan and Bradespar, which are
affiliated with Banco Bradesco S.A., a Brazilian bank.
(2) Eletron is a company 86% of which is owned by Bradespar and approximately
14% of which is owned by Opportunity Amafi Participacoes S.A.
(3) Sweet River Investments Ltd. is affiliated with Bank of America.
(4) Investvale is an investment club owned by our employees.
(5) Each of BB Carteira Ativa 0, BB Carteira Ativa I and BB Carteira Ativa II is
a Brazilian investment fund. BB Carteira Ativa 0 and BB Carteira Ativa I are
100% owned by Previ. BB Carteira Ativa II is 59.36% owned by Funcef and
38.8% owned by Petros. Each of Previ, Petros and Funcef is a Brazilian
pension fund.
The Privatization
In June 1995, the Brazilian government announced its intention to sell its
common and preferred share ownership interests in us as part of the ongoing
Brazilian privatization program. After a period of considerable governmental,
judicial and public attention and debate, the Brazilian government started our
privatization in May 1997.
In the first step of the privatization process, on May 6, 1997, the
Federative Republic of Brazil and BNDES sold 99,999,203 common shares,
representing approximately 40.0% of the outstanding common shares, for
approximately US$3 billion to Valepar, a special-purpose company formed to hold
a controlling interest in our outstanding common shares. The initial principal
investors in Valepar were a subsidiary of CSN, a Brazilian steelmaker, various
Brazilian pension funds, an affiliate of Bank of America, a U.S. bank, and
certain foreign investment funds.
In the second step of the privatization process, on May 20, 1997, the
Federative Republic of Brazil and BNDES sold 11,120,919 common shares,
representing approximately 4.5% of the outstanding common shares, and 8,744,308
preferred shares, representing approximately 6.3% of the outstanding preferred
shares, in an offering restricted to our current and retired employees.
Substantially all of the shares sold in this step of the privatization were
purchased through Investvale, an association of our current and retired
employees. Employees were also granted the option, exercisable through
Investvale, to obtain an interest in
110
the controlling block held by Valepar by exchanging their common shares for
equity in Valepar. The shares offered to employees were sold at substantial
discounts to prevailing market prices. Common shares exchanged for equity in
Valepar were sold at R$11.09 per share, representing a 58.4% discount from the
then-current market price. Common shares not exchanged for equity in Valepar
were sold at R$8.88 per share (representing a 66.7% discount from the
then-current market price). Preferred shares were sold at R$8.88 per share
(representing a 63.2% discount from the then-current market price). Investvale
subsequently contributed 1,125,000 common shares to Valepar, in exchange for a
0.9% equity interest in Valepar. These discounts gave rise to a US$318 million
extraordinary charge in 1997.
In the third step of the privatization process, the Federative Republic of
Brazil and BNDES are each selling 34,255,582 shares (and an additional 5,138,337
shares each if the underwriters' overallotment option is exercised in full), in
the form of common shares or American depositary shares, which together
represent 27.9% of our outstanding common stock (32.1% if the underwriters'
overallotment option is exercised in full). Following this offering, BNDESPAR, a
wholly-owned subsidiary of BNDES, will own 11,672,271 common shares,
representing approximately 4.8% of our outstanding common shares. In addition,
assuming the exercise in full of the underwriters' overallotment option, the
Federative Republic of Brazil will continue to own 5,075,341 preferred shares,
representing approximately 3.7% of our outstanding preferred shares, and a
golden share in us, which gives it veto powers over certain actions that we
could propose to take, and BNDES will own 1,003 of our common shares. For a
detailed description of the veto powers granted to the Federative Republic of
Brazil by virtue of its ownership of the golden share, see "Description of
Capital Stock -- General."
Shareholder Debentures
At the time of the first step of our privatization in 1997, we issued
debentures to our then-existing shareholders, including the Brazilian
government. The terms of the debentures, which are described below, were set to
ensure that our pre-privatization shareholders, including the Brazilian
government, would participate alongside us in potential future financial
benefits that we derive from exploiting our mineral resources.
In preparation for the issuance of the debentures, we issued preferred
class B shares on a one-for-one basis to all holders of our common shares and
preferred class A shares. We then exchanged all of the preferred class B shares
for the debentures. The debentures are not redeemable or convertible, and do not
trade on a stapled basis or otherwise with our common or preferred shares.
Currently, the debentures cannot be traded. Holders will be able to trade the
debentures only after a three-month period that will commence upon completion of
this offering, which will constitute the third step of our privatization. We
will be required to register the debentures with the CVM in order to permit
trading at that time.
Under Central Bank regulations, pre-privatization shareholders that held
their shares through our American depositary receipt program were not permitted
to receive the debentures or any financial benefits relating to the debentures.
We sought approval from the Central Bank to distribute the debentures to the
holders of American depositary receipts, but the Central Bank rejected our
request. We intend to renew our request to the Central Bank, but we cannot
assure you that we will succeed. If the Central Bank does not approve our
request, the depositary will not be able to distribute the debentures to the
holders of American depositary receipts and will not be able to sell the
debentures. Therefore, unless the Central Bank approves our request, the
debentures will not have any value for holders of American depositary receipts.
Under the terms of the debentures, holders will have the right to receive
semiannual payments equal to an agreed percentage of our net revenues (revenues
less value added tax) from certain identified mineral resources that we owned at
May 1997, to the extent that we exceed defined threshold production volumes of
these resources, and from the sale of mineral rights that we owned at May 1997.
Our obligation to make payments to the holders will cease when the relevant
mineral resources are exhausted. Based on current production levels, and on the
estimates of production of our new projects, we would begin making payments
related to copper in approximately 2004, payments related to iron ore resources
in approximately 2012, and payments related to other mineral resources in later
years.
111
The table below summarizes the amounts we will be required to pay under the
debentures, based on the net revenues we earn from the identified mineral
resources and the sale of mineral rights.
AREA MINERAL REQUIRED PAYMENTS BY CVRD
--------------------------------------------- -------------- ------------------------------------
Southern System.............................. Iron ore 1.8% of net revenue, after total
production from May 1997 exceeds 1.7
billion tons
Northern System.............................. Iron ore 1.8% of net revenue, after total
production from May 1997 exceeds 1.2
billion tons
Pojuca, Andorinhas, Liberdade and Sossego.... Gold and 2.5% of net revenue from the
Copper beginning of commercial production
Igarape Bahia and Alemao..................... Gold and 2.5% of net revenue, after total
Copper production from the beginning of
commercial production exceeds 70
tons of gold
Fazenda Brasileiro........................... Gold 2.5% of net revenue after total
production from the beginning of
commercial production exceeds 26
tons
Other areas, excluding Carajas/Serra Leste... Gold 2.5% of net revenue
Other areas owned at May 1997................ Other minerals 1% of net revenue, 4 years after the
beginning of commercial production
All areas.................................... Sale of 1% of the sales price
mineral rights
owned at May
1997
Principal Shareholder
Through the Brazilian government's privatization program, the by-laws of
Valepar restrict concentration of ownership of Valepar shares by particular
types of investors for a period of five years through May 9, 2002. The by-laws
of Valepar state that no single investor or group of affiliated investors may
hold more than 45% of Valepar's outstanding capital stock. In addition, joint
shareholdings in Valepar by any group of iron ore producers or any group of
steel producers, and iron ore trading companies combined, may not exceed 45% of
Valepar's outstanding capital stock. Finally, shareholdings in Valepar by
individual large iron ore producers, steel producers or iron ore trading
companies may not exceed 10% of Valepar's outstanding capital stock.
The shareholders of Valepar have entered into a shareholders' agreement,
ending in 2017. This agreement:
- gives rights of first refusal on any transfer of Valepar shares and
preemptive rights on any new issue of Valepar shares,
- prohibits encumbrances on Valepar shares (other than in connection with
financing our acquisition),
- requires each party generally to retain control of its special purpose
company holding its interest in shares of Valepar,
- allocates Valepar's and our board seats, and
- establishes super-majority voting requirements for certain matters
relating to Valepar or to us.
BNDESPAR has a golden share in Valepar giving it a veto right over:
- any change in Valepar's corporate purpose,
- the liquidation of Valepar,
112
- a change in ownership of Valepar's shares if such change were to increase
concentration of the ownership of Valepar over specified limits by
participants in the iron ore, steel or iron ore trading businesses, and
- any transfer of Valepar's shares to anyone until May 2002 if the transfer
were to result in such person owning more than 45% of Valepar's shares.
Another agreement among Valepar's shareholders, ending in 2002, contains
similar restrictions on transfers.
Continuing Relationship with the Federative Republic of Brazil and BNDES
From time to time, in the ordinary course of our business, we enter into
transactions with other entities which the Federative Republic of Brazil owns or
controls. See "Related Party Transactions." The most significant of these
transactions is with Eletronorte, a state-owned company. Pursuant to a contract
between Albras and Eletronorte, Albras is able to purchase electricity at
favorable rates. We are currently seeking to renegotiate this contract, which
expires in May 2004. For more information on our Eletronorte contract, see
"Business -- Our Lines of Business -- Holdings -- Aluminum Business." No other
entity controlled by the Federative Republic of Brazil, by itself or in the
aggregate, accounted for a significant percentage of our consolidated revenues
or purchases in 2000.
We have also entered into a Mineral Risk Contract with BNDES relating to
prospecting authorizations for mining regions where drilling and exploration are
still in their early stages. This contract provides for the joint development of
certain unexplored mineral deposits in the Carajas region, which is part of the
Northern System. BNDES is also our partner in Project 118, Alemao and
Cristalino, which are joint ventures through which we conduct our copper mining
exploration and development. For more information on these joint ventures, see
"Business -- Our Lines of Business -- Non-Ferrous Minerals -- Current Copper
Prospects -- Exploration."
As a result of the transfer of our voting control to Valepar, we are no
longer subject to various regulatory requirements and operating restrictions
applicable to Brazilian governmental entities. However, in connection with our
privatization, the Federative Republic of Brazil retained special rights with
respect to our and Valepar's future decisions and caused us to enter into
certain agreements which may restrict our activities and results of operations
in the future. We discuss these restrictions below.
Golden Share
The Federative Republic of Brazil holds one preferred golden share, which
confers upon its holder veto rights over certain changes, including:
- our name,
- the headquarters of our head office,
- our corporate purpose as regards the working of mineral deposits, and
- our continued operation of integrated iron ore mining systems.
For a more detailed description of the golden share, see "Description of
Capital Stock -- General."
Since the privatization, the Federative Republic of Brazil has not
exercised its veto rights and, consequently, has refrained from interfering in
our decision-making process.
SELLING SHAREHOLDERS
All of the American depositary shares and common shares being offered in
this offering are being sold by the Federative Republic of Brazil and by BNDES,
Brazil's national bank for economic and social development, which is wholly
owned by the Federative Republic of Brazil.
113
BNDES is selling 34,255,582 shares (and an additional 5,138,337 shares if
the underwriters' overallotment option is exercised in full). The Federative
Republic of Brazil is selling 34,255,582 shares (and an additional 5,138,337
shares if the underwriters' overallotment option is exercised in full). The
shares owned by BNDES and the Federative Republic of Brazil are on deposit in
the National Privatization Fund. BNDES is the administrator or gestor of the
National Privatization Fund (Fundo Nacional de Desestatizacao) and, subject to
the prior approval of the National Privatization Council, is vested with the
power to execute the sale and transfer of shares deposited in the Fund.
BNDES is the main vehicle for the execution of the Brazilian government's
investment policy, providing support, either directly or indirectly, to
programs, projects, works and services related to the economic and social
development of Brazil. BNDES is the primary domestic source of long-term
financing in the Brazilian economy, with special emphasis on private sector
investment projects and public sector infrastructure projects. The legal
domicile of BNDES is located at Av. Republica do Chile No. 100, 20139-900, Rio
de Janeiro, State of Rio de Janeiro, Brazil.
Following this offering BNDESPAR, a wholly-owned subsidiary of BNDES, will
continue to own approximately 4.8% of our outstanding common shares and
approximately 0.9% of our outstanding preferred shares. For information
regarding our share ownership, see "-- Major Shareholders."
114
RELATED PARTY TRANSACTIONS
At September 30, 2001, we had extended guarantees for borrowings obtained
by affiliates and joint ventures in the amount of US$801 million, of which
US$614 million is denominated in U.S. dollars and the remaining US$187 million
is denominated in Brazilian reais.
For information regarding investments in affiliated companies and joint
ventures and for information regarding transactions with major related parties,
see notes 10 and 17 to our consolidated financial statements.
The Federative Republic of Brazil owns or controls entities with which we
enter into transactions in the ordinary course of business. See "Major and
Selling Shareholders -- Major Shareholders -- Continuing Relationships with the
Federative Republic of Brazil and BNDES."
BNDES, in its role as an economic development bank, is involved with us as
a lender, partner and/or co-investor in a number of projects, and will probably
continue to do so in the future.
Current activities of BNDES related to us include:
- investments in several mining prospecting projects, including copper
development projects in accordance with our Mineral Risk Contract (see
"Business -- Our Lines of Businesses -- Non-Ferrous Minerals -- Mineral
Risk Contract"), and
- providing financing for our expansion.
Our consolidated balance sheet at September 30, 2001 includes loans
repayable to BNDES in the aggregate amount of US$125 million.
Further, one of our directors is also an executive officer of BNDES, one of
our alternate directors is the chief executive officer of BNDES, one of our
executive officers was a director of an affiliate of BNDES and one of our
directors is the Secretary of the National Treasury. BNDESPAR, an affiliate of
BNDES, also owns eleven percent of our largest shareholder, Valepar.
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DESCRIPTION OF CAPITAL STOCK
Set forth below is certain information concerning our authorized and issued
capital stock and a brief summary of certain significant provisions of our
by-laws and the Brazilian Corporation Law. This description does not purport to
be complete and is qualified by reference to our by-laws (an English translation
of which has been filed with the Commission) and to the Brazilian Corporation
Law.
GENERAL
Our by-laws authorize the issuance of up to 300 million common shares and
up to 600 million preferred class A shares or preferred class B shares, in each
case based solely on the approval of the board of directors without any
additional shareholder approval. There are currently no preferred class B shares
outstanding. Under the Brazilian Corporation Law, the number of preferred
non-voting or restricted voting shares outstanding, such as the preferred
shares, may not exceed two-thirds of the total number of outstanding shares.
Each common share entitles the holder thereof to one vote at meetings of
our shareholders. Holders of common shares are not entitled to any preference
relating to our dividends or other distributions or any preference upon our
liquidation.
Holders of preferred class A shares are generally entitled to the same
voting rights as holders of common shares, except with respect to the election
of members of the board of directors, and are entitled to a minimum annual
non-cumulative preferential dividend of 6% of their pro rata share of our
paid-in capital prior to any distribution to holders of common shares or to
holders of preferred class B shares, if any. Holders of preferred class A shares
and the golden share may also elect one member of the permanent fiscal council
and an alternate. Non-controlling holders of common shares comprising at least
10% of the common shares outstanding may also elect one member of the fiscal
council and an alternate. As of March 1, 2002, holders of preferred shares and
common shares may, in certain circumstances, combine their respective holdings
to elect members of our board of directors, as described under "-- New
Provisions in the Brazilian Corporation Law." The preferred class A shares are
not entitled to any preference in the case of our liquidation.
The golden share is a preferred share. It is required to be held by the
Federative Republic of Brazil. The holder of the golden share is entitled to the
same rights (including with respect to voting, dividend preference and
liquidation preference) as holders of preferred class A shares. In addition, the
holder of the golden share is entitled to veto any of our proposed action
relating to the following matters:
- a change in our name,
- a change in the location of our head office,
- a change in our corporate purpose as regards the working of mineral
deposits,
- any liquidation of our company,
- any disposal or winding up of activities of any one or more of the
following stages of the integrated systems of our iron ore mining:
(i) mineral deposits, ore deposits, mines,
(ii) railways,
(iii) ports and marine terminals,
- any change in the by-laws relating to the rights accorded to the classes
of capital stock issued by us, and
- any change in the by-laws relating to the rights accorded the golden
share.
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CALCULATION OF DISTRIBUTABLE AMOUNT
At each annual shareholders' meeting, the board of directors is required to
recommend how to allocate our earnings for the preceding fiscal year. For
purposes of the Brazilian Corporation Law, a company's net income after income
taxes and social contribution taxes for such fiscal year, net of any accumulated
losses from prior fiscal years and amounts allocated to employees' and
management's participation in earnings represents its "net profits" for such
fiscal year. In accordance with the Brazilian Corporation Law, an amount equal
to our "net profits," as further reduced by amounts allocated to the legal
reserve, to the contingency reserve or the unrealized income reserve established
by us in compliance with applicable law (as hereinafter discussed) and increased
by reversions of reserves constituted in prior years, will be available for
distribution to shareholders in any particular year. Such amount, the adjusted
net profits, is herein referred to as the distributable amount. We may also
establish discretionary reserves, reserves for investment projects and fiscal
incentive investment reserves, as discussed below.
Legal Reserve. Under the Brazilian Corporation Law, we are required to
maintain a legal reserve to which we must allocate 5% of our "net profits" for
each fiscal year until the amount of the reserve equals 20% of our paid-in
capital. Net losses, if any, may be charged against the legal reserve.
Discretionary Reserves. Under the Brazilian Corporation Law, a company may
also provide for discretionary allocations of "net profits" to the extent set
forth in its by-laws. Our by-laws provide for one discretionary depletion
reserve which may be taken into account in allocating net profits for any fiscal
year. We currently maintain a fiscal incentive depletion reserve established in
respect of certain mining operations. Appropriations to the fiscal incentive
depletion reserve are deductible for tax purposes. The discretionary depletion
reserve has not been used since 1996, when the related fiscal incentive expired.
For more details, see note 13 to the consolidated financial statements. There
are no limits on the size or amount of proceeds that may be retained by our
board in the discretionary depletion reserve. However, the sum of the legal
reserve, the depletion reserve and the reserve for investment projects may not
exceed the amount of our paid-in capital.
Contingency Reserve. Under the Brazilian Corporation Law, a portion of our
"net profits" may also be discretionally allocated to a "contingency reserve"
for an anticipated loss that is deemed probable in future years. Any amount so
allocated in a prior year must be either reversed in the fiscal year in which
the loss was anticipated if such loss does not in fact occur or charged off in
the event that the anticipated loss occurs.
Reserve for Investment Projects. Under the Brazilian Corporation Law, we
may allocate a portion of our "net profits" for discretionary appropriations for
plant expansion and other capital investment projects, the amount of which is
based on a capital budget previously presented by management and approved by
shareholders. Under Law 10,313, capital budgets with duration longer than one
year must be revised at each annual shareholders' meeting. After completion of
the relevant capital projects, we may retain the appropriation until
shareholders vote to transfer all or a portion of the reserve to capital or
retained earnings.
Unrealized Income Reserve. Under the Brazilian Corporation Law prior to
the enactment of Law 10,313, if the amount of "unrealized income" for any
particular year exceeds the sum allocated to the legal reserve, the
discretionary reserves, the contingency reserve and the reserve for investment
projects in such year, such excess may be allocated to an "unrealized income
reserve." "Unrealized income" in any particular year represents the sum of
price-level restatement of certain balance sheet accounts in such year in which
the system of price-level restatement was applicable (up to December 31, 1995),
the share of equity earnings of subsidiary and associated companies in such year
and profits from installment sales to be received after the end of the next
succeeding fiscal year. As of March 1, 2002, under Law 10,313, which amends the
Brazilian Corporation Law, the amount by which the mandatory dividend exceeds
the "realized" portion of net profits for any particular year may be allocated
to the unrealized income reserve. The "realized" portion of net profits is the
amount by which "net profits" exceed the sum of (i) our net positive results, if
any, from the equity method of accounting for earnings and losses of our
subsidiaries and certain affiliates, and (ii) the profits, gains or return
obtained on transactions maturing after the end of the following fiscal year.
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Fiscal Incentive Investment Reserve. Under the Brazilian tax laws, a
portion of "net profits" may also be allocated to a general "fiscal incentive
investment reserve" in amounts corresponding to reductions in our income tax
generated by credits for particular government-approved investments.
The Brazilian Corporation Law provides that all discretionary allocations
of "net profits," including discretionary reserves, the contingency reserve, the
unrealized income reserve and the reserve for investment projects, are subject
to approval by the shareholders voting at the annual meeting and can be
transferred to capital or used for the payment of dividends in subsequent years.
The fiscal incentive investment reserve and legal reserve are also subject to
approval by the shareholders voting at the annual meeting and may be transferred
to capital but are not available for the payment of dividends in subsequent
years.
Our calculation of "net profits" and allocations to reserves for any fiscal
year are determined on the basis of financial statements prepared in accordance
with the Brazilian Corporation Law. Our consolidated financial statements have
been prepared in accordance with U.S. GAAP and, although our allocations to
reserves and dividends will be reflected in these financial statements,
investors will not be able to calculate such allocations or required dividend
amounts from our consolidated financial statements.
MANDATORY DIVIDEND
Our by-laws prescribe that we must distribute to our shareholders in the
form of dividends or interest on shareholders' equity an annual amount equal to
not less than 25% of the distributable amount, referred to as the mandatory
dividend, unless the board of directors advises our shareholders at the general
shareholders' meeting that payment of the mandatory dividend for the preceding
year is inadvisable in light of our financial condition. Dividends paid to
holders of our preferred shares will be computed in determining whether we have
paid the mandatory dividend. The fiscal council must review any such
determination and report it to the shareholders and the CVM. In addition to the
mandatory dividend, our board of directors may recommend to the shareholders
payment of dividends from other funds legally available therefor. Any payment of
interim dividends will be netted against the amount of the mandatory dividend
for that fiscal year. The shareholders must also approve the recommendation of
the board of directors with respect to any required distribution. The amount of
the mandatory dividend is subject to the size of the legal reserve, the
contingency reserve, and the unrealized income reserve. The amount of the
mandatory dividend is not subject to the size of the discretionary depletion
reserve. For a description of the allocation of our earnings, see
"-- Calculation of Distributable Amount." To date, our board of directors has
never determined that payment of the mandatory dividend was inadvisable.
Since our privatization in 1997, and following a recommendation from
Valepar, our principal shareholder, we have distributed a dividend equal to at
least 50% of the amount of profits available for distribution with respect to
each fiscal year.
DIVIDEND PREFERENCE OF PREFERRED SHARES
Pursuant to our by-laws, holders of preferred class A shares and the golden
share are entitled to a minimum annual non-cumulative preferential dividend
equal to 6% of their pro rata share of our paid-in capital ahead of dividends to
holders of preferred class B shares and common shares. In addition, any future
holders of our authorized but unissued preferred class B shares will be entitled
to a minimum annual non-cumulative preferential dividend equal to 6% of their
pro rata share of our paid-in capital ahead of dividends to holders of common
shares. To the extent that dividends are declared by us in any particular year
in amounts which exceed the preferential dividends on preferred shares, and
after holders of common shares have received distributions equivalent, on a per
share basis, to the preferential dividends on preferred shares, holders of
common shares and preferred shares shall receive the same additional dividend
amount per share. Since the first step of our privatization in 1997, we have had
sufficient distributable amounts to be able to distribute equal amounts to both
common and preferred shareholders.
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OTHER MATTERS RELATING TO PREFERRED SHARES
Our by-laws do not provide for the conversion of preferred shares into
common shares. In addition, the preferred shares do not have any preference upon
our liquidation and there are no redemption provisions associated with the
preferred shares.
PAYMENTS ON SHAREHOLDERS' EQUITY
Pursuant to a change in Brazilian tax law effective January 1, 1996,
Brazilian companies are permitted to pay limited additional amounts to holders
of equity securities and treat such payments as an expense for Brazilian income
tax purposes. The purpose of the tax law change is to encourage the use of
equity investments as opposed to indebtedness to finance corporate activities.
In accordance with Law No. 9,249 dated December 26, 1995, our by-laws provide
for the distribution of interest on shareholders' equity as an alternative form
of payment to shareholders. The interest rate applied is generally limited to
the Brazilian long-term interest rate, or TJLP, for the applicable period. The
deduction of the amount of interest paid cannot exceed the greater of (1) 50% of
net income (after the deduction of the provision of social contribution on net
profits and before the deduction of the provision of the corporate income tax)
before taking into account any such distribution for the period in respect of
which the payment is made or (2) 50% of the sum of retained earnings and profit
reserves. Any payment of interest on shareholders' equity to shareholders is
subject to Brazilian withholding income tax at the rate of 15%, except for any
beneficiary located in a tax haven jurisdiction (i.e. country that does not
impose income tax or that imposes it at a maximum rate lower than 20%), in which
case the rate is 25%. Under our by-laws, the amount paid to shareholders as
interest on shareholders' equity (net of any withholding tax) may be included as
part of any mandatory dividend. Under the Brazilian Corporation Law, we are
obligated to distribute to shareholders an amount sufficient to ensure that the
net amount received, after payment by us of applicable Brazilian withholding
taxes in respect of the distribution of interest on shareholders' equity, is at
least equal to the mandatory dividend.
VOTING RIGHTS
Each common share entitles the holder thereof to one vote at meetings of
our shareholders. Holders of preferred shares are entitled to the same voting
rights as holders of common shares except that they may not vote on the election
of members of the board of directors, except in the event of dividend
arrearages, as described below. One of the members of the permanent fiscal
council and his or her alternate are elected by majority vote of the holders of
preferred shares. One of the members of the fiscal council and his or her
alternate are elected by majority vote of non-controlling holders of common
shares representing at least 10% of the outstanding common shares. As of March
1, 2002, holders of preferred shares and common shares may, in certain
circumstances, combine their respective holdings to elect members of our board
of directors, as described under "-- New Provisions in the Brazilian Corporation
Law."
The golden share entitles the holder thereof to the same voting rights as
holders of preferred shares. The golden share also confers certain other
significant voting rights in respect of particular actions, as described under
"-- General."
The Brazilian Corporation Law provides that non-voting or restricted-voting
shares, such as the preferred shares, acquire unrestricted voting rights
beginning when a company has failed for three consecutive fiscal years (or for
any shorter period set forth in a company's constituent documents) to pay any
fixed or minimum dividend to which such shares are entitled and continuing until
payment thereof is made. Our by-laws do not set forth any such shorter period.
Any change in the preferences or advantages of our preferred class A
shares, or the creation of a new class of shares having priority over the
preferred class A shares, would require the approval of holders of a majority of
the outstanding preferred class A shares, voting as a class at a special
meeting.
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SHAREHOLDERS' MEETINGS
A general shareholders' meeting convenes each year to decide all matters
relating to our corporate purposes and to pass such resolutions as they deem
necessary for our corporate protection and well-being.
Pursuant to the Brazilian Corporation Law, shareholders voting at a
shareholders' meeting have the power, among others, to:
- amend the by-laws;
- elect or dismiss members of the board of directors and members of the
fiscal council at any time;
- receive the annual reports by management and accept or reject
management's financial statements, including the allocation of net
profits and the distributable amount for payment of the mandatory
dividend and allocation to the various reserve accounts;
- authorize the issuance of debentures;
- suspend the rights of a shareholder in default of obligations established
by law or by the by-laws;
- accept or reject the valuation of assets contributed by a shareholder in
consideration for issuance of capital stock;
- pass resolutions to reorganize our legal form, to merge, consolidate or
split us, to dissolve and liquidate us, to elect and dismiss our
liquidators and to examine their accounts; and
- authorize management to file for bankruptcy or to request a concordata, a
procedure involving protection from creditors similar in nature to
reorganization under the U.S. Bankruptcy Code.
All shareholders' meetings, including the annual shareholders' meeting are
convened by publishing, no fewer than 15 days prior to the scheduled meeting
date and no fewer than three times, a notice in the Diario Oficial do Estado do
Rio de Janeiro and in a newspaper with general circulation in the city where we
have our registered office, which is Rio de Janeiro. Our shareholders have
previously designated Jornal do Commercio for this purpose. Also, as our shares
are traded on the Sao Paulo stock exchange, we must publish a notice in the Sao
Paulo-based Diario do Comercio da Industria. Such notice must contain the agenda
for the meeting and, in the case of an amendment to our by-laws, an indication
of the subject matter. In addition, under our by-laws, the holder of the golden
share is entitled to a minimum of 15 days prior notice of any shareholders'
meeting to consider any proposed action subject to the veto rights accorded to
the golden share. For more information about the veto rights associated with the
golden share, see "-- General."
A shareholders' meeting may be held if shareholders representing at least
one-quarter of the voting capital are present. If no such quorum is present,
notice must again be given in the same manner as described above, and a meeting
may then be convened without any specific quorum requirement, subject to the
minimum quorum and voting requirements for certain matters, as discussed below.
A shareholder without a right to vote may attend a shareholders' meeting and
take part in the discussion of matters submitted for consideration.
Except as otherwise provided by law, resolutions of a shareholders' meeting
are passed by a simple majority vote, abstentions not being taken into account.
Under the Brazilian Corporation Law, the approval of shareholders representing
at least one-half of the issued and outstanding voting shares is required for
the types of action described below, as well as, in the case of clause (a) and
clause (b), a majority of issued and outstanding shares of the affected class:
(a) creating a new class of preferred shares or disproportionately increasing an
existing class of preferred shares relative to the other classes of shares,
other than to the extent permitted by the by-laws, which permit us to increase
the number of preferred class B shares disproportionately in relation to the
number of common and preferred shares; (b) changing a priority, preference,
right, privilege or condition of redemption or amortization of any class of
preferred shares or creating any class of non-voting preferred shares that has a
priority, preference, right, condition or redemption or amortization superior to
an existing class of shares, such as the preferred shares;
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(c) reducing the mandatory dividend; (d) changing the corporate purposes; (e)
merging us with another company or consolidating or splitting us; (f) dissolving
or liquidating us; (g) participating in a group of companies as defined under
the Brazilian Corporation Law; and (h) canceling any ongoing liquidation of us.
Whenever the shares of any class of capital stock are entitled to vote,
each share is entitled to one vote.
Annual shareholders' meetings must be held by April 30 of each year.
Shareholders' meetings are called, convened and presided over by the President
or by the Vice-President of our board of directors. A shareholder may be
represented at a shareholders' meeting by an attorney-in-fact appointed not more
than one year before the meeting, who must be a shareholder, a company officer
or a lawyer. For a public company, such as us, the attorney-in-fact may also be
a financial institution.
REDEMPTION RIGHTS
Our common shares and preferred shares are not redeemable, except that a
dissenting, or, in certain cases, a non-voting shareholder is entitled under the
Brazilian Corporation Law to obtain redemption upon a decision made at a
shareholders' meeting by shareholders representing at least 50% of the voting
shares:
(1) to create a new class of preferred shares or to
disproportionately increase an existing class of preferred shares relative
to the other classes of shares (unless such actions are provided for or
authorized by the by-laws);
(2) to modify a preference, privilege or condition of redemption or
amortization conferred on one or more classes of preferred shares, or to
create a new class with greater privileges than the existing classes of
preferred shares;
(3) to reduce the mandatory dividend;
(4) to change our corporate purposes;
(5) to merge us with another company or consolidate us;
(6) to transfer all of our shares to another company in order to make
us a wholly-owned subsidiary of such company, an incorporacao de acoes;
(7) to approve the acquisition of control of another company at a
price which exceeds certain limits set forth in the Brazilian Corporation
Law;
(8) to approve our participation in a group of companies as defined
under the Brazilian Corporation Law;
(9) to conduct a spin-off that results in (a) a change of our
corporate purpose, (b) a reduction in the mandatory dividend or (c) any
participation in a group of companies (as defined by the Brazilian
Corporation Law); or
(10) in the event that the entity resulting from (a) a merger, (b) an
incorporacao de acoes as described in clause (6) above, or (c) a spin-off
that we conduct fails to become a listed company within 120 days of the
shareholders' meeting at which such decision was taken.
Only holders of shares adversely affected by the changes mentioned in items
(1) and (2) above may require us to redeem their shares. The right of redemption
mentioned in items (5), (6) and (8) above may only be exercised if our shares do
not satisfy certain tests of liquidity at the time of the shareholder
resolution. The right of redemption lapses 30 days after publication of the
minutes of the relevant shareholders' meeting, unless, in the case of items (1)
and (2) above, the resolution is subject to confirmation by preferred
shareholders (which must be made at a special meeting to be held within one
year), in which case the 30-day term is counted from the publication of the
minutes of the special meeting.
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We would be entitled to reconsider any action giving rise to redemption
rights within 10 days following the expiration of such rights if the redemption
of shares of dissenting shareholders would jeopardize our financial stability.
Law No. 9,457 dated May 5, 1997, which amended the Brazilian Corporation Law,
contains provisions which, among other provisions, restrict redemption rights in
certain cases and allow companies to redeem their shares at their economic
value, subject to certain requirements. Our by-laws currently do not provide
that our capital stock will be redeemable at its economic value and,
consequently, any redemption pursuant to the Brazilian Corporation Law would be
made at book value per share, determined on the basis of the last balance sheet
approved by the shareholders; provided that if the general shareholders' meeting
giving rise to redemption rights occurred more than 60 days after the date of
the last approved balance sheet, a shareholder would be entitled to demand that
his or her shares be valued on the basis of a new balance sheet dated within 60
days of such shareholders' meeting.
PREEMPTIVE RIGHTS
Each of our shareholders has a general preemptive right to subscribe for
shares in any capital increase, in proportion to his or her shareholding. A
minimum period of 30 days following the publication of notice of a capital
increase is allowed for the exercise of the right and the right is negotiable.
Under our by-laws, our board of directors may decide not to extend preemptive
rights to our shareholders or, under Law 10,303, to reduce the 30 days period
for the exercise of preemptive rights, in each case with respect to any issuance
of shares, debentures convertible into shares and warrants in the context of a
public offering, subject to the limit on the number of shares that may be issued
with the approval of the board without any additional shareholder approval. In
the event of a capital increase which would maintain or increase the proportion
of capital represented by preferred shares, holders of preferred American
depositary receipts will have preemptive rights to subscribe only to newly
issued preferred shares. In the event of a capital increase which would reduce
the proportion of capital represented by preferred shares, holders of preferred
American depositary receipts will have preemptive rights to subscribe for
preferred shares, in proportion to their shareholdings, and for common shares
only to the extent necessary to prevent dilution of their overall interest in
us. In the event of a capital increase which would maintain or increase the
proportion of capital represented by common shares, holders of common American
depositary receipts will have preemptive rights to subscribe only to newly
issued common shares. In the event of a capital increase which would reduce the
proportion of capital represented by common shares, holders of common American
depositary receipts will have preemptive rights to subscribe for preferred
shares only to the extent necessary to prevent dilution of their overall
interest in us.
NEW PROVISIONS IN THE BRAZILIAN CORPORATION LAW
On October 31, 2001, Law 10,303, a legislative act modifying the Brazilian
Corporation Law, was enacted. The main goal of Law 10,303 is to broaden the
rights of minority shareholders.
Law 10,303 could have a material impact on the shares represented by
American depositary shares because it will, as of March 1, 2002:
- obligate our controlling shareholder to make a tender offer for our
shares if it increases its interest in our share capital to a level that
materially and negatively affects the liquidity of our shares, as defined
by the CVM.
- require any acquiror of control to make a tender offer for our common
shares at a price equal to 80% of the per share price paid for the
controlling block of shares.
- authorize us to redeem minority shareholders' shares if, after a tender
offer, our controlling shareholder increases its participation in our
total share capital to more than 95%.
- entitle dissenting or, in certain cases, non-voting shareholders, to
obtain redemption upon a decision to conduct a spin-off that results in
(a) change of our corporate purpose, (b) a reduction in the mandatory
dividend or (c) any participation in a group of companies (as defined by
the Brazilian Corporation Law).
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- require that preferred shares have one of the following advantages in
order to be listed and to trade on a stock exchange: (i) priority in
receipt of dividends corresponding to at least 3% of the book value per
share (after this priority condition is met, equal conditions apply to
common shares); or (ii) dividends 10% higher than those paid for common
shares; or (iii) tag-along right at 80% of the price paid to the
controlling shareholder in case of a transfer of control. We may be
required to amend our by-laws to contemplate one or more of these
advantages which may affect the holders of our preferred shares currently
outstanding. No withdrawal rights will arise from such amendment if it is
made before December 31, 2002.
- entitle shareholders that are not a controlling shareholder but that
together hold
(i) preferred shares representing at least 10% of our total share
capital or
(ii) common shares representing at least 15% of our voting capital;
the right to appoint one member and an alternate to our board of
directors. If no group of common or preferred shareholders meets the
thresholds described above, shareholders holding preferred or common
shares representing at least 10% of our total share capital are entitled
to combine their holdings to appoint one member and an alternate to our
board of directors. Until 2005, the board members that may be elected
pursuant to (i) above or by the combined holdings of holders of preferred
and common shares are to be chosen from a list of three names drawn up by
the controlling shareholder. Any such members elected by the minority
shareholders will have veto powers on the selection of our independent
auditors.
- require controlling shareholders, shareholders that appoint members of
our board of directors or fiscal council and members of our board of
directors, board of executive officers or fiscal council to file
immediately with the CVM and the stock exchanges (or the over-the-counter
markets on which our securities are traded) a statement of any change in
their shareholdings.
- require us to send copies of the documentation we submit to our
shareholders in connection with shareholders meetings to the stock
exchanges on which our shares are most actively traded.
We are required to adapt our by-laws to these provisions by March 1, 2003.
FORM AND TRANSFER
Our preferred shares and common shares are in book-entry form registered in
the name of each shareholder or its nominee. The transfer of such shares is made
under the Brazilian Corporation Law which provides that a transfer of shares is
effected by our transfer agent, Banco Bradesco S.A., upon presentation of valid
share transfer instructions by a transferor or its representative. When
preferred shares or common shares are acquired or sold on a Brazilian stock
exchange, the transfer is effected on the records of our transfer agent by a
representative of a brokerage firm or the stock exchange's clearing system.
Transfers of shares by a foreign investor are made in the same way and are
executed by the investor's local agent, who is also responsible for updating the
information relating to the foreign investment furnished to the Central Bank.
The Sao Paulo stock exchange, known as BOVESPA, operates a central clearing
system through Companhia Brasileira de Liquidacao e Custodia, or CBLC. A holder
of our shares may participate in this system and all shares elected to be put
into the system will be deposited in custody with CBLC (through a Brazilian
institution that is duly authorized to operate by the Central Bank and maintains
a clearing account with CBLC). The fact that such shares are subject to custody
with the relevant stock exchange will be reflected in our registry of
shareholders. Each participating shareholder will, in turn, be registered in the
register of our beneficial shareholders that is maintained by CBLC and will be
treated in the same way as registered shareholders.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
GENERAL
JPMorgan Chase Bank has agreed to act as the depositary for the American
depositary shares. The depositary's offices are located at 60 Wall Street, New
York, New York 10260. American depositary shares represent ownership interests
in securities that are on deposit with the depositary. American depositary
shares are normally represented by certificates that are commonly known as
American depositary receipts. The depositary has appointed a custodian to
safekeep the securities on deposit. In this case, the custodian is Banco
Bradesco S.A., located at Departamento de Acoes e Custodia -- Cidade de
Deus -- Predio Amarelo -- 2(o) andar -- CEP 06029-900 -- Osasco -- SP -- Brasil.
We appointed JPMorgan Chase Bank as depositary under the terms of a deposit
agreement, dated February 25, 2002. A copy of the deposit agreement is on file
with the Securities and Exchange Commission under cover of a registration
statement on Form F-6 (Registration No. 333-83702). You may obtain a copy of the
deposit agreement from the Securities and Exchange Commission's Public Reference
Room. For instructions on how you can obtain this information, see "Where You
Can Find More Information."
We are providing you with a summary description of the material terms of
the American depositary shares and of your material rights as an owner of
American depositary shares. Your rights and obligations as an owner of American
depositary shares will be determined by reference to the terms of the deposit
agreement and not by this summary. This summary is not intended as a substitute
for the deposit agreement. We urge you to review the deposit agreement in its
entirety.
Each American depositary share represents one of our common shares on
deposit with the custodian. An American depositary share will also represent any
other property received by the depositary or the custodian on behalf of the
owner of the American depositary share but that has not been distributed to the
owners of American depositary shares because of legal restrictions or practical
considerations.
If you become an owner of American depositary shares, you will become a
party to the deposit agreement and therefore will be bound by its terms and to
the terms of the American depositary receipt that represents your American
depositary shares. The deposit agreement and the American depositary receipt
specify the rights and obligations of you, us and the depositary. As an American
depositary share holder you have agreed to appoint the depositary to act on your
behalf in certain circumstances. The deposit agreement and the American
depositary receipts are governed by New York law. However, our obligations to
the holders of the common shares will continue to be governed by the laws of
Brazil, which may be different from the laws in the United States.
As an owner of American depositary shares, your American depositary shares
may be represented either by an American depositary receipt registered in your
name or through a brokerage or safekeeping account. If you decide to hold your
American depositary receipts through your brokerage or safekeeping account, you
must rely on the procedures of your broker or bank to assert your rights as an
American depositary receipts owner. Please consult with your broker or bank to
determine what those procedures are. This summary description assumes you have
opted to own the American depositary shares directly by means of an American
depositary receipt registered in your name and, as such, we will refer to you as
the "holder." When we refer to "you," we assume the reader owns American
depositary shares and will own American depositary shares at the relevant time.
DIVIDENDS AND DISTRIBUTIONS
As a holder, you will generally have the right to receive the distributions
we make on the securities deposited with the custodian bank. Your receipt of
these distributions may be limited, however, by practical considerations and
legal limitations. You will receive distributions under the terms of the deposit
agreement in proportion to the number of American depositary shares held as of a
specified record date.
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Distributions of Cash. Whenever we make a cash distribution for the
securities on deposit with the custodian, we will notify the depositary. Upon
receipt of that notice the depositary will arrange for the funds to be converted
into U.S. dollars and for the distribution of the U.S. dollars to the holders,
subject to Brazilian laws and regulations.
The conversion into U.S. dollars will take place only if practicable and if
the U.S. dollars are transferable to the United States. The depositary will
reduce the distribution of cash to holders by applicable fees, expenses, taxes
and governmental charges payable by holders under the terms of the deposit
agreement. The depositary will apply the same method for distributing the
proceeds of the sale of any property (such as undistributed rights) held by the
custodian in respect of securities on deposit.
Distributions of Shares. Whenever we make a distribution consisting of a
dividend and a free distribution of common shares on securities on deposit with
the custodian, we will notify the depositary and deposit the applicable number
of common shares with the custodian. Upon receipt of notice of such deposit, the
depositary will either distribute to holders new American depositary shares
representing the aggregate common shares deposited or modify the American
depositary share to common share ratio, in which case each American depositary
share you already hold will represent rights and interests in the additional
common shares deposited. Only whole new American depositary shares will be
distributed. Fractional entitlements will be sold and the proceeds of the sale
will be distributed to holders as in the case of a cash distribution described
above.
The distribution of new American depositary shares or the modification of
the American depositary share-to-share ratio upon a distribution of common
shares will be reduced by applicable fees, expenses, taxes and governmental
charges payable by holders under the terms of the deposit agreement. In order to
pay the taxes or governmental charges, the depositary may sell all or a portion
of the new common shares so distributed.
No distribution of new American depositary shares as described above will
be made if it would violate the U.S. securities laws, or any other law, or if it
is not operationally practicable. If the depositary does not distribute new
American depositary shares as described above, it will endeavor to sell the
common shares received and will distribute the proceeds of the sale as in the
case of a distribution of cash.
Distribution of Rights. If we distribute rights to subscribe for
additional common shares, we will notify the depositary and we may assist the
depositary in determining whether it is lawful and reasonably practicable to
make these additional rights available to holders.
The depositary will establish procedures for the distribution of rights to
purchase additional American depositary shares to holders and to enable holders
to exercise rights when lawful and reasonably practicable. You may have to pay
fees, expenses, taxes and other governmental charges to subscribe for the new
American depositary shares upon the exercise of your rights. The depositary is
not obligated to make available to holders of rights a method to exercise rights
to subscribe to common shares directly rather than American depositary shares.
The depositary will not distribute rights to you if:
- we do not timely request that the rights be distributed to you or we
request that the rights not be distributed to you;
- we fail to deliver satisfactory documents to the depositary; or
- it is not reasonably practicable to distribute the rights.
The depositary will sell rights that are not exercised or distributed if
the sale is lawful and reasonably practicable. The proceeds of the sale will be
distributed to holders as in the case of a cash distribution described above. If
the depositary is unable to sell the rights, it will allow the rights to lapse.
Other Distributions. If we distribute property other than cash, common
shares or rights to purchase additional common shares, we will notify the
depositary in advance and will indicate whether we wish the
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distribution to be made to you. If so, we will assist the depositary in
determining whether the distribution to holders is lawful and reasonably
practicable.
If it is reasonably practicable to distribute the property to you and if we
provide all of the documentation contemplated in the deposit agreement, the
depositary will distribute the property to the holders in a manner it deems
practicable.
The distribution will be reduced by any applicable fees, expenses, taxes
and governmental charges payable by holders under the terms of the deposit
agreement. In order to pay the taxes and governmental charges, the depositary
may sell all or a portion of the property received.
The depositary will not distribute the property to you and will sell the
property if:
- we do not request that the property be distributed to you or if we ask
that the property not be distributed to you;
- we do not deliver satisfactory documents to the depositary; or
- the depositary determines that all or a portion of the distribution to
you is not reasonably practicable.
The proceeds of the sale will be distributed to holders as in the case of a
cash distribution as described above.
CHANGES AFFECTING THE COMMON SHARES
The common shares held on deposit for your American depositary shares may
be affected by changes from time to time. For example, there may be a change in
nominal or par value, a split-up, cancellation, consolidation or
reclassification of such common shares or a recapitalization, reorganization,
merger, consolidation or sale of assets.
If a change were to occur, your American depositary shares would, to the
extent permitted by law, represent the right to receive the property received or
exchanged in respect of the common shares held on deposit. The depositary may in
those circumstances deliver new American depositary shares to you or call for
the exchange of your existing American depositary shares for new American
depositary shares. If the depositary may not lawfully distribute such property
to you, the depositary may sell the property and distribute the net proceeds to
you as in the case of a cash distribution as described above.
ISSUANCE OF AMERICAN DEPOSITARY SHARES UPON DEPOSIT OF COMMON SHARES
The depositary may create American depositary shares on your behalf if you
or your broker deposit common shares with the custodian. The depositary will
deliver these American depositary shares to the person you indicate only after
you pay any applicable issuance fees and any charges and taxes payable for the
transfer of the common shares to the custodian. Your ability to deposit common
shares and receive American depositary shares may be limited by U.S. and
Brazilian legal considerations applicable at the time of deposit.
The issuance of American depositary shares may be delayed until the
depositary or the custodian receives confirmation that all required approvals
have been given and that the common shares have been duly transferred to the
custodian. The depositary will only issue American depositary shares in whole
numbers.
When you make a deposit of common shares, you will be responsible for
transferring good and valid title to the depositary. As such, you will be deemed
to represent and warrant that:
- the common shares are duly authorized, validly issued, fully paid,
non-assessable and legally obtained; and
- you are duly authorized to deposit the common shares.
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If any of the representations or warranties are incorrect in any way, we
and the depositary may, at your cost and expense, take any and all actions
necessary to correct the consequences of the misrepresentations.
WITHDRAWAL OF SHARES UPON CANCELLATION OF AMERICAN DEPOSITARY SHARES
As a holder, you will be entitled to present your American depositary
shares to the depositary, at the custodian's offices, for cancellation and
receive the corresponding number of underlying common shares. Your ability to
withdraw the common shares may be limited by U.S. and Brazilian law applicable
at the time of withdrawal. In order to withdraw the common shares represented by
your American depositary shares, you will be required to pay to the depositary
the fees for cancellation of American depositary shares and any charges and
taxes payable upon the transfer of the common shares being withdrawn. You assume
the risk of delivery of all funds and securities upon withdrawal. Once canceled,
the American depositary shares will not have any rights under the deposit
agreement.
If you hold an American depositary receipt registered in your name, the
depositary may ask you to provide proof of identity and genuineness of any
signature and such other documents as the depositary may deem appropriate before
it will cancel your American depositary shares. The withdrawal of the common
shares represented by your American depositary shares may be delayed until the
depositary receives satisfactory evidence of compliance with all applicable laws
and regulations. The depositary will only accept American depositary shares for
cancellation that represent a whole number of securities on deposit.
You will have the right to withdraw the securities represented by your
American depositary shares at any time unless any of these conditions exist:
- delays that may arise out of temporary closing of transfer books of the
common shares or American depositary shares, or temporary suspension of
transferability of common shares are immobilized due to a shareholders'
meeting or a payment of dividends;
- unsatisfied obligations to pay fees, taxes and similar charges; or
- restrictions imposed by laws or regulations applicable to American
depositary shares or the withdrawal of securities on deposit.
The deposit agreement may not be modified to impair your right to withdraw
the securities represented by your American depositary shares except to comply
with mandatory provisions of law.
RECORD DATES
The depositary may, after consulting with us, if practicable, fix a record
date (which shall by as near as practicable to any corresponding date set by us)
for the determination of the holders of American depositary shares who shall be
entitled to receive any distribution on or in respect of the American depositary
shares, to give instructions for the exercise of any voting rights, to receive
any notice or to act in respect of other matters and only such holders shall be
so entitled.
VOTING RIGHTS
As a holder, you will generally have the right under the deposit agreement
to instruct the depositary to exercise the voting rights for the common shares
represented by your American depositary shares. The voting rights of holders of
common shares are described in "Description of Capital Stock -- Voting Rights."
At our request, the depositary will distribute to you any notice of
shareholders' meeting received from us, together with information explaining how
to instruct the depositary to exercise your voting rights on the securities
represented by American depositary shares.
If the depositary timely receives voting instructions from a holder of
American depositary shares, it will endeavor to vote the securities represented
by the holder's American depositary shares in accordance
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with the voting instructions. If voting instructions are not timely received by
the depositary, the holder will be deemed to have given a discretionary proxy to
a person designated by us to vote your shares.
The ability of the depositary to carry out voting instructions may be
limited by practical and legal limitations and the terms of the securities on
deposit. We cannot assure you that you will receive voting materials in time to
enable you to return voting instructions to the depositary in a timely manner.
The depositary may fix record dates for the determination of the American
depositary receipt holders who will be entitled:
- to receive a dividend, distribution or rights, or
- to give instructions for the exercise of voting rights at a meeting of
holders of ordinary shares or other deposited securities,
all subject to the provisions of the deposit agreement.
FEES AND CHARGES
As a holder, you will be required to pay the following service fees to the
depositary:
SERVICE FEES FEES
------------ ----
Issuance of American depositary shares....... Up to US$5.00 per 100 American depositary
shares issued
Cancellation of American depositary shares... Up to US$5.00 per 100 American depositary
shares canceled
Exercise of rights to purchase additional
American depositary shares................. Up to US$5.00 per 100 American depositary
shares issued
Distribution of cash dividends............... No fee (so long as prohibited by NYSE)
Distribution of American depositary shares in
connection with stock dividends or other
free stock distributions................... No fee (so long as prohibited by NYSE)
Distribution of cash......................... Up to US$5.00 per 100 American depositary
shares held (i.e., upon sale of rights or
other entitlements)
As a holder you will also be responsible for paying some of the fees and
expenses incurred by the depositary and certain taxes and governmental charges,
including:
- fees and expenses as are incurred by the depositary in connection with
compliance with exchange control regulations and other regulatory
requirements applicable to common shares, American depositary shares and
American depositary receipts;
- expenses incurred in converting foreign currency into U.S. dollars;
- cable, telex and fax transmissions and delivery expenses, as expressly
provided for in the deposit agreement;
- taxes and duties upon the transfer of securities (i.e., when common
shares are deposited or withdrawn from deposit); and
- transfer or registration fees for the registration of transfer of
deposited securities on any applicable register in connection with the
deposit or withdrawal of deposited securities.
We have agreed to pay certain other charges and expenses of the depositary,
however, we will not pay or be liable for fees or related charges with respect
to shares or American depositary shares. The fees and charges you may be
required to pay may vary over time and may be changed by us and by the
depositary. You will receive prior notice of any changes in the amount you may
be required to pay.
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AMENDMENTS AND TERMINATION
We may agree with the depositary to modify the deposit agreement at any
time without your consent. Any amendment which will increase any fees or charges
or which will otherwise materially prejudice an existing right you may have will
not become effective until 30 days after notice of the amendment is given to the
holders. We will not deem any modifications or supplements that are reasonably
necessary for the American depositary shares to be registered under the
Securities Act or to be traded solely in electronic book-entry form, and which
do not impose or increase the fees and charges you are required to pay, to be
materially prejudicial to your substantive rights. In addition, we may not be
able to provide you with prior notice of any modifications or supplements that
are required to comply with applicable provisions of law.
You will be bound by the modifications to the deposit agreement if you
continue to hold your American depositary shares after the modifications to the
deposit agreement become effective. Except as permitted by law, the deposit
agreement cannot be amended so as to prevent you from withdrawing the common
shares represented by your American depositary shares.
We have the right to direct the depositary to terminate the deposit
agreement. Similarly, the depositary may terminate the deposit agreement. In
either case, the depositary must give notice to the holders at least 30 days
before termination.
For a period of six months after termination of the deposit agreement, you
will be able to request the cancellation of your American depositary shares and
the withdrawal of the common shares represented by your American depositary
shares and the delivery of all other property held by the depositary in respect
of those common shares on the same terms as prior to the termination. During
this six-month period, the depositary will continue to collect all distributions
received on the common shares on deposit but will not distribute anything to you
until you request the cancellation of your American depositary shares.
After the expiration of the six-month period, the depositary may sell the
securities held on deposit. The depositary will hold the proceeds from the sale
and any other cash then held for the holders of American depositary receipts in
a non-interest bearing, segregated account. After making the sale, the
depositary will have no further obligations to holders under the deposit
agreement, other than to account for the net proceeds and other cash then held
for the holders of American depositary receipts still outstanding.
BOOKS OF DEPOSITARY
The depositary will maintain American depositary share holder records at
its depositary office. You may inspect these records at its office during
regular business hours; provided, however, that the inspection will not be
carried out for the purpose of communicating with holders of American depositary
receipts in the interest of a business or object other than our business or
other than a matter related to the deposit agreement or American depositary
receipts.
The depositary will maintain an office and facilities in New York to record
and process the issuance, cancellation, combination, split-up and transfer of
American depositary receipts. These facilities may be closed from time to time,
to the extent not prohibited by law.
LIMITATIONS ON OBLIGATIONS AND LIABILITIES
The deposit agreement limits our obligations and the depositary's
obligations to you as follows:
- we and the depositary are obligated to take only the actions specifically
stated in the deposit agreement without gross negligence or bad faith;
- the depositary will not be liable for any failure to carry out voting
instructions, for the manner in which any vote is cast or for the effect
of any vote, provided that the depositary acts in good faith and in
accordance with the terms of the deposit agreement;
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- the depositary will not be liable for any failure by it to determine that
any distribution or action may be reasonably practicable, for the content
of any information submitted by us for distribution to holders (or for
any translation of a distribution), for any investment risk associated
with an investment in the common shares, for the validity of the common
shares or from any tax consequences that result from ownership of the
American depositary shares, for the credit-worthiness of any third party,
for allowing any rights to lapse under the terms of the deposit
agreement, for the timeliness of any of our notices or for our failure to
give notice;
- we and the depositary will not be obligated to perform any act that is
inconsistent with the terms of the deposit agreement;
- we and the depositary disclaim any liability if we are prevented or
forbidden from acting on account of any law or regulation, any provision
of our by-laws, any provision of any securities on deposit or by reason
of any act of God or war or other circumstances beyond our control;
- we and the depositary disclaim any liability by reason of any exercise
of, or failure to exercise, any discretion granted by the deposit
agreement or in our charter or in any provisions of securities on
deposit;
- we and the depositary further disclaim any liability for any action or
inaction in reliance on the advice or information received from legal
counsel, accountants, any person presenting common shares for deposit,
any holder of American depositary shares or authorized representatives
thereof, or any other person believed by either of us in good faith to be
competent to give such advice or information;
- we and the depositary also disclaim liability for the inability by a
holder to benefit from any distribution, offering, right or other benefit
which is made available to holders of common shares but is not, under the
terms of the deposit agreement, made available to you; and
- we and the depositary may rely without any liability upon any written
notice, request or other document believed to be genuine and to have been
signed or presented by the proper parties.
From time to time we may request you and other holders and beneficial
owners of American depositary shares to provide information as to:
- the capacity in which you and other holders and beneficial owners own or
owned American depositary shares;
- the identity of any other persons then or previously interested in such
American depositary shares; and
- the nature of such interest and various other matters.
You agree to provide any information requested by us or the depositary
pursuant to the deposit agreement. The depositary has agreed to use reasonable
efforts to comply with written instructions received from us requesting that it
forward any such requests to you and other holders and beneficial owners and to
forward to us any responses to such requests to the extent permitted by
applicable law.
PRE-RELEASE TRANSACTIONS
The depositary may, in some circumstances, issue American depositary shares
before receiving a deposit of common shares referred to as a "pre-release
transaction." The deposit agreement limits the aggregate size of pre-release
transactions and imposes a number of conditions on these types of transactions
such as:
- the need to receive collateral;
- the type of collateral required;
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- the need to receive written representations from recipients of
pre-released American depositary shares that the recipient
- owns the common shares that will be deposited;
- assigns all beneficial right, title and interest in the common
shares to the depositary;
- holds the common shares for the account of the depositary; and
- will deliver the common shares to the custodian as soon as
practicable and promptly upon demand; and
- restrictions on the percentage of American depositary shares that can be
pre-released American depositary shares.
The depositary may retain for its own account the compensation received from the
pre-release transactions.
TAXES
You will be responsible for taxes and other governmental charges payable on
the American depositary shares and the securities represented by the American
depositary shares. We, the depositary, and the custodian may deduct the taxes
and governmental charges payable by holders from any distribution and may sell
any and all property on deposit to pay the taxes and governmental charges
payable by holders. You will be liable for any deficiency if the sale proceeds
do not cover the taxes that are due.
The depositary may refuse to issue American depositary shares, to deliver,
transfer, split and combine American depositary receipts or to release
securities on deposit until all taxes and charges are paid by the applicable
holder. The depositary and the custodian may take reasonable administrative
actions to obtain tax refunds and reduced tax withholding for any distributions
on your behalf. However, you may be required to provide to the depositary and to
the custodian proof of taxpayer status and residence and other information as
the depositary and the custodian may require to fulfill their legal obligations.
Under the deposit agreement, you will be required to indemnify us, the
depositary, and the custodian for any claims with respect to taxes based on any
tax benefit obtained for you.
FOREIGN CURRENCY CONVERSION
The depositary will arrange for the conversion of all foreign currency
received into U.S. dollars if the conversion can be performed on a practicable
basis or by sale, and it will distribute the U.S. dollars in accordance with the
terms of the deposit agreement. You may have to pay any fees and expenses
incurred in converting foreign currency, such as fees and expenses incurred in
complying with currency exchange controls and other governmental requirements.
If the conversion of foreign currency is not practical or lawful, or if any
required approvals are denied or not obtainable at a reasonable cost or within a
reasonable period, the depositary may take the following actions in its
discretion:
- convert (or cause the custodian to convert) the foreign currency to the
extent practical and lawful and distribute the U.S. dollars to the
holders for whom the conversion and distribution is lawful and practical;
- distribute the foreign currency to holders for whom the distribution is
lawful and practical; or
- hold the foreign currency (without liability for interest) for the
accounts of the holders entitled to receive the foreign currency.
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TAXATION
The following summary contains a description of the principal Brazilian and
U.S. federal income tax consequences of the ownership and disposition of common
shares or American depositary shares. You should know that it does not purport
to be a comprehensive description of all the tax considerations that may be
relevant to a holder of common shares or American depositary shares.
Although there is at present no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may result in such a treaty. We cannot predict whether or when such a
treaty will enter into force or how it will affect the U.S. holders, as defined
below, of common shares or American depositary receipts. Holders of common
shares or American depositary receipts should discuss with their own tax
advisors the tax consequences of the acquisition, ownership and disposition of
the common shares or American depositary shares in their particular
circumstances, including, in particular, the effect of any state, local or other
national tax laws.
BRAZILIAN TAX CONSIDERATIONS
The following discussion of the material Brazilian tax consequences
applicable to the ownership and disposition of common shares or American
depositary shares by a non-Brazilian holder, as defined below, is the opinion of
Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados.
This discussion only applies to a holder who is not domiciled in Brazil for
purposes of Brazilian taxation and to a holder of common shares, who has
registered his/her investment in common shares with the Central Bank as a U.S.
dollar investment (in each case, a non-Brazilian holder). It is based on the tax
laws of Brazil and regulations thereunder in effect on the date hereof, which
are subject to change (possibly with retroactive effect).
Any change in such law may change the consequences we describe below. The
following discussion summarizes the principal tax consequences applicable under
current Brazilian law to non-Brazilian holders of common shares or American
depositary receipts; it does not specifically address all of the Brazilian tax
considerations applicable to any particular non-Brazilian holder. Therefore,
each non-Brazilian holder should consult his or her own tax advisor concerning
the Brazilian tax consequences of an investment in common shares or American
depositary shares.
Taxation of Distributions. Dividends, including dividends paid in kind,
paid by us (1) to the depositary in respect of the common shares underlying the
American depositary shares or (2) to a non-Brazilian holder in respect of common
shares will not be subject to Brazilian withholding income tax for distribution
of profits earned as of January 1, 1996. Dividends paid from profits generated
before January 1, 1996 may be subject to taxation at varying rates, except in
case of stock dividends, which are not subject to withholding income tax in
Brazil unless we redeem the stock within five years from such distribution or
the non-Brazilian holder sells the stock in Brazil within such five-year period.
Since January 1, 1996, Brazilian corporations may attribute interest on
shareholders' equity, which they may pay in cash. They base the calculation on
shareholders' equity as stated in the statutory accounting records. The interest
rate applied may not exceed the TJLP as determined by the Brazilian Central Bank
from time to time (in 2000 the annual rate was approximately 10.75%). Also, the
amount paid may not be higher than the greater of (1) 50% of net income (after
the deduction of the provision of social contribution on net profits but before
taking into account such payment of interest and the provision of corporate
income tax), before taking into account such payment of interest, for the
relevant period or (2) 50% of the sum of retained earnings and profit reserves
as of the beginning of the year in respect of which the payment is made.
The amount of interest attributed to shareholders is deductible for
corporate income tax and social contribution on net profit purposes. Therefore,
the benefit to us, as opposed to making a dividend payment, is a reduction in
our corporate taxes charge equivalent to 34% of such amount. Subject to certain
limitations, income tax is withheld from the shareholders on interest payments
at the rate of 15%, except if the beneficiary is located in a tax haven
jurisdiction in which case the applicable rate is 25%. As defined
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by Brazilian law, a tax haven jurisdiction is a country that does not impose
taxes on income or where the maximum income tax rate is lower than 20%.
Taxation of Gains. Regarding this issue, for purposes of Brazilian
taxation, two types of non-Brazilian residents should be considered: (1)
non-Brazilian holders that are not resident or domiciled in tax haven
jurisdictions, which are registered before the Central Bank and the CVM to
invest in Brazil in accordance with Resolution 2,689 or are holders of American
depositary receipts; and (2) other non-Brazilian holders, which include any and
all non-residents in Brazil who invest in the country through any other means
and all types of investors that are located in a tax haven jurisdiction. The
investors identified in item (1) are subject to a favorable tax treatment, as
described below.
Gains realized outside Brazil by a non-Brazilian holder on the disposition
of American depositary shares to another non-Brazilian holder are not subject to
Brazilian tax.
The deposit of common shares in exchange for American depositary shares is
not subject to Brazilian income tax if the common shares are registered under
Resolution 2,689 and the respective holder is not located in a tax haven
jurisdiction. If the common shares are not registered or if they are registered
but the respective holder is located in a tax haven jurisdiction, the deposit of
common shares in exchange for American depositary shares may be subject to
Brazilian capital gains tax at the rate of 15%. The withdrawal of common shares
in exchange for American depositary shares is not subject to Brazilian income
tax. On receipt of the underlying common shares, a non-Brazilian holder,
registered under Resolution 2,689 may register the U.S. dollar value of such
shares with the Central Bank as described below under Registered Capital.
Non-Brazilian holders are not subject to tax in Brazil on gains realized on
sales of common shares that occur abroad to a non-Brazilian resident.
Non-Brazilian holders are subject to income tax imposed at a rate of 15% on
gains realized on sales or exchanges of common shares that occur in Brazil or
with a resident of Brazil, other than on a Brazilian stock, future or
commodities exchange. With reference to proceeds of a redemption or of a
liquidating distribution with respect to the common shares, the difference
between the amount received and the amount of foreign currency registered with
the Central Bank, translated into reais at the commercial market rate on the
date of the redemption or liquidation distribution, will be also subject to
income tax at a rate of 15%, once such transactions are treated as a sale or
exchange carried out outside of the Brazilian stock, future commodities
exchange.
Gains realized arising from transactions on a Brazilian stock, future or
commodities exchange, by an investor under Resolution 2,689 and not located in a
tax haven jurisdiction are exempt from income tax. At January 1, 2000, the
preferential treatment under Resolution 2,689 is no longer applicable if the
non-Brazilian holder of the American depositary shares or common shares is
resident in a tax haven jurisdiction in accordance with Law 9,959 of January 27,
2000. As a consequence, gains realized on transactions performed by such holder
on the Brazilian stock, futures or commodities exchange are subject to income
tax at a rate of 20%.
Therefore, non-Brazilian holders are subject to income tax imposed at a
rate of 20% on gains realized on sales or exchanges in the spot market in Brazil
of common shares that occur on a Brazilian stock exchange unless such a sale is
made by a non-Brazilian holder who is not resident in a tax haven jurisdiction
and (1) such sale is made within five business days of the withdrawal of such
common shares in exchange for American depositary shares and the proceeds
thereof are remitted abroad within such five-day period, or (2) such sale is
made under Resolution 2,689 by registered non-Brazilian holders who obtain
registration with the Brazilian securities commission.
The gain realized as a result of a transaction on a Brazilian stock
exchange is the difference between the amount in Brazilian currency realized on
the sale or exchange and the acquisition cost, without any correction for
inflation, of the shares sold. The gain realized as a result of a transaction
that does not occur on a Brazilian stock exchange will be calculated based on
the foreign currency amount registered with the Central Bank. It is possible
that the current preferential treatment for holders of American depositary
receipts and non-Brazilian holders of common shares under Resolution 2,689 will
not continue in the future.
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Any exercise of preemptive rights relating to the common shares will not be
subject to Brazilian taxation. Any gain on the sale or assignment of preemptive
rights relating to the common shares by the depositary that occurs abroad among
non-residents will not be subject to Brazilian taxation. In case such sale or
assignment is made to a Brazilian party, any gain on the transaction will be
subject to Brazilian income taxation according to the same rules applicable to
the sale or disposition of common shares, unless such sale or assignment is
performed within Brazilian stock exchanges and by a investor under Resolution
2,689 who is not a resident in a tax haven jurisdiction, in which the gains are
exempt from income tax.
Taxation of Foreign Exchange Transactions (IOF/Cambio). Pursuant to Decree
2,219 of May 2, 1997, the conversion into Brazilian currency of proceeds
received by a Brazilian entity from a foreign investment in the Brazilian
securities market (including those in connection with an investment in common
shares or the American depositary shares and those under Resolution 2,689) and
the conversion into foreign currency of proceeds received by a non-Brazilian
holder are subject to a tax on exchange transactions known as IOF/Cambio, which
is currently zero for the transaction under analysis. However, according to Law
8,894/94, the IOF/Cambio rate may be increased at any time to a maximum of 25%
by a decision of the Minister of Finance, but only in relation to future
exchange transactions.
Tax on Bonds and Securities Transactions (IOF/Titulos). Law 8,894/94
created the Tax on Bonds and Securities Transactions, the IOF/Titulos, which may
be imposed on any transactions involving bonds and securities, even if these
transactions are performed on Brazilian stock, futures or commodities exchanges.
As a general rule, the rate of this tax is currently zero, although the
executive branch may increase such rate up to 1.5% per day, but only with
respect to future transactions.
Tax on Bank Accounts (CPMF). As a general rule, CPMF is imposed on any
debit to bank accounts, at a current rate of 0.38%. Although CPMF is set to
expire in June 2002, the Government is discussing the possibility of extending
this period or converting this tax into a permanent tax.
Other Brazilian Taxes. There are no Brazilian inheritance, gift or
succession taxes applicable to the ownership, transfer or disposition of common
shares or American depositary shares by a non-Brazilian holder, except for gift
and inheritance taxes which are levied by some states of Brazil on gifts made or
inheritances bestowed by individuals or entities not resident or domiciled in
Brazil within such state to individuals or entities resident or domiciled within
such state in Brazil. There are no Brazilian stamp, issue, registration, or
similar taxes or duties payable by holders of common shares or American
depositary receipts.
Registered Capital. The amount of an investment in common shares held by a
non-Brazilian holder who obtains registration under Resolution 2,689, or by the
depositary representing such holder, is eligible for registration with the
Central Bank; such registration (the amount so registered is referred to as
Registered Capital) allows the remittance outside Brazil of foreign currency,
converted at the commercial market rate, acquired with the proceeds of
distributions on, and amounts realized with respect to disposition of, such
common shares.
The registered capital for each common share purchased in the form of an
American depositary shares, or purchased in Brazil, and deposited with the
depositary in exchange for an American depositary share, will be equal to its
purchase price (in U.S. dollars) to the purchaser.
The registered capital for a common share that is withdrawn upon surrender
of an American depositary share will be the U.S. dollar equivalent of:
(1) the average price of a common share on the Brazilian stock
exchange on which the greatest number of such shares was sold on the day of
withdrawal, or
(2) if no common shares were sold on that day, the average price on
the Brazilian stock exchange on which the greatest number of common shares
were sold in the fifteen trading sessions immediately preceding such
withdrawal.
The U.S. dollar value of the common shares is determined on the basis of
the average commercial market rates quoted by the Central Bank on such date (or,
if the average price of common shares is
134
determined under clause (2) of the preceding sentence, the average of such
average quoted rates on the same fifteen dates used to determine the average
price of the common shares).
A non-Brazilian holder of common shares may experience delays in completing
such registration which may delay remittances abroad. Such a delay may adversely
affect the amount, in U.S. dollars, received by the non-Brazilian holder.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of the material U.S. federal income tax
consequences applicable to the ownership and disposition of common shares or
American depositary shares by U.S. holders, as defined below, is the opinion of
Davis Polk & Wardwell.
This discussion only applies to U.S. holders who hold their common shares
or American depositary shares as capital assets. This discussion does not
describe all of the tax consequences that may be relevant in light of a holder's
particular circumstances or to holders subject to special rules, such as:
- certain financial institutions,
- insurance companies,
- dealers or traders in securities or foreign currencies,
- persons holding common shares or American depositary shares as part of a
hedge, straddle, conversion or other integrated transaction,
- holders whose functional currency is not the U.S. dollar,
- partnerships or other entities classified as partnerships for U.S.
federal income tax purposes,
- persons subject to the alternative minimum tax, or
- persons owning, actually or constructively, 10% or more of our voting
shares.
This discussion is based on the Internal Revenue Code of 1986, as amended
to the date hereof, administrative pronouncements, judicial decisions and final,
temporary and proposed Treasury Regulations, changes to any of which may affect
the tax consequences described herein. Holders should consult their tax advisors
with regard to the application of the U.S. federal income tax laws to their
particular situations as well as any tax consequences arising under the laws of
any state, local or non-U.S. taxing jurisdiction.
This discussion is also based, in part, on representations of the
depositary and the assumption that each obligation in the deposit agreement and
any related agreement will be performed in accordance with its terms.
As used herein, the term "U.S. holder" means a beneficial owner of common
shares or American depositary shares that is for U.S. federal income tax
purposes:
- a citizen or resident alien individual of the United States,
- a corporation created or organized in or under the laws of the United
States or of any political subdivision thereof, or
- an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
The term "U.S. holder" also includes certain former citizens of the United
States.
In general, for U.S. federal income tax purposes, holders of American
depositary receipts evidencing American depositary shares will be treated as the
beneficial owners of the common shares represented by those American depositary
shares. Deposits and withdrawals of common shares by holders in exchange for
American depositary shares will not result in the realization of gain or loss
for U.S. federal income tax purposes.
135
Taxation of Dividends. Subject to the discussion under "-- Passive Foreign
Investment Company Rules" below, distributions paid on American depositary
shares or common shares, including distributions paid in the form of payments of
interest on capital for Brazilian tax purposes, out of our current or
accumulated earnings and profits, as determined for U.S. federal tax purposes,
before reduction for any Brazilian income tax withheld by us, will be taxable to
you as foreign source dividend income and will not be eligible for the
dividends-received deduction allowed to corporations.
You will be required to include dividends paid in reais in income in an
amount equal to their U.S. dollar value calculated by reference to an exchange
rate in effect on the date such items are received. If you hold American
depositary shares, you will be considered to receive a dividend when the
dividend is received by the depositary.
Subject to generally applicable limitations and restrictions, you will be
entitled to a credit against your United States federal income tax liability, or
a deduction in computing your U.S. federal taxable income, for Brazilian income
taxes withheld by us. You must satisfy minimum holding period requirements to be
eligible to claim a foreign tax credit for Brazilian taxes withheld on
dividends. The limitation on foreign taxes eligible for credit is calculated
separately for specific classes of income. For this purpose dividends paid by us
on our shares will generally constitute "passive income." The U.S. Treasury has
expressed concerns that parties to whom depositary receipts such as the American
depositary receipts are released may be taking actions that are inconsistent
with the claiming of foreign tax credits by U.S. holders of such depositary
receipts. Accordingly, the creditability of Brazilian taxes described above
could be affected by actions that may be taken by the U.S. Treasury.
Taxation of Capital Gains. Subject to the discussion under "-- Passive
Foreign Investment Company Rules" below, upon a sale or exchange of common
shares or American depositary shares, you will recognize a capital gain or loss
for U.S. federal income tax purposes equal to the difference, if any, between
the amount realized on the sale or exchange and your adjusted tax basis in the
common shares or American depositary shares. This gain or loss will be long-term
capital gain or loss if your holding period in the American depositary shares or
common shares exceeds one year. Any gain or loss generally will be U.S. source
gain or loss for U.S. foreign tax credit purposes. Consequently, if a Brazilian
withholding tax is imposed on the sale or disposition of common shares, and you
do not receive significant foreign source income from other sources you may not
be able to derive effective U.S. foreign tax credit benefits in respect of such
Brazilian withholding tax. You should consult your own tax advisor regarding the
application of the foreign tax credit rules to your investment in, and
disposition of, common shares.
If a Brazilian tax is withheld on the sale or disposition of shares, your
amount realized will include the gross amount of the proceeds of such sale or
disposition before deduction of the Brazilian tax. For a discussion of this
Brazilian tax matter, see "-- Brazilian Tax Considerations -- Taxation of
Gains."
Passive Foreign Investment Company Rules
CVRD believes that it will not be considered a passive foreign investment
company for U.S. federal income tax purposes. Passive foreign investment company
status depends on a foreign company not earning more than a permitted amount of
gross income that is considered "passive income" and not holding more than a
permitted percentage of assets, determined by value, that produce or are held to
produce passive income. For these purposes, a company is treated as earning and
holding its pro rata share of the income and assets of any corporation in which
it owns, directly or indirectly, 25% of the stock, by value. Since this test
depends on the composition of a company's income and assets, and market value of
those assets, from time to time, and it is unclear whether certain of CVRD's
income and assets would be associated with "commodities transactions" that would
not be considered "qualified active sales," there can be no assurance that CVRD
will not be considered a passive foreign investment company for any taxable
year. If CVRD were treated as a passive foreign investment company for any
taxable year during which a U.S. Holder held an American depositary share or
common share, certain adverse consequences could apply to the U.S. holder.
136
If CVRD is treated as a passive foreign investment company for any taxable
year and a U.S. holder does not make the mark to market election described
below, gain recognized by such U.S. holder on a sale or other disposition of the
American depositary shares or common shares would be allocated ratably over the
U.S. holder's holding period for the American depositary shares or common
shares. The amounts allocated to the taxable year of the sale or other exchange
and to any year before we became a passive foreign investment company would be
taxed as ordinary income. The amount allocated to each other taxable year would
be subject to tax at the highest rate in effect for individuals or corporations,
as appropriate, and an interest charge would be imposed on the amount allocated
to such taxable year. Further, any distribution in respect of American
depositary shares or common shares in excess of 125 percent of the average of
the annual distributions on American depositary shares or common shares received
by the U.S. holder during the preceding three years or the U.S. holder's holding
period, whichever is shorter, would be subject to taxation and an interest
charge in the manner described above.
If CVRD is treated as a passive foreign investment company and the common
shares or American depositary shares are regularly traded on a "qualified
exchange," a U.S. holder may make a mark-to-market election. A "qualified
exchange" includes a foreign exchange that is regulated by a governmental
authority in which the exchange is located and with respect to which certain
other requirements are met. The IRS has not yet identified specific foreign
exchanges that are "qualified" for this purpose. The New York Stock Exchange, on
which the American depositary shares are expected to be traded, is a qualified
exchange for U.S. federal income tax purposes.
A U.S. holder that makes the election generally will include each year as
ordinary income the excess, if any, of the fair market value of the American
depositary shares or common shares at the end of the taxable year over their
adjusted basis, and will be permitted an ordinary loss in respect of the excess,
if any, of the adjusted basis of the American depositary shares or common shares
over their fair market value at the end of the taxable year (but only to the
extent of the net amount of previously included income as a result of the
mark-to-market election). The basis of a U.S. holder that makes the election in
the American depositary shares or common shares will be adjusted to reflect any
such income or loss amounts. Any gain recognized on the sale or other
disposition of American depositary shares or common shares will be treated as
ordinary income.
If a U.S. holder own shares or American depositary shares or common shares
during a year in which CVRD is considered a passive foreign investment company,
the U.S. holder must file Internal Revenue Service Form 8621.
Prospective U.S. holders are urged to consult their tax advisers concerning
the consequences to them if CVRD were considered to be a passive foreign
investment company.
Information Reporting and Backup Withholding
Information returns may be filed with the Internal Revenue Service in
connection with distributions on the common shares or American depositary shares
and the proceeds from their sale or other disposition. You may be subject to
United States backup withholding tax on these payments if you fail to provide
your taxpayer identification number or comply with certain certification
procedures or otherwise establish an exemption from backup withholding. The
amount of any backup withholding from a payment to you will be allowed as a
credit against your U.S. federal income tax liability and may entitle you to a
refund, provided that the required information is furnished to the Internal
Revenue Service.
137
UNDERWRITING
The selling shareholders intend to offer the American depositary shares in
an underwritten offer to be made in the United States and elsewhere
internationally. Merrill Lynch, Pierce, Fenner & Smith Incorporated and ABN AMRO
Rothschild LLC are acting as representatives for each of the underwriters named
below. Subject to the terms and conditions described in a purchase agreement
among us, the selling shareholders, and the underwriters, the selling
shareholders have agreed to sell to the underwriters, and each of the
underwriters severally has agreed to purchase from the selling shareholders, the
number of American depositary shares listed opposite its name below.
NUMBER OF
AMERICAN
DEPOSITARY
SHARES
UNDERWRITER ----------
-----------
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 11,583,394
ABN AMRO Rothschild LLC..................................... 11,583,394
Credit Suisse First Boston Corporation...................... 2,485,727
Goldman, Sachs & Co. ....................................... 2,485,727
J.P. Morgan Securities Inc.................................. 2,485,727
Morgan Stanley & Co. Incorporated........................... 2,485,727
Banco Espirito Santo de Investimento, S.A. ................. 200,000
Credit Lyonnais Securities (USA) Inc. ...................... 200,000
Lazard Freres & Co. LLC..................................... 200,000
Santander Central Hispano Investment Securities Inc. ....... 200,000
Trilon International Inc. .................................. 200,000
----------
Total.......................................... 34,109,696
==========
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth in that agreement, to purchase all of the
American depositary shares sold under the terms of that purchase agreement if
any of the American depositary shares sold under the terms of that agreement is
purchased. If an underwriter defaults, the purchase agreement provides that the
purchase commitments of the nondefaulting underwriters may be increased or the
purchase agreement may be terminated.
In the purchase agreement, we and the selling shareholders have agreed to,
respectively, indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make in respect of those respective liabilities.
The underwriters are offering the American depositary shares, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of legal matters by their counsel, including the validity of the common shares
and the American depositary shares, and other conditions contained in the
purchase agreement, such as the receipt by the underwriters of officers'
certificates and legal opinions. The underwriters reserve the right to withdraw,
cancel or modify offers to the public and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling shareholders that the
underwriters propose to offer the American depositary shares to the public
initially at the public offering price listed on the cover page of this
prospectus, and to certain dealers at that price less a concession not in excess
of US$.2588 per American depositary share. After the public offering, the public
offering price, concession and discount may be changed.
138
The following table shows the per American depositary share and total
public offering price, underwriting discount to be paid and proceeds before
expenses to the selling shareholders. The information assumes either no exercise
or full exercise by the underwriters of their overallotment options.
PER AMERICAN
DEPOSITARY SHARE WITHOUT OPTION WITH OPTION
---------------- -------------- ----------------
Public offering price................. US$ 24.50 US$835,687,552 US$1,087,466,065
Underwriting discount................. US$ .468 US$ 15,963,338 US$ 20,772,821
Proceeds, before expenses, to the
selling shareholders................ US$24.032 US$819,724,214 US$1,066,693,244
The following table shows the fees and estimated expenses payable in
connection with this offering:
Securities and Exchange Commission registration fee......... US$169,878
National Association of Securities Dealers, Inc. filing
fee....................................................... 30,500
New York Stock Exchange listing fee......................... 100,000
Printing and engraving expenses............................. 816,000
Legal fees and expenses..................................... 1,925,000(1)
Accounting fees and expenses................................ 529,000
Mining expert fees and expenses............................. 329,000
Miscellaneous............................................... 154,000
------------
Total(2)............................................... US$4,053,378
(1) Includes legal fees and expenses for the account of the underwriters
and the selling shareholders.
(2) The underwriters have agreed to reimburse us for some of our offering
expenses.
OVERALLOTMENT OPTION
The selling shareholders have granted an option to the representatives on
behalf of the underwriters, exercisable until 30 days after the date of this
prospectus, to purchase from the selling shareholders an additional amount of
shares (in the form of American depositary shares) up to a number not exceeding
15% of the aggregate number of shares (in the form of common shares or American
depositary shares) in the global offering, at the public offering price set
forth on the cover page of this prospectus, less the underwriting discount, to
cover overallotments, if any. The representatives may exercise this option from
time to time solely to cover overallotments, if any, made on the sale of our
American depositary shares offered hereby. If the representatives exercise this
option, each underwriter will be obligated, subject to certain conditions
contained in the purchase agreement, to purchase a number of additional American
depositary shares proportionate to that underwriter's initial amount reflected
in the above table.
INTERSYNDICATE AGREEMENT
The underwriters and the Brazilian underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the underwriters and any dealer
to whom they sell American depositary shares will not offer to sell or sell
American depositary shares in Brazil or to persons they believe intend to resell
in Brazil, and the Brazilian underwriters and any dealer to whom they sell
common shares will not offer to sell or sell common shares outside of Brazil,
except in the case of transactions under the terms of the intersyndicate
agreement. The intersyndicate agreement also provides that Merrill Lynch,
Pierce, Fenner & Smith Incorporated may direct the transfer of common shares to
the underwriters from the Brazilian underwriters in response to market demand.
The price of any common shares (adjusted to reflect the ratio of one common
share per American depositary share) so transferred will be the initial public
offering price, less an amount not greater than the selling concession, as
defined in the intersyndicate agreement.
139
NO SALES OF SIMILAR SECURITIES
We and the selling shareholders have agreed, with exceptions listed below,
not to sell or transfer any shares for 120 days after the date of this
prospectus without first obtaining the written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, on behalf of the underwriters. Specifically, we and
the selling shareholders have agreed not to directly or indirectly:
- offer, pledge, sell, or contract to sell any American depositary shares
or common shares;
- sell any option or contract to purchase any American depositary shares or
common shares;
- purchase any option or contract to sell any American depositary shares or
common shares;
- grant any option, right or warrant for the sale of any American
depositary shares or common shares;
- lend or otherwise dispose of or transfer any American depositary shares
or common shares;
- file a registration statement under the Securities Act relating to any of
the foregoing; or
- enter into any swap or other agreement or transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of
ownership of any American depositary shares or any common shares whether
any such swap or transaction is to be settled by delivery of any American
depositary shares, common shares or other securities, in cash or
otherwise.
This lock-up provision applies to common shares and to securities
convertible into or exchangeable or exercisable for or repayable with common
shares. It also applies to common shares and preferred shares owned now or
acquired later by the person executing the agreement or for which the person
executing the agreement later acquires the power of disposition.
The restrictions described in the preceding two paragraphs do not apply to:
- the sale of the American depositary shares to the underwriters;
- the sale of the common shares to the Brazilian underwriters;
- any common shares issued or options to purchase common shares granted
pursuant to existing employee benefit plans of our company referred to in
this prospectus;
- any common shares issued pursuant to any non-employee director stock plan
or dividend reinvestment plan; or
- those common and preferred shares of our company held by BNDESPAR, a
wholly owned subsidiary of BNDES, which may be contributed to an
investment fund intended to track the Sao Paulo Stock Exchange Index;
otherwise, the lock-up described above applies to those common and
preferred shares.
The underwriters may, in their sole discretion, release all or any portion
of the shares subject to the lock-up agreements prior to the expiration of their
term. The underwriters may waive these restrictions at our request or upon the
request of a shareholder. In evaluating whether to grant such a request, the
underwriters may consider a number of factors with a view toward maintaining an
orderly market for, and minimizing volatility in the market price of, our
shares. These factors include, among others, the number of shares involved, the
then recent trading volume and prices of the stock, the length of time before
the lock-up expires and the reasons for, and the timing of, the request.
NEW YORK STOCK EXCHANGE LISTING
Our American depositary shares have been approved for listing on the New
York Stock Exchange under the symbol "RIO," subject to official notice of
issuance. In order to meet the requirements for listing of the American
depositary shares on that exchange, the underwriters have undertaken to sell a
minimum number of American depositary shares to a minimum number of beneficial
owners as required by that exchange.
The underwriters do not expect to sell more than 5% of the common shares in
the aggregate to accounts over which they exercise discretionary authority.
140
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the American depositary shares is completed, U.S.
Securities and Exchange Commission rules may limit the ability of the
underwriters and certain selling group members from bidding for and purchasing
our common shares, including common shares in the form of American depositary
shares. However, Merrill Lynch, Pierce, Fenner & Smith Incorporated and ABN AMRO
Rothschild LLC, as joint global coordinators, may engage in transactions that
stabilize the price of the American depositary shares, such as bids or purchases
to peg, fix or maintain that price.
In connection with the offering, the global coordinators may make short
sales of the American depositary shares and may purchase the American depositary
shares on the open market to cover positions created by short sales. Short sales
involve the sale by the underwriters of a greater number of American depositary
shares than they are required to purchase in the offering. Covered short sales
are sales made in an amount not greater than the underwriters' overallotment
option to purchase additional American depositary shares in the offering. Naked
short sales are sales in excess of the overallotment option. The underwriters
may close out any covered short position by either exercising their
overallotment option or purchasing American depositary shares in the open
market. In determining the source of American depositary shares to close out the
covered short position, the underwriters will consider, among other things, the
price of American depositary shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
overallotment option. The underwriters must close out any naked short position
by purchasing American depositary shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the American depositary shares in
the open market after pricing that could adversely affect investors who purchase
in the offering. Similar to other purchase transactions, the underwriters'
purchases to cover the syndicate short sales may have the effect of raising or
maintaining the market price of the common shares or preventing or retarding a
decline in the market price of the common shares. As a result, the price of the
common shares may be higher than the price that might otherwise exist in the
open market.
Neither we, the selling shareholders, nor any of the underwriters make any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the American
depositary shares. In addition, neither we, the selling shareholders, nor any of
the underwriters make any representation that these transactions, once
commenced, will not be discontinued without notice.
U.K. SELLING RESTRICTIONS
Each underwriter has agreed that:
- it has not offered or sold and will not offer or sell any American
depositary shares to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which do not constitute an
offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services and Markets Act 2000 with respect to anything done by
it in relation to the American depositary shares in, from or otherwise
involving the United Kingdom; and
- it has only communicated and caused to be communicated and will only
communicate or cause to be communicated any invitation or inducement to
engage in investment activity within the meaning of Section 21 of the
Financial Services and Markets Act 2000 received by it in connection with
the issue or sale of any American depositary shares in circumstances in
which Section 21(1) of the Financial Services and Markets Act 2000 does
not apply to us.
141
BRAZILIAN OFFERING
The selling shareholders will be conducting a concurrent offering in Brazil
of 34,401,468 of our common shares to retail and institutional investors,
pursuant to a Brazilian underwriting agreement entered into between us, the
selling shareholders and BB Banco de Investimento S.A., Banco Merrill Lynch S.A.
and NM Rothschild and Sons (Brasil) Ltda., and Merrill Lynch, Pierce, Fenner &
Smith Incorporated. Brazilian individual investors who, subject to certain
limits of investment, wanted to acquire our common shares directly in the
Brazilian retail offering, and certain investment vehicles made available to
Brazilian individual investors have made reservations for shares offered by the
selling shareholders and have deposited the amount of the proposed investment
with the Brazilian underwriters. The number of shares to be purchased by each
individual investor or each investment vehicle is the highest number of shares
that may be purchased with the amount deposited, and any remainder in the
account representing less than one share will be returned by the Brazilian
underwriters to the depositing investor.
PRIORITY IN THE ALLOCATION OF SHARES. In the event of an over-subscription
for our shares in this offering, Brazilian individual retail investors and the
investment vehicles for individual investors will have priority with respect to
the allocation of shares to be offered by the Brazilian underwriters and the
underwriters. If Brazilian individual investors indicate an interest in all of
the shares offered by the selling shareholders, the underwriters will not be
permitted to purchase any shares in the offering. Furthermore, if all of the
shares are not purchased by Brazilian retail investors, the shares, either
directly or in the form of American depositary shares, will then be allocated to
institutional investors and the underwriters.
RETAIL INCENTIVES. In order to encourage investment at the retail level,
the selling shareholders are offering incentives to Brazilian individual
investors and the investment vehicles for individual investors, including:
- preferential allocation for retail investors and the investment vehicles
for individual investors; and
- a discounted purchase price under certain circumstances.
DISCOUNTED PURCHASE PRICE. Brazilian individual investors and the
investment vehicles for individual investors who agree not to sell or transfer
any shares for six months after the settlement date will be entitled to purchase
the common shares offered by the selling shareholders at a discount of 5% from
the offering price. With limited exceptions, shares purchased at the discounted
price may only be sold after six months.
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES AND BRAZIL
No action has been or will be taken in any jurisdiction (except in the
United States and Brazil) that would permit a public offering of the common
shares, directly or in the form of American depositary shares, or the
possession, circulation or distribution of this prospectus or any other material
relating to our company, the selling shareholders, our common shares or our
American depositary shares in any jurisdiction where action for that purpose is
required. Accordingly, our common shares, directly or in the form of American
depositary shares, may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with the common shares may be distributed or published, in or from
any country or jurisdiction except in compliance with any applicable rules and
regulations of any such country or jurisdiction.
Purchasers of the securities offered by this prospectus may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price on the cover page of
this prospectus.
OTHER RELATIONSHIPS
Some of the underwriters and their affiliates and the selling shareholders
have engaged in, and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us or the selling
shareholders. They have received customary fees and commissions for these
transactions.
142
LEGAL MATTERS
The validity of the American depositary shares offered hereby will be
passed upon for us by Davis Polk & Wardwell, New York, New York and for the
underwriters by Shearman & Sterling, New York, New York. The validity of the
common shares underlying the American depositary shares will be passed upon for
us by Paulo Francisco de Almeida Lopes, Esq., our general counsel, and for the
underwriters by Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados, Sao
Paulo, Brazil. Various legal matters in connection with this offering will be
passed upon for the selling shareholders by Arnold & Porter, Washington, D.C.
EXPERTS
Our consolidated financial statements as of December 31, 2000 and 1999 and
for each of the three years in the period ended December 31, 2000 are included
in this prospectus in reliance upon the report of PricewaterhouseCoopers
Auditores Independentes, independent accountants, given on the authority of said
firm as experts in auditing and accounting. The financial statements of certain
of our subsidiaries and affiliates, not separately included in this prospectus,
have been audited by various independent accountants other than
PricewaterhouseCoopers Auditores Independentes. The companies and periods
covered by these audits are indicated in the individual accountants' reports
appearing in this prospectus. These financial statements, to the extent they
have been included in our consolidated financial statements, have been included
in reliance on the reports of the various independent accountants given on the
authority of said firms as experts in auditing and accounting.
With respect to our unaudited interim consolidated financial statements, at
and for the nine months ended September 30, 2000 and 2001,
PricewaterhouseCoopers Auditores Independentes reported that they have applied
limited procedures in accordance with professional standards for a review of
that information. However, their separate report thereon states that they did
not audit and they did not express an opinion on our unaudited information.
Accordingly, the degree of reliance on their report on that information should
be restricted in light of the limited nature of the review procedures applied.
PricewaterhouseCoopers Auditores Independentes is not subject to the liability
provisions of Section 11 of the Securities Act for their report on our interim
financial information because that report is not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers Auditores
Independentes within the meaning of Sections 7 and 11 of the Securities Act.
We have engaged Mineral Resources Development, Inc., or MRDI, experts in
geology, mining and ore reserve determination, to perform an audit of our
estimates of proven and probable reserves and mine life at December 31, 2000.
The estimates of proven and probable reserves and mine life as presented herein
have been audited and verified by MRDI, which has indicated that our proven and
probable reserves have been estimated in accordance with good engineering
practices, using current reasonable cost estimates. Reserves classified as
"other mineral deposits" have not been audited by MRDI.
ENFORCEMENT OF CIVIL LIABILITIES AGAINST NON-U.S. PERSONS
CVRD
We are organized under the laws of Brazil and substantially all of our
assets are located outside of the United States. The majority of our directors
and executive officers and certain experts named in this prospectus reside
outside of the United States and substantially all of the assets of such persons
are located outside the United States. As a result, it may not be possible (or
may be difficult) for investors to effect service of process upon us or such
persons within the United States or to enforce against us or them judgments
obtained in U.S. courts, including those predicated upon the civil liability
provisions of the federal securities laws of the United States.
143
We have been advised by Paulo Francisco de Almeida Lopes, Esq., our general
counsel, that a judgment of a U.S. court for civil liabilities predicated upon
the federal securities laws of the United States may be enforced in Brazil
against us and our directors and executive officers and certain of the experts
named herein without reconsideration of the merits, upon confirmation of that
judgment by the Brazilian Federal Supreme Court. Such confirmation, generally,
will be available if the foreign judgment (i) is for a payment of a sum certain,
(ii) fulfills all formalities required for its enforceability under the laws of
the United States, (iii) is issued by a competent court after proper service of
process, (iv) is not subject to appeal, (v) is authenticated by a Brazilian
consular office in the United States and is accompanied by a sworn translation
in Portuguese and (vi) does not violate Brazilian national sovereignty, public
policy or "good morals" (as set forth in Brazilian law). We have also been
advised by our general counsel that (i) original civil actions may be brought in
connection with this prospectus predicated solely on the federal securities laws
of the United States in Brazilian courts and that Brazilian courts may enforce
such liabilities in such actions against us and our directors and executive
officers and certain of the experts named herein (provided that provisions of
the federal securities laws of the United States do not contravene Brazilian
public policy and provided further that Brazilian courts can assert jurisdiction
over the particular action) and (ii) the ability of a judgment creditor to
satisfy a judgment by attaching certain assets of the defendant is limited by
provisions of Brazilian law. In addition, a plaintiff (whether Brazilian or
non-Brazilian) that resides outside Brazil during the course of the litigation
in Brazil must provide a bond to guarantee court costs and legal fees if the
plaintiff owns no real property in Brazil.
THE SELLING SHAREHOLDERS
BNDES, an entity owned by the Brazilian government, is incorporated under
the laws of Brazil. Substantially all of BNDES's assets are located in Brazil.
All of BNDES's directors and officers and some of the advisors named herein
reside in Brazil. As a result, it may not be possible for investors to effect
service of process within the United States upon such persons or to enforce
against them or BNDES in U.S. courts judgments predicated upon the civil
liability provisions of the federal securities laws of the United States.
The Federative Republic of Brazil is a foreign sovereign government and has
not waived its sovereign immunity in connection with any action relating to the
securities, including any action arising out of or based on United States
federal or state securities laws. Under Brazilian law, the Federative Republic
of Brazil is prohibited from submitting to the jurisdiction of a foreign court
for the purpose of adjudication on the merits in any dispute, controversy or
claim against the Federative Republic of Brazil arising out of or relating to
the sale of the securities. In addition, BNDES in its capacity as administrator
or gestor has not waived its sovereign immunity in connection with any action
relating to the securities to be sold by the Federative Republic of Brazil,
including any action arising out of or based on United States federal or state
securities laws. As a result, it may not be possible for investors to effect
service of process within the United States upon Brazil, to attain jurisdiction
over Brazil or to enforce against Brazil in U.S. courts judgments predicated
upon the civil liability provisions of the federal securities laws of the United
States.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-3 under the Securities Act with respect to the common shares
(in the form of American depositary shares) to be sold in this offering. This
prospectus, which is part of the registration statement, does not contain all of
the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information pertaining to
us and our common shares (in the form of American depositary shares) to be sold
in this offering, we refer you to the registration statement and the exhibits
and schedules filed as part of the registration statement. If a document has
been filed as an exhibit to the registration statement, we refer you to the copy
of the document that has been filed. Each statement in this prospectus relating
to a document filed as an exhibit is qualified in all
144
respects by the filed exhibit. The registration statement, including exhibits
and schedules thereto, may be inspected without charge at the Commission's
public reference rooms at:
- Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
- 233 Broadway, New York, New York 10279; or
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661.
Copies of all or any part of the registration statement may be obtained
from such office after payment of fees prescribed by the Commission. Please call
the Commission at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. In addition, the Commission maintains an Internet web
site at www.sec.gov, from which you can electronically access the registration
statement and its exhibits. Copies of reports and other information may also be
inspected in the offices of the New York Exchange, 20 Broad Street, New York,
New York 10005.
We are subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith file reports, including annual reports on Form 20-F, and
other information with the Commission. However, as a foreign private issuer, we
are exempt from the rules under the Exchange Act relating to the furnishing and
content of proxy statements and relating to short swing profits reporting and
liability. In addition, we are not required to file annual, quarterly or current
reports and financial statements as frequently or as promptly as U.S. companies
whose securities are registered under the Exchange Act. However, we will file,
as long as we are required to do so, within 180 days after the end of each
fiscal year, an annual report on Form 20-F containing consolidated financial
statements audited by an independent public accounting firm. We also file
quarterly reports on Form 6-K with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission allows us to incorporate by
reference the information we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and some later information that we file with the Commission will
automatically be deemed to update and supersede this information. We incorporate
by reference the following document that has been filed with the Commission:
- our Annual Report on Form 20-F, as amended, for the fiscal year ended
December 31, 2000
(File No. 000-26030).
We also incorporate by reference into this prospectus any future filings
made with the Commission under Sections 13(a), 13(c), or 15(d) of the Exchange
Act and, to the extent designated therein, reports on Form 6-K that we furnish
to the Commission.
Any statement contained in a document, all or a portion of which is
incorporated or deemed to be incorporated by reference herein, shall be deemed
to be modified or superseded for purposes of this prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute part of this
prospectus.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents referred to above which have been or may be
incorporated herein by reference, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests should be directed to the Investor Relations Department, Avenida Graca
Aranha, No. 26, 17th floor, 20005-900 Rio de Janeiro, RJ, Brazil (telephone no:
5521-3814-4557).
145
MINING TERMS
Alumina........................................... Aluminum oxide. It is extracted from bauxite
in a chemical refining process and is the
principal raw material in the
electro-chemical process from which aluminum
is produced.
Bauxite........................................... A rock composed primarily of hydrated
aluminum oxides. It is the principal ore of
alumina, the raw material from which aluminum
is made.
Beneficiation..................................... The process of separating, concentrating and
classifying ore by particle size or some
other characteristic (e.g., specific gravity,
magnetic susceptibility, surface chemistry,
etc.) in order to obtain the mineral or metal
of interest.
CIF............................................... Cost, insurance and freight. It indicates
that the seller pays for shipping, insurance,
and all other costs associated with
transportation of the commodity to its
destination.
CIL............................................... Carbon-in-Leach. A method of recovering gold
in solution from slurry streams by contacting
activated carbon with the pulp during the
leaching process within agitated vessels and
separating loaded carbon from the pulp by
screening.
CIP............................................... Carbon-in-Pulp. A method of recovering gold
and silver extracted from pregnant cyanide
solutions by absorbing the precious metals to
granules of activated carbon, which are
typically ground up coconut shells.
Concentration..................................... Physical, chemical or biological process to
increase the grade of the metal or mineral of
interest.
DR................................................ Direct reduction. DR iron ore pellets are
used by steelmakers that employ minimill
technology.
DWT............................................... Deadweight ton. The measurement unit of a
vessel's capacity for cargo, fuel oil, stores
and crew, measured in metric tons of 1,000
kg. A vessel's total deadweight is the total
weight the vessel can carry when loaded to a
particular load line.
Fines............................................. Refers to iron ore with particles in the
range of 0.10 mm to 6.35 mm diameter.
FOB............................................... Free on Board. It indicates that the
purchaser pays for shipping, insurance, and
all the other costs associated with
transportation of the commodity to its
destination.
Grade............................................. The proportion of metal or mineral present in
ore or any other host material.
HL................................................ Heap Leaching. A low cost method of
extracting metals such as gold and copper
from low-grade ores. It consists of building
a heap of ore and applying a solution
(lixiviant) which dissolves the metal to
produce a pregnant solution (leachate) from
which the metal is recovered by precipitation
and smelting or carbon absorption, stripping
and electrowinning methods.
146
Kaolin............................................ A fine white aluminum silicate clay used as a
coating agent, filler, extender and absorbent
in the paper, ceramics and pharmaceutical
industries.
Lump ore.......................................... Iron ore or manganese ore with the coarsest
particle size in the range of 6.35 mm to 75
mm diameter, but varying slightly between
different mines and ores.
Manganese......................................... A hard brittle metallic element found
primarily in the minerals pyrolusite,
hausmannite and manganate.
Mineral deposit(s) or mineralized material(s)..... Refers to a mineralized body which has been
intersected by a sufficient number of
closely-spaced drill holes and/or
underground/surface samples to support
sufficient tonnage and grade of metal(s) or
mineral(s) of interest to warrant further
exploration-development work. The deposit
does not qualify as an ore body until it can
be legally and economically extracted at the
time of ore reserve determination.
Open pit mining................................... The extraction method by which surface or
barren rock is removed so that ore may be
removed using power shovels, front-end
loaders, hydraulic excavators, draglines,
etc.
Oxides............................................ Compounds of oxygen with another element. For
example, magnetite (Fe(3)O(4)) is an oxide
mineral formed by the chemical union of iron
with oxygen.
Pellet feed....................................... Fine (0.10 mm to 6.35 mm) and ultra-fine
(less than 0.10 mm) iron ore particles
generated by the mining, grading, handling
and transporting of iron ore, with no
practical direct application in the steel
industry, unless the material is aggregated
into pellets through an agglomeration
process.
Pellets........................................... Balls of agglomerated fine and ultra-fine
iron ore particles of a size and quality
suitable for particular steelmaking
processes. Our pellets range in size from 8
mm to 18 mm.
Potash............................................ A potassium chloride compound, chiefly KCl,
used in industry and agriculture.
Probable (indicated) reserves..................... Reserves for which quantity and grade and/or
quality are computed from information similar
to that used for proven (measured) reserves,
but the sites for inspection, sampling and
measurement are farther apart or are
otherwise less adequately spaced. The degree
of assurance, although lower than that for
proven (measured) reserves, is high enough to
assume continuity between points of
observation.
147
Proven (measured) reserves........................ Reserves for which (1) quantity is computed
from dimensions revealed in outcrops,
trenches, workings or drill holes; (2) grade
and/or quality are computed from the results
of detailed sampling; and (3) the sites for
inspection, sampling and measurement are
spaced so closely and the geologic character
is so well defined that size, shape, depth
and mineral content of reserves are well-
established.
Recoverable reserve............................... That portion of interest in the ore that can
be physically recovered through processing.
Reserve........................................... Refers to that part of a mineral deposit
which could be economically and legally
extracted or produced at the time of the
reserve determination.
Run-of-mine....................................... Ore in its natural (unprocessed) state, as
mined, without having been crushed.
Seaborne market................................... The market for iron ore products that are
shipped in vessels which have a capacity in
excess of 50,000 DWT.
Sinter feed....................................... Iron or manganese ore suitable for sintering.
Sintering......................................... Refers to the agglomeration of small
particles into a coherent mass by heating
without melting.
S/P............................................... Stockpile. Refers to ore or materials
accumulated or piled at the surface for
future use.
Sulfides.......................................... Compounds of sulphur with more than one
element and metallic sulfides (such as
galena, PbS, and chalcopyrite, CuFeS(2))
which occur as minerals.
148
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements.................. F-1
Report of PricewaterhouseCoopers Auditores Independentes
dated February 21, 2001 for the three years ended December
31, 2000, 1999 and 1998................................... F-3
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statements of Income for the three years ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 2000, 1999 and 1998.................... F-6
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended December 31, 2000, 1999 and
1998...................................................... F-7
Notes to Consolidated Financial Statements.................. F-8
Report of PricewaterhouseCoopers Auditores Independentes
dated October 22, 2001 for the Nine-month periods ended
September 30, 2001 and 2000............................... F-46
Consolidated Balance Sheets as of September 30, 2001 and
2000...................................................... F-47
Consolidated Statements of Income for the Nine-month periods
ended September 30, 2001 and 2000......................... F-48
Consolidated Statements of Cash Flows for the Nine-month
periods ended September 30, 2001 and 2000................. F-49
Consolidated Statements of Changes in Stockholders' Equity
for the Nine-month periods ended September 30, 2001 and
2000...................................................... F-50
Notes to Consolidated Financial Statements.................. F-51
INDEX TO AUDIT REPORTS FROM INDEPENDENT ACCOUNTANTS LISTEDIN NOTE
23 TO OUR CONSOLIDATED FINANCIAL STATEMENTS
Index to Audit Reports...................................... B-1
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to the financial statements of Albras for the
three years ended December 31, 2000, 1999 and 1998........ B-2
Report of Deloitte Touche Tohmatsu dated January 17, 2001
with respect to the financial statements of Alunorte for
the three years ended December 31, 2000, 1999 and 1998.... B-3
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to the financial statements of Aluvale for
the three years ended December 31, 2000, 1999 and 1998.... B-4
Report of KPMG Auditores Independentes dated February 6,
2001 with respect to the consolidated financial statements
of Bahia Sul Celulose S.A. and subsidiaries for the three
years ended December 31, 2000, 1999 and 1998.............. B-5
Report of KPMG LLP dated January 19, 2001 with respect to
the financial statements of CSI for the three years ended
December 31, 2000, 1999 and 1998.......................... B-6
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to the financial statements of Cenibra for
the two years ended December 31, 2000 and 1999............ B-7
Reports of Deloitte Touche Tohmatsu dated February 8, 2001
and February 12, 1999 with respect to the financial
statements of Docenave for the three years ended December
31, 2000, 1999 and 1998................................... B-8
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to the financial statements of Docepar for
the two years ended December 31, 2000 and 1999............ B-11
Report of Arthur Andersen S/C dated January 15, 2001 with
respect to the financial statements of Hispanobras for the
three years ended December 31, 2000, 1999 and 1998........ B-12
Report of Arthur Andersen S/C dated January 15, 2001 with
respect to the financial statements of Itabrasco for the
three years ended December 31, 2000, 1999 and 1998........ B-13
Report of Deloitte Touche Tohmatsu dated January 29, 2001
with respect to the financial statements of Kobrasco for
the year ended December 31, 2000.......................... B-14
Reports of Arthur Andersen S/C dated January 18, 2001 and
January 17, 2000 with respect to the financial statements
of MRN for the three years ended December 31, 2000, 1999
and 1998.................................................. B-15
F-1
Report of Deloitte Touche Tohmatsu dated January 29, 2001
with respect to the financial statements of Nibrasco for
the three years ended December 31, 2000, 1999 and 1998.... B-17
Report of KPMG Auditores Independentes dated January 19,
2001 with respect to the financial statements of Valesul
for the two years ended December 31, 2000 and 1999........ B-18
Report of Deloitte Touche Tohmatsu dated January 20, 1999
with respect to the financial statements of Valesul for
the two years ended December 31, 1998 and 1997............ B-19
Report from Arthur Andersen S/C dated February 19, 2001 with
respect to their consolidated financial statements of CSN
for the two years ended December 31, 2000 and 1999........ B-20
Reports of Deloitte Touche Tohmatsu dated February 2, 2001
and April 28, 2000 with respect to financial statements of
Terminal Vila Velha S.A for the three years ended December
31, 2000, 1999, and 1998 (English Version)................ B-21
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to financial statements of Nova Era Silicon
S.A. for the year ended December 31, 2000 (English
Version).................................................. B-23
Report of Trevisan dated January 18, 2000 with respect to
financial statements of Nova Era Silicon S.A. for the two
years ended December 31, 1999 and 1998 (English
Version).................................................. B-25
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to financial statements of Celmar
S.A.-Industria de Celulose e Papel for the year ended
December 31, 2000 (English Version)....................... B-27
Report of Deloitte Touche Tohmatsu dated January 22, 2001
with respect to financial statements of SIBRA
Eletrosiderurgica Brasileira S.A. for the year ended
December 31, 2000 (English Version)....................... B-28
INDEX TO REVIEW REPORTS FROM INDEPENDENT ACCOUNTANTS LISTED IN
NOTE 20 TO OUR CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Index to Review Reports..................................... C-1
Report of Deloitte Touche Tohmatsu dated October 23, 2001
with respect to the financial statements of Albras for the
nine-month periods ended September 30, 2001 and 2000...... C-2
Report of Deloitte Touche Tohmatsu dated October 23, 2001
with respect to the financial statements of Alunorte for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-3
Report of KPMG Auditores Independentes dated October 18,
2000 with respect to the financial statements of Bahia Sul
for the nine-month periods ended September 30, 2000 and
1999...................................................... C-4
Report of Deloitte Touche Tohmatsu dated November 1, 2001
with respect to the financial statements of Cenibra for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-5
Report of Deloitte Touche Tohmatsu dated October 22, 2001
with respect to the financial statements of Docenave for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-6
Report of Deloitte Touche Tohmatsu dated October 22 , 2001
with respect to the financial statements of Docepar for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-7
Report of Arthur Andersen S/C dated October 19, 2001 with
respect to the financial statements of Hispanobras for the
nine-month periods ended September 30, 2001 and 2000...... C-8
Report of Arthur Andersen S/C dated October 19, 2001 with
respect to the financial statements of Itabrasco for the
nine-month periods ended September 30, 2001 and 2000...... C-9
Report of Deloitte Touche Tohmatsu dated October 19, 2001
with respect to the financial statements of Kobrasco for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-10
Report of Arthur Andersen S/C dated October 22, 2001 with
respect to the financial statements of MRN for the
nine-month periods ended September 30, 2001 and 2000...... C-11
Report of Deloitte Touche Tohmatsu dated October 19, 2001
with respect to the financial statements of Nibrasco for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-12
Report of KPMG Auditores Independentes dated October 19,
2001 with respect to the financial statements of Valesul
for the nine-month periods ended September 30, 2001 and
2000...................................................... C-13
Report of Arthur Andersen S/C dated October 20, 2000 with
respect to the financial statements of CSN for the
nine-month period ended September 30, 2000................ C-14
F-2
[PRICEWATERHOUSECOOPERS LETTERHEAD]
--------------------------------------------------------------------------------
PricewaterhouseCoopers
Rua da Candelaria, 65
11--15-
20091-020 Rio de Janeiro,
RJ-Brasil
Caixa Postal 949
Telefone (21) 3232-6112
Fax (21) 2516-6319
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF COMPANHIA VALE DO RIO DOCE
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, of cash flows and of changes in stockholders' equity, present fairly,
in all material respects, the financial position of Companhia Vale do Rio Doce
and its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of certain affiliates, the investments in which total
US$1,188 million and US$929 million at December 31, 2000 and 1999, respectively,
and equity in earnings of US$213 million, US$42 million and US$21 million for
2000, 1999 and 1998, respectively. Also, we did not audit the financial
statements of the majority-owned shipping and ferro alloys subsidiaries as at
and for the years ended December 31, 2000, 1999 and 1998, which statements
reflect total assets of US$584 million and US$569 million at December 31, 2000
and 1999, respectively, and total revenues of US$480 million, US$177 million and
US$222 million for 2000, 1999 and 1998, respectively. The financial statements
of these affiliates and subsidiaries were audited by other auditors whose
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts for these affiliates and subsidiaries, is
based solely on the reports of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
As discussed in Note 21 to the financial statements, the Company has made
changes in the application of certain accounting principles.
/S/ PRICEWATERHOUSECOOPERS
PRICEWATERHOUSECOOPERS
Auditores Independentes
Rio de Janeiro, Brazil
February 21, 2001, except for the accounting changes described in Note 21 and
the information on subsequent events contained in Note 22 which are as of
February 22, 2002 and March 9, 2001, respectively.
F-3
CONSOLIDATED BALANCE SHEETS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
AS OF
DECEMBER 31
----------------
2000 1999
------ ------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. 1,211 1,453
Accounts receivable
Related parties......................................... 125 107
Unrelated parties....................................... 365 350
Loans and advances to related parties..................... 121 93
Inventories............................................... 306 244
Deferred income tax....................................... 89 60
Others.................................................... 285 183
------ ------
2,502 2,490
Property, plant and equipment, net.......................... 3,955 3,943
Investments in affiliated companies and joint ventures and
other investments......................................... 2,216 1,707
Provision for losses and write-downs on equity
investments............................................... (421) (504)
OTHER ASSETS
Goodwill on acquisition of consolidated subsidiaries...... 175 --
Loans and advances
Related parties......................................... 704 601
Unrelated parties....................................... 52 66
Unrecognized pension obligation........................... 125 64
Deferred income tax....................................... 255 192
Judicial deposits......................................... 119 72
Others.................................................... 113 57
------ ------
TOTAL....................................................... 9,795 8,688
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Suppliers................................................. 321 251
Payroll and related charges............................... 51 48
Interest attributed to stockholders....................... 657 254
Current portion of long-term debt
Related parties......................................... 30 30
Unrelated parties....................................... 250 458
Short-term debt........................................... 465 690
Loans from related parties................................ 152 190
Others.................................................... 210 151
------ ------
2,136 2,072
------ ------
LONG-TERM LIABILITIES
Employees postretirement benefits......................... 591 314
Long-term debt
Related parties......................................... 128 121
Unrelated parties....................................... 1,892 1,200
Loans from related parties................................ 21 4
Provisions for contingencies (Note 15).................... 338 185
Others.................................................... 111 98
------ ------
3,081 1,922
------ ------
Minority interest........................................... 9 3
------ ------
STOCKHOLDERS' EQUITY
Preferred class A stock -- 600,000,000 no-par-value shares
authorized and 138,575,913 issued....................... 709 709
Common stock -- 300,000,000 no-par-value shares authorized
and 249,983,143 issued.................................. 1,279 1,279
Treasury stock -- 3,659,311 (1999 -- 3,659,311) preferred
and 7,300 common shares................................. (61) (61)
Additional paid-in capital................................ 498 498
Other cumulative comprehensive income..................... (3,040) (2,487)
Appropriated retained earnings............................ 3,537 3,567
Unappropriated retained earnings.......................... 1,647 1,186
------ ------
4,569 4,691
------ ------
TOTAL....................................................... 9,795 8,688
====== ======
See Notes to Consolidated Financial Statements.
F-4
CONSOLIDATED STATEMENTS OF INCOME
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues, net of discounts, returns and allowances
Sales of ores and metals
Iron ore and pellets................................... 2,177 1,694 1,930
Gold................................................... 156 155 168
Others................................................. 412 175 200
------- ------- -------
2,745 2,024 2,298
Revenues from transportation services..................... 760 642 848
Aluminum products......................................... 362 363 407
Other products and services............................... 202 128 105
------- ------- -------
4,069 3,157 3,658
Value-added tax........................................... (134) (81) (105)
------- ------- -------
Net operating revenues.................................... 3,935 3,076 3,553
------- ------- -------
Operating costs and expenses
Cost of ores and metals sold.............................. (1,423) (996) (1,348)
Cost of transportation services........................... (481) (368) (440)
Cost of aluminum products................................. (334) (323) (387)
Others.................................................... (191) (119) (97)
------- ------- -------
(2,429) (1,806) (2,272)
Selling, general and administrative expenses.............. (225) (138) (171)
Research and development.................................. (48) (27) (48)
Employee profit sharing plan.............................. (29) (24) (29)
Other..................................................... (220) (161) (179)
------- ------- -------
(2,951) (2,156) (2,699)
------- ------- -------
Operating income............................................ 984 920 854
------- ------- -------
Non-operating income (expenses)
Financial income.......................................... 208 200 394
Financial expenses........................................ (315) (233) (243)
Foreign exchange and monetary gains (losses), net......... (142) (213) (108)
Others.................................................... (4) (4) (5)
------- ------- -------
(253) (250) 38
------- ------- -------
Income before income taxes, equity results and minority
interests................................................. 731 670 892
------- ------- -------
Income taxes
Current................................................... (10) -- (28)
Deferred.................................................. 42 (33) 28
------- ------- -------
32 (33) --
------- ------- -------
Equity in results of affiliates and joint ventures.......... 260 41 80
Change in provision for losses and write-downs on equity
investments............................................... 62 (268) (273)
Minority interests.......................................... 1 2 (1)
------- ------- -------
Net income.................................................. 1,086 412 698
======= ======= =======
Basic earnings per Common Share............................. 2.82 1.07 1.80
------- ------- -------
Basic earnings per Preferred Class A Share.................. 2.82 1.07 1.80
------- ------- -------
Weighted average number of shares outstanding (thousands of
shares)
Common shares............................................. 249,983 249,983 249,983
Preferred Class A shares.................................. 134,917 134,917 137,965
See Notes to Consolidated Financial Statements
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
YEAR ENDED DECEMBER 31
------------------------
2000 1999 1998
------ ----- -----
Cash flows from operating activities:
Net income................................................ 1,086 412 698
Adjustments to reconcile net income with cash provided by
operating activities:
Depreciation, depletion and amortization................ 195 163 231
Equity in results of affiliates and joint ventures, net
of dividends received.................................. (127) 23 36
Change in provision for losses and write-downs on equity
investments............................................ (62) 268 273
Deferred income taxes................................... (42) 33 (28)
Provisions for contingencies............................ 101 57 78
Loss on disposals of property, plant and equipment...... 47 23 64
Gain on Alunorte/MRN transaction........................ (54) -- --
Pension plan............................................ 105 55 88
Foreign exchange and monetary losses.................... 208 399 135
Others.................................................. 54 61 (50)
Decrease (increase) in assets:
Accounts receivable..................................... (63) (135) (69)
Inventories............................................. (50) (6) (58)
Others.................................................. (103) (25) (2)
Increase (decrease) in liabilities:
Suppliers............................................... 84 49 (2)
Payroll and related charges............................. (1) 2 (20)
Others.................................................. 46 (43) (2)
------ ----- -----
Net cash provided by operating activities................. 1,424 1,336 1,372
------ ----- -----
Cash flows from investing activities:
Loans and advances receivable
Related parties
Additions............................................. (168) (202) (399)
Repayments............................................ 32 42 230
Others................................................ 8 5 6
Guarantees and deposits................................... (98) (4) (47)
Additions to investments.................................. (538) (49) (36)
Additions to property, plant and equipment................ (447) (265) (412)
Proceeds from disposal of property, plant and equipment... 1 1 12
Proceeds from disposal of investments..................... 44 -- --
Net cash used to acquire subsidiaries..................... (323) -- --
Others.................................................... -- 3 15
------ ----- -----
Net cash used in investing activities..................... (1,489) (469) (631)
------ ----- -----
Cash flows from financing activities:
Short-term debt, net issuances............................ (278) (110) 60
Loans
Related parties
Additions............................................. 8 223 46
Repayments............................................ (42) (42) (38)
Perpetual notes........................................... 120 -- --
Long-term debt
Related parties......................................... 62 60 38
Unrelated parties....................................... 750 175 288
Repayments of long-term debt
Related parties......................................... (25) (48) (87)
Unrelated parties....................................... (419) (299) (239)
Interest attributed to stockholders....................... (246) (452) (607)
Treasury stock............................................ -- -- (36)
------ ----- -----
Net cash used in financing activities..................... (70) (493) (575)
------ ----- -----
Increase (decrease) in cash and cash equivalents.......... (135) 374 166
Effect of exchange rate changes on cash and cash
equivalents............................................. (107) (110) (85)
Cash and cash equivalents, beginning of year.............. 1,453 1,189 1,108
------ ----- -----
Cash and cash equivalents, end of year.................... 1,211 1,453 1,189
====== ===== =====
Cash paid during the year for:
Interest on short-term debt............................. (48) (55) (68)
Interest on long-term debt, net of interest capitalized
of $12 in 2000, $12 in 1999 and $23 in 1998............ (128) (107) (98)
Income tax.............................................. (6) -- --
Non-cash transactions
Exchange of loans receivable for investments............ 7 241 240
Transfer of credits from related parties at fair
value.................................................. -- 126 --
See Notes to Consolidated Financial Statements
F-6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-------------------------------------
SHARES 2000 1999 1998
----------- ------ ------ -----
Preferred class A stock (including one special share)
Balance January 1, 2000, 1999 and 1998.................... 138,575,913 709 642 468
Transfer from appropriated retained earnings.............. -- -- 67 174
----------- ------ ------ -----
Balance December 31, 2000, 1999 and 1998.................. 138,575,913 709 709 642
----------- ------ ------ -----
Common stock
Balance January 1, 2000, 1999 and 1998.................... 249,983,143 1,279 1,159 845
Transfer from appropriated retained earnings.............. -- -- 120 314
----------- ------ ------ -----
Balance December 31, 2000, 1999 and 1998.................. 249,983,143 1,279 1,279 1,159
----------- ------ ------ -----
Treasury stock
Balance January 1......................................... (1,347,500) (61) (61) (25)
Acquisitions in 1998...................................... (2,311,500) -- -- (36)
Acquisitions in 1999...................................... (311) -- -- --
Acquisitions in 2000...................................... (7,300) -- -- --
----------- ------ ------ -----
Balance December 31....................................... (3,666,611) (61) (61) (61)
----------- ------ ------ -----
Additional paid-in capital
Balance January 1 and December 31......................... 498 498 498
------ ------ -----
Other cumulative comprehensive income
Amounts not recognized as net periodic pension cost
Balance January 1....................................... -- (153) (77)
Excess of additional minimum liability.................. (151) 229 (115)
Tax effect on above..................................... 51 (76) 39
------ ------ -----
Balance December 31..................................... (100) -- (153)
------ ------ -----
Cumulative translation adjustments
Balance January 1....................................... (2,513) (731) (218)
Change in the year...................................... (459) (1,804) (517)
------ ------ -----
Balance December 31..................................... (2,972) (2,535) (735)
------ ------ -----
Unrealized gain on available-for-sale securities
Balance January 1....................................... 54 30 --
Unrealized gain (loss) in the year...................... (30) 24 30
------ ------ -----
Balance December 31..................................... 24 54 30
------ ------ -----
Adjustments relating to investments in affiliates
Balance January 1....................................... (6) (7) --
Change in adjustments relating to investments in
affiliates............................................ 14 1 (7)
------ ------ -----
Balance December 31..................................... 8 (6) (7)
------ ------ -----
Total other cumulative comprehensive income................. (3,040) (2,487) (865)
------ ------ -----
Appropriated retained earnings
Balance January 1....................................... 3,567 5,212 5,806
Transfer to retained earnings........................... (30) (1,458) (106)
Transfer to capital stock............................... -- (187) (488)
------ ------ -----
Balance December 31..................................... 3,537 3,567 5,212
------ ------ -----
Retained earnings
Balance January 1......................................... 1,186 (193) (391)
Net income.............................................. 1,086 412 698
Interest attributed to stockholders
Preferred class A stock ($1.70, $1.28 and $1.58 per
share in 2000, 1999 and 1998)....................... (230) (172) (212)
Common stock ($1.70, $1.28 and $1.58 per share in
2000, 1999 and 1998).............................. (425) (319) (394)
Appropriation from reserves............................. 30 1,458 106
------ ------ -----
Balance December 31....................................... 1,647 1,186 (193)
----------- ------ ------ -----
Total stockholders' equity.................................. 384,892,445 4,569 4,691 6,392
=========== ====== ====== =====
Comprehensive income is comprised as follows:
Net income................................................ 1,086 412 698
Amounts not recognized as net period pension cost......... (100) 153 (76)
Cumulative translation adjustments........................ (459) (1,804) (517)
Unrealized gain (loss) on available-for-sale securities... (30) 24 30
Adjustments relating to investments in affiliates......... 14 1 (7)
------ ------ -----
Total comprehensive income (loss)........................... 511 (1,214) 128
====== ====== =====
See Notes to Consolidated Financial Statements
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
1. THE COMPANY AND ITS OPERATIONS
Companhia Vale do Rio Doce (CVRD) is a limited liability company, duly
organized and existing under the laws of the Federative Republic of Brazil. Our
operations are carried out through CVRD and its subsidiary companies, joint
ventures and affiliates, and mainly consist of mining, non-ferrous metal
production and logistics, as well as pulp and paper, aluminum and steel
activities. Further details of our operations and those of our joint ventures
and affiliates are described in Note 16.
The main operating subsidiaries we consolidate are as follows:
HEAD OFFICE
SUBSIDIARY % OWNERSHIP LOCATION PRINCIPAL ACTIVITY
---------- ----------- ------------- ---------------------
S.A. Mineracao da Trindade -- SAMITRI....... 100 Brazil Iron ore and pellets
Para Pigmentos S.A. ........................ 76 Brazil Kaolin
SIBRA -- Eletrosiderurgica Brasileira
S.A....................................... 98 Brazil Ferrous alloys
Navegacao Vale do Rio Doce S.A. --
DOCENAVE.................................. 100 Brazil Shipping
Vale do Rio Doce Aluminio S.A. -- ALUVALE... 100 Brazil Aluminum
Itabira Rio Doce Company Ltd. -- ITACO...... 100 Cayman Trading
Islands
Rio Doce International Finance
Ltd. -- RDIF.............................. 100 Bahamas International finance
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In preparing the consolidated financial statements, we are required to use
estimates to account for certain assets, liabilities, revenues and expenses. Our
consolidated financial statements therefore include various estimates concerning
the selection of useful lives of property, plant and equipment, provisions
necessary for contingent liabilities, fair values assigned to assets and
liabilities acquired in business combinations, income tax valuation allowances,
employee postretirement benefits and other similar evaluations; actual results
may vary from our estimates.
(a) BASIS OF PRESENTATION
We have prepared the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP"), which differ in certain respects from the Brazilian accounting
principles that we use in preparing our statutory financial information.
The U.S. dollar amounts for the years presented have been remeasured
(translated) from the Brazilian currency amounts in accordance with the criteria
set forth in Statement of Financial Accounting Standards 52 -- "Foreign Currency
Translation" (SFAS 52).
Prior to July 1, 1997, Brazil was considered under SFAS 52 to have a highly
inflationary economy, defined as an economy in which the cumulative inflation
rate over the latest thirty-six month period has exceeded 100%. Accordingly, up
to June 30, 1997, we adopted the U.S. dollar as both our functional currency and
reporting currency.
As from July 1, 1997, we concluded that the Brazilian economy had ceased to
be highly inflationary and changed our functional currency from the reporting
currency (U.S. dollars) to the local currency (Brazilian reais). Accordingly, at
July 1, 1997, we translated the U.S. dollar amounts of non-monetary assets and
liabilities into reais at the current exchange rate, and those amounts became
the new accounting bases for such assets and liabilities. The resulting deferred
taxes associated with the differences between the new functional currency bases
and the tax bases, including those relating to affiliates and joint
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
ventures, net of related valuation allowances, were reflected in the cumulative
translation adjustments component of stockholders' equity.
We have remeasured all assets and liabilities into U.S. dollars at the
current exchange rate at each balance sheet date (R$1.9554 and R$1.7890 to
US$1.00 at December 31, 2000 and 1999, respectively), and all accounts in the
statements of income (including amounts relative to local currency indexation
and exchange variances on assets and liabilities denominated in foreign
currency) at the average rates prevailing during the year. The translation gain
or loss resulting from this remeasurement process is included in the cumulative
translation adjustments account in stockholders' equity.
The net transaction loss included in our statement of income was $115, $265
and $114 in 2000, 1999 and 1998, respectively.
(b) BASIS OF CONSOLIDATION
All majority-owned subsidiaries where we have both share and management
control are consolidated, with elimination of all significant intercompany
accounts and transactions. Investments in unconsolidated affiliates and joint
ventures are reported at cost less amortized goodwill plus our equity in
undistributed earnings or losses. Included in this category are certain joint
ventures in which we have majority ownership but, by force of shareholders'
agreements, do not have effective management control. We provide for losses on
equity investments with negative stockholders' equity and for other than
temporary decreases in market value below carrying value where applicable (see
Notes 10 and 21).
We evaluate the carrying value of our listed equity investments as at year
end, relative to publicly available quoted market prices. If the quoted market
price is below book value and such decline is considered other than temporary,
we write-down our equity investments to quoted market value.
We define joint ventures as businesses in which we and a small group of
other partners each participate actively in the overall management thereof,
based on a shareholders agreement. We define affiliates as businesses in which
we participate as a minority stockholder but with significant influence over the
operating and financial policies of the investee.
(c) BUSINESS COMBINATIONS
We adopt the procedures determined by Accounting Principles Board Opinion
16 -- "Business Combinations" (APB 16) to recognize acquisitions of interests in
other companies. The method of accounting normally used in our business
combination transactions is the "purchase method", which requires that acquirers
reasonably determine the fair value of the identifiable assets and liabilities
of acquired companies, individually, in order to determine the goodwill paid in
the purchase to be recognized as an intangible asset. On the acquisition of
assets which include the rights to mine reserves of natural resources, the
establishment of values for these assets includes the placing of fair values on
purchased reserves, which are classified in the balance sheet as property, plant
and equipment.
Goodwill recorded in our business combination transactions is amortized in
a systematic manner over the periods estimated to be benefited.
(d) INVENTORIES
Inventories are stated at the average cost of purchase or production, lower
than replacement or realizable values. We record allowances for slow-moving or
obsolete inventories when considered appropriate, reflecting our periodic
assessment of recoverability. A write-down of inventory utilizing the allowance
establishes a new cost basis for the related inventory.
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
Finished goods inventories include all related materials, labor and direct
production expenditures, and exclude general and administrative expenses.
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, including interest cost
incurred during the construction of major new facilities. We compute
depreciation on the straight-line basis at rates which take into consideration
the useful lives of the items, principally an average of 80 years for the
railroads, 20 years for ships, 25 years for buildings and improvements and
between 10 to 20 years for mining and other equipment. Expenditures for
maintenance and repairs are charged to operating costs and expenses as incurred.
We capitalize the costs of developing major new ore bodies or expanding the
capacity of operating mines and amortize these to operations on the
unit-of-production method based on the total probable and proven quantity of ore
to be recovered. Exploration costs are expensed until viability of mining
activities is established; subsequently such costs are capitalized together with
further exploration costs. We capitalize mine development costs as from the time
we actually begin such development.
(f) AVAILABLE-FOR-SALE EQUITY SECURITIES
Equity securities classified as "available-for-sale" are recorded in
accordance with SFAS 115 "Accounting for Certain Investments in Debt and Equity
Securities". Accordingly, we exclude unrealized holding gains and losses, net of
taxes, if applicable, from income and recognize them as a separate component of
stockholders' equity until realized.
(g) REVENUES AND EXPENSES
Revenues are recognized when title has transferred to the customer or
services are rendered. Expenses and costs are recognized on the accrual basis.
Revenue from exported products is recognized when such products are loaded on
board the ship. Revenue from products sold in the domestic market is recognized
when delivery is made to the customer. Revenue from transportation services,
other than shipping operations, is recognized when the service order has been
fulfilled. Shipping operations are recorded on the completed voyage basis and
net revenue, costs and expenses of voyages not completed at period-end are
deferred. Anticipated losses on voyages are provided when probable and can be
reasonably estimated.
(h) ENVIRONMENTAL AND SITE RECLAMATION AND RESTORATION COSTS
Expenditures relating to ongoing compliance with environmental regulations
are charged against earnings or capitalized as appropriate. These ongoing
programs are designed to minimize the environmental impact of our activities.
With respect to our two major iron ore mines at Itabira and Carajas, which have
extensive remaining reserves, liabilities for final site reclamation and
restoration costs will be recorded when the respective reclamation and
restoration strategies can be reasonably determined and the related costs can be
reasonably estimated. At December 31, 2000 we have recorded provisions of $14.
(i) COMPENSATED ABSENCES
We fully accrue the liability for future compensation to employees for
vacations vested during the year.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
(j) INCOME TAXES
In accordance with SFAS 109 "Accounting for Income Taxes", the deferred tax
effects of temporary differences have been recognized in the consolidated
financial statements. A valuation allowance is made when we believe that it is
more likely than not that tax assets will not be fully recoverable in the
future.
(k) Statement of Cash Flows
Cash flows relating to overnight financing and investment are reported net.
Short-term investments that have a ready market and maturity to us, when
purchased, of 90 days or less are considered cash equivalents.
In 2000, dividends of $133 received from equity method affiliates and joint
ventures have been netted against the equity in results of these entities in the
statement of cash flows. For comparative purposes dividends received in 1999 and
1998 of $64 and $116, respectively, have been reclassified from investing
activities to reflect the same presentation.
(l) Earnings Per Share
Earnings per share are computed by dividing net income by the weighted
average number of common and preferred shares outstanding during the year.
(m) Interest Attributed to Stockholders
As from January 1, 1996 Brazilian corporations are permitted to attribute
interest on stockholders' equity. The calculation is based on the stockholders'
equity amounts as stated in the statutory accounting records and the interest
rate applied may not exceed the long-term interest rate (TJLP) determined by the
Brazilian Central Bank. Also, such interest may not exceed the greater of 50% of
net income for the year or 50% of retained earnings plus revenue reserves.
The amount of interest attributed to stockholders is deductible for income
tax purposes. Accordingly, the benefit to us, as opposed to making a dividend
payment, is a reduction in our income tax charge equivalent to the statutory tax
rate applied to such amount. Income tax is withheld from the stockholders
relative to interest at the rate of 15%, except for interest due to the
Brazilian Government which is exempt from tax withholdings.
We have opted to pay such tax-deductible interest to our stockholders and
have therefore accrued the amounts due as of December 31, 2000 and 1999, with a
direct charge to stockholders' equity.
Under Brazilian law interest attributable to stockholders is considered as
part of the annual minimum dividend (See Note 13). Accordingly such
distributions are treated as dividends for accounting purposes.
(n) Accounting for Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 -- Accounting for Derivative
Financial Instruments and Hedging Activities (SFAS 133). The standard, as
amended by SFAS 137 -- Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB 133, and amendment of FASB
Statement No. 133 and SFAS 138 -- Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement No. 133 (referred
to hereafter as "FAS 133"), is effective for us as from January 1, 2001. FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or in other comprehensive income, depending on
whether the derivative is designated as part of a hedge transaction and, if it
is, depending on the type of hedge relationship. The ineffective portion of all
hedges
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
is recognized in current period earnings. We currently believe that the initial
impact of the adoption of SFAS 133 will not be significant.
(o) Comprehensive Income
We have disclosed comprehensive income as part of the Statement of Changes
in Stockholders' Equity, in compliance with SFAS 130 -- "Reporting Comprehensive
Income".
3. OUR PRIVATIZATION
In May 1997, we were privatized by the Brazilian Government, which
transferred voting control to Valepar S.A. ("Valepar"). The Brazilian Government
has retained certain rights with respect to our future decisions and those of
Valepar and has also caused us to enter into agreements which may affect our
activities and results of operations in the future. These rights and agreements
are:
- Preferred Special Share. The Brazilian Government holds a preferred
special share of CVRD which confers upon it permanent veto rights over
changes in our (i) name, (ii) headquarters location, (iii) corporate
purpose with respect to mineral exploration, (iv) continued operation of
our integrated iron ore mining systems and (v) certain other matters.
- Preferred Class A Share of Valepar. The Brazilian Government holds a
preferred class A share of Valepar which confers upon it approval rights
for a period of five years in respect of (i) concentration of ownership
of Valepar by particular types of investors in excess of prescribed
limitations and (ii) changes in the Valepar holding company structure
relating to ownership of our common shares.
- Shareholder revenue interests. On July 7, 1997, we issued to
shareholders of record on April 18, 1997 (including the Brazilian
Government) revenue interests providing holders thereof with the right to
receive semi-annual payments based on a percentage of our net revenues
above threshold production volumes from identified mining resources.
These instruments are not secured by the corresponding mineral reserves
and deposits.
In addition to the preferred special share mentioned above, the National
Treasury and the Banco Nacional de Desenvolvimento Economico e Social - BNDES,
the Government-owned development bank, together currently own 32% of our common
shares and 4% of our preferred shares, which in aggregate represents 22% of our
total capital.
4. MAJOR ACQUISITIONS
We made the following acquisitions during the year ended December 31, 2000.
Pro forma information with respect to results of operations is not presented
since the effects are not considered material to an understanding of our
consolidated financial statements.
(a) On May 11, 2000, we acquired the entire capital of Mineracao
SOCOIMEX S.A., a non-public company whose main activity is production and
commercialization of iron ore, for the total price of $55, being an initial
cash payment of $47 and two further cash payments of $3 and $5, in 2001 and
2002, respectively, plus interest based on 89% of the Brazilian Interbank
Rate through the payment date. The increment of the fair value over the
book value of SOCOIMEX at the date of purchase was entirely attributable to
its mineral reserves, which are included in the property, plant and
equipment. In August 2000 SOCOIMEX was merged into CVRD.
(b) On May 30, 2000, we acquired 4,026,694,190 common shares and
4,231,324,374 preferred shares of S.A. Mineracao Trindade -- SAMITRI,
representing 79.27% of the voting capital and 63.06% of the total capital
for $520 in cash: becoming the controlling stockholder. At the date of the
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
purchase, SAMITRI was a publicly listed Brazilian iron ore mining company,
which also owned a 51% interest in the voting capital of SAMARCO Mineracao
S.A., a large iron ore pellets producer (see Note 10). On June 29, 2000, we
sold 1% of the share capital of SAMARCO to BHP Brasil Ltda. (BHP), a
subsidiary of The Broken Hill Proprietary Company Limited of Australia, for
$8, to equalize our shareholdings in the joint venture.
(c) The assets and liabilities acquired as a result of the above
transactions and corresponding goodwill were as follows:
UNCONSOLIDATED {CONSOLIDATED SUBSIDIARIES}
JOINT VENTURE ----------------------------
SAMARCO SAMITRI SOCOIMEX
-------------- ------------ -------------
Fair value of assets............................... 1,006 293 77
Fair value of liabilities.......................... (450) (144) (22)
----- ----- ------
Net assets at fair value........................... 556 149 55
----- ----- ------
Interest acquired.................................. 50.00% 63.06% 100.00%
Fair value of net assets acquired.................. 278 94 55
Attributable to minority stockholders of SAMITRI
(36.94%)......................................... (103) -- --
Tax benefits....................................... 31 -- --
----- ----- ------
Effective interest acquired........................ 206 94 55
Purchase price..................................... 252 268 55
----- ----- ------
Goodwill........................................... 46 174 --
===== ===== ======
The main assets for which fair values differ from book values are
inventories and property, plant and equipment. We determined the fair
values of inventories based on the current replacement costs for raw
materials and the estimated selling prices for finished goods, net of
disposal costs and a selling margin. The fair values of property, plant and
equipment were determined based on current replacement costs for similar
capacity and the estimated market value of purchased reserves. Deferred
taxes were recorded for the differences between fair values and tax bases.
For SAMARCO, SAMITRI and SOCOIMEX inventories were valued at $36, $38
and $9, respectively, property, plant and equipment were valued at $830,
$161 and $58, respectively, and the deferred tax liability was $60, $49 and
$15, respectively.
We amortize the goodwill on the SAMITRI and SAMARCO purchases on the
straight-line basis over a period of 6 years starting on the date of
acquisition.
(d) On September 22, 2000 we acquired via public tender a further
1,014,529,197 common shares and 3,716,344,366 preferred shares of SAMITRI
bringing our ownership to 99.25% of the voting capital and 99.19% of the
total capital. The cash cost of this purchase was $180 and resulted in
additional goodwill of $27, all attributed to SAMARCO.
(e) In October 2000, we acquired 50% of Gulf Industrial Investment
Company (GIIC), a pelletizing company located in Bahrain, for $91,
including goodwill of $20.
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
5. INCOME TAXES
Income taxes in Brazil comprise federal income tax and social contribution,
which is an additional federal tax. The statutory enacted tax rates applicable
in the years presented are as follows:
YEAR ENDED DECEMBER 31 -- %
-------------------------------
2000 1999 1998
-------------- -------------- -----
Federal income tax............................. 25.00 25.00 25.00
Social contribution(*)......................... 9.00 to 12.00 8.00 to 12.00 8.00
-------------- -------------- -----
Composite tax rate............................. 34.00 to 37.00 33.00 to 37.00 33.00
============== ============== =====
---------------
(*) As from May 1, 1999 through January 31, 2000, the social contribution rate
has been increased from 8% to 12% (not enacted). Pursuant to a provisional
measure, which is valid only for 30 days unless approved by the Congress,
the social contribution rate will be 9% from February 1, 2000 to December
31, 2002 and will be reduced to 8% as from January 1, 2003. Since the
provisional measure is not enacted, the social contribution rate of 8% was
used to calculate deferred taxes at December 31, 2000.
The amount reported as income tax expense in these consolidated financial
statements is reconciled to the statutory rates as follows:
YEAR ENDED DECEMBER 31
------------------------
2000 1999 1998
------ ------ ------
Income before income taxes, equity results, provision for
losses on equity investments and minority interests....... 731 670 892
==== ==== ====
Federal income tax and social contribution expense at
statutory not enacted rates............................... (249) (248) (294)
Adjustments to derive effective tax rate:
Tax benefit on interest attributed to stockholders........ 222 181 200
Tax incentives............................................ 31 -- --
Exempt foreign income (losses)............................ 69 (4) 23
Impairment write-downs on investments..................... -- -- 96
Valuation allowance reversal (provision).................. (51) 37 (2)
Other non-taxable gains (loss)......................... 10 1 (23)
---- ---- ----
Federal income tax and social contribution benefit (expense)
in consolidated financial statements...................... 32 (33) --
==== ==== ====
In 2000, we obtained government approval of certain tax incentives relative
to our iron ore and manganese operations in Carajas. The incentives comprise
full income tax exemption on defined production levels up to 2005 and partial
exemption thereafter up to 2013. An amount equal to the tax saving must be
appropriated to a reserve account within stockholders' equity (Note 13) and may
not be distributed in the form of cash dividends.
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
The major components of the deferred tax accounts in the balance sheet are
as follows:
AS OF
DECEMBER 31
-----------
2000 1999
---- ----
Net current deferred tax assets
Accrued expenses deductible only when disbursed........... 89 58
Tax loss carryforwards................................. -- 2
---- ----
89 60
==== ====
Long-term deferred tax
Assets
Deferred tax relative to temporary differences :
Established on the July 1, 1997 change in functional
currency, less reversals............................... 16 23
Relative to investments acquired.......................... 15 --
Tax-deductible goodwill in business combinations............ 103 --
Write-downs of investments.................................. 61 76
Additional retirement benefits provision, net of
unrecognized pension obligation........................... 158 84
Tax loss carryforwards...................................... 190 214
Other temporary differences................................. 6 1
---- ----
549 398
---- ----
Liabilities
Inflationary income......................................... (32) (28)
Fair value adjustments in business combinations............. (61) --
---- ----
(93) (28)
---- ----
Valuation allowance
Beginning balance........................................... (178) (54)
Translation adjustments..................................... 15 17
Additions................................................... (51) --
Valuation allowance of ferro alloys subsidiaries............ 13 (158)
Reversals................................................... -- 17
---- ----
Ending balance.............................................. (201) (178)
---- ----
Net long-term deferred tax assets........................... 255 192
==== ====
6. CASH AND CASH EQUIVALENTS
AS OF
DECEMBER 31
-------------
2000 1999
----- -----
Cash........................................................ 28 20
Deposits in local currency.................................. 694 338
Deposits in United States dollars........................... 489 1,095
----- -----
1,211 1,453
===== =====
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
7. ACCOUNTS RECEIVABLE
AS OF
DECEMBER 31
-----------
2000 1999
---- ----
Customers
Domestic.................................................. 198 195
Export, all denominated in United States dollars.......... 312 280
--- ---
510 475
Allowance for doubtful accounts............................. (14) (13)
Allowance for ore weight credits............................ (6) (5)
--- ---
Total....................................................... 490 457
=== ===
Accounts receivable from customers in the steel industry amount to 16.3%
and 14.5% of domestic receivables (export receivables -- 78.8% and 80.8%) at
December 31, 2000 and 1999, respectively. No single customer accounted for more
than 10% of total revenues in any of the years presented.
8. INVENTORIES
AS OF
DECEMBER 31
-----------
2000 1999
---- ----
Finished products
Iron ore.................................................. 100 57
Gold...................................................... 4 9
Manganese................................................. 7 22
Ferro alloys.............................................. 32 31
Others.................................................... 34 20
Spare parts and maintenance supplies........................ 129 105
--- ---
306 244
=== ===
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT
a) Per Business Area:
AS OF DECEMBER 31, 2000 AS OF DECEMBER 31, 1999
---------------------------- ----------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION NET COST DEPRECIATION NET
----- ------------ ----- ----- ------------ -----
Ferrous
Ferrous -- Southern System
Mining............................ 1,096 533 563 969 560 409
Railroads......................... 1,022 513 509 1,110 574 536
Marine terminals.................. 157 102 55 184 115 69
----- ----- ----- ----- ----- -----
2,275 1,148 1,127 2,263 1,249 1,014
Ferrous -- Northern System
Mining............................ 691 310 381 783 333 450
Railroads......................... 1,206 439 767 1,289 457 832
Marine terminals.................. 222 108 114 229 112 117
----- ----- ----- ----- ----- -----
2,119 857 1,262 2,301 902 1,399
Pelletizing....................... 194 123 71 190 125 65
Ferro alloys...................... 278 140 138 295 152 143
Energy............................ 77 4 73 81 2 79
Construction in progress.......... 406 -- 406 250 -- 250
----- ----- ----- ----- ----- -----
5,349 2,272 3,077 5,380 2,430 2,950
----- ----- ----- ----- ----- -----
Non-Ferrous
Potash............................... 47 16 31 48 14 34
Gold................................. 295 132 163 323 134 189
Kaolin............................... 91 12 79 153 18 135
Research and projects................ 19 10 9 21 10 11
Construction in progress............. 43 -- 43 31 -- 31
----- ----- ----- ----- ----- -----
495 170 325 576 176 400
----- ----- ----- ----- ----- -----
Logistics
General cargo........................ 349 173 176 371 177 194
Maritime transportation.............. 351 167 184 361 158 203
Construction in progress............. 14 -- 14 7 -- 7
----- ----- ----- ----- ----- -----
714 340 374 739 335 404
----- ----- ----- ----- ----- -----
Holdings
Pulp and paper....................... 175 26 149 191 33 158
----- ----- ----- ----- ----- -----
Corporate Center
Corporate............................ 41 15 26 35 14 21
Construction in progress............. 4 -- 4 10 -- 10
----- ----- ----- ----- ----- -----
45 15 30 45 14 31
----- ----- ----- ----- ----- -----
Total.................................. 6,778 2,823 3,955 6,931 2,988 3,943
===== ===== ===== ===== ===== =====
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
b) PER TYPE OF ASSETS:
AS OF DECEMBER 31, 2000 AS OF DECEMBER 31, 1999
---------------------------- ----------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION NET COST DEPRECIATION NET
----- ------------ ----- ----- ------------ -----
Land and buildings..................... 824 289 535 899 317 582
Installations.......................... 1,634 885 749 1,806 976 830
Equipment.............................. 597 290 307 519 259 260
Ships.................................. 348 165 183 358 156 202
Railroads.............................. 1,741 770 971 2,043 947 1,096
Mine development costs................. 326 83 243 303 64 239
Others................................. 841 341 500 705 269 436
----- ----- ----- ----- ----- -----
6,311 2,823 3,488 6,633 2,988 3,645
Construction in progress............... 467 -- 467 298 -- 298
----- ----- ----- ----- ----- -----
Total.................................. 6,778 2,823 3,955 6,931 2,988 3,943
===== ===== ===== ===== ===== =====
Losses on disposals of property, plant and equipment totaled $47, $23 and
$64 in 2000, 1999 and 1998, respectively. In 2000 and 1999, disposals mainly
relate to sales of trucks, locomotives and other equipment which were replaced
in the normal course of business. In 1998, additional losses of $28 were
incurred with respect to closure of the Serra Leste gold mine and $13 on sale of
two ships.
10. INVESTMENTS
AS OF DECEMBER 31
----------------------------------------------------------------------------------
2000 INVESTMENTS EQUITY ADJUSTMENTS
--------------------------------------------- ------------- ------------------
NET INCOME
PARTICIPATION IN NET (LOSS) FOR
CAPITAL(%) EQUITY(1) THE YEAR(1) 2000 1999 2000 1999 1998
----------------- --------- ------------- ----- ----- ---- ---- ----
VOTING TOTAL
------- -------
Investments in Affiliated
Companies and Joint Ventures
STEEL
Usinas Siderurgicas de Minas
Gerais SA --
USIMINAS(2)............... 22.99 11.46 1,213 61 225 255 7 (13) 10
Companhia Siderurgica
Nacional -- CSN(3)(7)..... 10.33 10.33 1,621 129 167 134 13 3 39
Companhia Siderurgica de
Tubarao -- CST(4)......... 20.51 22.85 1,096 100 250 233 22 (5) 19
California Steel Industries
Inc -- CSI................ 50.00 50.00 238 34 119 110 17 22 14
PAPER AND PULP
Celulose Nipo-Brasileira
SA -- CENIBRA............. 50.67 51.48 407 129 210 177 66 (4) 6
Bahia-Sul Celulose
SA -- BSC................. 50.00 32.00 506 131 162 141 42 13 (28)
ALUMINUM AND BAUXITE
Mineracao Rio do Norte SA --
MRN....................... 40.00 40.00 383 91 153 145 36 10 28
Valesul Aluminio SA --
VALESUL................... 54.51 54.51 80 21 44 41 12 -- 16
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
AS OF DECEMBER 31
----------------------------------------------------------------------------------
2000 INVESTMENTS EQUITY ADJUSTMENTS
--------------------------------------------- ------------- ------------------
NET INCOME
PARTICIPATION IN NET (LOSS) FOR
CAPITAL(%) EQUITY(1) THE YEAR(1) 2000 1999 2000 1999 1998
----------------- --------- ------------- ----- ----- ---- ---- ----
VOTING TOTAL
------- -------
Aluminio Brasileiro SA --
ALBRAS.................... 51.00 51.00 -- -- -- -- -- -- (25)
Alumina do Norte do Brasil
SA -- ALUNORTE............ 50.28 49.29 102 23 80 105 11 -- --
PELLETS
Companhia Nipo-Brasileira de
Pelotizacao -- NIBRASCO... 51.11 51.00 54 22 28 39 11 10 11
Companhia Hispano-Brasileira
de Pelotizacao --
HISPANOBRAS............... 51.00 50.89 42 17 21 21 9 7 9
Companhia Coreano Brasileira
de Pelotizacao --
KOBRASCO.................. 50.00 50.00 24 3 12 12 2 (11) (5)
Companhia Italo-Brasileira
de
Pelotizacao -- ITABRASCO.. 51.00 50.90 32 13 16 17 7 7 5
Gulf Industrial Investment
Company -- GIIC........... 50.00 50.00 186 2 93 -- 1 -- --
SAMARCO Mineracao SA........ 50.00 50.00 519 30 318 -- 8 -- --
OTHERS
Fertilizantes Fosfatados
SA -- FOSFERTIL(6)........ 10.96 10.96 281 48 31 33 5 7 6
Salobo Metais SA(5)......... 50.00 50.00 50 -- 25 27 -- -- --
Ferrovia Centro-Atlantica
SA -- FCA................. 20.00 45.65 131 (67) 82 -- (30) -- 0
Vale Usiminas Participacoes
SA -- VUPSA(8)............ -- -- -- -- -- (15)
Para Pigmentos SA(8)........ -- -- -- -- -- (8)
Others...................... 131 111 21 (5) (2)
----- ----- --- ---- ----
2,167 1,601 260 41 80
Investments at cost
ACOMINAS.................... 2.28 2.28 -- 29 -- -- --
SIDERAR (market value $42 in
2000 -- $69 in 1999)...... 4.85 4.85 15 15 -- -- --
Unrealized holding gains on
equity security........... 27 54 -- -- --
Others...................... 7 8 -- -- --
----- ----- --- ---- ----
2,216 1,707 260 41 80
===== ===== === ==== ====
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
AS OF DECEMBER 31
----------------------------------------------------------------------------------
2000 INVESTMENTS EQUITY ADJUSTMENTS
--------------------------------------------- ------------- ------------------
NET INCOME
PARTICIPATION IN NET (LOSS) FOR
CAPITAL(%) EQUITY(1) THE YEAR(1) 2000 1999 2000 1999 1998
----------------- --------- ------------- ----- ----- ---- ---- ----
VOTING TOTAL
------- -------
Change in provision for losses
and write-downs on equity
investments:
Usinas Siderurgicas de Minas
Gerais S.A. --
USIMINAS(2)............... -- -- (174)
Companhia Siderurgica de
Tubarao -- CST(4)......... -- -- (120)
Para Pigmentos SA(8)........ -- (15) --
Cia Ferroviaria do
Nordeste.................. (4) (4) --
Vale Usiminas Participacoes
S.A. -- VUPSA(8).......... -- (56) --
Aluminio Brasileiro S.A. --
ALBRAS.................... 66 (104) --
Alumina do Norte do Brasil
S.A. -- ALUNORTE.......... -- (89) 21
--- ---- ----
62 (268) (273)
=== ==== ====
---------------
(1) Based on US GAAP financial statements.
(2) Value based on quoted market price at December 31, 2000 is $75 compared to
net book value of $40.
(3) Value based on quoted market price at December 31, 2000 is $218.
(4) Value based on quoted market price at December 31, 2000 is $129 compared to
net book value of $35.
(5) Development state enterprises.
(6) Value based on quoted market price at December 31, 2000 is $47.
(7) In 2000, based on September 30 financial statements.
(8) Consolidated as from 1999 upon increase in ownership to over 50%.
Goodwill included in the above investments is as follows:
AS OF
ORIGINAL TERM REMAINING DECEMBER 31
OF AMORTIZATION AMORTIZATION -----------
INVESTEE (YEARS) (YEARS) 2000 1999
-------- ---------------- ------------ ---- ----
Alumina do Norte do Brasil S.A. -- ALUNORTE... 35 35 30 78
SAMARCO Mineracao S.A......................... 6 5 59 --
Ferrovia Centro-Atlantica S.A. -- FCA......... 30 26 22 --
Gulf Industrial Investment Company -- GIIC.... 20 20 20 --
--- ---
131 78
=== ===
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
The combined financial position and results of operations of the Company's
affiliates in the steel sector is as follows:
STEEL SECTOR
AFFILIATES
(COMBINED)
AS OF DECEMBER 31
-----------------
2000 1999
------- -------
Balance sheet
Current assets.............................................. 3,094 3,013
Noncurrent assets......................................... 10,231 10,542
Current liabilities....................................... (2,695) (3,626)
Noncurrent liabilities.................................... (5,094) (4,314)
Purchase accounting adjustments........................... (1,368) (1,681)
------ ------
Stockholders' equity...................................... 4,168 3,934
====== ======
Investments............................................... 761 732
====== ======
STEEL SECTOR AFFILIATES
(COMBINED)
YEAR ENDED DECEMBER 31
------------------------
2000 1999 1998
------ ------ ------
Statement of operations
Net sales.................................................. 4,581 4,174 5,095
Cost and expenses........................................ (4,082) (4,790) (4,351)
Purchase accounting adjustments.......................... 24 83 26
------ ------ ------
Income before income taxes............................... 523 (533) 770
Income taxes............................................. (199) 556 (58)
------ ------ ------
Net income............................................... 324 23 712
====== ====== ======
Equity adjustments....................................... 59 7 82
====== ====== ======
Information with respect to other major affiliates' financial position and
results of operations is as follows:
AS OF DECEMBER 31
-------------------------------------------------------------
ALUNORTE ALBRAS MRN BSC
------------- ------------- ------------- -------------
2000 1999 2000 1999 2000 1999 2000 1999
----- ----- ----- ----- ----- ----- ----- -----
Balance Sheet
Current assets........................... 130 74 128 145 90 99 164 144
Noncurrent assets........................ 505 531 627 632 349 346 857 923
Current liabilities...................... (79) (123) (247) (321) (19) (33) (232) (299)
Noncurrent liabilities................... (454) (446) (538) (620) (37) (49) (283) (328)
----- ----- ----- ----- ----- ----- ----- -----
Stockholders' equity..................... 102 36 (30) (164) 383 363 506 440
===== ===== ===== ===== ===== ===== ===== =====
Company's participation.................... 49.29% 74.06% 51.00% 51.00% 40.00% 40.00% 32.00% 32.00%
----- ----- ----- ----- ----- ----- ----- -----
Investments................................ 50 27 (15) (84) 153 145 162 141
===== ===== ===== ===== ===== ===== ===== =====
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------
ALUNORTE ALBRAS MRN BSC
---------------------- --------------------- --------------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Statement of
Operations
Net sales.......... 322 253 268 551 459 452 217 205 224 402 326 288
Costs and
expenses......... (327) (446)(*) (286) (452) (755) (535) (109) (156) (136) (274) (397)(*) (380)
Income (loss)
before income
taxes............ (5) (193) (18) 99 (296) (83) 108 49 88 128 (71) (92)
Income taxes....... 28 56 57 30 93 33 (17) (23) (19) 3 112(**) --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).. 23 (137) 39 129 (203) (50) 91 26 69 131 41 (92)
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Company's
participation...... 49.29% 65.82% 53.61% 51.00% 51.00% 51.00% 40.00% 40.00% 40.00% 32.00% 32.00% 30.48%
Participation in
results............ 11 (89) 21 66 (104) (25) 36 10 28 42 13 (28)
Change in provision
for losses......... -- 89 (21) (66) 104 -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Equity adjustments... 11 -- -- -- -- (25) 36 10 28 42 13 (28)
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
---------------
(*) Includes exchange losses of $213 (ALUNORTE), $378 (ALBRAS), and $127 (BSC)
for the year ended December 31, 1999 -- see Note 20
(**) Includes $19 of tax benefit on 1999 losses and $93 of valuation allowance
reversal relative to prior year losses
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
The provision for losses and write-downs on equity investments of $421 and
$504 at December 31, 2000 and 1999, respectively, relates to other than
temporary declines to the public quoted market price below carrying value of our
affiliates' equity securities and to our investments in affiliates which have
reported negative stockholders' equity in their financial statements prepared in
accordance with US GAAP and in circumstances where we have assumed commitments
to fund our share of the accumulated losses, if necessary, through additional
capital contributions or other means. Accordingly we (a) first reduce the value
of the investment to zero and (b) subsequently provide for our portion of
negative equity. The provision is comprised as follows:
CIA
FERROVIARIA
PARA DO
CST USIMINAS PIGMENTOS NORDESTE VUPSA ALBRAS ALUNORTE TOTAL
---- -------- --------- ----------- ----- ------ -------- -----
Provision at January
1, 1999............ (250) (224) -- -- -- -- (9) (483)
Change in
provision --
results............ -- -- (15) (4) (56) (104) (89) (268)
---- ---- --- -- --- ---- --- ----
(250) (224) (15) (4) (56) (104) (98) (751)
Cumulative
translation
adjustment......... 27 30 -- -- 10 21 (7) 81
Payment of capital... -- -- 76 76
Elimination upon
consolidation in
1999............... -- -- 15 -- 46 -- -- 61
Effect of
capitalization of
interest-free
debentures......... -- -- -- -- -- -- 29 29
---- ---- --- -- --- ---- --- ----
PROVISION AT DECEMBER
31, 1999........... (223) (194) -- (4) -- (83) -- (504)
Change in
provision --
results............ -- -- -- (4) -- 66 -- 62
---- ---- --- -- --- ---- --- ----
(223) (194) -- (8) -- (17) -- (442)
Cumulative
translation
adjustment......... 8 9 -- 1 -- 2 -- 20
Payment of capital... -- -- -- 1 -- -- -- 1
---- ---- --- -- --- ---- --- ----
PROVISION AT DECEMBER
31, 2000........... (215) (185) -- (6) -- (15) -- (421)
==== ==== === == === ==== === ====
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
Our participation in ALUNORTE (49.29% at December 31, 2000) changed several
times during the periods presented, but we did not consolidate the financial
statements of this investee due to the temporary nature of our increased
holding. Movements on the investment account and related provision during 1999
and 2000 are as follows:
TOTAL ALUNORTE
SHARES OF SHARES OWNED
ALUNORTE BY CVRD INVESTMENT GOODWILL PROVISION NET
-------------- -------------- ---------- -------- --------- ---
(IN THOUSANDS) (IN THOUSANDS)
Balance January 1, 1999.................. 325,107 174,279 -- -- (9) (9)
Purchase of additional participation:
January 1999........................... 453,921 124,491 68 48 9 125
December 1999.......................... 598,184 144,263 55 30 -- 85
Participation in 1999 losses............. (89) (89)
Translation adjustment................... (7) (7)
-------- --- --- -- ---
BALANCE DECEMBER 31, 1999................ 598,184 443,033 27 78 -- 105
Sale of participation in January 2000.... 598,184 (124,491) (7) (48) -- (55)
Changes in participation-subscriptions by
other shareholders..................... 19 -- 19
Capital call............................. 673,494 13,437 5 5
Participation in 2000 net income......... 11 11
Translation adjustment................... (5) (5)
-------- --- --- -- ---
BALANCE DECEMBER 31, 2000................ 673,494 331,979 50 30 -- 80
======== === === == ===
On January 14, 2000 we entered into a structured transaction with an
unrelated party to sell both a 20.81% of the capital of ALUNORTE and a
beneficial interest in 8% of the capital of MRN owned by us for a total of $164,
resulting in a net gain to us of $54, recorded in other operating income, as
follows:
Book value of 124,491 thousand shares of ALUNORTE sold...... (7)
Goodwill amortized.......................................... (48)
Book value of beneficial interest in 8% of MRN.............. --
---
Cash received by us......................................... (55)
On transfer of ALUNORTE shares............................ 44
On issue and sale of Perpetual Notes...................... 120
Fair value of Perpetual Notes............................... (55)
---
Gain recognized on the transaction.......................... 54
===
The Perpetual Notes are exchangeable for 48 billion preferred shares of the
affiliate MRN (initially equivalent to 8% of the total number of shares of MRN
owned by us). Interest is payable on the Notes in an amount equal to dividends
paid on the underlying preferred shares, relative to periods starting as from
the 2000 fiscal year. The Notes may be redeemed at our option or the Noteholders
at any time by transfer of the underlying preferred shares to the Noteholders,
providing the rights of pre-emption of the existing shareholders of MRN have
been waived or have expired. Redemption by transfer of the underlying net assets
of MRN is compulsory if certain events occur, including the liquidation or
merger of MRN or the transfer of MRN's asset and liabilities to a consortium
formed by its shareholders to take over the operations of MRN. In the event of
early termination the Notes may be redeemed, at the option the Noteholders, in
lieu of transfer of the shares, for a cash sum equal to $48 plus the net present
value of average annual earnings declared and paid by MRN for the three years
immediately preceding such
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
termination multiplied by 20 and discounted by 10% per year. This latter amount
represents a fair value of $55.
On October 6, 2000, with the objective of financing part of the expansion
in its alumina production capacity from 1,5 million tons to 2,3 million tons per
year, ALUNORTE called a capital increase of $126, to be paid up in 6
installments. ALUVALE contributed only $5 to the first of these installments
($15), changing its stockholding interest to 49.29%.
During 1999 our 50%-owned affiliate VUPSA incurred significant losses, of
which we recognized our portion of $56 through the provision for losses on
equity investments. In December 1999 we acquired the remaining 50% of VUPSA in
exchange for the transfer of amounts owed to the seller from subsidiaries of
VUPSA amounting to $126, resulting in negative goodwill of $86. At December 31,
1999 the balance sheet of VUPSA has been consolidated and the negative goodwill
used to reduce the carrying value of VUPSA's property, plant and equipment.
In 2000, we acquired a further 34.41% of Ferrovia Centro-Atlantica S.A.,
for $25, bringing our participation to 45.65%.
Dividends received from investees aggregated $133, $64 and $116 in 2000,
1999 and 1998 respectively.
11. SHORT-TERM DEBT
Our short-term borrowings are principally from commercial banks and include
import and export financing denominated in United States dollars, as follows:
AS OF
DECEMBER 31
-----------
2000 1999
---- ----
Export...................................................... 386 655
Import...................................................... 11 21
Working Capital............................................. 68 14
--- ---
465 690
=== ===
Average annual interest rates on short-term borrowings were 8.18% and 7.13%
in 2000 and 1999, respectively.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
12. LONG-TERM DEBT
AS OF DECEMBER 31
---------------------------
CURRENT LONG-TERM
LIABILITIES LIABILITIES
----------- -------------
2000 1999 2000 1999
---- ---- ----- -----
Foreign debt
Loans and financing contracted in the following
currencies, maturing up to 2011:
United States dollars................................ 170 336 990 576
Japanese Yen......................................... 10 11 4 5
Others............................................... 2 2 4 6
Fixed Rate Notes -- US$ denominated....................... -- -- 500 500
Export Securitization -- US$ denominated.................. -- -- 300 --
Perpetual Notes........................................... -- -- 55 --
Accrued charges........................................... 41 28 -- --
--- --- ----- -----
223 377 1,853 1,087
--- --- ----- -----
Local debt
Indexed by Long-Term Interest Rate -- TJLP maturing up
to 2002.............................................. 6 6 40 51
Indexed by General Price Index-Market (IGPM) maturing up
to 2005.............................................. 21 38 49 66
Basket of currencies.................................... 15 9 51 52
Capital Lease........................................... 1 1 -- --
Shareholder revenue interests (Note 2).................. -- -- 3 4
Indexed by US dollars................................... 11 55 24 61
Accrued charges......................................... 3 2 -- --
--- --- ----- -----
57 111 167 234
--- --- ----- -----
Total..................................................... 280 488 2,020 1,321
=== === ===== =====
The long-term portion at December 31, 2000 becomes due in the following
years:
2002........................................................ 236
2003........................................................ 625
2004........................................................ 580
2005........................................................ 170
2006........................................................ 107
2007 and thereafter......................................... 247
No due date (Perpetual notes)............................... 55
-----
2,020
=====
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
At December 31, 2000 annual interest rates on long-term debt were as
follows:
Up to 7%.................................................... 410
7.1% to 9%.................................................. 1,183
9.1% to 11%................................................. 579
Over 11%.................................................... 73
Variable (Perpetual notes).................................. 55
-----
2,300
=====
The indexes applied to debt and respective percentage variations in each
year were as follows:
2000 1999 1998
---- ----- ----
TJLP -- Long-Term Interest Rate (effective rate)............ 4.56 6.92 5.41
IGP-M -- General Price Index -- Market...................... 9.95 20.10 1.78
United States Dollar........................................ 9.30 48.01 8.27
Long-term debt at December 31, 2000 is guaranteed or secured as follows:
AMOUNT OF
GUARANTEE
---------
Federal Government guarantee (for which we have provided
counter-guarantees)....................................... 353
Shares and securities given in guarantee.................... 28
Ships....................................................... 69
In October 2000 we issued $300 under a US dollar -- denominated export
securitization program, divided into three tranches as follows:
TENOR GRACE PERIOD EFFECTIVE RATE
AMOUNT (YEARS) (YEARS) P.A.
------ ------- ------------ --------------
Tranche 1.................................. 25 7 2 8.682%
Tranche 2.................................. 125 7 2 Libor+0.65%
Tranche 3.................................. 150 10 3 8.926%
---
300
===
Tranche 2 is guaranteed by an insurance contract with a major U.S.
insurance company.
13. STOCKHOLDERS' EQUITY
Each holder of common and preferred class A stock is entitled to one vote
for each share on all matters that come before a stockholders' meeting, except
for the election of the Board of Directors, which is restricted to the holders
of common stock. As described in Note 3, the Brazilian Government holds a
preferred special share which confers on it permanent veto rights over certain
matters.
The Board of Directors authorized the acquisition of up to 9,832,691 of our
own preferred class A shares, to remain in treasury for subsequent disposal or
cancellation. As of December 31, 2000, 3,659,311 shares had been acquired, at an
average weighted unit cost of R$20,83 (minimum cost of R$14,02 and maximum of
R$24,19).
Both common and preferred stockholders are entitled to receive a dividend
of at least 25% of annual net income, upon approval at the annual stockholders'
meeting. In the case of preferred stockholders, this dividend cannot be less
than 6% of the preferred capital as stated in the statutory accounting records.
With respect to each of 2000, 1999 and 1998 we distributed dividends to
preferred stockholders in excess of this limit. Interest attributed to
stockholders as from January 1, 1996 is considered part of the minimum dividend.
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
Brazilian law permits the payment of cash dividends only from retained
earnings as stated in the statutory accounting records and such payments are
made in Reais. At December 31, 2000, we had no undistributed retained earnings.
In addition appropriated retained earnings at December 31, 2000 includes $2,420,
related to the unrealized income and expansion reserves, which could be freely
transferred to retained earnings and paid as dividends, if approved by the
stockholders.
No withholding tax is payable on distribution of profits earned as from
January 1, 1996, except for distributions in the form of interest attributed to
stockholders as explained in Note 2(m).
Brazilian laws and our by-laws require that certain appropriations be made
from retained earnings to reserve accounts on an annual basis, all determined in
accordance with amounts stated in the statutory accounting records, as detailed
below:
YEAR ENDED DECEMBER 31
------------------------
2000 1999 1998
------ ------ ------
Appropriated retained earnings
Unrealized income reserve
Balance January 1...................................... 1,062 1,636 1,850
Transfer to retained earnings.......................... (188) (574) (214)
----- ----- -----
Balance December 31.................................... 874 1,062 1,636
Expansion reserve
Balance January 1...................................... 1,367 1,685 1,936
Transfer to capital stock.............................. -- -- (469)
Transfer (to) from retained earnings................... 179 (318) 218
----- ----- -----
Balance December 31.................................... 1,546 1,367 1,685
Legal reserve
Balance January 1...................................... 284 368 352
Transfer (to) from retained earnings................... 23 (84) 16
----- ----- -----
Balance December 31.................................... 307 284 368
Fiscal incentive depletion reserve
Balance January 1...................................... 842 1,246 1,349
Transfer to retained earnings.......................... (71) (404) (103)
----- ----- -----
Balance December 31.................................... 771 842 1,246
Fiscal incentive investment reserve
Balance January 1...................................... 12 277 300
Transfer to capital stock.............................. -- (187) --
Transfer to retained earnings.......................... 27 (78) (23)
----- ----- -----
Balance December 31.................................... 39 12 277
Development reserve Balance January 1..................... -- -- 19
Transfer to capital stock.............................. -- -- (19)
----- ----- -----
Balance December 31.................................... -- -- --
----- ----- -----
Total appropriated retained earnings........................ 3,537 3,567 5,212
===== ===== =====
The purpose and basis of appropriation to such reserves is as follows:
- Unrealized income reserve -- this represents principally inflationary
profit up to December 31, 1995 and our share of the earnings of
affiliates and joint ventures, not yet received in the form of cash
dividends.
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
- Expansion reserve -- this is a general reserve for expansion of our
activities.
- Legal reserve -- this reserve is a requirement for all Brazilian
corporations and represents the appropriation of 5% of annual net income
under Brazilian GAAP up to a limit of 20% of capital stock under
Brazilian GAAP.
- Fiscal incentive depletion reserve -- this represents an additional
amount relative to mineral reserve depletion equivalent to 20% of the
sales price of mining production, which is deductible for tax purposes
providing an equivalent amount is transferred from retained earnings to
the reserve account. This fiscal incentive expired in 1996.
- Fiscal incentive investment reserve -- this reserve results from an
option to designate a portion of income tax otherwise payable for
investment in government approved projects and is recorded in the year
following that in which the taxable income was earned. As from 2000, this
reserve also contemplates the tax incentives described in Note 5.
- Development reserve -- this was a general reserve for assisting economic
and social development in areas in which we operate. During 1998, this
reserve was extinguished by transfer to capital stock.
14. PENSION PLAN
Since 1973 we have sponsored a defined benefit pension plan (the "Old
Plan") covering substantially all employees, with benefits based on years of
service, salary and social security benefits. This plan is administered by
Fundacao Vale do Rio Doce de Seguridade Social -- VALIA and was funded by
monthly contributions made by us and our employees, calculated based on periodic
actuarial appraisals.
In May 2000, we implemented a new pension plan, which is primarily a
defined contribution plan with a defined benefit feature relative to service
prior to May 2000 (the "New Plan"), and offered our active employees the
opportunity of transferring to the New Plan. Over 98% of our active employees
opted to transfer to the New Plan. The Old Plan will continue in existence,
covering almost exclusively retired participants and their beneficiaries.
The following information details the status of the defined benefit
elements of our plans in accordance with SFAS 132 -- "Employers' Disclosure
about Pensions and Other Postretirement Benefits":
(a) CHANGE IN BENEFIT OBLIGATION
AS OF
DECEMBER 31
--------------
2000 1999
----- -----
Benefit obligation at beginning of year..................... 1,440 2,102
Service cost................................................ 10 31
Interest cost............................................... 91 126
Benefits paid............................................... (109) (107)
Plan amendments............................................. (13) --
Effect of exchange rate changes............................. (65) (734)
Actuarial loss.............................................. 242 22
----- -----
Benefit obligation at end of year........................... 1,596 1,440
===== =====
The actuarial loss of $242 in 2000 is mainly due to the adoption of a new
mortality table which is considered to better reflect the current life
expectancy of the plan participants.
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
(b) CHANGE IN PLAN ASSETS
AS OF
DECEMBER 31
--------------
2000 1999
----- -----
Fair value of plan assets at beginning of year.............. 1,231 1,402
Actual return on plan assets................................ 128 345
Employer contributions...................................... 34 27
Employee contributions...................................... 5 15
Benefits paid............................................... (109) (107)
Effect of exchange rate changes............................. (100) (451)
----- -----
Fair value of plan assets at end of year.................... 1,189 1,231
===== =====
Plan assets at December 31, 2000 include $95 of portfolio investments in
our own shares ($93 at December 31, 1999) and $9 of shares of related parties
($1 at December 31, 1999), as well as $480 of Federal Government Securities
($439 at December 31, 1999).
(c) ACCRUED PENSION COST LIABILITY
AS OF
DECEMBER 31
-----------
2000 1999
---- ----
Funded status, excess of benefit obligation over plan
assets.................................................... 407 209
Unrecognized net transitory obligation...................... (125) (165)
Unrecognized net actuarial gains (loss)..................... (152) 88
---- ----
Accrued pension cost liability.............................. 130 132
==== ====
(d) RECOGNITION OF ADDITIONAL MINIMUM LIABILITY
AS OF
DECEMBER 31
-----------
2000 1999
---- ----
Accrued pension cost liability.............................. 130 132
Unrecognized pension obligation, limited to unrecognized net
transitory obligation..................................... 125 64
Additional amount recognized in stockholders' equity........ 151 --
--- ---
Minimum liability........................................... 406 196
=== ===
(e) ASSUMPTIONS USED IN EACH PERIOD
2000 1999
---------- ----------
Discount rate............................................... 6% p.a. 6% p.a.
Expected return on plan assets.............................. 6% p.a. 6% p.a.
Rate of compensation increase............................... 1.82% p.a. 1.82% p.a.
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
Net pension cost includes the following components:
YEAR ENDED DECEMBER 31
------------------------
2000 1999 1998
------ ------ ------
Service cost -- benefits earned during the period........... 10 31 52
Interest cost on projected benefit obligation............... 91 126 126
Actual return on assets..................................... (128) (345) (104)
Amortization of initial transitory obligation............... 15 17 24
Net deferral................................................ 58 241 17
---- ---- ----
46 70 115
Employee contributions...................................... (5) (15) (27)
---- ---- ----
Net periodic pension cost................................... 41 55 88
==== ==== ====
The cost recognized in 2000 relative to the defined contribution element of
the New Plan was $3.
In addition to benefits provided under our pension plans accruals have been
made relative to supplementary benefits extended in previous periods as part of
early-retirement programs. Such accruals included in long-term liabilities
totalled $185 and $118, at December 31, 2000 and 1999, respectively, plus $30
and $19 in current liabilities.
15. COMMITMENTS AND CONTINGENCIES
(a) At December 31, 2000, we had extended guarantees for borrowings
obtained by affiliates and joint ventures in the amount of $788, of which $607
is denominated in United States dollars and the remaining $181 in local
currency. These guarantees include $372 relative to ALBRAS and $75 relative to
ALUNORTE (see Note 10).
(b) CVRD and its subsidiaries are defendants in numerous legal actions in
the normal course of business. Based on the advice of its legal counsel,
management believes that the provision made against contingent losses is
sufficient to cover probable losses in connection with such actions.
The provision for contingencies and the related judicial deposits are
composed as follows:
AS OF DECEMBER 31}
---------------------------------------------------
2000 1999
------------------------ ------------------------
PROVISION FOR JUDICIAL PROVISION FOR JUDICIAL
CONTINGENCIES DEPOSITS CONTINGENCIES DEPOSITS
------------- -------- ------------- --------
Labor claims.............................. 114 60 72 52
Civil claims.............................. 137 4 88 3
Tax-related actions....................... 80 54 24 16
Others.................................... 7 1 1 1
--- --- --- --
338 119 185 72
=== === === ==
Current................................... -- -- -- --
Long-term................................. 338 119 185 72
--- --- --- --
338 119 185 72
=== === === ==
Labor-related actions principally comprise employee claims for (i) payment
of time spent travelling from their residences to the work-place, (ii)
additional payments for alleged dangerous or unhealthy working conditions and
(iii) various other matters, often in connection with disputes about the amount
of indemnities paid upon dismissal.
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
Civil actions principally relate to claims made against us by contractors
in connection with losses alleged to have been incurred by them as a result of
various past government economic plans during which full indexation of contracts
for inflation was not permitted.
Tax-related actions principally comprise our challenges of changes in basis
of calculation and rates of certain revenue taxes and of the tax on financial
movements -- CPMF.
We continue to vigorously pursue our interests in all the above actions but
recognize that probably we will incur some losses in the final instance, for
which we have made provisions.
Our judicial deposits are made as required by the courts for us to be able
to enter or continue a legal action. When judgment is favorable to us, we
receive the deposits back; when unfavorable, the deposits are delivered to the
prevailing party.
Contingencies settled in 2000 and 1999 aggregated $36 and $12,
respectively, and additional provisions aggregated $101 and $60 in these years,
respectively.
(c) We are defendant in two actions seeking substantial compensatory
damages brought by the Municipality of Itabira, State of Minas Gerais, which we
believe are without merit. Due to the remote likelihood that any loss will arise
therefrom no provision has been made in the financial statements with respect to
these two actions.
(d) We are committed under a take-or-pay agreement to take delivery of
approximately 175,950 metric tons per year of aluminum from ALBRAS at market
prices. This estimate is based on 51% of ALBRAS expected production and, at a
market price of $1,567.20 per metric ton at December 31, 2000, represents an
annual commitment of $275. We are also committed to take-or-pay 465,816 metric
tons per year of alumina produced by ALUNORTE which at a market price of $194.17
per metric ton at December 31, 2000, represents an annual commitment of $90.
Actual take from ALBRAS was $260, $222 and $222 in 2000, 1999 and 1998,
respectively, and direct from ALUNORTE was $45 (net of take ceded to ALBRAS),
$30 and $83 in 2000, 1999 and 1998, respectively.
(e) We and BNDES entered into a contract, known as the Mineral Risk
Contract, in March 1997, relating to prospecting authorizations for mining
regions where drilling and exploration are still in their early stages. The
Mineral Risk Contract provides for the joint development of certain unexplored
mineral deposits in approximately two million identified hectares of land in the
Carajas region, as well as proportional participation in any financial benefits
earned from the development of such resources. Iron ore and manganese deposits
already identified and subject to development are specifically excluded from the
Mineral Risk Contract.
Pursuant to the Mineral Risk Contract, we and BNDES each agreed to provide
$205, which represents half of the $410 in expenditures estimated as necessary
to complete geological exploration and mineral resource development projects in
the region over a period of five years. Under certain circumstances, this period
may be extended for an additional two years. We will oversee these projects and
BNDES will advance us half of our costs on a quarterly basis. Under the Mineral
Risk Contract, as of December 31, 2000, each of us and BNDES had remaining
commitments to contribute an additional $93 toward exploration and development
activities. We both expect to fund a portion of these contributions each year
through 2001. In the event that either of us wishes to conduct further
exploration and development after having spent such $205, the contract provides
that each party may either choose to match the other party's contributions, or
may choose to have its financial interest proportionally diluted. If a party's
participation in the project is diluted to an amount lower than 40% of the
amount invested in connection with exploration and development projects, then
the Mineral Risk Contract provides that the diluted party will lose (1) all the
rights and benefits provided for in the Mineral Risk Contract and (2) any amount
previously contributed to the project.
Under the Mineral Risk Contract, BNDES has agreed to compensate us for our
contribution of existing development and ownership rights in the Carajas region
through a finder's fee production royalty
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
on mineral resources that are discovered and placed into production. This
finder's fee is equal to 3.5% of the revenues derived from the sale of gold,
silver and platinum group metals and 1.5% of the revenues derived from the sale
of other minerals, including copper, except for gold and other minerals
discovered at Serra Leste, for which the finder's fee is equal to 6.5% of
revenues.
(f) At the time of our privatization in 1997, we issued shareholder revenue
interests known in Brazil as "debentures" to our then-existing shareholders,
including the Brazilian Government. The terms of the debentures, which are
described below, were set to ensure that our pre-privatization shareholders,
including the Brazilian Government, would participate alongside us in potential
future financial benefits that we are able to derive from exploiting our mineral
resources.
In preparation for the issuance of the debentures, we issued series B
preferred shares on a one-for-one basis to all holders of our common shares and
series A preferred shares. We then exchanged all of the series B shares for the
debentures at par value. The debentures are not redeemable or convertible, and
do not trade on a stapled basis or otherwise with our common or preferred
shares. At present the debentures cannot be traded. Holders will be able to
trade the debentures only after a three-month period that will commence upon
completion of the sale by the Brazilian Government of its 32% stake in our
common shares, which will constitute the final step of our privatization. We
will be required to register the debentures with the CVM in order to permit
trading at this time. We cannot be sure when the final step of our privatization
will take place.
Under Brazilian Central Bank regulations, pre-privatization shareholders
that held their shares through our American Depositary Receipt, or ADR, program
were not permitted to receive the debentures or any financial benefits relating
to the debentures. We sought approval from the Central Bank to distribute the
debentures to the ADR holders, but the Central Bank rejected our request. We
intend to renew our request to the Central Bank, but we cannot be sure that we
will succeed. If the Central Bank does not approve our request, the ADR
depositary will not be able to distribute the debentures to the ADR holders and
will not be able to sell the debentures. Therefore, unless the Central Bank
approves our request, the debentures will not have any value for ADR holders.
Under the terms of the debentures, holders will have the right to receive
semi-annual payments equal to an agreed percentage of our net revenues (revenues
less value added tax) from certain identified mineral resources that we owned as
of May 1997, to that extent that we exceed defined threshold production volumes
of these resources, and from the sale of mineral rights that we owned as of May
1997. Our obligation to make payments to the holders will cease when the
relevant mineral resources are exhausted. Based on current production levels,
and on the estimates of production of our new projects, we would begin making
payments related to iron ore resources in approximately 2012, and payments
related to other mineral resources in later years.
The table below summarizes the amounts we will be required to pay under the
debentures based on the net revenues we earn from the identified mineral
resources and the sale of mineral rights.
AREA MINERAL REQUIRED PAYMENTS BY CVRD
---- ------- -------------------------
Southern System Iron ore 1.8% of net revenue, after total
production from May 1997 exceeds 1.7
billion tons
Northern System Iron ore 1.8% of net revenue, after total
production from May 1997 exceeds 1.2
billion tons
Pojuca, Andorinhas, Liberdade and
Sossego Gold and copper 2.5% of net revenue from the
beginning of commercial production
Igarape Bahia and Alemao Gold and copper 2.5% of net revenue, after total
production from the beginning of
commercial production exceeds 70 tons
of gold
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
AREA MINERAL REQUIRED PAYMENTS BY CVRD
---- ------- -------------------------
Fazenda Brasileiro Gold 2.5% of net revenue after total
production from the beginning of
commercial production exceeds 26 tons
Other areas, excluding Carajas/ Serra
Leste Gold 2.5% of net revenue
Other areas owned as of May 1997 Other minerals 1% of net revenue, 4 years after the
beginning of commercial production
All areas Sale of mineral 1% of the sales price
rights owned as
of May 1997
(g) At December 31, 2000 we have provided $14 for environmental
liabilities. Such provisions relate to site restoration at mines already closed
or which are expected to be closed in the next two years.
We use various judgments and assumptions when measuring our environmental
liabilities. Changes in circumstances, law or technology may affect our
estimates and we periodically review the amounts accrued and adjust them as
necessary. Our accruals do not reflect unasserted claims because we are
currently not aware of any such issues. Also the amounts provided are not
reduced by any potential recoveries under cost sharing, insurance or
indemnification arrangements because such recoveries are considered uncertain.
16. SEGMENT AND GEOGRAPHICAL INFORMATION
In 1999 we adopted SFAS 131 "Disclosures about Segments of an Enterprise
and Related Information" with respect to the information we present about our
operating segments. SFAS 131 introduced a "management approach" concept for
reporting segment information, whereby financial information is required to be
reported on the basis that the top decision-maker uses such information
internally for evaluating segment performance and deciding how to allocate
resources to segments. Our business segments are currently organized as follows:
Ferrous products -- comprises iron ore mining and pellet production, as
well as the Northern and Southern transportation systems, including railroads,
ports and terminals, as they pertain to mining operations. Manganese mining and
ferro alloys are also classified in this segment.
Non-ferrous products -- comprises the production of gold and other
non-ferrous minerals.
Logistics -- comprises our transportation systems as they pertain to
external commercial operations, and the operations of our ships.
Holdings -- divided into the following sub-groups:
- Pulp and paper -- comprises our forestation activities and investments in
joint ventures and affiliates engaged in the manufacture of pulp and
paper products.
- Aluminium -- comprises aluminum trading activities and investments in
joint ventures and affiliates engaged in bauxite mining, alumina refining
and aluminum metal smelting.
- Steel -- comprises our investments in joint ventures and affiliates
operating in the steel industry.
- Others -- comprises our investments in joint ventures and affiliates
engaged in other businesses.
Corporate Center -- the Corporate Center is responsible for accounting and
control, finance, legal matters, human resources and administration, investor
and external relations and internal auditing.
Information presented to top management with respect to the performance of
each segment is generally derived directly from the accounting records
maintained in accordance with Brazilian corporate law together with certain
relatively minor inter-segment allocations, and is focused primarily on return
on capital employed (ROCE), net operating profit less taxes (NOPLT) as well as
net income. For return on
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
capital employed purposes we consider dividends received from affiliates and
joint ventures as part of our net operating profit less taxes.
In 2000 we transferred various accounting, control, legal and information
technology functions from the operating divisions to our Corporate Center. We
estimate that this transfer increased the costs in our Corporate Center by
approximately $8, and reduced the costs of our ferrous, non ferrous and
logistics segments by $6, $1 and $1, respectively.
Consolidated net income and principal assets are reconciled as follows
(certain minor reclassifications have been made to the 1999 and 1998 information
to be comparable with that for 2000):
HOLDINGS
------------------------------------ 2000
NON PULP AND CORPORATE ------------
FERROUS FERROUS LOGISTICS PAPER ALUMINUM STEEL OTHERS CENTER ELIMINATIONS
------- ------- --------- -------- -------- ----- ------ --------- ------------
RESULTS
Revenues -- Export... 2,849 198 195 121 351 -- -- -- (1,068)
Revenues -- Domestic.. 1,000 90 403 21 12 1 -- -- (104)
Cost and expenses.... (2,585) (214) (418) (156) (261) (10) -- (578) 1,196
Interest revenue..... 52 1 1 7 25 5 -- 173 (56)
Interest expense..... (74) (12) (6) -- (2) (6) -- (247) 32
Depreciation......... (115) (30) (22) (22) -- -- -- (6) --
Pension plan......... (7) (2) -- -- -- -- -- -- --
Equity and provision
for losses and
write-downs........ 45 -- (22) 108 126 60 5 -- --
Income taxes......... 8 -- 5 (7) (5) (48) -- 79 --
------ ---- ---- ---- ---- --- -- ---- ------
Net income........... 1,173 31 136 72 246 2 5 (579) --
====== ==== ==== ==== ==== === == ==== ======
SALES CLASSIFIED BY
GEOGRAPHIC
DESTINATION:
Export market
Latin America........ 224 -- 30 -- 23 -- -- -- (91)
United States........ 252 156 64 73 39 -- -- -- (108)
Europe............... 969 35 75 48 237 -- -- -- (222)
Middle East.......... 209 -- 6 -- 16 -- -- -- (19)
Japan................ 544 4 15 -- 34 -- -- -- (308)
Asia, other than
Japan.............. 651 3 5 -- 2 -- -- -- (320)
------ ---- ---- ---- ---- --- -- ---- ------
2,849 198 195 121 351 -- -- -- (1,068)
Domestic market...... 1,000 90 403 21 12 1 -- -- (104)
------ ---- ---- ---- ---- --- -- ---- ------
3,849 288 598 142 363 1 -- -- (1,172)
====== ==== ==== ==== ==== === == ==== ======
ASSETS :
Property, plant and
equipment, net..... 3,077 325 374 149 -- -- -- 30 --
Capital
expenditures....... 373 50 14 -- -- -- -- 10 --
Investments in
affiliated
companies and joint
ventures and other
investments........ 519 31 151 372 262 423 37 -- --
====== ==== ==== ==== ==== === == ==== ======
Capital employed..... 3,064 316 390 135 (10) 1 14 (6) 8
NOPLT................ 1,155 52 165 (44) 23 (54) -- (63) 16
ROCE................. 38% 16% 42% (33%) -- -- -- -- --
2000
------------
CONSOLIDATED
------------
RESULTS
Revenues -- Export... 2,646
Revenues -- Domestic. 1,423
Cost and expenses.... (3,026)
Interest revenue..... 208
Interest expense..... (315)
Depreciation......... (195)
Pension plan......... (9)
Equity and provision
for losses and
write-downs........ 322
Income taxes......... 32
------
Net income........... 1,086
======
SALES CLASSIFIED BY
GEOGRAPHIC
DESTINATION:
Export market
Latin America........ 186
United States........ 476
Europe............... 1,142
Middle East.......... 212
Japan................ 289
Asia, other than
Japan.............. 341
------
2,646
Domestic market...... 1,423
------
4,069
======
ASSETS :
Property, plant and
equipment, net..... 3,955
Capital
expenditures....... 447
Investments in
affiliated
companies and joint
ventures and other
investments........ 1,795
======
Capital employed..... 3,912
NOPLT................ 1,250
ROCE................. 32%
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
HOLDINGS
---------------------------------
PULP 1999
NON AND CORPORATE ---------------------------
FERROUS FERROUS LOGISTICS PAPER ALUMINUM STEEL OTHERS CENTER ELIMINATIONS CONSOLIDATED
------- ------- --------- ----- -------- ----- ------ --------- ------------ ------------
RESULTS
Revenues -- Export..... 1,989 143 100 101 318 -- -- -- (578) 2,073
Revenues -- Domestic... 639 96 318 10 62 -- -- -- (41) 1,084
Cost and expenses...... (1,435) (151) (396) (103) (367) -- -- (428) 619 (2,261)
Interest revenue....... 46 -- 8 4 9 -- -- 170 (37) 200
Interest expense....... (50) -- (13) -- (6) -- -- (201) 37 (233)
Depreciation........... (120) (16) (21) (6) -- -- -- -- -- (163)
Pension plan........... (21) (4) (3) -- -- -- -- -- -- (28)
Equity and provision
for losses and
write-downs.......... (44) (15) (9) 9 (182) 7 -- 7 -- (227)
Income taxes........... -- -- 14 (5) -- -- -- (42) -- (33)
------ ---- ---- ---- ---- --- -- ---- ---- ------
Net income............. 1,004 53 (2) 10 (166) 7 -- (494) -- 412
====== ==== ==== ==== ==== === == ==== ==== ======
SALES CLASSIFIED BY
GEOGRAPHIC
DESTINATION:
Export market
Latin America........ 149 -- 13 -- 5 -- -- -- (60) 107
United States.......... 147 139 34 62 23 -- -- -- (71) 334
Europe................. 621 -- 31 39 146 -- -- -- (110) 727
Middle East............ 146 -- 3 -- -- -- -- -- (13) 136
Japan.................. 351 -- 9 -- 94 -- -- -- (83) 371
Asia, other than
Japan................ 575 4 9 -- 50 -- -- -- (241) 397
Others................. -- -- 1 -- -- -- -- -- -- 1
------ ---- ---- ---- ---- --- -- ---- ---- ------
1,989 143 100 101 318 -- -- -- (578) 2,073
Domestic market........ 639 96 318 10 62 -- -- -- (41) 1,084
------ ---- ---- ---- ---- --- -- ---- ---- ------
2,628 239 418 111 380 -- -- -- (619) 3,157
====== ==== ==== ==== ==== === == ==== ==== ======
ASSETS:
Property, plant and
equipment, net....... 2,950 400 404 158 -- -- -- 31 -- 3,943
Capital expenditures... 201 56 4 -- -- -- -- 4 -- 265
Investments in
affiliated companies
and joint ventures
and other
investments.......... 116 33 68 318 208 426 34 -- -- 1,203
====== ==== ==== ==== ==== === == ==== ==== ======
Capital employed....... 3,081 399 419 148 9 -- -- (9) -- 4,047
NOPLT.................. 1,055 68 28 6 28 -- -- (309) 11 887
ROCE................... 34% 17% 7% 4% 311% -- -- -- -- 22%
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
HOLDINGS
---------------------------------
PULP 1998
NON AND CORPORATE ---------------------------
FERROUS FERROUS LOGISTICS PAPER ALUMINUM STEEL OTHERS CENTER ELIMINATIONS CONSOLIDATED
------- ------- --------- ----- -------- ----- ------ --------- ------------ ------------
RESULTS
Revenues -- Export.... 2,004 145 135 80 419 -- -- -- (443) 2,340
Revenues -- Domestic... 776 124 396 8 65 -- -- -- (51) 1,318
Cost and expenses..... (1,548) (213) (382) (90) (473) -- -- (422) 494 (2,634)
Interest revenue...... 20 -- 16 4 25 -- -- 367 (38) 394
Interest expense...... (23) -- (25) -- (10) -- -- (223) 38 (243)
Depreciation.......... (167) (32) (28) (4) -- -- -- -- -- (231)
Pension plan.......... (46) (7) -- -- -- -- -- -- -- (53)
Equity and provision
for losses and
write-downs......... 2 (9) 1 (22) 40 (211) 6 -- -- (193)
Income taxes.......... -- -- -- -- -- -- -- 0 -- 0
------ ---- ---- --- ---- ----- -- ---- ---- ------
Net income............ 1,018 8 113 (24) 66 (211) 6 (278) -- 698
====== ==== ==== === ==== ===== == ==== ==== ======
SALES CLASSIFIED BY
GEOGRAPHIC
DESTINATION:
Export market
Latin America......... 177 -- 5 -- 105 -- -- -- (121) 166
United States......... 185 145 36 37 44 -- -- -- (96) 351
Europe................ 751 -- 40 43 269 -- -- -- (65) 1,038
Middle East........... 135 -- 2 -- -- -- -- -- (3) 134
Japan................. 299 -- 31 -- -- -- -- -- -- 330
Asia, other than
Japan............... 456 -- 15 -- -- -- -- -- (158) 313
Others................ 1 -- 6 -- 1 -- -- -- -- 8
------ ---- ---- --- ---- ----- -- ---- ---- ------
2,004 145 135 80 419 -- -- -- (443) 2,340
Domestic market....... 776 124 396 8 65 -- -- -- (51) 1,318
------ ---- ---- --- ---- ----- -- ---- ---- ------
2,780 269 531 88 484 -- -- -- (494) 3,658
====== ==== ==== === ==== ===== == ==== ==== ======
ASSETS:
Property, plant and
equipment, net...... 4,132 392 508 203 -- -- -- 26 -- 5,261
Capital
expenditures........ 366 32 1 8 -- -- -- 5 -- 412
Investments in
affiliated companies
and joint ventures
and other
investments......... 166 45 64 424 240 571 47 -- -- 1,557
====== ==== ==== === ==== ===== == ==== ==== ======
Capital employed...... 4,098 401 523 204 15 -- -- (32) -- 5,209
NOPLT................. 1,018 17 133 (5) 11 -- -- (316) (4) 854
ROCE.................. 25% 4% 25% (2)% 73% -- -- -- -- 16%
F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
17. RELATED PARTY TRANSACTIONS
Transactions with major related parties (including agencies of the
Brazilian Federal Government) resulted in the following balances:
AS OF DECEMBER 31
-------------------------------------------
2000 1999
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
AFFILIATED COMPANIES AND JOINT VENTURES
ALUNORTE(1)....................................... 332 45 333 5
CENIBRA(2)........................................ 126 41 161 69
Salobo Metais S.A.(3)............................. 76 -- 75 --
FCA............................................... 151 18 1 --
HISPANOBRAS....................................... 21 23 22 23
ITABRASCO......................................... 17 22 27 29
NIBRASCO.......................................... 29 38 12 42
KOBRASCO.......................................... 34 7 38 37
Wilsea Shipping Inc. ............................. -- 34 9 --
USIMINAS.......................................... 24 -- 4 --
ALBRAS............................................ 1 24 -- 42
URUCUM............................................ 8 1 2 2
Others............................................ 133 85 129 64
EMPLOYEE FUNDS
Fundacao Vale do Rio Doce......................... -- 1 15 8
VALIA............................................. -- 40 -- 6
BRAZILIAN FEDERAL GOVERNMENT
Banco do Brasil S.A.(4)........................... 85 3 151 --
Rede Ferroviaria Federal S.A...................... 13 39 14 42
BNDES............................................. 7 158 6 151
----- --- ----- ---
1,057 579 999 520
===== === ===== ===
Current............................................. 337 378 378 360
===== === ===== ===
Long-term........................................... 720 201 621 160
===== === ===== ===
---------------
(1) Includes on lending outstanding balance of $204 (1999 -- $204), with
identical conditions and terms, of a $200 U.S. dollar denominated loan
obtained by us from the Nippon Amazon Aluminium Company (NAAC) in January
1997 (bearing interest of 6.41% p.a. and maturing up to 2011).
(2) Includes onlending outstanding balance of $117 (1999 -- $146), with
identical conditions and terms, of a $200 U.S. dollar denominated loan
obtained by us from the Japanese Eximbank in 1996, bearing interest of 6.21%
p.a. and maturing up to 2004.
(3) Convertible debentures bearing interest of IGPM plus 6.50% p.a., maturing up
to 2000.
(4) Represents interest bearing deposits and investment funds.
F-38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
These balances are included in the following balance sheet classifications:
AS OF DECEMBER 31
-------------------------------------------
2000 1999
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Current assets
Cash and cash equivalents....................... 85 -- 171 --
Accounts receivable............................. 125 -- 107 --
Loans and advances to related parties........... 121 -- 93 --
Others.......................................... 6 -- 7 --
Other assets
Loans and advances to related parties........... 704 -- 601 --
Others.......................................... 16 -- 20 --
Current liabilities
Suppliers....................................... -- 179 -- 119
Current portion of long-term debt............... -- 30 -- 30
Loans from related parties...................... -- 152 -- 190
Others.......................................... -- 17 -- 21
Long-term liabilities
Long-term debt.................................. -- 128 -- 121
Loans from related parties...................... -- 21 -- 4
Others.......................................... -- 52 -- 35
----- --- --- ---
1,057 579 999 520
===== === === ===
F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
The principal amounts of business and financial operations carried out with
major related parties are as follows:
YEAR ENDED DECEMBER 31
------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
INCOME EXPENSE INCOME EXPENSE INCOME EXPENSE
------ ------- ------ ------- ------ -------
AFFILIATED COMPANIES AND JOINT
VENTURES
CST.............................. 166 -- 135 -- 132 --
NIBRASCO......................... 172 205 44 58 101 108
ALUNORTE......................... 42 93 167 28 76 89
SIDERAR.......................... 18 -- 30 -- 45 --
ITABRASCO........................ 66 24 57 23 40 41
HISPANOBRAS...................... 75 77 26 50 40 45
KOBRASCO......................... 76 18 62 67 9 9
CENIBRA.......................... 33 123 78 99 27 1
USIMINAS......................... 47 -- 18 -- 25 --
ACOMINAS......................... 7 -- 8 -- 12 --
ALBRAS........................... 6 216 14 205 11 222
VALESUL.......................... 4 -- -- 24 2 32
MRN.............................. 1 17 -- 20 -- 20
Others........................... 82 75 80 59 55 73
BRAZILIAN FEDERAL GOVERNMENT
Banco do Brasil S.A.............. 46 24 46 14 72 14
Petroleo Brasileiro S.A. --
PETROBRAS..................... 6 11 1 17 1 24
Centrais Eletricas Brasileiras
S.A. ......................... -- -- -- -- 1 15
BNDES............................ 1 18 1 12 1 13
--- --- --- --- --- ---
848 901 767 676 650 706
=== === === === === ===
These amounts are included in the following statement of income
classifications:
YEAR ENDED DECEMBER 31
------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
INCOME EXPENSE INCOME EXPENSE INCOME EXPENSE
------ ------- ------ ------- ------ -------
Sales of iron ore and pellets........... 494 313 288 175 316 183
Revenues from transportation services... 133 -- 89 -- 137 --
Cost of aluminum products............... -- 327 -- 271 -- 357
Financial income/expenses............... 117 79 101 59 162 62
Others.................................. 104 182 289 171 35 104
--- --- --- --- --- ---
848 901 767 676 650 706
=== === === === === ===
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of our current financial instruments generally
approximates fair market value because of the short-term maturity or frequent
repricing of these instruments.
The market value of long-term investments, where available, is disclosed in
Note 10 to these financial statements.
Based on borrowing rates currently available to us for bank loans with
similar terms and average maturities, the fair market value of long-term debt at
December 31 is estimated as follows:
FAIR
MARKET CARRYING
VALUE VALUE
------ --------
2000........................................................ 1,967 1,965
1999........................................................ 1,278 1,290
Fair market value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
Changes in assumptions could significantly affect the estimates.
19. DERIVATIVE FINANCIAL INSTRUMENTS
We actively manage our positions in derivative instruments. In view of the
policies and practices established for operations with derivatives, management
considers the occurrence of non-measurable risk situations as unlikely. Our
policy has been to settle all contracts through cash payments or receipts,
without physical delivery of product.
(A) GOLD
In connection with our gold mining activities, we are party to derivative
financial instruments designed to manage the risks associated with gold price
fluctuations, to provide stable cash flows and gross margins for the gold
business. At December 31, 2000, such operations can be summarized as follows:
UNREALIZED
TYPE QUANTITY (OZ.) FINAL MATURITY GAIN (LOSS)
---- -------------- -------------- -----------
Puts........................................ 479,500 December 2004 13
Calls....................................... 999,800 December 2004 (5)
Collar conditional.......................... 30,000 November 2002 1
--
9
==
The unrealized gain in the amount of $9 represents the amount receivable if
all transactions had been settled on December 31, 2000.
Realized net gains (losses) were $7, $3 and $14 in 2000, 1999 and 1998,
respectively.
F-41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
(B) INTEREST RATES (6-MONTH LIBOR)
We carry out derivative operations seeking to manage our exposure to the
6-month Libor rate, arising from our trade finance operations. At December 31,
2000 such operations were as follows:
NOTIONAL UNREALIZED
TYPE VALUE FINAL MATURITY GAIN (LOSS)
---- -------- --------------- -----------
Cap........................................................ 1,200 December 2004 3
Floor...................................................... 850 December 2004 (7)
Swap....................................................... 125 October 2007 (4)
--
(8)
==
The unrealized loss in the amount of $8 represents the amount payable if
all transactions had been settled on December 31, 2000.
Realized net gains (losses) were $3, $nihil and $(1) in 2000, 1999 and
1998, respectively.
(C) CURRENCY
We also carry out derivative operations seeking to manage our exposure to
currencies, arising from our indebteness in EURO and YEN. At December 31, 2000
such operations were as follows:
NOTIONAL UNREALIZED
TYPE VALUE FINAL MATURITY GAIN (LOSS)
---- -------- -------------- -----------
Yen................................................ 15 April 2005 (2)
EURO............................................... 12 April 2005 (2)
--
(4)
==
The unrealized loss in the amount of $4 represents the amount payable if
all transactions had been settled on December 31, 2000.
Realized net gains (losses) were $(7), $54 and $(20) in 2000, 1999 and
1998, respectively.
20. EFFECTS OF CURRENCY DEVALUATION
On January 13 and 15, 1999, certain significant changes occurred in the
exchange rate policy until then adopted by the Brazilian government, which
resulted in the elimination of certain exchange controls, previously carried out
by means of a system of trading bands, from the moment the Central Bank decided
to no longer intervene in the foreign exchange market. As a result of this
decision and the market reaction, our functional currency (Real) devalued to
US$1: R$1.7890 on December 31, 1999 from US$1: R$1.2087 at December 31, 1998
(US$1: R$1.9554 at December 31, 2000).
21. ACCOUNTING CHANGES
These financial statements have been restated to reflect the following
accounting changes:
(A) CHANGES WHICH EFFECT NET INCOME AND STOCKHOLDERS' EQUITY
(a.1) Impairment provision for equity investments in CST and Usiminas.
The Company has concluded that the loss in value in its investment in CST
and Usiminas was other than temporary, and that the carrying value should be
reduced to the quoted market price of the applicable shares. This methodology
has been applied retroactively resulting in a write-down provision of
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
$180 as at December 31, 1997 (with write-down changes of $50, $24 and $106
recorded for the years ended December 31, 1997, 1996 and 1995, respectively).
(a.2) Amortization of goodwill related to Samarco and Samitri.
The Company has recognized amortization expense of goodwill relating to the
acquisition of Samarco and Samitri in May 2000 from the date of the acquisition
on a straight line basis at 16.67% per annum. Previously, the Company had not
commenced amortization of goodwill.
The impact of the above alterations is shown below:
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------ ------ ------
Net income previously reported.............................. 1,100 412 896
Impairment of CST and Usiminas.............................. -- -- (294)
Goodwill amortization....................................... (21) -- --
Deferred tax effects........................................ 7 -- 96
----- ----- -----
RESTATED NET INCOME......................................... 1,086 412 698
===== ===== =====
Earnings per share previously reported...................... 2.86 1.07 2.31
Restated earnings per share................................. 2.83 1.07 1.80
Shareholders' equity previously reported.................... 4,922 5,032 6,715
Impairment of CST and Usiminas.............................. (400) (417) (474)
Goodwill amortization....................................... (21) -- --
Deferred tax effects........................................ 68 76 151
----- ----- -----
RESTATED SHAREHOLDERS' EQUITY............................... 4,569 4,691 6,392
===== ===== =====
(B) CHANGE THAT DOES NOT AFFECT NET INCOME AND STOCKHOLDERS'
EQUITY -- CONSOLIDATION OF CELMAR S.A.
Previously we accounted for our development stage subsidiary, Celmar S.A.,
under the equity method of accounting. We now consolidate this entity for all
periods presented which has not resulted in any change to our net income or
stockholders' equity. The effects on our consolidated current assets and current
liabilities is less than 1% while consolidated long-term liabilities increased
by 1.8%.
22. SUBSEQUENT EVENTS
(a) On February 22, 2001 we agreed to sell our 32.00% interest in Bahia Sul
Celulose S.A. -- BSC for $318.
(b) On March 9, 2001 we transferred our 10.33% interest in Companhia
Siderurgica Nacional -- CSN to VALIA as a special pension plan contribution for
$249 (fair market valued determined based on the weighted average price of the
last 30 (thirty) trading sessions at the Sao Paulo stock exchange in the period
ended on March 9, 2001).
F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
23. INFORMATION ABOUT OUR INDEPENDENT ACCOUNTANTS
Our consolidated financial statements are audited by PricewaterhouseCoopers
Auditores Independentes. The financial statements of certain of our subsidiaries
and affiliates have been audited by independent accountants other than
PricewaterhouseCoopers Auditores Independentes and, as mentioned in their
report, PricewaterhouseCoopers Auditores Independentes has relied on such audits
when expressing their opinion on our consolidated financial statements.
The following entities prepare financial statements in US GAAP which are
audited in accordance with auditing standards generally accepted in the United
States of America:
AUDITORS YEARS AUDITED CITY STATE COUNTRY
-------- ---------------- -------- ----- -------
Aluminio Brasileiro S.A. -- ALBRAS.... DTT 2000, 1999, 1998 RJ RJ Brazil
Alumina do Norte do Brasil S.A. --
ALUNORTE............................ DTT 2000, 1999, 1998 RJ RJ Brazil
Vale do Rio Doce Aluminio S.A. --
ALUVALE............................. DTT 2000, 1999, 1998 RJ RJ Brazil
Bahia Sul Celulose S.A................ KPMG 2000, 1999, 1998 SP SP Brazil
California Steel Industries, Inc...... KPMG LLP 2000, 1999, 1998 Orange CA USA
County
Celulose Nipo-Brasileira S.A. --
CENIBRA(1).......................... DTT 2000, 1999 BH MG Brazil
Navegacao Vale do Rio Doce S.A. --
DOCENAVE............................ DTT 2000, 1999, 1998 RJ RJ Brazil
DOCEPAR S.A.(1)....................... DTT 2000, 1999 RJ RJ Brazil
Companhia Hispano-Brasileira de
Pelotizacao -- HISPANOBRAS.......... AA 2000, 1999, 1998 Vitoria ES Brazil
Companhia Italo-Brasileira de
Pelotizacao -- ITABRASCO............ AA 2000, 1999, 1998 Vitoria ES Brazil
Companhia Coreano Brasileira de
Pelotizacao -- KOBRASCO(2).......... DTT 2000 RJ RJ Brazil
Mineracao Rio do Norte S.A............ AA 2000, 1999, 1998 RJ RJ Brazil
Companhia Nipo-Brasileira de
Pelotizacao -- NIBRASCO............. DTT 2000, 1999, 1998 RJ RJ Brazil
Valesul Aluminio S.A.................. KPMG 2000, 1999 RJ RJ Brazil
Valesul Aluminio S.A.................. DTT 1998 RJ RJ Brazil
Companhia Siderugica Nacional(1)...... AA 2000, 1999 RJ RJ Brazil
F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
In addition to the above, the following entities prepare financial
statements in Brazilian GAAP which are audited in accordance with auditing
standards generally accepted in Brazil. PricewaterhouseCoopers Auditores
Independentes relies on such audits but is responsible for reviewing the US GAAP
translation and, if applicable, US GAAP adjustments.
AUDITORS YEARS AUDITED CITY STATE COUNTRY
-------- ---------------- -------- ----- -------
Terminal Vila Velha S.A. .............. DTT 2000, 1999, 1998 RJ RJ Brazil
Nova Era Silicon S.A. ................. DTT 2000 BH MG Brazil
Nova Era Silicon S.A. ................. Trevisan 1999, 1998 BH MG Brazil
Celmar S.A. -- Industria de Celulose e
Papel(2)............................. DTT 2000 RJ RJ Brazil
SIBRA Eletrosiderurgica Brasileira
S.A.(3) ............................. DTT 2000 Salvador BA Brazil
AA -- Arthur Andersen S/C
DTT -- Deloitte Touche Tohmatsu
RJ -- Rio de Janeiro
MG -- Minas Gerais
BH -- Belo Horizonte
SP -- Sao Paulo
BA -- Bahia
ES -- Espirito Santo
(1) Audited by PricewaterhouseCoopers Auditores Independentes in 1998.
(2) Audited by PricewaterhouseCoopers Auditores Independentes in 1999 and 1998.
(3) Consolidated as from 2000.
F-45
[PRICEWATERHOUSECOOPERS LOGO]
--------------------------------------------------------------------------------
PricewaterhouseCoopers
Rua da Candelaria, 65
11(degree)-15(degree)
20091-020 Rio de Janeiro,
RJ-Brasil
Caixa Postal 949
Telefone (21) 3232-6112
Fax (21) 2516-6319
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
AND STOCKHOLDERS OF COMPANHIA VALE DO RIO DOCE
We have reviewed the accompanying unaudited consolidated balance sheets of
Companhia Vale do Rio Doce and its subsidiaries at September 30, 2001 and 2000,
and the related unaudited consolidated statements of income, of cash flows and
of changes in stockholders' equity for the nine month periods then ended. This
financial information is the responsibility of the Company's management. The
unaudited financial information of certain affiliates, the investments in which
total US$274 million and US$864 million at September 30, 2001 and 2000,
respectively, and equity in earnings total US$7 million and US$156 million for
the nine month periods then ended, and that of the majority-owned shipping and
ferrous alloy subsidiaries, which statements reflect total assets of US$288
million and US$422 million at September 30, 2001 and 2000, respectively, and
total revenues of US$197 million and US$223 million for the nine month periods
then ended, were reviewed by other independent accountants whose reports thereon
have been furnished to us.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews and the reports of the other independent accountants
referred to above, we are not aware of any material modification that should be
made to the accompanying financial information for it to be in conformity with
accounting principles generally accepted in the United States of America.
/s/ PRICEWATERHOUSECOOPERS
PRICEWATERHOUSECOOPERS
Auditores Independentes
Rio de Janeiro, Brazil
October 22, 2001, except for the accounting changes described in Note 19 which
is as of February 22, 2002.
F-46
CONSOLIDATED BALANCE SHEETS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
AS OF
SEPTEMBER 30
---------------
2001 2000
------ ------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. 1,708 1,055
Accounts receivable
Related parties......................................... 102 122
Unrelated parties....................................... 418 391
Loans and advances to related parties..................... 86 192
Inventories............................................... 286 295
Deferred income tax....................................... 197 39
Others.................................................... 198 224
------ ------
2,995 2,318
Property, plant and equipment, net.......................... 3,320 4,024
Investments in affiliated companies and joint ventures and
other investments......................................... 1,223 2,155
Provision for losses on equity investments.................. (405) (446)
Other assets
Goodwill on acquisition of consolidated subsidiaries...... 485 181
Loans and advances
Related parties......................................... 516 636
Unrelated parties....................................... 97 56
Unrecognized pension obligation........................... 46 136
Prepaid pension cost...................................... 89 --
Deferred income tax....................................... 78 298
Judicial deposits......................................... 147 109
Unrealized gain on derivative instruments................. 6 --
Others.................................................... 67 115
------ ------
TOTAL....................................................... 8,664 9,582
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Suppliers................................................. 258 280
Payroll and related charges............................... 49 76
Interest attributed to stockholders....................... 667 428
Current portion of long-term debt
Related parties......................................... 24 25
Unrelated parties....................................... 236 313
Short-term debt........................................... 649 777
Loans from related parties................................ 119 101
Others.................................................... 173 169
------ ------
2,175 2,169
------ ------
LONG-TERM LIABILITIES
Employees postretirement benefits......................... 194 530
Long-term debt
Related parties......................................... 101 106
Unrelated parties....................................... 2,010 1,419
Loans from related parties................................ 4 21
Provisions for contingencies (Note 15).................... 373 312
Unrealized loss on derivative instruments................. 44 --
Others.................................................... 142 112
------ ------
2,868 2,500
------ ------
Minority interests.......................................... 8 26
------ ------
STOCKHOLDERS' EQUITY
Preferred class A stock -- 600,000,000 no-par-value shares
authorized and 138,575,913 issued....................... 820 709
Common stock -- 300,000,000 no-par-value shares authorized
and 249,983,143 issued.................................. 1,479 1,279
Treasury stock -- 4,249,970 (2000 -- 3,659,311) common and
91 preferred shares..................................... (79) (61)
Additional paid-in capital................................ 498 498
Other cumulative comprehensive income..................... (3,899) (2,766)
Appropriated retained earnings............................ 2,321 3,484
Unappropriated retained earnings.......................... 2,473 1,744
------ ------
3,613 4,887
------ ------
TOTAL....................................................... 8,664 9,582
====== ======
See Notes to Consolidated Financial Information.
F-47
CONSOLIDATED STATEMENTS OF INCOME
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS)
NINE MONTHS ENDED
SEPTEMBER 30
------------------
2001 2000
------- -------
(UNAUDITED)
Operating revenues, net of discounts, returns and allowances
Sales of ores and metals
Iron ore and pellets................................... 1,937 1,635
Gold................................................... 100 113
Others................................................. 291 327
------- -------
2,328 2,075
Revenues from transportation services..................... 464 577
Aluminum products......................................... 224 280
Other products and services............................... 83 160
------- -------
3,099 3,092
Value-added tax........................................... (102) (96)
------- -------
Net operating revenues.................................... 2,997 2,996
------- -------
Operating costs and expenses
Cost of ores and metals sold.............................. (1,155) (1,107)
Cost of transportation services........................... (270) (357)
Cost of aluminum products................................. (214) (259)
Others.................................................... (76) (142)
------- -------
(1,715) (1,865)
Selling, general and administrative expenses.............. (188) (140)
Research and development.................................. (31) (34)
Employee profit sharing plan.............................. (21) (31)
Others.................................................... (335) (231)
------- -------
(2,290) (2,301)
------- -------
Operating income............................................ 707 695
------- -------
Non-operating income (expenses)
Financial income.......................................... 80 136
Financial expenses........................................ (240) (204)
Foreign exchange and monetary losses, net................. (700) (10)
Gain on sale of investments............................... 784 54
Others.................................................... (43) (11)
------- -------
(119) (35)
------- -------
Income before income taxes, equity results and minority
interests................................................. 588 660
------- -------
Income taxes
Current................................................... 41 --
Deferred.................................................. 2 1
------- -------
43 1
------- -------
Equity in results of affiliates and joint ventures.......... (8) 187
Change in provision for losses and write-downs on equity
investments............................................... (45) 53
Minority interests.......................................... 7 --
------- -------
Net income.................................................. 585 901
======= =======
Basic earnings per Common and Preferred Class A Share....... 1.52 2.34
------- -------
Weighted average number of shares outstanding (thousands of
shares)
Common shares............................................. 249,864 249,983
Preferred Class A shares.................................. 135,042 134,917
See Notes to Consolidated Financial Information.
F-48
CONSOLIDATED STATEMENTS OF CASH FLOWS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
NINE MONTHS
ENDED
SEPTEMBER 30
---------------
2001 2000
----- ------
(UNAUDITED)
Cash flows from operating activities:
Net income................................................ 585 901
Adjustments to reconcile net income with cash provided by
operating activities:
Depreciation, depletion and amortization................ 174 130
Equity in results of affiliates and joint ventures, net
of dividends received.................................. 120 (91)
Change in provision for losses and write-downs on equity
investments............................................ 45 (53)
Deferred income taxes................................... (2) (1)
Provisions for contingencies............................ 87 131
Loss on disposals of property, plant and equipment...... 69 34
Gain on sale of investments............................. (784) (54)
Pension plan............................................ 24 21
Foreign exchange and monetary losses.................... 616 57
Net unrealized derivative losses........................ 38 --
Others.................................................. 134 --
Decrease (increase) in assets:
Accounts receivable..................................... (78) (61)
Inventories............................................. (17) (26)
Others.................................................. (5) (100)
Increase (decrease) in liabilities:
Suppliers............................................... 30 30
Payroll and related charges............................. 12 22
Others.................................................. 42 27
----- ------
Net cash provided by operating activities................. 1,090 967
----- ------
Cash flows from investing activities:
Loans and advances receivable
Related parties
Additions............................................. (4) (185)
Repayments............................................ 69 20
Others.................................................. 5 6
Guarantees and deposits................................... (15) (61)
Additions to investments.................................. (52) (423)
Additions to property, plant and equipment................ (444) (214)
Proceeds from disposals of property, plant and
equipment............................................... 2 1
Proceeds from disposal of investments..................... 989 44
Net cash used to acquire subsidiaries..................... (516) (323)
----- ------
Net cash provided by (used in) investing activities....... 34 (1,135)
----- ------
Cash flows from financing activities:
Short-term debt, net issuances............................ 133 20
Loans
Related parties
Additions............................................. 85 53
Repayments............................................ (9) (81)
Perpetual notes........................................... -- 120
Long-term debt
Related parties......................................... 3 70
Others.................................................. 320 237
Repayments of long-term debt
Related parties......................................... (27) (22)
Others.................................................. (326) (331)
Interest attributed to stockholders....................... (639) (246)
Treasury stock............................................ (18) --
----- ------
Net cash used in financing activities..................... (478) (180)
----- ------
Increase (decrease) in cash and cash equivalents.......... 646 (348)
Effect of exchange rate changes on cash and cash
equivalents............................................. (149) (50)
Cash and cash equivalents, beginning of period............ 1,211 1,453
----- ------
Cash and cash equivalents, end of period.................. 1,708 1,055
===== ======
Cash paid during the period for:
Interest on short-term debt............................. (25) (36)
Interest on long-term debt, net of interest capitalized
of $9 in 2001 and $12 in 2000.......................... (116) (102)
Income tax.............................................. (41) --
Non-cash transactions
Special pension plan contribution in shares of CSN...... 249 --
Exchange of loans receivable for investments............ 35 4
See Notes to Consolidated Financial Information.
F-49
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS
(EXCEPT NUMBER OF SHARES AND PER-SHARE AMOUNTS)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
SHARES 2001 2000
----------- ------ ------
(UNAUDITED)
Preferred class A stock (including one special share)
Balance January 1, 2001 and 2000.......................... 138,575,913 709 709
Transfer from appropriated retained earnings.............. -- 111 --
----------- ------ ------
Balance September 30, 2001 and 2000....................... 138,575,913 820 709
----------- ------ ------
Common stock
Balance January 1, 2001 and 2000.......................... 249,983,143 1,279 1,279
Transfer from appropriated retained earnings.............. -- 200 --
----------- ------ ------
Balance September 30, 2001 and 2000....................... 249,983,143 1,479 1,279
----------- ------ ------
Treasury stock
Balance January 1......................................... (3,666,611) (61) (61)
Acquisitions in 2001...................................... (583,450) (18) --
----------- ------ ------
Balance September 30...................................... (4,250,061) (79) (61)
----------- ------ ------
Additional paid-in capital
Balance January 1 and September 30........................ 498 498
------ ------
Other cumulative comprehensive income
Amounts not recognized as net periodic pension cost
Balance January 1......................................... (100) --
Excess of additional minimum liability.................... 151 (119)
Tax effect on above....................................... (51) 40
------ ------
Balance September 30...................................... -- (79)
------ ------
Cumulative translation adjustments
Balance January 1......................................... (2,952) (2,513)
Change in the period...................................... (954) (208)
------ ------
Balance September 30...................................... (3,906) (2,721)
------ ------
Unrealized gain on available-for-sale security
Balance January 1......................................... 24 54
Change in the period...................................... (24) (19)
------ ------
Balance September 30...................................... -- 35
------ ------
Adjustments relating to investments in affiliates
Balance January 1......................................... 8 (6)
Change in the period...................................... (1) 5
------ ------
Balance September 30...................................... 7 (1)
------ ------
Total other cumulative comprehensive income................. (3,899) (2,766)
------ ------
Appropriated retained earnings
Balance January 1......................................... 3,537 3,567
Transfer to retained earnings............................. (905) (83)
Transfer to capital stock................................. (311) --
------ ------
Balance September 30...................................... 2,321 3,484
------ ------
Retained earnings
Balance January 1......................................... 1,647 1,186
Net Income.............................................. 585 901
Interest attributed to stockholders
Preferred class A stock ($1.72 and $1.11 per share in
2001 and 2000)....................................... (239) (149)
Common stock ($1.72 and $1.11 per share in 2001 and
2000)................................................ (425) (277)
Appropriation from reserves............................. 905 83
------ ------
Balance September 30...................................... 2,473 1,744
----------- ------ ------
Total stockholders equity................................... 384,308,995 3,613 4,887
=========== ====== ======
Comprehensive income is comprised as follows:
Net Income................................................ 585 901
Amounts not recognized as net periodic pension cost....... 100 (79)
Cumulative translation adjustments........................ (954) (208)
Unrealized gain on available-for-sale security............ (24) (19)
Adjustments relating to investments in affiliates......... (1) 5
------ ------
Total comprehensive income (loss)........................... (294) 600
====== ======
See Notes to Consolidated Financial Information.
F-50
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
1. THE COMPANY AND ITS OPERATIONS
Companhia Vale do Rio Doce (CVRD) is a limited liability company, duly
organized and existing under the laws of the Federative Republic of Brazil. Our
operations are carried out through CVRD and its subsidiary companies, joint
ventures and affiliates, and mainly consist of mining, non-ferrous metal
production and logistics, as well as pulp and paper, aluminum and steel
activities. Further details of our operations and those of our joint ventures
and affiliates are described in Note 16.
The main operating subsidiaries we consolidate are as follows:
HEAD OFFICE
SUBSIDIARY % OWNERSHIP LOCATION PRINCIPAL ACTIVITY
---------- ----------- ----------- ------------------
S.A. Mineracao da Trindade -- SAMITRI......... 100 Brazil Iron ore and pellets
Ferteco Mineracao S.A. -- FERTECO............. 100 Brazil Iron ore and pellets
Para Pigmentos S.A. .......................... 80 Brazil Kaolin
SIBRA -- Eletrosiderurgica Brasileira S.A..... 98 Brazil Ferrous alloys
Navegacao Vale do Rio Doce S.A. -- DOCENAVE... 100 Brazil Shipping
Vale do Rio Doce Aluminio S.A. -- ALUVALE..... 100 Brazil Aluminum
Itabira Rio Doce Company Ltd. -- ITACO........ 100 Cayman Island Trading
Rio Doce International Finance Ltd. -- RDIF... 100 Bahamas International finance
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our consolidated interim financial information as of and for the periods of
nine months ended September 30, 2001 and 2000 is unaudited. However, in our
management's opinion, such consolidated financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation thereof. The results of operations for the nine month period
ended September 30, 2001 are not necessarily indicative of the results to be
expected for the full fiscal year ending December 31, 2001.
In preparing the consolidated financial information, we are required to use
estimates to account for certain assets, liabilities, revenues and expenses. Our
consolidated financial information therefore includes various estimates
concerning the selection of useful lives of property, plant and equipment,
provisions necessary for contingent liabilities, fair values assigned to assets
and liabilities acquired in business combinations, income tax valuation
allowances, employee post-retirement benefits and other similar evaluations;
actual results may vary from our estimates.
(a) BASIS OF PRESENTATION
We have prepared the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP"), which differ in certain respects from the Brazilian accounting
principles that we use in preparing our statutory financial information.
The U.S. dollar amounts for the period presented have been remeasured
(translated) from the Brazilian currency amounts in accordance with the criteria
set forth in Statement of Financial Accounting Standards 52 -- "Foreign Currency
Translation" (SFAS 52).
Prior to July 1, 1997, Brazil was considered under SFAS 52 to have a highly
inflationary economy, defined as an economy in which the cumulative inflation
rate over the latest thirty-six month period has exceeded 100%. Accordingly, up
to June 30, 1997, we adopted the U.S. dollar as both our functional currency and
reporting currency.
F-51
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
As from July 1, 1997, we concluded that the Brazilian economy had ceased to
be highly inflationary and changed our functional currency from the reporting
currency (U.S. dollars) to the local currency (Brazilian reais). Accordingly, at
July 1, 1997, we translated the U.S. dollar amounts of non-monetary assets and
liabilities into reais at the current exchange rate, and those amounts became
the new accounting bases for such assets and liabilities. The resulting deferred
taxes associated with the differences between the new functional currency bases
and the tax bases, including those relating to affiliates and joint ventures,
net of related valuation allowances, were reflected in the cumulative
translation adjustments component of stockholders' equity.
We have remeasured all assets and liabilities into U.S. dollars at the
current exchange rate at each balance sheet date (R$2.6713 and R$1.8437 to
US$1.00 at September 30, 2001 and 2000, respectively), and all accounts in the
statements of income (including amounts relative to local currency indexation
and exchange variances on assets and liabilities denominated in foreign
currency) at the average rates prevailing during the period. The translation
gain or loss resulting from this remeasurement process is included in the
cumulative translation adjustments account in stockholders' equity.
The net transaction loss included in our statement of income was $558 and
$2 in the nine months ended September 30, 2001 and 2000, respectively.
(b) BASIS OF CONSOLIDATION
All majority-owned subsidiaries where we have both share and management
control are consolidated with elimination of all significant intercompany
accounts and transactions. Investments in unconsolidated affiliates and joint
ventures are reported at cost less amortized goodwill plus our equity in
undistributed earnings or losses. Included in this category are certain joint
ventures in which we have majority ownership but, by force of shareholders'
agreements, do not have effective management control. We provide for losses on
equity investments with negative stockholders' equity and for other than
temporary decreases in market value below carrying value where applicable (see
Notes 10 and 19).
We evaluate the carrying value of our listed equity investments, as at year
end, relative to publicly available quoted market prices. If the quoted market
price is below book value and such decline is considered other than temporary,
we write-down our equity investments to quoted market value.
We define joint ventures as businesses in which we and a small group of
other partners each participate actively in the overall management thereof,
based on a shareholders agreement. We define affiliates as businesses in which
we participate as a minority stockholder but with significant influence over the
operating and financial policies of the investee.
(c) BUSINESS COMBINATIONS
We adopt the procedures determined by Accounting Principles Board Opinion
16 -- "Business Combinations" (APB 16) to recognize acquisitions of interests in
other companies. The method of accounting normally used in our business
combination transactions is the "purchase method", which requires that acquirers
reasonably determine the fair value of the identifiable assets and liabilities
of acquired companies, individually, in order to determine the goodwill paid in
the purchase to be recognized as an intangible asset. On the acquisition of
assets which include the rights to mine reserves of natural resources, the
establishment of values for these assets includes the placing of fair values on
purchased reserves, which are classified in the balance sheet as property, plant
and equipment.
Goodwill recorded in our business combination transactions is amortized in
a systematic manner over the periods estimated to be benefited.
F-52
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
(d) INVENTORIES
Inventories are stated at the average cost of purchase or production, lower
than replacement or realizable values. We record allowances for slow-moving or
obsolete inventories when considered appropriate, reflecting our periodic
assessment of recoverability. A write-down of inventory utilizing the allowance
establishes a new cost basis for the related inventory.
Finished goods inventories include all related materials, labor and direct
production expenditures, and exclude general and administrative expenses.
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, including interest cost
incurred during the construction of major new facilities. We compute
depreciation on the straight-line basis at rates which take into consideration
the useful lives of the items, principally an average of 80 years for the
railroads, 20 years for ships, 25 years for buildings and improvements and
between 10 to 20 years for mining and other equipment. Expenditures for
maintenance and repairs are charged to operating costs and expenses as incurred.
We capitalize the costs of developing major new ore bodies or expanding the
capacity of operating mines and amortize these to operations on the
unit-of-production method based on the total probable and proven quantity of ore
to be recovered. Exploration costs are expensed until viability of mining
activities is established; subsequently such costs are capitalized together with
further exploration costs. We capitalize mine development costs as from the time
we actually begin such development.
(f) AVAILABLE-FOR-SALE EQUITY SECURITIES
Equity securities classified as "available-for-sale" are recorded in
accordance with SFAS 115 "Accounting for Certain Investments in Debt and Equity
Securities". Accordingly, we exclude unrealized holding gains and losses, net of
taxes, if applicable, from income and recognize them as a separate component of
stockholders' equity until realized.
(g) REVENUES AND EXPENSES
Revenues are recognized when title has transferred to the customer or
services are rendered. Expenses and costs are recognized on the accrual basis.
Revenue from exported products is recognized when such products are loaded on
board the ship. Revenue from products sold in the domestic market is recognized
when delivery is made to the customer. Revenue from transportation services,
other than shipping operations, is recognized when the service order has been
fulfilled. Shipping operations are recorded on the completed voyage basis and
net revenue, costs and expenses of voyages not completed at period-end are
deferred. Anticipated losses on voyages are provided when probable and can be
reasonably estimated.
(h) ENVIRONMENTAL AND SITE RECLAMATION AND RESTORATION COSTS
Expenditures relating to ongoing compliance with environmental regulations
are charged against earnings or capitalized as appropriate. These ongoing
programs are designed to minimize the environmental impact of our activities.
With respect to our two major iron ore mines at Itabira and Carajas, which have
extensive remaining reserves, liabilities for final site reclamation and
restoration costs will be recorded when the respective reclamation and
restoration strategies can be reasonably determined and the related costs can be
reasonably estimated.
F-53
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
(i) COMPENSATED ABSENCES
We fully accrue the liability for future compensation to employees for
vacations vested during the year.
(j) INCOME TAXES
In accordance with SFAS 109 "Accounting for Income Taxes", the deferred tax
effects of temporary differences have been recognized in the consolidated
financial statements. A valuation allowance is made when we believe that it is
more likely than not that tax assets will not be fully recoverable in the
future.
(k) STATEMENT OF CASH FLOWS
Cash flows relating to overnight financing and investment are reported net.
Short-term investments that have a ready market and maturity to us, when
purchased, of 90 days or less are considered cash equivalents.
At September 30, 2001 dividends of $112 received from equity method
affiliates and joint ventures have been netted against the equity in results of
these entities in the statement of cash flows. For comparative purposes
dividends received at September 30, 2000 of $94, have been reclassified from
investing activities to reflect the same presentation.
(l) EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted
average number of common and preferred shares outstanding during the period.
(m) INTEREST ATTRIBUTED TO STOCKHOLDERS
As from January 1, 1996 Brazilian corporations are permitted to attribute
interest on stockholders' equity. The calculation is based on the stockholders'
equity amounts as stated in the statutory accounting records and the interest
rate applied may not exceed the long-term interest rate (TJLP) determined by the
Brazilian Central Bank. Also, such interest may not exceed the greater of 50% of
net income for the year or 50% of retained earnings plus revenue reserves.
The amount of interest attributed to stockholders is deductible for income
tax purposes. Accordingly, the benefit to us, as opposed to making a dividend
payment, is a reduction in our income tax charge equivalent to the statutory tax
rate applied to such amount. Income tax is withheld from the stockholders
relative to interest at the rate of 15%, except for interest due to the
Brazilian Government which is exempt from tax withholdings.
We have opted to pay such tax-deductible interest to our stockholders and
have therefore accrued the amounts due as of September 30, 2001 and 2000, with a
direct charge to stockholders' equity.
Under Brazilian law interest attributable to stockholders is considered as
part of the annual minimum dividend (See Note 13). Accordingly such
distributions are treated as dividends for accounting purposes.
(n) DERIVATIVES AND HEDGING ACTIVITIES
As of January 1, 2001 we adopted SFAS 133 "Accounting for Derivative
Financial Instruments and Hedging Activities", as amended by SFAS 137 and SFAS
138. Those standards require that we recognize all derivative financial
instruments as either assets or liabilities on our balance sheet and measure
such instruments at fair value. Changes in the fair value of derivatives are
recorded in each period in current earnings or in other comprehensive income, in
the later case depending on whether a transaction is designated as an effective
hedge.
F-54
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
The transition adjustment relating to the fair value of derivatives
existing as of December 31, 2000 is recorded as a charge of $3 in our statement
of income for the period of nine months ended September 30, 2001. In view of the
immateriality of this effect of a change in accounting principle the
corresponding amount was included with other non-operating expenses. Certain of
our affiliated companies and joint ventures also recorded similar charges, of
which our portion of $3 is included in the caption "Equity in results of
affiliates and joint ventures" in the statement of income.
Further information about our derivatives and hedging activities is
included in Note 18.
(o) COMPREHENSIVE INCOME
We have disclosed comprehensive income as part of the Statement of Changes
in Stockholders' Equity, in compliance with SFAS 130 -- "Reporting Comprehensive
Income".
(p) RECENTLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS
141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible Assets".
We do not expect that the provisions of SFAS 141 will affect our current
accounting practices relative to business combinations. However, the adoption of
SFAS 142 on January 1, 2002 (or immediately for goodwill relating to
acquisitions after June 30, 2001) is expected to have the following effects:
(i) goodwill relative to consolidated subsidiaries will no longer be
amortized, but will be aggregated to reporting units and subject at least
annually to testing for impairment, considering the reporting unit as a
whole.
(ii) goodwill relative to affiliates and joint ventures will no
longer be amortized but will remain allocated to the respective investment
and included in the measurement of the gain or loss on sale, or the loss
arising from an other than temporary decline in the value of the
investment.
Goodwill charged against earnings for the nine months ended September 30,
2001 totaled $53.
In June 2001 and August 2001, respectively, the FASB also issued SFAS 143
"Accounting for Asset Retirement Obligations" and SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 143 is effective for us as
from January 1, 2003 and we are still studying the potential effects that
adoption may have on our financial statements. SFAS 144 will be effective for us
as from January 1, 2002 and the provisions thereof generally are to be applied
prospectively.
3. OUR PRIVATIZATION
In May 1997, we were privatized by the Brazilian Government, which
transferred voting control to Valepar S.A. ("Valepar"). The Brazilian Government
has retained certain rights with respect to our future decisions and those of
Valepar and has also caused us to enter into agreements which may affect our
activities and results of operations in the future. These rights and agreements
are:
- Preferred Special Share. The Brazilian Government holds a preferred
special share of CVRD which confers upon it permanent veto rights over
changes in our (i) name, (ii) headquarters location, (iii) corporate
purpose with respect to mineral exploration, (iv) continued operation of
our integrated iron ore mining systems and (v) certain other matters.
- Preferred Class A Share of Valepar. The Brazilian Government holds a
preferred class A share of Valepar which confers upon it approval rights
for a period of five years in respect of (i) concentration of ownership
of Valepar by particular types of investors in excess of prescribed
limitations and (ii) changes in the Valepar holding company structure
relating to ownership of our common shares.
F-55
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
- Shareholder revenue interests. On July 7, 1997, we issued to
shareholders of record on April 18, 1997 (including the Brazilian
Government) revenue interests providing holders thereof with the right to
receive semi-annual payments based on a percentage of our net revenues
above threshold production volumes from identified mining resources.
These instruments are not secured by the corresponding mineral reserves
and deposits.
In addition to the preferred special share mentioned above, the National
Treasury and the Banco Nacional de Desenvolvimento Economico e Social -- BNDES,
the Government -- owned development bank, together currently own 32% of our
common shares and 4% of our preferred shares, which in aggregate represents 22%
of our total capital.
4. MAJOR ACQUISITIONS AND DISPOSALS DURING THE PERIODS PRESENTED
We made the following acquisitions during the periods presented. Pro forma
information with respect to results of operations is not presented since the
effects are not considered material to an understanding of our consolidated
financial statements.
(a) On May 11, 2000, we acquired the entire capital of Mineracao
SOCOIMEX S.A., a non-public company whose main activity is production and
commercialization of iron ore, for the total price of $55, being an initial
cash payment of $47 and two further cash payments of $3 and $5, in 2001 and
2002, respectively, plus interest based on 89% of the Brazilian Interbank
Rate through the payment date. The increment of the fair value over the
book value of SOCOIMEX at the date of purchase was entirely attributable to
its mineral reserves, which are included in the property, plant and
equipment. In August 2000 SOCOIMEX was merged into CVRD.
(b) On May 30, 2000, we acquired 4,026,694,190 common shares and
4,231,324,374 preferred shares of S.A. Mineracao Trindade -- SAMITRI,
representing 79.27% of the voting capital and 63.06% of the total capital
for $520 in cash, becoming the controlling stockholder. At the date of the
purchase, SAMITRI was a publicly listed Brazilian iron ore mining company,
which also owned a 51% interest in the voting capital of SAMARCO Mineracao
S.A., a large iron ore pellets producer (see Note 10). On June 29, 2000, we
sold 1% of the share capital of SAMARCO to BHP Brasil Ltda. (BHP), a
subsidiary of The Broken Hill Proprietary Company Limited of Australia, for
$8, to equalize our shareholdings in the joint venture.
F-56
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
(c) The assets and liabilities acquired as a result of the above
transactions and corresponding goodwill were as follows:
UNCONSOLIDATED CONSOLIDATED SUBSIDIARIES
JOINT VENTURE --------------------------
SAMARCO SAMITRI SOCOIMEX
-------------- ----------- ------------
Fair value of assets............................. 1,006 293 77
Fair value of liabilities........................ (450) (144) (22)
----- ----- ------
Net assets at fair value......................... 556 149 55
----- ----- ------
Interest acquired................................ 50.00% 63.06% 100.00%
Fair value of net assets acquired................ 278 94 55
Attributable to minority stockholders of SAMITRI
(36.94%)....................................... (103) -- --
Tax benefits..................................... 31 -- --
----- ----- ------
Effective interest acquired...................... 206 94 55
Purchase price................................... 252 268 55
----- ----- ------
Goodwill......................................... 46 174 --
===== ===== ======
The main assets for which fair values differ from book values are
inventories and property, plant and equipment. We determined the fair values of
inventories based on the current replacement costs for raw materials and the
estimated selling prices for finished goods, net of disposal costs and a selling
margin. The fair values of property, plant and equipment were determined based
on current replacement costs for similar capacity and the estimated market value
of purchased reserves. Deferred taxes were recorded for the differences between
fair values and tax bases.
For SAMARCO, SAMITRI and SOCOIMEX inventories were valued at $36, $38 and
$9, respectively, property, plant and equipment were valued at $830, $161 and
$58, respectively, and the deferred tax liability was $60, $49 and $15,
respectively.
We had adopted a policy to amortize the goodwill on the SAMITRI and SAMARCO
purchases on the straight-line basis over a period of 6 years starting on the
date of acquisition. However, as explained in note 2(p), upon adoption of SFAS
142 on January 1, 2002 such straight-line amortization will cease.
(d) On April 27, 2001 we acquired 100% of Ferteco Mineracao
S.A. -- FERTECO, a non-public company whose main activity is production and
commercialization of iron ore and pellets, for $523 in cash.
The assets and liabilities acquired and corresponding goodwill were as
follows:
Fair value of assets........................................ 401
Fair value of liabilities................................... (251)
----
Net assets at fair value.................................... 150
Purchase price.............................................. 523
----
Goodwill.................................................... 373
====
For FERTECO inventories were valued at $57, property, plant and equipment
were valued at $178, and the deferred tax liability was $24.
F-57
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
(e) On January 14, 2000 we sold 20.81% of the capital of Alumina do Norte
do Brasil S.A. -- ALUNORTE and a beneficial interest in 8% of the capital of
Mineracao Rio do Norte S.A. -- MRN owned by us for an aggregate of $164,
resulting in a gain of $54. The total consideration of $164 was received in
cash; however, $120 was received through the issue and sale of Perpetual Notes
with a fair value of $55 and this fair value continues to be reported as a
liability and periodically adjusted based on an early termination formula
reflecting the underlying profitability of MRN.
(f) On March 9, 2001 we transferred our 10.33% interest in Companhia
Siderurgica Nacional -- CSN to VALIA, as a special pension plan contribution,
for $249 (fair market value determined based on the weighted average price of
the last thirty trading sessions at the Sao Paulo stock exchange in the period
ended on March 9, 2001). This transfer resulted in a gain of $107.
(g) On April 27, 2001 we concluded the sale of our 32.00% interest in Bahia
Sul Celulose S.A. -- BSC for $318, received in cash on May 7, 2001. This
operation resulted in a gain of $170.
(h) On June 6, 2001 we concluded the sale of our 51.48% interest in
Celulose Nipo-Brasileira S.A. -- CENIBRA for $671, received in cash on September
14, 2001. This operation resulted in a gain of $507.
5. INCOME TAXES
Income taxes in Brazil comprise federal income tax and social contribution,
which is an additional federal tax. The statutory enacted tax rates applicable
in the periods presented are as follows:
NINE MONTHS ENDED
SEPTEMBER 30 - %
----------------------
2001 2000
----- --------------
Federal income tax.......................................... 25.00 25.00
Social contribution(*)...................................... 9.00 9.00 to 12.00
----- --------------
Composite tax rate.......................................... 34.00 34.00 to 37.00
===== ==============
---------------
(*) As from May 1, 1999 through January 31, 2000, the social contribution rate
has been increased from 8% to 12% (not enacted). Pursuant to a provisional
measure, the social contribution rate will be 9% from February 1, 2000 to
December 31, 2002 and will be reduced to 8% as from January 1, 2003.
F-58
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
The amount reported as income tax benefit in this consolidated financial
information is reconciled to the statutory rates as follows:
NINE MONTHS
ENDED
SEPTEMBER 30
------------
2001 2000
---- ----
Income before income taxes, equity results and minority
interests................................................. 588 660
==== ====
Federal income tax and social contribution expense at
statutory enacted rates................................... (200) (224)
Adjustments to derive effective tax rate:
Tax benefit on interest attributed to stockholders........ 226 144
Exempt foreign income..................................... 185 65
Tax incentives............................................ 22 32
Valuation allowance reversal (provision).................. (27) (5)
Other non-taxable gains................................... 4 14
Adjustment to reflect expected annual effective tax
rate................................................... (167) (25)
---- ----
Federal income tax and social contribution expense in
consolidated statements of income......................... 43 1
==== ====
In 2000, we obtained approval of certain tax incentives relative to our
iron ore and manganese operations in Carajas. The incentives comprise full
income tax exemption on defined production levels up to 2005 and partial
exemption up to 2013. An amount equal to the tax saving must be appropriated to
a reserve account within stockholders' equity (Note 13) and may not be
distributed in the form of cash dividends.
F-59
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
The major components of the deferred tax accounts in the balance sheet are
as follows:
AS OF
SEPTEMBER 30
------------
2001 2000
---- ----
NET CURRENT DEFERRED TAX ASSETS
Accrued expenses deductible only when disbursed........... 147 64
Interest attributed to stockholders....................... 217 --
Adjustment to reflect expected annual effective tax
rate................................................... (167) (25)
---- ----
197 39
==== ====
LONG-TERM DEFERRED TAX ASSETS AND LIABILITIES
ASSETS
Deferred tax relative to temporary differences:
Established on the July 1, 1997 change in functional
currency, less reversals............................... -- 22
Relative to investments acquired.......................... 9 15
Tax-deductible goodwill in business combinations............ 71 96
Write-downs of investments.................................. 74 75
Additional retirement benefits provision (in 2000 net of
unrecognized pension obligation).......................... 49 135
Tax loss carry forwards..................................... 175 218
Other temporary differences................................. 29 3
---- ----
407 564
---- ----
LIABILITIES
Inflationary income......................................... (22) (29)
Established on the July 1, 1997 change in functional
currency, less reversals.................................. (44) --
Prepaid retirement benefit.................................. (30) --
Fair value adjustments in business combinations............. (59) (58)
---- ----
(155) (87)
---- ----
VALUATION ALLOWANCE
Beginning balance........................................... (201) (178)
Translation adjustments..................................... 54 1
Additions................................................... (27) (2)
---- ----
Ending balance.............................................. (174) (179)
---- ----
Net long-term deferred tax assets........................... 78 298
==== ====
F-60
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
6. CASH AND CASH EQUIVALENTS
AS OF
SEPTEMBER 30
--------------
2001 2000
----- -----
Cash........................................................ 33 28
Deposits in local currency.................................. 451 464
Deposits in United States dollars........................... 1,224 563
----- -----
1,708 1,055
===== =====
7. INVENTORIES
AS OF
SEPTEMBER 30
------------
2001 2000
---- ----
Finished products
Iron ore.................................................. 116 80
Gold...................................................... 6 11
Manganese................................................. 23 15
Ferrous alloys............................................ 22 30
Others.................................................... 7 14
Spare parts and maintenance supplies........................ 112 145
--- ---
286 295
=== ===
F-61
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
8. OTHER ASSETS -- LOANS AND ADVANCES
AS OF
SEPTEMBER 30
------------
2001 2000
---- ----
Alunorte(1)................................................. 294 314
Cenibra..................................................... -- 85
Salobo(2)................................................... 60 79
CFN......................................................... -- 11
FCA......................................................... 83 76
Eletrobras.................................................. 9 13
Sepetiba Tecon.............................................. 9 12
Kobrasco.................................................... 23 21
Wilsea...................................................... -- 4
Usiminas.................................................... 17 12
BNDES....................................................... 6 7
Others...................................................... 15 2
--- ---
TOTAL RELATED PARTIES.................................. 516 636
=== ===
Cenibra..................................................... 57 --
Regional development loans.................................. 16 28
Mineracao Morro Velho....................................... 18 18
Estaleiro Verolme........................................... 6 8
Others...................................................... -- 2
--- ---
TOTAL UNRELATED PARTIES................................ 97 56
--- ---
---------------
(1) Includes on-lending outstanding balance of $203 (2000 -- $204), with
identical conditions and terms, of a $200 U.S. dollar denominated loan
obtained by us from the Nippon Amazon Aluminium Company (NAAC) in January
1997 (bearing interest of 6.41% p.a. and maturing up to 2011).
(2) Convertible debentures bearing interest of IGPM plus 6.50% p.a.
9. PROPERTY, PLANT AND EQUIPMENT
a) PER BUSINESS AREA:
AS OF SEPTEMBER 30, 2001 AS OF SEPTEMBER 30, 2000
---------------------------- ----------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION NET COST DEPRECIATION NET
----- ------------ ----- ----- ------------ -----
Ferrous
Ferrous -- Southern System
Mining................................. 842 372 470 1,147 550 597
Railroads.............................. 818 396 422 1,087 540 547
Marine terminals....................... 192 79 113 166 107 59
----- ----- ----- ----- ----- -----
1,852 847 1,005 2,400 1,197 1,203
F-62
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
AS OF SEPTEMBER 30, 2001 AS OF SEPTEMBER 30, 2000
---------------------------- ----------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION NET COST DEPRECIATION NET
----- ------------ ----- ----- ------------ -----
Ferrous -- Northern System
Mining................................. 564 256 308 738 330 408
Railroads.............................. 926 345 581 1,260 459 801
Marine terminals....................... 172 83 89 223 113 110
----- ----- ----- ----- ----- -----
1,662 684 978 2,221 902 1,319
Pelletizing............................ 168 92 76 202 132 70
Ferrous-alloys......................... 217 113 104 273 142 131
Energy................................. 131 5 126 85 4 81
Construction in progress............... 380 -- 380 287 -- 287
----- ----- ----- ----- ----- -----
4,410 1,741 2,669 5,468 2,377 3,091
----- ----- ----- ----- ----- -----
NON-FERROUS
Potash.................................... 44 15 29 49 16 33
Gold...................................... 225 147 78 321 148 173
Kaolin.................................... 65 10 55 95 12 83
Research and projects..................... 15 7 8 20 10 10
Construction in progress.................. 33 -- 33 39 -- 39
----- ----- ----- ----- ----- -----
382 179 203 524 186 338
----- ----- ----- ----- ----- -----
LOGISTICS
General cargo............................. 278 140 138 368 180 188
Maritime transportation................... 303 162 141 357 167 190
Construction in progress.................. 15 -- 15 11 -- 11
----- ----- ----- ----- ----- -----
596 302 294 736 347 389
----- ----- ----- ----- ----- -----
HOLDINGS
Pulp and paper............................ 140 10 130 212 41 171
----- ----- ----- ----- ----- -----
CORPORATE CENTER
Corporate................................. 34 14 20 35 15 20
Construction in progress.................. 4 -- 4 15 -- 15
----- ----- ----- ----- ----- -----
38 14 24 50 15 35
----- ----- ----- ----- ----- -----
Total..................................... 5,566 2,246 3,320 6,990 2,966 4,024
===== ===== ===== ===== ===== =====
F-63
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
b) PER TYPE OF ASSETS:
AS OF SEPTEMBER 30, 2001 AS OF SEPTEMBER 30, 2000
---------------------------- ----------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION NET COST DEPRECIATION NET
----- ------------ ----- ----- ------------ -----
Land and buildings..................... 525 205 320 850 296 554
Installations.......................... 1,349 665 684 1,717 928 789
Equipment.............................. 569 246 323 639 316 323
Ships.................................. 301 160 141 354 164 190
Railroads.............................. 1,449 621 828 1,832 809 1,023
Mine development costs................. 284 72 212 318 73 245
Others................................. 657 277 380 928 380 548
----- ----- ----- ----- ----- -----
5,134 2,246 2,888 6,638 2,966 3,672
Construction in progress............... 432 -- 432 352 -- 352
----- ----- ----- ----- ----- -----
Total.................................. 5,566 2,246 3,320 6,990 2,966 4,024
===== ===== ===== ===== ===== =====
10. INVESTMENTS
AS OF SEPTEMBER 30
---------------------------------------------------------------------
2001
---------------------------------------
PARTICIPATION NET INCOME EQUITY
IN CAPITAL(%) (LOSS) FOR INVESTMENTS ADJUSTMENTS
-------------- NET THE ------------- -----------
INVESTMENTS IN AFFILIATED COMPANIES AND JOINT VENTURES VOTING TOTAL EQUITY(1) PERIOD(1) 2001 2000 2001 2000
------------------------------------------------------ ------ ----- --------- ---------- ----- ----- ---- ----
STEEL
Usinas Siderurgicas de Minas Gerais S.A. --
USIMINAS(2).................................... 22.99 11.46 1,389 60 159 239 7 4
Companhia Siderurgica Nacional -- CSN(3)......... -- 92 -- 137 9 4
Companhia Siderurgica de Tubarao -- CST(4)....... 20.51 22.85 1,138 27 260 250 6 19
California Steel Industries Inc. -- CSI.......... 50.00 50.00 230 (5) 115 121 (3) 17
PAPER AND PULP
Celulose Nipo-Brasileira S.A. -- CENIBRA(3)...... -- 17 -- 215 9 50
Bahia-Sul Celulose S.A -- BSC(3)................. -- 6 -- 166 2 34
ALUMINUM AND BAUXITE
Mineracao Rio do Norte S.A. -- MRN............... 40.00 40.00 358 53 143 146 21 29
Valesul Aluminio S.A. -- VALESUL................. 54.51 54.51 72 15 39 46 8 8
Alumina do Norte do Brasil S.A. -- ALUNORTE...... 50.30 46.60 42 (79) 41 73 (37) 8
PELLETS
Companhia Nipo-Brasileira de Pelotizacao --
NIBRASCO....................................... 51.11 51.00 41 (12) 21 30 6 8
Companhia Hispano-Brasileira de Pelotizacao --
HISPANOBRAS.................................... 51.00 50.89 30 8 16 21 4 6
Companhia Coreano Brasileira de Pelotizacao --
KOBRASCO....................................... 50.00 50.00 3 (17) 1 13 (8) 2
Companhia Italo-Brasileira de Pelotizacao --
ITABRASCO...................................... 51.00 50.90 26 7 13 17 4 5
Gulf Industrial Investment Company -- GIIC....... 50.00 50.00 130 8 65 -- 4 --
SAMARCO Mineracao S.A............................ 50.00 50.00 355 (5) 216 346 (12) --
F-64
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
AS OF SEPTEMBER 30
---------------------------------------------------------------------
2001
---------------------------------------
PARTICIPATION NET INCOME EQUITY
IN CAPITAL(%) (LOSS) FOR INVESTMENTS ADJUSTMENTS
-------------- NET THE ------------- -----------
INVESTMENTS IN AFFILIATED COMPANIES AND JOINT VENTURES VOTING TOTAL EQUITY(1) PERIOD(1) 2001 2000 2001 2000
------------------------------------------------------ ------ ----- --------- ---------- ----- ----- ---- ----
OTHERS
Fertilizantes Fosfatados S.A. -- FOSFERTIL(5).... 10.96 10.96 205 23 22 30 3 3
Salobo Metais S.A. (6)........................... 50.00 50.00 37 -- 18 27 -- --
Ferrovia Centro-Atlantica S.A. -- FCA............ 20.00 45.65 68 (61) -- 54 (28) (14)
Others........................................... 54 112 (3) 4
----- ----- --- ---
1,183 2,043 (8) 187
INVESTMENTS AT COST
ACOMINAS......................................... -- 27 -- --
SIDERAR (market value $18 in 2001 -- $50 in 2000)... 4.85 4.85 15 15 -- --
Unrealized holding gains on equity security...... 3 35 -- --
MRS Logistica S.A................................ 17.19 9.76 19 -- -- --
Others........................................... 3 35 -- --
----- ----- --- ---
1,223 2,155 (8) 187
===== ===== === ===
CHANGE IN PROVISION FOR LOSSES ON EQUITY INVESTMENTS:
Aluminio Brasileiro S.A. -- ALBRAS............... (37) 55
Cia Ferroviaria do Nordeste...................... (8) (2)
--- ---
(45) 53
=== ===
---------------
(1) Based on US GAAP financial statements
(2) Value based on quoted market price at September 30, 2001 is $36 compared to
net book value of $33
(3) Investments sold in 2001
(4) Value based on quoted market price at September 30, 2001 is $81 compared to
net book value of $28
(5) Value based on quoted market price at September 30, 2001 is $31
(6) Development stage enterprise
Goodwill included in the above investments is as follows:
AS OF
ORIGINAL TERM OF REMAINING SEPTEMBER 30
AMORTIZATION AMORTIZATION -------------
INVESTEE (YEARS) (YEARS) 2001 2000
-------- ---------------- ------------ ----- -----
Alumina do Norte do Brasil S.A. -- ALUNORTE... 35 34 21 30
SAMARCO Mineracao S.A......................... 6 5 42 69
--- ---
63 99
=== ===
Based on our revised expectation for profitability and other economic
facts, we fully amortized the remaining goodwill relative to FCA and GIIC in the
quarter ended September 30, 2001.
F-65
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
The combined financial position and results of operations of our affiliates
in the steel sector is as follows:
STEEL SECTOR AFFILIATES
(COMBINED)
AS OF SEPTEMBER 30
------------------------
2001 2000
--------- ---------
Balance sheet
Current assets............................................ 1,099 2,873
Noncurrent assets......................................... 5,843 10,420
Current liabilities....................................... (973) (2,929)
Noncurrent liabilities.................................... (2,505) (4,825)
Purchase accounting adjustments........................... (707) (1,612)
------ ------
Stockholders' equity...................................... 2,757 3,927
====== ======
Investments............................................... 534 747
====== ======
STEEL SECTOR AFFILIATES
(COMBINED)
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
2001 2000
--------- ---------
Statement of operations
Net sales................................................. 2,320 3,277
Costs and expenses........................................ (2,195) (2,958)
Purchase accounting adjustments........................... 4 24
------ ------
Income before income taxes................................ 129 343
Income taxes.............................................. 45 (146)
------ ------
Net income................................................ 174 197
====== ======
Equity adjustments........................................ 19 44
====== ======
Information with respect to other major affiliates' financial position and
results of operations is as follows:
AS OF SEPTEMBER 30
---------------------------------------------
ALUNORTE ALBRAS MRN
------------- ------------- -------------
2001 2000 2001 2000 2001 2000
----- ----- ----- ----- ----- -----
Balance Sheet
Current assets........................ 120 74 100 123 51 72
Noncurrent assets..................... 408 513 483 636 371 347
Current liabilities................... (76) (78) (163) (235) (26) (17)
Noncurrent liabilities................ (410) (423) (507) (577) (38) (38)
----- ----- ----- ----- ----- -----
Stockholders' equity.................. 42 86 (87) (53) 358 364
===== ===== ===== ===== ===== =====
Our participation....................... 46.60% 50.27% 51.00% 51.00% 40.00% 40.00%
----- ----- ----- ----- ----- -----
Investments............................. 20 43 (44) (27) 143 146
===== ===== ===== ===== ===== =====
F-66
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------
ALUNORTE ALBRAS MRN
------------- ------------- -------------
2001 2000 2001 2000 2001 2000
----- ----- ----- ----- ----- -----
Statement of Operations Net sales....... 227 237 382 417 148 164
Costs and expenses.................... (306) (236) (454) (326) (80) (84)
Income (loss) before income taxes..... (79) 1 (72) 91 68 80
Income taxes.......................... -- 14 -- 18 (6) (15)
Equity in results of affiliates....... -- -- -- -- (9) 7
----- ----- ----- ----- ----- -----
Net income (loss)..................... (79) 15 (72) 109 53 72
===== ===== ===== ===== ===== =====
Our participation....................... 46.60% 50.27% 51.00% 51.00% 40.00% 40.00%
Participation in results................ (37) 8 (37) 55 21 29
Change in provision for losses.......... -- -- 37 (55) -- --
----- ----- ----- ----- ----- -----
Equity adjustments...................... (37) 8 -- -- 21 29
===== ===== ===== ===== ===== =====
The provision for losses and write-downs on equity investments of $405 and
$446 at September 30, 2001 and 2000, respectively, relates to other than
temporary declines in the publicly quoted market price below carrying value of
our affiliates equity securities and to our investments in affiliates which have
reported negative stockholders' equity in their financial statements prepared in
accordance with US GAAP and in circumstances where we have assumed commitments
to fund our share of the accumulated losses, if necessary, through additional
capital contributions or other means. Accordingly we (a) first reduce the value
of the investment to zero and (b) subsequently provide for our portion of
negative equity. The provision is comprised as follows:
CIA
FERROVIARIA
CST USIMINAS DO NORDESTE ALBRAS TOTAL
---- -------- ----------- ------ -----
PROVISION AT JANUARY 1, 2000......... (223) (194) (4) (83) (504)
Change in provision -- results....... -- -- (2) 55 53
---- ---- -- --- ----
(223) (194) (6) (28) (451)
Payment of capital................... -- -- 1 -- 1
Translation adjustment............... 2 1 -- 1 4
---- ---- -- --- ----
PROVISION AT SEPTEMBER 30, 2000...... (221) (193) (5) (27) (446)
==== ==== == === ====
PROVISION AT JANUARY 1, 2001......... (215) (185) -- (15) (415)
Change in provision -- results....... -- -- (8) (37) (45)
---- ---- -- --- ----
(215) (185) (8) (52) (460)
Translation adjustment............... (17) 59 5 8 55
---- ---- -- --- ----
PROVISION AT SEPTEMBER 30, 2001...... (232) (126) (3) (44) (405)
==== ==== == === ====
Dividends received from investees aggregated $112 and $94 in nine month
periods ended September 30, 2001 and 2000, respectively.
F-67
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
11. SHORT-TERM DEBT
Our short-term borrowings are principally from commercial banks and include
import and export financing denominated in United States dollars, as follows:
AS OF
SEPTEMBER 30
-------------
2001 2000
----- -----
Export...................................................... 638 761
Import...................................................... 2 9
Working Capital............................................. 9 7
--- ---
649 777
=== ===
Average annual interest rates on short-term borrowings were 7.43% and 8.67%
in 2001 and 2000, respectively.
12. LONG-TERM DEBT
AS OF SEPTEMBER 30
---------------------------
CURRENT LONG-TERM
LIABILITIES LIABILITIES
----------- -------------
2001 2000 2001 2000
---- ---- ----- -----
Foreign debt
Loans and financing contracted in the following
currencies, maturing up to 2011:
United States dollars............................... 199 235 1,072 743
Japanese Yen........................................ 9 10 30 4
Others.............................................. 2 3 3 3
Fixed Rate Notes -- US$ denominated.................... -- -- 500 500
Export Securitization -- US$ denominated............... -- -- 300 --
Perpetual notes........................................ -- -- 56 55
Accrued charges........................................ 21 23 -- --
--- --- ----- -----
231 271 1,961 1,305
--- --- ----- -----
Local debt
Indexed by Long-Term Interest Rate -- TJLP maturing up
to 2002............................................. 3 7 29 42
Indexed by General Price Index-Market (IGPM) maturing
up to 2005.......................................... 2 21 51 50
Basket of currencies................................... 15 16 44 61
Capital Lease.......................................... -- 1 -- --
Shareholders revenue interests (Note 3)................ -- -- 3 3
Indexed by U.S. dollars................................ 5 21 23 64
Accrued charges........................................ 4 1 -- --
--- --- ----- -----
29 67 150 220
--- --- ----- -----
Total.................................................. 260 338 2,111 1,525
=== === ===== =====
F-68
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
The long-term portion at September 30, 2001 becomes due in the following
years:
2002 (after September 30)................................... 55
2003........................................................ 689
2004........................................................ 713
2005........................................................ 192
2006........................................................ 129
2007 and thereafter......................................... 277
No due date (Perpetual notes)............................... 56
-----
2,111
=====
At September 30, 2001 annual interest rates on long-term debt were as
follows:
Up to 7%.................................................... 1,172
7.1% to 9%.................................................. 481
9.1% to 11%................................................. 562
Over 11%.................................................... 100
Variable (Perpetual notes).................................. 56
-----
2,371
=====
Long-term debt at September 30, 2001 is guaranteed or secured as follows:
AMOUNT OF
GUARANTEE
---------
Federal Government guarantee(*)............................. 308
Export receivables (securitization)......................... 125
Ships....................................................... 62
---------------
(*) For this guarantee, counter-guarantees were constituted by us with
receivables of a subsidiary and an affiliate.
13. STOCKHOLDERS' EQUITY
Each holder of common and preferred class A stock is entitled to one vote
for each share on all matters that come before a stockholders' meeting, except
for the election of the Board of Directors, which is restricted to the holders
of common stock. As described in Note 3, the Brazilian Government holds a
preferred special share which confers on it permanent veto rights over certain
matters.
The Board of Directors authorized the acquisition of up to 9,832,691 of our
own preferred class A shares, to remain in treasury for subsequent disposal or
cancellation. As of September 30, 2001, 3,519,288 shares had been acquired, at
an average weighted unit cost of R$20.03 (minimum cost of R$14.02 and maximum of
R$24.19).
Both common and preferred stockholders are entitled to receive a dividend
of at least 25% of annual net income, upon approval at the annual stockholders'
meeting. In the case of preferred stockholders, this dividend cannot be less
than 6% of the preferred capital as stated in the statutory accounting records.
With respect to each of 2001 and 2000 we distributed dividends to preferred
stockholders in excess of this limit. Interest attributed to stockholders as
from January 1, 1996 is considered part of the minimum dividend.
F-69
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
Brazilian law permits the payment of cash dividends only from retained
earnings as stated in the statutory accounting records and such payments are
made in Reais. At September 30, 2001, we had $239 in undistributed retained
earnings. In addition, appropriated retained earnings at September 30, 2001
includes $1,532, related to the unrealized income and expansion reserves, which
could be freely transferred to retained earnings and paid as dividends, if
approved by the stockholders.
No withholding tax is payable on distribution of profits earned as from
January 1, 1996, except for distributions in the form of interest attributed to
stockholders as explained in Note 2 (m).
Brazilian laws and our By-laws require that certain appropriations be made
from retained earnings to reserve accounts on an annual basis, all determined in
accordance with amounts stated in the statutory accounting records, as detailed
below:
NINE MONTHS
ENDED
SEPTEMBER 30
--------------
2001 2000
----- -----
Appropriated retained earnings
Unrealized income reserve
Balance January 1...................................... 874 1,062
Transfer to retained earnings.......................... (234) (34)
----- -----
Balance September 30................................... 640 1,028
Expansion reserve
Balance January 1...................................... 1,546 1,367
Transfer to capital stock.............................. (278) --
Transfer to retained earnings.......................... (376) (43)
----- -----
Balance September 30................................... 892 1,324
Legal reserve
Balance January 1...................................... 307 284
Transfer to retained earnings.......................... (82) (10)
----- -----
Balance September 30................................... 225 274
Fiscal incentive depletion reserve
Balance January 1...................................... 771 842
Transfer to retained earnings.......................... (207) (27)
----- -----
Balance September 30................................... 564 815
Fiscal incentive investment reserve
Balance January 1...................................... 39 12
Transfer to capital stock.............................. (33) --
Transfer (to) from retained earnings................... (6) 31
----- -----
Balance September 30................................... -- 43
----- -----
Total appropriated retained earnings........................ 2,321 3,484
===== =====
The purpose and basis of appropriation to such reserves is described below:
- Unrealized income reserve -- this represents principally our share of the
earnings of affiliates and joint ventures, not yet received in the form
of cash dividends.
- Expansion reserve -- this is a general reserve for expansion of our
activities.
F-70
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
- Legal reserve -- this reserve is a requirement for all Brazilian
corporations and represents the appropriation of 5% of annual net income
under Brazilian GAAP up to a limit of 20% of capital stock under
Brazilian GAAP.
- Fiscal incentive depletion reserve -- this represents an additional
amount relative to mineral reserve depletion equivalent to 20% of the
sales price of mining production, which is deductible for tax purposes
providing an equivalent amount is transferred from retained earnings to
the reserve account. This fiscal incentive expired in 1996.
- Fiscal incentive investment reserve -- this reserve results from an
option to designate a portion of income tax otherwise payable for
investment in government approved projects and is recorded in the year
following that in which the taxable income was earned. As from 2000, this
reserve also contemplates the tax incentives described in Note 5.
14. PENSION PLANS
Since 1973 we have sponsored a defined benefit pension plan (the "Old
Plan") covering substantially all employees, with benefits based on years of
service, salary and social security benefits. This plan is administered by
Fundacao Vale do Rio Doce de Seguridade Social -- VALIA and was funded by
monthly contributions made by us and our employees, calculated based on periodic
actuarial appraisals.
In May 2000, we implemented a new pension plan, which is primarily a
defined contribution plan with a defined benefit feature relative to service
prior to May 2000 (the "New Plan"), and offered our active employees the
opportunity of transferring to the New Plan. Over 98% of our active employees
opted to transfer to the New Plan. The Old Plan will continue in existence,
covering almost exclusively retired participants and their beneficiaries.
The following information details the status of the defined benefit
elements of our plans in accordance with SFAS 132 "Employers' Disclosure about
Pensions and Other Post-retirement Benefits":
(a) CHANGE IN BENEFIT OBLIGATION
AS OF AND FOR THE
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
2001 2000
------ ------
Benefit obligation at beginning of period................... 1,596 1,440
Service cost................................................ 3 9
Interest cost............................................... 60 69
Benefits paid............................................... (68) (84)
Plan amendments............................................. -- (13)
Effect of exchange rate changes............................. (427) (51)
Actuarial loss.............................................. -- 242
----- -----
Benefit obligation at end of period......................... 1,164 1,612
===== =====
The actuarial loss of $242 in the period of nine months ended September 30,
2000 is mainly due to the adoption of a new mortality table which is considered
to better reflect the current life expectancy of the plan participants.
F-71
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
(b) CHANGE IN PLAN ASSETS
AS OF AND FOR THE
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
2001 2000
------ ------
Fair value of plan assets at beginning of period............ 1,189 1,231
Actual return on plan assets................................ 114 82
Special employer contributions (Note 4(f)).................. 249 --
Employer contributions...................................... 14 25
Employee contributions...................................... -- 4
Benefits paid............................................... (68) (84)
Effect of exchange rate changes............................. (380) (39)
----- -----
Fair value of plan assets at end of period.................. 1,118 1,219
===== =====
Plan assets at September 30, 2001 include $92 of portfolio investments in
our own shares ($92 at September 30, 2000) and $6 of shares of related parties
($9 at September 30, 2000), as well as $469 of Federal Government Securities
($426 at September 30, 2000).
(c) ACCRUED PENSION COST LIABILITY
AS OF
SEPTEMBER 30
------------
2001 2000
---- ----
Funded status, excess of benefit obligation over plan
assets.................................................... 46 393
Unrecognized net transitory obligation...................... (84) (136)
Unrecognized net actuarial loss............................. (51) (120)
--- ----
Accrued pension cost liability (prepaid pension cost)....... (89) 137
=== ====
(d) RECOGNITION OF ADDITIONAL MINIMUM LIABILITY
AS OF
SEPTEMBER 30
------------
2001 2000
---- ----
Accrued pension cost liability.............................. -- 137
Unrecognized pension obligation, limited to unrecognized net
transitory obligation..................................... 46 136
Additional amount recognized in stockholders' equity........ -- 119
-- ---
Minimum liability........................................... 46 392
== ===
(e) ASSUMPTIONS USED IN EACH PERIOD
2001 2000
---------- ----------
Discount rate............................................... 6% p.a. 6% p.a.
Expected return on plan assets.............................. 6% p.a. 6% p.a.
Rate of compensation increase............................... 1.82% p.a. 1.82% p.a.
F-72
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
Net pension cost includes the following components:
NINE MONTHS
ENDED
SEPTEMBER 30
------------
2001 2000
---- ----
Service cost -- benefits earned during the period........... 3 9
Interest cost on projected benefit obligation............... 60 69
Actual return on assets..................................... (114) (82)
Amortization of initial transitory obligation............... 9 12
Net deferral................................................ 66 30
---- ---
24 38
Employee contributions...................................... -- (4)
---- ---
Net periodic pension cost................................... 24 34
==== ===
In addition to benefits provided under our pension plan accruals have been
made relative to supplementary benefits extended in previous periods as part of
early-retirement programs. Such accruals included in long-term liabilities
totaled $148 and $138, at September 30, 2001 and 2000, respectively, plus $23
and $22 in current liabilities.
The cost recognized in the period of nine months ended September 30, 2001
relative to the defined contribution element of the New Plan was $3.
15. COMMITMENTS AND CONTINGENCIES
(a) At September 30, 2001, we had extended guarantees for borrowings
obtained by affiliates and joint ventures in the amount of $801, of which $614
is denominated in United States dollars and the remaining $187 in local
currency. These guarantees include $372 relative to ALBRAS and $78 relative to
ALUNORTE (see Note 10).
(b) CVRD and its subsidiaries are defendants in numerous legal actions in
the normal course of business. Based on the advice of our legal counsel,
management believes that the provision made against contingent losses is
sufficient to cover probable losses in connection with such actions.
The provision for contingencies and the related judicial deposits are
composed as follows:
AS OF SEPTEMBER 30
---------------------------------------------------
2001 2000
------------------------ ------------------------
PROVISION FOR JUDICIAL PROVISION FOR JUDICIAL
CONTINGENCIES DEPOSITS CONTINGENCIES DEPOSITS
------------- -------- ------------- --------
Labor claims.............................. 97 45 98 60
Civil claims.............................. 102 42 139 15
Tax -- related actions.................... 122 58 69 32
Others.................................... 52 2 6 2
--- --- --- ---
373 147 312 109
=== === === ===
Current................................... -- -- -- --
Long-term................................. 373 147 312 109
--- --- --- ---
373 147 312 109
=== === === ===
F-73
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
Labor-related actions principally comprise employee claims for (i) payment
of time spent travelling from their residences to the work-place, (ii)
additional payments for alleged dangerous or unhealthy working conditions and
(iii) various other matters, often in connection with disputes about the amount
of indemnities paid upon dismissal.
Civil actions principally relate to claims made against us by contractors
in connection with losses alleged to have been incurred by them as a result of
various past government economic plans during which full indexation of contracts
for inflation was not permitted.
Tax-related actions principally comprise our challenges of changes in basis
of calculation and rates of certain revenue taxes and of the tax on financial
movements -- CPMF.
We continue to vigorously pursue our interests in all the above actions but
recognize that probably we will incur some losses in the final instance, for
which we have made provisions.
Our judicial deposits are made as required by the courts for us to be able
to enter or continue a legal action. When judgment is favorable to us, we
receive the deposits back; when unfavorable, the deposits are delivered to the
prevailing party.
Contingencies settled in the nine months ended September 30, 2001 and 2000
aggregated $19 and $15, respectively, and additional provisions aggregated $125
and $131 in these periods, respectively.
(c) We are defendants in two actions seeking substantial compensatory
damages brought by the Municipality of Itabira, State of Minas Gerais, which we
believe are without merit. Due to the remote likelihood that any loss will arise
therefrom no provision has been made in the financial statements with respect to
these two actions.
(d) We are committed under a take-or-pay agreement to take delivery of
approximately 175,950 metric tons per year of aluminum from ALBRAS at market
prices. This estimate is based on 51% of ALBRAS expected production and, at a
market price of $1,368.15 per metric ton at September 30, 2001, represents an
annual commitment of $241. We are also committed to take-or-pay 459,214 metric
tons per year of alumina produced by ALUNORTE which at a market price of $183.21
per metric ton at September 30, 2001, represents an annual commitment of $84.
Actual take from ALBRAS was $176 and $196 during the nine month periods ended
September 30, 2001 and 2000, respectively, and direct from ALUNORTE (net of take
ceded to ALBRAS) was $22 and $35 during the nine month periods ended September
30, 2001 and 2000, respectively.
(e) We and BNDES entered into a contract, known as the Mineral Risk
Contract, in March 1997, relating to prospecting authorizations for mining
regions where drilling and exploration are still in their early stages. The
Mineral Risk Contract provides for the joint development of certain unexplored
mineral deposits in approximately two million identified hectares of land in the
Carajas region, as well as proportional participation in any financial benefits
earned from the development of such resources. Iron ore and manganese deposits
already identified and subject to development are specifically excluded from the
Mineral Risk Contract.
Pursuant to the Mineral Risk Contract, we and BNDES each agreed to provide
$205, which represents half of the $410 in expenditures estimated as necessary
to complete geological exploration and mineral resource development projects in
the region over a period of five years. Under certain circumstances, this period
may be extended for an additional two years. We oversee these projects and BNDES
advances us half of our costs on a quarterly basis. Under the Mineral Risk
Contract, as of September 30, 2001, each of us and BNDES had remaining
commitments to contribute an additional $89 toward exploration and development
activities. We both expect to fund a portion of these contributions through the
end of 2001. In the event that either of us wishes to conduct further
exploration and development after having spent such $205, the contract provides
that each party may either choose to
F-74
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
match the other party's contributions, or may choose to have its financial
interest proportionally diluted. If a party's participation in the project is
diluted to an amount lower than 40% of the amount invested in connection with
exploration and development projects, then the Mineral Risk Contract provides
that the diluted party will lose (1) all the rights and benefits provided for in
the Mineral Risk Contract and (2) any amount previously contributed to the
project.
Under the Mineral Risk Contract, BNDES has agreed to compensate us for our
contribution of existing development and ownership rights in the Carajas region
through a finder's fee production royalty on mineral resources that are
discovered and placed into production. This finder's fee is equal to 3.5% of the
revenues derived from the sale of gold, silver and platinum group metals and
1.5% of the revenues derived from the sale of other minerals, including copper,
except for gold and other minerals discovered at Serra Leste, for which the
finder's fee is equal to 6.5% of revenues.
(f) At the time of our privatization in 1997, we issued shareholder revenue
interests known in Brazil as "debentures" to our then-existing shareholders,
including the Brazilian Government. The terms of the "debentures", which are
described below, were set to ensure that our pre-privatization shareholders,
including the Brazilian Government, would participate alongside us in potential
future financial benefits that we are able to derive from exploiting our mineral
resources.
In preparation for the issuance of the debentures, we issued series B
preferred shares on a one-for-one basis to all holders of our common shares and
series A preferred shares. We then exchanged all of the series B shares for the
debentures at par value. The debentures are not redeemable or convertible, and
do not trade on a stapled basis or otherwise with our common or preferred
shares. At present the debentures cannot be traded. Holders will be able to
trade the debentures only after a three-month period that will commence upon
completion of the sale by the Brazilian Government of its 32% stake in our
common shares, which will constitute the final step of our privatization. We
will be required to register the debentures with the CVM in order to permit
trading at this time. We cannot be sure when the final step of our privatization
will take place.
Under Brazilian Central Bank regulations, pre-privatization shareholders
that held their shares through our American Depositary Receipt, or ADR, program
were not permitted to receive the debentures or any financial benefits relating
to the debentures. We sought approval from the Central Bank to distribute the
debentures to the ADR holders, but the Central Bank rejected our request. We
intend to renew our request to the Central Bank, but we cannot be sure that we
will succeed. If the Central Bank does not approve our request, the ADR
depositary will not be able to distribute the debentures to the ADR holders and
will not be able to sell the debentures. Therefore, unless the Central Bank
approves our request, the debentures will not have any value for ADR holders.
Under the terms of the debentures, holders will have the right to receive
semi-annual payments equal to an agreed percentage of our net revenues (revenues
less value added tax) from certain identified mineral resources that we owned as
of May 1997, to the extent that we exceed defined threshold production volumes
of these resources, and from the sale of mineral rights that we owned as of May
1997. Our obligation to make payments to the holders will cease when the
relevant mineral resources are exhausted. Based on current production levels,
and on the estimates of production of our new projects, we would begin making
payments related to iron ore resources in approximately 2012, and payments
related to other mineral resources in later years.
F-75
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
The table below summarizes the amounts we will be required to pay under the
debentures based on the net revenues we earn from the identified mineral
resources and the sale of mineral rights.
AREA MINERAL REQUIRED PAYMENTS BY CVRD
---- ------- -------------------------
Southern System Iron ore 1.8% of net revenue, after total production from
May 1997 exceeds 1.7 billion tons.
Northern System Iron ore 1.8% of net revenue, after total production from
May 1997 exceeds 1.2 billion tons.
Pojuca, Andorinhas, Gold and copper 2.5% of net revenue from the beginning of
Liberdade and Sossego commercial production.
Igarape Bahia and Alemao Gold and copper 2.5% of net revenue, after total production from
the beginning of commercial production exceeds 70
tons of gold.
Fazenda Brasileiro Gold 2.5% of net revenue after total production from
the beginning of commercial production exceeds 26
tons.
Other areas, excluding Gold 2.5% of net revenue.
Carajas/Serra Leste
Other areas owned as of Other minerals 1% of net revenue, 4 years after the beginning of
May 1997 commercial production.
All areas Sale of mineral 1% of the sales price.
rights owned as
of May 1997
(g) At September 30, 2001 we have provided $29 for environmental
liabilities. Such provisions relate to site restoration at mines already closed
or which are expected to be closed in the next two years.
We use various judgments and assumptions when measuring our environmental
liabilities. Changes in circumstances, law or technology may affect our
estimates and we periodically review the amounts accrued and adjust them as
necessary. Our accruals do not reflect unasserted claims because we are
currently not aware of any such issues. Also the amounts provided are not
reduced by any potential recoveries under cost sharing, insurance or
indemnification arrangements because such recoveries are considered uncertain.
16. SEGMENT AND GEOGRAPHICAL INFORMATION
In 1999 we adopted SFAS 131 "Disclosures about Segments of an Enterprise
and Related Information" with respect to the information we present about our
operating segments. SFAS 131 introduced a "management approach" concept for
reporting segment information, whereby financial information is required to be
reported on the basis that the top decision-maker uses such information
internally for evaluating segment performance and deciding how to allocate
resources to segments. Our business segments are currently organized as follows:
Ferrous products -- comprises iron ore mining and pellet production, as
well as the Northern and Southern transportation systems, including railroads,
ports and terminals, as they pertain to mining operations. Manganese mining and
ferrous alloys are also classified in this segment.
Non-ferrous products -- comprises the production of gold and other
non-ferrous minerals.
Logistics -- comprises our transportation systems as they pertain to
external commercial operations, and the operations of our ships.
Holdings -- divided into the following sub-groups:
- Pulp and paper -- comprises our forestation activities and investments in
joint ventures and affiliates engaged in the manufacture of pulp and
paper products.
F-76
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
- Aluminum -- comprises aluminum trading activities and investments in
joint ventures and affiliates engaged in bauxite mining, alumina refining
and aluminum metal smelting.
- Steel -- comprises our investments in joint ventures and affiliates
operating in the steel industry.
- Others -- comprises our investments in joint ventures and affiliates
engaged in other businesses.
Corporate Center -- the Corporate Center is responsible for accounting and
control, finance, legal matters, human resources and administration, investor
and external relations and internal auditing.
Information presented to top management with respect to the performance of
each segment is generally derived directly from the accounting records
maintained in accordance with Brazilian corporate law together with certain
minor inter-segment allocations, and is focused primarily on return on capital
employed (ROCE), net operating profit less taxes (NOPLT) as well as net income.
F-77
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
Consolidated net income and principal assets are reconciled as follows:
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------------------------
HOLDINGS
---------------------------------
PULP
NON AND
FERROUS FERROUS LOGISTICS PAPER ALUMINUM STEEL OTHERS
------- ------- --------- ----- -------- ----- ------
RESULTS
Revenues -- Export................. 2,570 133 125 49 225 -- --
Revenues -- Domestic............... 805 58 269 7 1 -- --
Cost and expenses.................. (2,292) (141) (446)(1) 611(2) (209) 107(3) --
Interest revenue................... 22 1 6 7 5 -- --
Interest expense................... (76) (9) (7) -- (1) (3) --
Depreciation....................... (128) (23) (17) (2) -- -- --
Pension plan....................... (19) (3) (2) -- -- -- --
Equity and provision for losses and
write-downs...................... 2 -- (43) 11 (45) 19 3
Income taxes....................... 2 -- (1) (3) -- -- --
------ ---- ---- --- ---- --- --
Net income......................... 886 16 (116) 680 (24) 123 3
====== ==== ==== === ==== === ==
Sales classified by geographic
destination:
Export market
Latin America.................... 194 4 52 -- 8 -- --
United States...................... 154 100 15 42 33 -- --
Europe............................. 1,015 27 43 7 161 -- --
Middle East........................ 149 -- 3 -- -- -- --
Japan.............................. 395 -- 9 -- 12 -- --
Asia, other than Japan............. 663 2 3 -- 11 -- --
------ ---- ---- --- ---- --- --
2,570 133 125 49 225 -- --
Domestic market.................... 805 58 269 7 1 -- --
------ ---- ---- --- ---- --- --
3,375 191 394 56 226 -- --
====== ==== ==== === ==== === ==
Assets:
Property, plant and equipment,
net.............................. 2,669 203 294 130 -- -- --
Capital expenditures............... 382 36 17 -- -- -- --
Investments in affiliated companies
and joint ventures and other
investments...................... 372 20 35 -- 179 194 18
====== ==== ==== === ==== === ==
Capital employed................... 2,819 194 302 127 (2) 10 1
NOPLT.............................. 1,104 62 55 (30) 17 (1) --
ROCE............................... 39% 32% 18% (24)% -- (10)% --
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------
CORPORATE
CENTER ELIMINATIONS CONSOLIDATED
--------- ------------ ------------
RESULTS
Revenues -- Export................. -- (986) 2,116
Revenues -- Domestic............... -- (157) 983
Cost and expenses.................. (919) 1,143 (2,146)
Interest revenue................... 75 (36) 80
Interest expense................... (180) 36 (240)
Depreciation....................... (4) -- (174)
Pension plan....................... -- -- (24)
Equity and provision for losses and
write-downs...................... -- -- (53)
Income taxes....................... 45 -- 43
---- ------ ------
Net income......................... (983) -- 585
==== ====== ======
Sales classified by geographic
destination:
Export market
Latin America.................... -- (69) 189
United States...................... -- (57) 287
Europe............................. -- (450) 803
Middle East........................ -- (57) 95
Japan.............................. -- (114) 302
Asia, other than Japan............. -- (239) 440
---- ------ ------
-- (986) 2,116
Domestic market.................... -- (157) 983
---- ------ ------
-- (1,143) 3,099
==== ====== ======
Assets:
Property, plant and equipment,
net.............................. 24 -- 3,320
Capital expenditures............... 9 -- 444
Investments in affiliated companies
and joint ventures and other
investments...................... -- -- 818
==== ====== ======
Capital employed................... (15) (50) 3,386
NOPLT.............................. (160) (42) 1,005
ROCE............................... -- -- 30%
---------------
(1) -- Includes provisions $101 to reflect realizable value of assets
(2) -- Includes $170 profit on sale of Bahia Sul Celulose S.A. -- BSC and $507
profit on sale of Celulose Nipo-Brasileira S.A. -- CENIBRA
(3) -- Includes $107 profit on sale of Companhia Siderurgica Nacional -- CSN
F-78
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------------------------------------------------------------
HOLDINGS
---------------------------------
PULP
NON AND CORPORATE
FERROUS FERROUS LOGISTICS PAPER ALUMINUM STEEL OTHERS CENTER ELIMINATIONS CONSOLIDATED
------- ------- --------- ----- -------- ----- ------ --------- ------------ ------------
RESULTS
Revenues -- Export.... 1,980 143 143 114 274 -- -- -- (649) 2,005
Revenues -- Domestic... 748 70 295 9 11 1 -- -- (47) 1,087
Cost and expenses..... (1,784) (154) (307) (114) (193) (3) -- (366) 696 (2,225)
Interest revenue...... 32 1 1 5 21 -- -- 114 (38) 136
Interest expense...... (46) (9) (6) -- (3) (4) -- (174) 38 (204)
Depreciation.......... (87) (18) (18) (2) -- -- -- (5) -- (130)
Pension plan.......... (7) (2) -- -- -- -- -- -- -- (9)
Equity and provision
for losses and
write-downs......... 27 -- (18) 84 100 44 3 -- -- 240
Income taxes.......... 2 -- 6 (4) (4) -- -- 1 -- 1
------ ---- ---- ---- ---- --- -- ---- ---- ------
Net income............ 865 31 96 92 206 38 3 (430) -- 901
====== ==== ==== ==== ==== === == ==== ==== ======
Sales classified by
geographic
destination:
Export market
Latin America....... 161 -- 16 -- 17 -- -- -- (51) 143
United States......... 169 113 53 114 34 -- -- -- (70) 413
Europe................ 660 28 56 -- 172 -- -- -- (120) 796
Middle East........... 135 -- 3 -- 16 -- -- -- (11) 143
Japan................. 409 2 8 -- 34 -- -- -- (191) 262
Asia, other than
Japan............... 446 -- 7 -- 1 -- -- -- (206) 248
------ ---- ---- ---- ---- --- -- ---- ---- ------
1,980 143 143 114 274 -- -- -- (649) 2,005
Domestic market....... 748 70 295 9 11 1 -- -- (47) 1,087
------ ---- ---- ---- ---- --- -- ---- ---- ------
2,728 213 438 123 285 1 -- -- (696) 3,092
====== ==== ==== ==== ==== === == ==== ==== ======
Assets:
Property, plant and
equipment, net...... 3,091 338 389 171 -- -- -- 35 -- 4,024
Capital
expenditures........ 168 29 12 -- -- -- -- 5 -- 214
Investments in
affiliated companies
and joint ventures
and other
investments......... 457 32 111 381 238 410 80 -- -- 1,709
====== ==== ==== ==== ==== === == ==== ==== ======
Capital employed...... 3,174 343 434 44 2 12 4 (28) 31 4,016
NOPLT................. 850 44 119 3 22 1 -- (135) -- 904
ROCE.................. 27% 13% 27% 7% -- 8% -- -- -- 23%
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of our current financial instruments generally
approximates fair market value because of the short-term maturity or frequent
repricing of these instruments.
The market value of long-term investments, where available, is disclosed in
Note 10 to these financial statements.
F-79
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
Based on borrowing rates currently available to us for bank loans with
similar terms and average maturities, the fair market value of long-term debt at
September 30, 2001 is not substantially different from that as of December 31,
2000.
Fair market value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
Changes in assumptions could significantly affect the estimates.
18. DERIVATIVE FINANCIAL INSTRUMENTS
Volatility of interest rates, exchange rates and commodity prices are the
main market risks to which we are exposed -- all three are managed through
derivative operations. These have the exclusive aim of reducing exposure to
risk. We do not use derivatives for speculation purposes.
We monitor and evaluate our derivative positions on a regular basis and
adjust our strategy in response to market conditions. We also periodically
review the credit limits and credit worthiness of our counter-parties in these
transactions. In view of the policies and practices established for operations
with derivatives, management considers the occurrence of non-measurable risk
situations as unlikely.
As from January 1, 2001 we adopted SFAS 133 "Accounting for Derivative
Financial Instruments and Hedging Activities", as amended by SFAS 137 and SFAS
138, and began to recognize all derivatives on our balance sheet at fair value.
Accordingly we recognized an initial transition adjustment of $3 as a charge in
our statement of income relative to net unrealized losses on contracts open as
of December 31, 2000. Subsequently to January 1, 2001 all derivatives have been
adjusted to fair market value at each balance sheet date and the change included
in current earnings.
For the nine month period ended September 30, 2001 the movement of
unrealized and realized gains or losses on derivative financial instruments is
as follows:
NET GAINS (LOSSES)}
------------------------------------
INTEREST
RATES
GOLD (LIBOR) CURRENCIES TOTAL
---- -------- ---------- -----
Initial unrealized gains and losses at January 1,
2001............................................... 9 (8) (4) (3)
Change in the period............................... 2 (39) (1) (38)
(Gains) and losses realized in the period.......... (5) 6 2 3
-- --- -- ---
UNREALIZED GAINS AND (LOSSES) AT
SEPTEMBER 30, 2001.............................. 6 (41) (3) (38)
== === == ===
Realized and unrealized gains and losses are included in our income
statement under the following captions:
Gold -- other operating costs and expenses;
Interest rates -- financial expenses;
Currencies -- foreign exchange and monetary losses, net.
Final maturity dates for the above instruments are as follows:
Gold........................................................ December 2005
Interest rates (libor)...................................... October 2007
Currencies.................................................. April 2005
F-80
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
(a) INTEREST RATE AND EXCHANGE RATE RISK
Interest rate risks mainly relate to that part of the debt borrowed at
floating rates. The foreign currency debt is largely subject to fluctuations in
the London Interbank Offered Rate -- LIBOR. That portion of local currency
denominated debt that is subject to floating rates is linked to the Long Term
Interest Rate -- TJLP, fixed quarterly by the Brazilian Central Bank. Since May
1998, we have used derivative instruments to protect overselves against
fluctuations in the LIBOR rate.
There is an exchange rate risk associated with our foreign currency
denominated debt. On the other hand, a substantial proportion of our revenues
are denominated in, or automatically indexed to, the U.S. dollar, while the
majority of costs are expressed in reais. This provides a natural hedge against
any devaluation of the Brazilian real against the U.S. dollar. When events of
this nature occur, the immediate negative impact on foreign currency denominated
debt is offset over time by the positive effect of devaluation on future cash
flows.
With the advent of a floating exchange rate regime in Brazil in January
1999, we adopted a strategy of monitoring market fluctuations, using derivatives
to protect against specific risks from exchange rate variation.
From time to time we enter into foreign exchange derivative swap
transactions seeking to change the characteristics of our real-denominated cash
investments to US dollar-indexed instruments. The extent of such transactions
depends on our perception of market and currency risk, but is never speculative
in nature. All such operations are marked-to-market at each balance sheet date
and the effect included in financial income or expense. During the nine months
ended September 30, 2001 our use of such instruments was not significant.
(b) COMMODITY PRICE RISK
We also use derivative instruments to manage exposure to changing gold
prices. Derivatives allow the fixing of an average minimum profit level for
future gold production. However, they may also have the effect of eliminating
potential gains on certain price increases in the spot market for gold. We
manage our contract positions actively, and the results are reviewed at least
monthly, allowing adjustments to targets and strategy to be made in response to
changing market conditions.
In the case of gold derivatives, our policy has been to settle all
contracts through cash payments or receipts, without physical delivery of
product.
Our affiliates Albras and Alunorte manage the risk of fluctuating aluminum
prices using derivatives, allowing an average minimum profit level for future
production and ensuring stable cash generation. However, they may also have the
effect of eliminating potential gains on certain price increases in the spot
market for aluminum. We account for both affiliates using the equity method.
In December 2000, we introduced a new risk management system to evaluate,
measure and manage the market risk associated with our financial activities,
using the value-at-risk -- VAR method. VAR incorporates a variety of risk
factors which affect our results, including commodity prices, interest and
exchange rate volatilities, as well as the correlation between all these
variables. This tool will permit more efficient monitoring of market risk
exposure.
F-81
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
19. ACCOUNTING CHANGES
These financial statements have been restated to reflect the following
accounting changes:
(a) CHANGES WHICH EFFECT NET INCOME AND STOCKHOLDERS' EQUITY
(a.1) Impairment provision for equity investments in CST and Usiminas.
The Company has concluded that the loss in value in its investment in CST
and Usiminas was other than temporary, and that the carrying value should be
reduced to the quoted market price of the applicable shares. This methodology
has been applied retroactively resulting in a write-down provision of $180 as at
December 31, 1997 (with write-down changes of $50, $24 and $106 recorded for the
years ended December 31, 1997, 1996 and 1995, respectively).
(a.2) Amortization of goodwill related to Samarco and Samitri.
The Company has recognized amortization expense of goodwill relating to the
acquisition of Samarco and Samitri in May 2000 from the date of the acquisition
on a straight line basis at 16.67% per annum. Previously, the Company had not
commenced amortization of goodwill.
The impact of the above alterations is shown below:
AS OF
SEPTEMBER 30,
-------------
2001 2000
----- -----
Net income previously reported.............................. 597 909
Goodwill amortization....................................... (18) (12)
Deferred tax effects........................................ 6 4
----- -----
RESTATED NET INCOME......................................... 585 901
===== =====
Earnings per share previously reported...................... 1.55 2.36
Restated earnings per share................................. 1.52 2.34
Shareholders' equity previously reported.................... 3,928 5,238
Write-off of Usiminas goodwill..............................
Impairment of CST and Usiminas.............................. (358) (414)
Goodwill amortization....................................... (31) (12)
Deferred tax effects........................................ 74 75
----- -----
RESTATED SHAREHOLDERS' EQUITY............................... 3,613 4,887
===== =====
(b) CHANGE THAT DOES NOT AFFECT NET INCOME AND STOCKHOLDERS'
EQUITY -- CONSOLIDATION OF CELMAR S.A.
Previously we accounted for our development stage subsidiary, Celmar S.A.,
under the equity method of accounting. We now consolidate this entity for all
periods presented which has not resulted in any change to our net income or
stockholders' equity. The effects on our consolidated current assets and current
liabilities is less than 1% while consolidated long-term liabilities increased
by 1.8%.
20. INFORMATION ABOUT OUR INDEPENDENT ACCOUNTANTS
Our consolidated financial statements are reviewed by
PricewaterhouseCoopers Auditores Independentes. The financial statements of
certain of our subsidiaries and affiliates have been reviewed by independent
accountants other than PricewaterhouseCoopers Auditores Independentes and, as
mentioned
F-82
NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE STATED
in their report, PricewaterhouseCoopers Auditores Independentes has relied on
such reviews when issuing their report on our consolidated financial statements.
The following entities prepare interim financial statements in US GAAP
which are reviewed in accordance with auditing standards generally accepted in
the United States of America:
INDEPENDENT
ACCOUNTANTS PERIODS REVIEWED CITY STATE COUNTRY
----------- ---------------- ------- ----- -------
Aluminio Brasileiro S.A.-ALBRAS............ DTT 2001, 2000 RJ RJ Brazil
Alumina do Norte do Brasil S.A.-ALUNORTE... DTT 2001, 2000 RJ RJ Brazil
Bahia Sul Celulose S.A.(1)................. KPMG 2000 SP SP Brazil
Celulose Nipo-Brasileira S.A.-CENIBRA(1)... DTT 2001, 2000 BH MG Brazil
Navegacao Vale do Rio Doce S.A.-DOCENAVE... DTT 2001, 2000 RJ RJ Brazil
DOCEPAR S.A. .............................. DTT 2001, 2000 RJ RJ Brazil
Companhia Hispano-Brasileira de
Pelotizacao-HISPANOBRAS.................. AA 2001, 2000 Vitoria ES Brazil
Companhia Italo-Brasileira de Pelotizacao-
ITABRASCO................................ AA 2001, 2000 Vitoria ES Brazil
Companhia Coreano Brasileira de
Pelotizacao-KOBRASCO..................... DTT 2001, 2000 RJ RJ Brazil
Minaracao Rio do Norte S.A. ............... AA 2001, 2000 RJ RJ Brazil
Companhia Nipo-Brasileira de Pelotizacao-
NIBRASCO................................. DTT 2001, 2000 RJ RJ Brazil
Valesul Aluminio S.A. ..................... KPMG 2001, 2000 RJ RJ Brazil
Companhia Siderurgica Nacional(1).......... AA 2000 RJ RJ Brazil
---------------
(1) Investments sold in 2001.
AA -- Arthur Andersen S/C
DTT -- Deloitte Touche Tohmatsu
RJ -- Rio de Janeiro
MG -- Minas Gerais
BH -- Belo Horizonte
SP -- Sao Paulo
ES -- Espirito Santo
F-83
INDEX TO AUDIT REPORTS FROM INDEPENDENT ACCOUNTANTS LISTED IN
NOTE 23 TO OUR CONSOLIDATED FINANCIAL STATEMENTS
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to the financial statements of Albras for the
three years ended December 31, 2000, 1999 and 1998........ B-2
Report of Deloitte Touche Tohmatsu dated January 17, 2001
with respect to the financial statements of Alunorte for
the three years ended December 31, 2000, 1999 and 1998.... B-3
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to the financial statements of Aluvale for
the three years ended December 31, 2000, 1999 and 1998.... B-4
Report of KPMG Auditores Independentes dated February 6,
2001 with respect to the consolidated financial statements
of Bahia Sul Celulose S.A. and subsidiaries for the three
years ended December 31, 2000, 1999 and 1998.............. B-5
Report of KPMG LLP dated January 19, 2001 with respect to
the financial statements of CSI for the three years ended
December 31, 2000, 1999 and 1998.......................... B-6
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to the financial statements of Cenibra for
the two years ended December 31, 2000 and 1999............ B-7
Reports of Deloitte Touche Tohmatsu dated February 8, 2001
and February 12, 1999 with respect to the financial
statements of Docenave for the three years ended December
31, 2000, 1999 and 1998................................... B-8
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to the financial statements of Docepar for
the two years ended December 31, 2000 and 1999............ B-11
Report of Arthur Andersen S/C dated January 15, 2001 with
respect to the financial statements of Hispanobras for the
three years ended December 31, 2000, 1999 and 1998........ B-12
Report of Arthur Andersen S/C dated January 15, 2001 with
respect to the financial statements of Itabrasco for the
three years ended December 31, 2000, 1999 and 1998........ B-13
Report of Deloitte Touche Tohmatsu dated January 29, 2001
with respect to the financial statements of Kobrasco for
the year ended December 31, 2000.......................... B-14
Reports of Arthur Andersen S/C dated January 18, 2001 and
January 17, 2000 with respect to the financial statements
of MRN for the three years ended December 31, 2000, 1999
and 1998.................................................. B-15
Report of Deloitte Touche Tohmatsu dated January 29, 2001
with respect to the financial statements of Nibrasco for
the three years ended December 31, 2000, 1999 and 1998.... B-17
Report of KPMG Auditores Independentes dated January 19,
2001 with respect to the financial statements of Valesul
for the two years ended December 31, 2000 and 1999........ B-18
Report of Deloitte Touche Tohmatsu dated January 20, 1999
with respect to the financial statements of Valesul for
the two years ended December 31, 1998 and 1997............ B-19
Report from Arthur Andersen S/C dated February 19, 2001 with
respect to their consolidated financial statements of CSN
for the two years ended December 31, 2000 and 1999........ B-20
Reports of Deloitte Touche Tohmatsu dated February 2, 2001
and April 28, 2000 with respect to financial statements of
Terminal Vila Velha S.A. for the three years ended
December 31, 2000, 1999, and 1998 (English Version)....... B-21
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to financial statements of Nova Era Silicon
S.A. for the year ended December 31, 2000 (English
Version).................................................. B-23
Report of Trevisan dated January 18, 2000 with respect to
financial statements of Nova Era Silicon S.A. for the two
years ended December 31, 1999 and 1998 (English
Version).................................................. B-25
Report of Deloitte Touche Tohmatsu dated January 19, 2001
with respect to financial statements of Celmar
S.A.-Industria de Celulose e Papel for the year ended
December 31, 2000 (English Version)....................... B-27
Report of Deloitte Touche Tohmatsu dated January 22, 2001
with respect to financial statements of SIBRA
Eletrosiderurgica Brasileira S.A. for the year ended
December 31, 2000 (English Version)....................... B-28
B-1
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE
TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Stockholders of
ALBRAS -- Aluminio Brasileiro S.A.
Barcarena -- PA
We have audited the accompanying balance sheets of ALBRAS -- Aluminio Brasileiro
S.A. as of December 31, 2000 and 1999, and the related statements of operations,
changes in stockholders' deficiency and cash flows for the three-year period
ended December 31, 2000 (all expressed in United States dollars). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the financial position of ALBRAS -- Aluminio
Brasileiro S.A. at December 31, 2000 and 1999, and the results of its operations
and its cash flows for the three-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
January 19, 2001
/s/ DELOITTE TOUCHE TOHMATSU
B-2
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Stockholders
ALUNORTE -- Alumina do Norte do Brasil S.A.
Barcarena -- PA
We have audited the accompanying balance sheets of ALUNORTE -- Alumina do Norte
do Brasil S.A. as of December 31, 2000 and 1999, and the related statement of
operations, changes in stockholders' equity and cash flows for the three-year
period ended December 31, 2000 (all expressed in United States Dollars). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the financial position of ALUNORTE -- Alumina
do Norte do Brasil S.A. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for the three-year period ended December 31, 2000,
in conformity with accounting principles generally accepted in the United States
of America.
January 17, 2001
/s/ DELOITTE TOUCHE TOHMATSU
B-3
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Vale do Rio Doce Aluminio S.A. -- ALUVALE
We have audited the accompanying balance sheets of Vale do Rio Doce Aluminio
S.A. -- ALUVALE as of December 31, 2000 and 1999, and the related statements of
operations, cash flows and changes in stockholders' equity for each of the
three-years in the period ended December 31, 2000 (all expressed in United
States dollars). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of the Mineracao Rio do Norte S.A. (2000, 1999 and 1998) and Valesul
Aluminio S.A. (2000 and 1999), the Company's investment in which are accounted
for by use of the equity method. The Company's equity in the aforementioned
affiliates companies' net assets at December 31, 2000 and 1999, totaling
US$197,104,000 and US$186,296,000, respectively, and the Company's net equity in
the aforementioned affiliated companies' net income for the years ended December
31, 2000, 1999 and 1998, totaling US$47,861,000, US$10,538,000 and
US$27,688,000, respectively, are included in the accompanying financial
statements. The financial statements of the above mentioned affiliated companies
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for such companies is
based solely on the reports of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
accompanying financial statements referred to above present fairly, in all
material respects, the financial position of Vale do Rio Doce Aluminio
S.A. -- ALUVALE as of December 31, 2000 and 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with the accounting principles generally
accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
January 19, 2001
B-4
[KPMG LOGO]
KPMG AUDITORES INDEPENDENTES
Mail address Office address
Caixa Postal 2467 R.Dr. Renato Paes de Barros, 33 Central Tel 55 (11) 3067 3000
01060-970 Sao Paulo SP 04530-904 Sao Paulo SP Fax National (11) 3079 3752
Brasil Brasil International 55 (11) 3079 2916
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Bahia Sul Celulose S.A.
We have audited the accompanying consolidated balance sheets of Bahia Sul
Celulose S.A. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity and comprehensive income
(loss), and cash flows for each of the years in the three-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bahia Sul Celulose
S.A. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
Sao Paulo, Brazil
February 6, 2001
/s/ KPMG Auditores Independentes
B-5
[KPMG LOGO]
600 Anton Boulevard
Suite 700
Costa Mesa, CA 92626-7651
INDEPENDENT AUDITORS' REPORT
The Board of Directors
California Steel Industries, Inc.:
We have audited the accompanying consolidated balance sheets of California Steel
Industries, Inc. and subsidiary as of December 31, 2000 and 1999 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of California Steel
Industries, Inc. and subsidiary as of December 31, 2000 and 1999 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principals
generally accepted in the United States of America.
/s/ KPMG LLP
Orange County, California
January 19, 2001
B-6
Deloitte Touche Tohmatsu
Rua Paralba, 1 122-20 degrees
30130-141 -- Belo Horizonte -- MG
Brasil
Telefone: (31) 262-0445
Fac-simile: (31) 262-0446
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT AUDITORS' OPINION
To the Shareholders and Directors of
Celulose Nipo-Brasileira S.A. -- CENIBRA
Belo Oriente/MG
We have audited the accompanying consolidated balance sheets of Celulose
Nipo-Brasileira S.A. -- CENIBRA as of December 31, 2000 and 1999 and the related
statements of operations, changes in stockholders' equity and of cash flows for
the years then ended (all expressed in United States dollars). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements of the
Company for the year ended December 31, 1998 were audited by other auditors,
whose report dated January 21, 1999 expressed a qualified opinion in relation to
the same matter mentioned in the fourth paragraph.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celulose
Nipo-Brasileira S.A. -- CENIBRA and its subsidiaries as of December 31, 2000 and
1999 the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles in United
States of America.
As mentioned in note 4, at December 31, 1999 the Company had not provided for a
contingency in the amount of US$2,993 thousand related to the tax effects
(income tax and social contribution) for the use of the deductibility of the
effects of the restatement determined by Law n degrees 7.730/89, which
established the "Plano Verao". In 2000 the Company conservatively decided to
provide for the referred amount and, consequently, to restatement the financial
statements of 1999 and 1998.
/s/ DELOITTE TOUCHE TOHMATSU
January 19, 2001
B-7
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
Navegacao Vale do Rio Doce S.A. -- DOCENAVE
We have audited the accompanying consolidated balance sheets of Navegacao Vale
do Rio Doce S.A. -- DOCENAVE and subsidiaries as of December 31, 2000 and 1999
and the related consolidated statements of operations, cash flows and changes in
stockholders' equity for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of the affiliated company,
Wilsea Shipping, Inc., the Company's investment in which is accounted for by use
of the equity method. The Company's equity of US$36,257,000 and US$22,273,000 in
the aforementioned affiliated company's net assets at December 31, 2000 and
1999, respectively, and of US$13,984,000 and US$783,000 in that company's net
income for the respective years then ended are included in the accompanying
financial statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
accompanying financial statements referred to above presented fairly, in all
material respects, the financial position of Navegacao Vale do Rio Doce
S.A. -- DOCENAVE and subsidiaries as of December 31, 2000 and 1999, and the
results of its operations and its cash flows the years then ended in conformity
with accounting principles generally accepted in the United States of America.
February 8, 2001
/s/ DELOITTE TOUCHE TOHMATSU
B-8
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Vale do Rio Doce Navegacao S.A. - DOCENAVE
We have audited the accompanying consolidated balance sheet of Vale do Rio Doce
Navegacao S.A. - DOCENAVE and subsidiaries as of December 31, 1998 (restated as
note 9) and the related consolidated statements of operations, cash flows and
changes in stockholders' equity for the year ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We did not audit the financial statements of the
affiliated companies, Companhia Siderurgica Nacional and Wilsea Shipping Inc.,
the Company's investments in which are accounted for by use of the equity
method. The Company's equity and net income for the year in the aforementioned
affiliated companies totals US$246,136,000 and US$42,309,000 at December 31,
1998.
The financial statements of the above mentioned affiliated companies were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for such companies, is
based solely on the reports of such other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
accompanying restated financial statements referred to above present fairly, in
all material respects, the financial position of Vale do Rio Doce Navegacao S.A.
and subsidiaries as of December 31, 1998 and the result of its operations, its
cash flows and the changes in its stockholders' equity for the year then ended,
in conformity with accounting principles generally accepted in the United States
of America.
B-9
Vale do Rio Doce Navegacao S.A. -- DOCENAVE 2
Subsequent to the issuance of the Company's 1998 financial statements, the
management determined to change the method used to account for the investment in
a certain affiliated company, as discussed in note 9. As a result, the
previously-issued financial statements for the year ended December 31, 1998 have
been restated in order to reflect such changing in the accounting method.
The consolidated financial statements of Vale do Rio Doce Navegacao S.A. and
subsidiaries for the year ended in December 31, 1997 and the consolidated
statements of operations, cash flows and changes in stockholders' equity for the
year ended December 31, 1996 were audited by other accountants whose issued
unqualified opinion thereon dated February 6, 1998. These financial statements
have also been restated due to the same reason described in the previous
paragraph.
February 12, 1999
/s/ DELOITTE TOUCHE TOHMATSU
B-10
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To
The Board of Directors and Stockholders of
DOCEPAR S.A.
Rio de Janeiro - RJ
Brazil
We have audited the accompanying balance sheets of DOCEPAR S.A. as of December
31, 2000 and 1999, and the related statements of operations, cash flows and
changes in stockholders' equity (deficiency) for the years then ended (all
expressed in United States Dollars). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit the
financial statements of the affiliated company, Companhia Siderurgica Nacional,
the Company's investments in which is accounted for by use of the equity method.
The Company's equity related to the aforementioned affiliated company totals
US$133,569,000 at December 31, 1999 and a gain of US$4,189,000 and US$3,328,000
for the years ended December 31, 2000 and 1999, respectively. The financial
statements of the above mentioned affiliated company were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such company, is based solely on the reports
of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
accompanying financial statements referred to above present fairly, in all
material respects, the financial position of DOCEPAR S.A. as of December 31,
2000 and 1999 and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
January 19, 2001
/s/ DELOITTE TOUCHE TOHMATSU
B-11
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Companhia Hispano-Brasileira de
Pelotizacao -- HISPANOBRAS:
(1) We have audited the accompanying balance sheets of COMPANHIA
HISPANO-BRASILEIRA DE PELOTIZACAO -- HISPANOBRAS (a Brazilian corporation and a
subsidiary of Companhia Vale do Rio Doce), translated into U.S. dollars, as of
December 31, 2000 and 1999, and the related translated statements of income,
changes in stockholders' equity and cash flows for the years ended December 31,
2000, 1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
(2) We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
(3) These translated financial statements have been prepared as the basis for
application of the equity method by its stockholders and, accordingly, they
translate the assets, liabilities, stockholders' equity and revenues and
expenses of Companhia Hispano-Brasileira de Pelotizacao -- Hispanobras for that
purpose, as explained in Note 2.
(4) In our opinion, the financial statements referred to in paragraph 1 present
fairly, in all material respects, and for the purpose described in the preceding
paragraph, the financial position of Companhia Hispano-Brasileira de
Pelotizacao -- Hispanobras as of December 31, 2000 and 1999, and the results of
its operations, the changes in its stockholders' equity and its cash flows for
the years ended December 31, 2000, 1999 and 1998, in conformity with generally
accepted accounting principles in the United States.
/s/ Arthur Andersen S/C
Vitoria, Brazil,
January 15, 2001.
B-12
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Companhia Italo-Brasileira de
Pelotizacao -- ITABRASCO:
(1) We have audited the accompanying balance sheets of COMPANHIA
ITALO-BRASILEIRA DE PELOTIZACAO-ITABRASCO (a Brazilian corporation and a
subsidiary of Companhia Vale do Rio Doce), translated into U.S. dollars, as of
December 31, 2000 and 1999, and the related translated statements of income,
changes in stockholders' equity and cash flows for the years ended December 31,
2000, 1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
(2) We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
(3) These translated financial statements have been prepared as the basis for
application of the equity method by its stockholders and, accordingly, they
translate the assets, liabilities, stockholders' equity and revenues and
expenses of Companhia Italo-Brasileira de Pelotizacao -- Itabrasco for that
purpose, as explained in Note 2.
(4) In our opinion, the financial statements referred to in paragraph 1 present
fairly, in all material respects, and for the purpose described in the preceding
paragraph, the financial position of Companhia Italo-Brasileira de
Pelotizacao -- Itabrasco as of December 31, 2000 and 1999, and the results of
its operations, the changes in its stockholders' equity and its cash flows for
the years ended December 31, 2000, 1999 and 1998, in conformity with generally
accepted accounting principles in the United States.
/s/ Arthur Andersen S/C
Vitoria, Brazil
January 15, 2001
B-13
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Companhia Coreano-Brasileira de Pelotizacao -- KOBRASCO
Vitoria, Brazil
We have audited the accompanying consolidated balance sheet of Companhia
Coreano-Brasileira de Pelotizacao -- KOBRASCO as of December 31, 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended (all expressed in United States dollars).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of the Company for the years ended
December 31, 1999 and 1998 were audited by other accountants whose reports
thereon, dated January 14, 2000 and January 15, 1999, respectively, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Companhia Coreano-Brasileira de Pelotizacao -- KOBRASCO as of December 31, 2000,
and the consolidated results of its operations, the changes in its stockholders'
equity and its cash flow for the year then ended, in conformity with accounting
principles generally accepted in United States of America.
January 29, 2001
/s/ DELOITTE TOUCHE TOHMATSU
B-14
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Mineracao Rio do Norte S.A.:
(1) We have audited the accompanying balance sheets of MINERACAO RIO DO NORTE
S.A. (a Brazilian corporation), translated into U.S. dollars, as of December 31,
2000 and 1999, and the related translated statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
(2) We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
(3) The financial statements of the associated company Alunorte -- Alumina do
Norte do Brasil S.A. as of December 31, 2000 and 1999 were audited by other
auditors. This investment represents 3% of the total assets (1% in 1999) and 7%
of the net income (19% in 1999). Our opinion on such investment is based solely
on the report of the other auditors.
(4) These translated financial statements have been prepared as the basis for
application of the equity method by the Company's stockholders and, accordingly,
they translate the assets, liabilities, stockholders' equity and revenues and
expenses of Mineracao Rio do Norte S.A. for that purpose, as explained in Note
2.
(5) In our opinion, based on our audits and on the report of other auditors, as
mentioned in paragraph (3), the financial statements referred to in paragraph
(1) present fairly, in all material respects, and for the purpose described in
the preceding paragraph, the financial position of Mineracao Rio do Norte S.A.
as of December 31, 2000 and 1999, and the results of its operations, the changes
in its stockholders' equity and its cash flows for the years then ended, in
conformity with generally accepted accounting principles in the United States.
/s/ ARTHUR ANDERSEN S/C
Rio de Janiero, Brazil,
January 18, 2001.
B-15
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Mineracao Rio do Norte S.A.:
(1) We have audited the accompanying balance sheets of MINERACAO RIO DO NORTE
S.A. (a Brazilian corporation), translated into U.S. dollars, as of December 31,
1999 and 1998, and the related translated statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
(2) We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide reasonable basis for
our opinion.
(3) The financial statements of the associate Alunorte -- Alumina do Norte do
Brasil S.A. as of December 31, 1999 were audited by other auditors. This
investment represents 1% of the total assets and 100% of the equity adjustment.
Our opinion on such investments is based solely on the report of the other
auditors.
(4) These translated financial statements have been prepared as the basis for
application of the equity method by the Company's stockholders and, accordingly,
they translate the assets, liabilities, stockholders' equity and revenues and
expenses of Mineracao Rio do Norte S.A. for that purpose, as explained in Note
2.
(5) In our opinion, based on our audits and on the report of other auditors, as
mentioned in paragraph (3), the financial statements referred to in paragraph
(1) present fairly, in all material respects, and for the purpose described in
the preceding paragraph, the financial position of Mineracao Rio do Norte S.A.
as of December 31, 1999 and 1998, and the results of its operations, the changes
in its stockholders' equity and its cash flows for the years then ended, in
conformity with generally accepted accounting principles in the United States.
(6) The report of other auditors, mentioned in paragraph (3), indicates the
Alunorte -- Alumina do Norte do Brasil S.A. and its stockholders are
implementing measures designed to alleviate the Company's financial condition
(Note 7).
/s/ ARTHUR ANDERSEN S/C
Rio de Janeiro, Brazil,
January 17, 2000.
B-16
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Companhia Nipo-Brasileira de Pelotizacao - NIBRASCO
Vitoria, Brazil
We have audited the accompanying balance sheets of Companhia Nipo-Brasileira de
Pelotizacao - NIBRASCO as of December 31, 2000 and 1999, and the related
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000 (all expressed in
United States dollars). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the financial position of Companhia
Nipo-Brasileira de Pelotizacao - NIBRASCO at December 31, 2000 and 1999, and the
results of its operations, the changes in its stockholders' equity and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
January 29, 2001
/s/ DELOITTE TOUCHE TOHMATSU
B-17
[KPMG LOGO]
KPMG AUDITORES INDEPENDENTES
Mail address Office address
Caixa Postal 2888 Av. Almivarte Barroso 52-17 degrees Central Tel 55 (21) 272 2700
20001-970 Rio de Janeiro, RJ 200031-000 Rio de Janeiro, RJ Fax 55 (21) 544-1338
Brasil Brasil
The Board of Directors of
Valesul Aluminio S.A.
We have audited the accompanying balance sheet of Valesul Aluminio S.A. as of
December 31, 2000 and 1999, and the related statements of income, changes in
stockholders' equity and comprehensive income and cash flows for each of the
years in the two-year period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
accompanying statements of income, changes in stockholders' equity and
comprehensive income and cash flows for the year ended December 31, 1998 were
audited by other independent auditors, who issued an unqualified report, dated
January 20, 1999.
We conducted our audit in accordance with auditing standards generally accepted
in Brazil and in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosure in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valesul Aluminio S.A. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
As more fully described in Notes 4 and 8 to the financial statements, the
company has adjusted its property, plant and equipment and deferred income taxes
accounting balances as a result of correcting of errors. Consequently, the
Company's financial statements for 2000, 1999 and 1998 referred to above have
been restated to conform with these adjustments.
January 19, 2001, except for notes 4 and 8, which date is January 17, 2002
Rio de Janeiro, Brazil
/s/ KPMG Auditores Independentes
B-18
DELOITTE TOUCHE TOHMATSU
AV. PRESIDENTE WILSON 231-22 degrees
20030-021 -- RIO DE JANEIRO -- RJ
BRASIL
TELEFONE: (21) 524-1281
FAC-SIMILE: (21) 220-3876
WWW.DELOITTE.COM.BR
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders
Valesul Aluminio S.A.
Rio de Janeiro, Brazil
We have audited the accompanying balance sheets of Valesul Aluminio S.A. as of
December 31, 1998 and 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended (all expressed in
United States dollars). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the financial position of Valesul Aluminio
S.A. at December 31, 1998 and 1997, and the results of its operations, the
changes in its stockholders' equity and its cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States
of America.
January 20, 1999
/s/ DELOITTE TOUCHE TOHMATSU
B-19
ANDERSEN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Companhia Siderurgica Nacional
(1) We have audited the accompanying consolidated balance sheets of COMPANHIA
SIDERURGICA NACIONAL (a Brazilian corporation) and its subsidiaries (the
"Company") as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
(2) The financial statements of the affiliate CVRD -- Companhia Vale do Rio Doce
as of December 31, 2000 and 1999 were audited by other auditors. As of December
31, 2000 this asset represents 14% of the total assets and 28% of the net income
(15% and 21% respectively as of December 31, 1999). Our opinion on such asset is
based solely on the report of other auditors.
(3) We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
(4) In our opinion, based on our audits and the report of other auditors for the
years ended December 31, 2000 and 1999 as mentioned in paragraph (2) above, the
consolidated financial statements referred to in paragraph (1) present fairly,
in all material respects, the financial position of Companhia Siderurgica
Nacional and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States.
/s/ Arthur Andersen S/C
Rio de Janeiro, Brazil,
February 19, 2001 (except for Notes 7, 9 and 21, as to which the date is June
19, 2001).
B-20
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT AUDITORS' OPINION
To
The Stockholders and Board of Directors
TVV - Terminal de Vila Velha S.A.
Vitoria - ES
1. We have audited the balance sheets of TVV - Terminal de Vila Velha S.A. as of
December 31, 2000 and 1999, and the related statements of operations, changes
in stockholders' equity and changes in financial position for the years then
ended (all expressed in Brazilian Reais). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
2. We conducted our audits in accordance with auditing standards generally
accepted in Brazil, and included: (a) planning the audit, considering the
materiality of the amounts presented, the number of transactions and the
Company's accounting and internal control systems; (b) examining, on a test
basis, the evidence supporting the amounts and disclosures in the financial
statements; and (c) the assessment of the accounting principles used and of
the significant estimates made by management, as well as the presentation of
the financial statements taken as a whole.
3. In our opinion, the financial statements referred to the first paragraph
present fairly, in all material respects, the financial position of as of
December 31, 2000 and 1999, and the results of its operations, changes in its
stockholders' equity and changes in its financial position for the years then
ended, in conformity with the Brazilian corporate law.
4. The translation of the financial statements into English have been made
solely for the convenience of readers outside of Brazil.
Vitoria, February 2, 2001
/s/ DELOITTE TOUCHE TOHMATSU /s/ MARCELO C. ALMEIDA
DELOITTE TOUCHE TOHMATSU MARCELO C. ALMEIDA
Independent Auditors Certified Accountant
CRC-SP 11.609 S/RJ CRC-RJ 36.206-3 S/ES
B-21
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT AUDITORS' OPINION
To
The Stockholders and Board of Directors
TVV - Terminal de Vila Velha S.A.
Vila Velha - ES
1. We have audited the balance sheets of TVV - Terminal de Vila Velha S.A. as of
December 31, 1999 and 1998, and the related statements of operations, changes
in stockholders' equity and changes in financial position for the years then
ended and for the period between July 2 (date of Company's organization) and
December 31, 1998 (all expressed in Brazilian Reais). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
2. We conducted our audits in accordance with auditing standards generally
accepted in Brazil, and included: (a) planning the audit, considering the
materiality of the amounts presented, the number of transactions and the
Company's accounting and internal control systems; (b) examining, on a test
basis, the evidence supporting the amounts and disclosures in the financial
statements; and (c) the assessment of the accounting principles used and of
the significant estimates made by management, as well as the presentation of
the financial statements taken as a whole.
3. In our opinion, the financial statements referred to the first paragraph
present fairly, in all material respects, the financial position of as of
December 31, 1999 and 1998 and the results of its operations, changes in its
stockholders' equity and changes in its financial position for the years then
ended and for the period between July 2 (date of Company's organization) and
December 31, 1998, in conformity with the Brazilian corporate law.
4. The translation of the financial statements into English have been made
solely for the convenience of readers outside of Brazil.
Rio de Janeiro, April 28, 2000
/s/ DELOITTE TOUCHE TOHMATSU /s/ MARCELLO C. ALMEIDA
DELOITTE TOUCHE TOHMATSU MARCELLO C. ALMEIDA
Independent Auditors Certified Accountant
CRC-SP 11.609 S/RJ CRC-RJ 36.206-3 S/ES
B-22
Deloitte Touche Tohmatsu
Rue Fariba, 1.122-20 degrees
30130-141 Bela Horizonte -- MG
Brasil
Telefone: (31) 3202-0440
Fac-simile: (31) 3262-0445
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT AUDITORS' REPORT
To the Management and Stockholders of
Nova Era Silicon S.A.
Belo Horizonte/MG
1. We have audited the accompanying balance sheet of Nova Era Silicon S.A. as of
December 31, 2000 and the related statements of income, changes in
stockholders' equity and changes in financial position for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
2. Except for the mentioned on the third paragraph, we conducted our audit in
accordance with generally accepted auditing standards in Brazil, which
included: (a) planning of the engagement, considering the materiality of the
balances, the volume of transactions and the accounting and internal control
system of the Company; (b) examination, on a test basis, of the evidence and
records supporting the amounts and disclosures in the financial statements;
and (c) evaluation of the accounting principles used and significant used
adopted by management of the company, as well as the overall financial
statement presentation.
3. The Company has calculated the depletion of its forests, with a net balance
of R$3,761 at December 31, 2000, at a 10% annual (straight line) rate. As
required by accounting policies, depletion of forests should be calculated
based on the volume of timber that has been extracted in proportion to total
potential volume, applied to total building cost. We were unable to measure
the effects arising from the adoption of such procedure as of December 31,
2000.
4. As of December 31, 1999, the Company elected to follow Resolution 294, issued
by the Brazilian Securities and Exchange Commission -- CVM, and recorded in
its deferred assets the net loss on exchange variation for the three-month
period ended March 31, 1999. As required by accounting principles, exchange
variation should be recorded as expenses in the period in which they were
incurred. Consequently, permanent assets and stockholders' equity as of
December 31, 2000 were overstated by R$4,128 thousand, and net income for the
year then ended was understated by R$2,061 related to respective
amortization.
5. In our opinion, except for the effects, if any, of the matter mentioned in
the third paragraph and for the effects of the matter mentioned in the fourth
paragraph, the financial statements referred in the first paragraph present
fairly, in all material respects, the financial position of Nova Era Silicon
S.A. as of December 31, 2000, and the results of its operations, the changes
in its stockholders' equity and the changes in its financial position for the
year then ended, in conformity with accounting principles established by the
Brazilian Corporate Law.
6. The financial statements for the year ended December 31, 1999, presented for
comparison purposes, were examined by other auditors who issued a report on
January 18, 2000 containing the same qualification as stated in Paragraph 4,
in the amount of R$6,190 thousand.
B-23
7. The translation of the financial statements into English have been made
solely for the convenience of readers outside of Brazil.
/s/ Deloitte Touche Tohmatsu
January 19, 2001
B-24
TREVISAN
THE GLOBAL SOLUTION
A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE, ISSUED IN JANUARY 18, 2000, ON
FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH BRAZILIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.
INDEPENDENT AUDITORS' REPORT
The Shareholders and Management
Nova Era Silicon S.A.
1. We have examined the balance sheets of Nova Era Silicon S.A. as of December
31st, 1999 and 1998, and the related statements of income, of changes in
shareholders' equity and of changes in financial position for the years then
ended, all prepared under the responsibility of the management. Our
responsibility is to issue an opinion on these financial statements, based on
our audit.
2. Except for the subject on paragraph 3, we conducted our audit in accordance
with Brazilian generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test-basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used, internal control systems and significant estimates made by
the management, as well as evaluating the overall financial statements
presentation. We believe that our audit provides a reasonable basis for our
opinion.
3. The Company has calculated the depletion on the forests, which net amount at
December 31st, 1999 is R$3,859 (R$3,998 at 1998), considering the
straight-line method and the rate of 10% per annum. Brazilian generally
accepted accounting principles require that depletion on the forest should be
calculated considering the amount of wood extracted in relation to the total
potential of extraction of the referred forests. The possible effects related
to the deviation of accounting principles has not been measured at the
balance sheet dates.
4. Exercising the permission contained in the Deliberation 294 of the Brazilian
Securities Exchange Commission -- CVM (the Comissao de Valores Mobiliarios),
as of March 26, 1999, the company recorded the negative net effect from
exchange variation for the 3 months period ended on March 31, 1999 as a
deferred asset. Brazilian generally accepted accounting principles request
that exchange variations to be registered as expense on the period of their
occurrence. Consequently, the permanent assets (deferred assets) and the
shareholders' equity as of December 31, 1999 and the net income for the year
then ended are overstated in an amount of R$6,190 thousand.
B-25
TREVISAN
THE GLOBAL SOLUTION
A FREE TRANSLATION OF THE ORIGINAL IN PORTUGUESE, ISSUED IN JANUARY 18, 2000, ON
FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH BRAZILIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.
INDEPENDENT AUDITORS' REPORT
The Shareholders and Management
Nova Era Silicon S.A.
5. In our opinion, except for the possible effects regarding the subject
mentioned in the paragraph 3, and the effects of the exchange variation
deferred, mentioned in the paragraph 4, the financial statements referred to
in paragraph 1 present fairly, in all material respects, the financial
position of Nova Era Silicon S.A. as of December 31, 1999 and 1998, the
results of its operations, the changes in its shareholders' equity and in
financial position for the years then ended, in accordance to accounting
practices prescribed by the Brazilian Corporate law.
Belo Horizonte, Brazil
January 18th, 2000 (except for the subject mentioned on the paragraph 3 that is
dated on January 31st, 2002)
/s/ LUIZ CLAUDIO FONTES
Luiz Claudio Fontes
Socio-contador
CRC 1RJ032470/O-9 "I" PR "S" MG
Trevisian Auditores
Independentes
CRC 2SP013439/O-5 "S" MG
B-26
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT AUDITORS' OPINION
To
The Stockholders and Board of Directors
CELMAR S.A. -- Industria de Celulose e Papel
Imperatriz - Maranhao
1. We have audited the balance sheets of CELMAR S.A. -- Industria de Celulose e
Papel as of December 31, 2000, and the related statements of operations,
changes in stockholders' equity and changes in financial position for the
years then ended (all expressed in Brazilian Reais). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
2. We conducted our audits in accordance with auditing standards generally
accepted in Brazil, and included: (a) planning the audit, considering the
materiality of the amounts presented, the number of transactions and the
Company's accounting and internal control systems; (b) examining, on a test
basis, the evidence supporting the amounts and disclosures in the financial
statements; and (c) the assessment of the accounting principles used and of
the significant estimates made by management, as well as the presentation of
the financial statements taken as a whole.
3. In our opinion, the financial statements referred to the first paragraph
present fairly, in all material respects, the financial position of CELMAR
S.A. -- Industria de Celulose e Papel as of December 31, 2000, and the
results of its operations, changes in its stockholders' equity and changes in
its financial position for the years then ended, in conformity with the
Brazilian corporate law.
4. The Company is in the pre-operating phase. In order to take advantage of new
technology that would allow the optimization of industrial production
capacity, the production activities start-up was postponed. As described in
the first paragraph to the financial statements, the Company's management is
endeavoring, primarily, to obtain financial resources that will enable the
Company to increase the forestry capacity of the project. The continuity as
well as the recovery of the costs already invested in the project depends on
the obtaining of these resources.
5. The financial statements of CELMAR S.A. -- Industria de Celulose e Papel for
the year ended December 31, 1999 were audited by other auditors, whose
report, dated January 14, 2000, expressed an unqualified opinion included the
same emphasis as that described in the previous paragraph.
6. The translation of the financial statements into English have been made
solely for the convenience of readers outside of Brazil.
Rio De Janeiro, January 19, 2001
/s/ DELOITTE TOUCHE TOHMATSU /s/ MARCELO C. ALMEIDA
DELOITTE TOUCHE TOHMATSU MARCELO C. ALMEIDA
Independent Auditors Certified Accountant
CRC-SP 11.609 S/RJ CRC/RJ 36.206-3
B-27
DELOITTE TOUCHE TOHMATSU
AVENIDA TANCREDO NEVES 1.283-SI. 401/402
EDIFICIO EMPRESARIAL OMEGA
41820-021 SALVADOR - BA
BRASIL
TEL: (71) 341-4454
FAX: (71 341-0541
WWW.DELOITTE.COM.BR
[DELOITTE TOUCHE TOHMATSU LOGO]
(Convenience Translation into English from the Original Previously Issued in
Portuguese)
INDEPENDENT AUDITORS' REPORT
To the Shareholders, Administrative Council and Directors of
SIBRA -- ELETROSIDERURGICA BRASILEIRA S.A.
Simoes Filho - BA
1. We have audited the accompanying balance sheet of SIBRA -- ELETROSIDERURGICA
BRASILEIRA S.A., Parent Company and Consolidated, as of December 31, 2000,
and the related statements of income, changes in shareholders' equity (Parent
Company) and changes in financial position for the year then ended (all
expressed in thousands of Brazilian Reais) which were prepared under the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
2. We conducted our audit in accordance with auditing standards generally
accepted in Brazil. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
3. The accompanying financial statements have been translated into the English
language from those issued in Portuguese and in all respects follow Brazilian
generally accepted accounting principles and reporting practices. The effects
of the differences between generally accepted accounting principles as
established by Brazilian Corporate Law and the accounting principles
generally accepted in the countries in which the accompanying financial
statements are to be used have not been quantified. Accordingly, the
accompanying financial statements are not intended to present financial
position, results of operations and changes in financial position in
accordance with accounting principles generally accepted in the countries of
users of the financial statements other than Brazil.
4. In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of SIBRA --
ELETROSIDERURGICA BRASILEIRA S.A. as of December 31, 2000, Parent Company and
Consolidated, the results of its operations, changes in its shareholder's
equity and changes in its financial position for the year then ended in
conformity with accounting principles established by Brazilian Corporate Law.
5. As mentioned in notes 15 and 17, the Company and its subsidiary Companhia
Paulista de Ferro-Ligas, have received a Public Civil Environment Suit and a
Notice of Violation questioning certain procedures for federal taxes and
several legal actions, which currently are in process. Based on the opinion
of its lawyers that the Company will be successful in these processes, no
provisions were made.
B-28
6.The financial statements corresponding to the period ending on December 31,
1999, presented for comparative reasons, were audited by us, and our opinion,
dated February 24, 2000, contained an emphasis paragraph concerning the
matters below:
- The Company's administration introduced a series of operational and financial
restructuring measures, with the objective of reestablishing the economic and
financial equilibrium of the Company and its subsidiaries, and the financial
statements were prepared based on the presumed success of these measures. In
2000, these measures were concluded;
- the Company and its subsidiary, Companhia Paulista de Ferro-Ligas, hold loans
with subsidiary companies and shareholders in the amount of R$ 10,537
thousand, parent company and R$ 35,975 thousand, consolidated, R$ 4,054
thousand and R$ 4,500 thousand, consolidated, respectively, registered under
long term liabilities. In 2000, R$ 12,056 thousand, in loans with shareholders
were capitalized and the other loans with shareholders and subsidiaries, ICMS
and IPI, are being used in the operations;
- on December 31, 1999 the subsidiary, Companhia Paulista de Ferro-Ligas had
overdue loans for which the parent company recognized a provision equivalent
to its stock participation. On March 31, 2000, the subsidiary reverted the
situation of deficiency in Shareholder's equity.
Salvador, January 22, 2001
/s/ DELOITTE TOUCHE TOHMATSU /s/ JOSE OTHON TAVARES DE ALMEIDA
Auditores Independentes Accountant
CRC -- SP 011.609/O-8-F "BA" CRC -- BA 013.212/O
B-29
INDEX TO REVIEW REPORTS FROM INDEPENDENT ACCOUNTANTS
LISTED IN NOTE 20 TO OUR CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Report of Deloitte Touche Tohmatsu dated October 23, 2001
with respect to the financial statements of Albras for the
nine-month periods ended September 30, 2001 and 2000...... C-2
Report of Deloitte Touche Tohmatsu dated October 23, 2001
with respect to the financial statements of Alunorte for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-3
Report of KPMG Auditores Independentes dated October 18,
2000 with respect to the financial statements of Bahia Sul
for the nine-month periods ended September 30, 2000 and
1999...................................................... C-4
Report of Deloitte Touche Tohmatsu dated November 1, 2001
with respect to the financial statements of Cenibra for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-5
Report of Deloitte Touche Tohmatsu dated October 22, 2001
with respect to the financial statements of Docenave for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-6
Report of Deloitte Touche Tohmatsu dated October 22, 2001
with respect to the financial statements of Docepar for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-7
Report of Arthur Andersen S/C dated October 19, 2001 with
respect to the financial statements of Hispanobras for the
nine-month periods ended September 30, 2001 and 2000...... C-8
Report of Arthur Andersen S/C dated October 19, 2001 with
respect to the financial statements of Itabrasco for the
nine-month periods ended September 30, 2001 and 2000...... C-9
Report of Deloitte Touche Tohmatsu dated October 19, 2001
with respect to the financial statements of Kobrasco for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-10
Report of Arthur Andersen S/C dated October 22, 2001 with
respect to the financial statements of MRN for the
nine-month periods ended September 30, 2001 and 2000...... C-11
Report of Deloitte Touche Tohmatsu dated October 19, 2001
with respect to the financial statements of Nibrasco for
the nine-month periods ended September 30, 2001 and
2000...................................................... C-12
Report of KPMG Auditores Independentes dated October 19,
2001 with respect to the financial statements of Valesul
for the nine-month periods ended September 30, 2001 and
2000...................................................... C-13
Report of Arthur Andersen S/C dated October 20, 2000 with
respect to the financial statements of CSN for the
nine-month period ended September 30, 2000................ C-14
C-1
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Stockholders of
ALBRAS -- Aluminio Brasileiro S.A.
Barcarena -- PA
We have reviewed the accompanying balance sheets of ALBRAS - Aluminio Brasileiro
S.A. as of September 30, 2001 and 2000, and the related statements of
operations, changes in stockholders' deficiency and cash flows for the
nine-month periods then ended (all expressed in United States dollars). These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
October 23, 2001
C-2
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Stockholders
ALUNORTE -- Alumina do Norte do Brasil S.A.
Barcarena -- PA
We have reviewed the accompanying balance sheets of ALUNORTE -- Alumina do Norte
do Brasil S.A. as of September 30, 2001 and 2000, and the related statements of
operations, changes in stockholders' equity and cash flows for the nine-month
periods then ended (all expressed in United States dollars). These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquires of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
October 23, 2001
C-3
[KPMG LOGO]
KPMG AUDITORES INDEPENDENTES
Mail address Office address
Caixa Postal 2467 R.Dr. Renato Paes de Barros, 33 Central Tel 44 (11) 3067 3000
01060-970 Sao Paulo SP 04530-904 Sao Paulo SP Fax National (11) 3079 3752
Brasil Brasil International 55 (11) 3079 2916
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
and Shareholders of Bahia Sul Celulose S.A.
We have reviewed the accompanying consolidated balance sheet of Bahia Sul
Celulose S.A. and subsidiaries as of September 30, 2000 and the related
consolidated statements of operations, shareholders' equity and comprehensive
income (loss) and cash flows for the nine-month periods ended September 30, 2000
and 1999. These consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with United States generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Bahia Sul Celulose S.A. and its
subsidiaries as of December 31, 1999. We also have audited the consolidated
statements of operations, changes in shareholders' equity and comprehensive
income, and cash flows for the year then ended not presented herein. In our
report dated January 20, 2000, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the selected information set
forth in the accompanying consolidated balance sheet as of December 31, 1999 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Sao Paulo, Brazil
/s/ KPMG Auditores Independentes
October 18, 2000
C-4
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Directors of
Celulose Nipo-Brasileira S/A -- CENIBRA
Belo Oriente/MG
We have reviewed the accompanying consolidated balance sheets of Celulose
Nipo-Brasileira S/A -- CENIBRA as of September 30, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the nine-month periods then ended (all expressed in United
States dollars). These consolidated financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
November 1, 2001
C-5
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders
Navegacao Vale do Rio Doce S.A. -- DOCENAVE
Rio de Janeiro -- RJ
We have reviewed the accompanying consolidated balance sheets of Navegacao
Vale do Rio Doce S.A. -- DOCENAVE and subsidiaries as of September 30, 2001 and
2000 and the related consolidated statements of operations, cash flows and
changes in stockholders' equity for the nine-month periods then ended (all
expressed in United States dollars). These consolidated financial statements are
the responsibility of the Company's management.
Except as discussed in the following paragraph, we conducted our reviews in
accordance with standards established by the American Institute of Certified
Public Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data and of making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
The financial statements of the affiliated company, Wilsea Shipping, Inc.,
in which the Company's investment is accounted for by use of the equity method,
were not reviewed by us or other accountants. The Company's equity and accounts
receivable from the aforementioned affiliated company total US$946,000 and
US$26,391,000 as of September 30, 2001 and 2000, respectively, and the net loss
for the nine-month periods ended September 30, 2001 and 2000 totals US$314,000
and US$1,577,000, respectively.
Based on our reviews, excepted for the effects of adjustments, if any, as
might have been determined to be necessary had the affiliated company's
financial statements referred to above been reviewed by independent accountants,
we are not aware of any material modifications that should be made to such
consolidated financial statements for them to be in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
October 22, 2001
C-6
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REPORT
To The Board of Directors and Stockholders of
DOCEPAR S.A.
Rio de Janeiro -- RJ
Brazil
We have reviewed the accompanying balance sheets of DOCEPAR S.A. as of
September 30, 2001 and 2000 and the related statements of operations, cash flows
and changes in stockholders' equity (deficiency) for the nine-month periods then
ended (all expressed in United States dollars). These financial statements are
the responsibility of the Company's management. We were furnished with the
report of other accountants on their review of the interim financial information
of the affiliated company, Companhia Siderurgica Nacional-CSN for the nine-month
period ended September 30, 2000, in which the Company's investment was accounted
for by use of equity method. The Company's gain related to the aforementioned
affiliated company totals US$4,189,000 for the nine-month period ended September
30, 2000.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews and the report of the other accountants, we are not
aware of any material modifications that should be made to such financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
October 22, 2001
C-7
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Companhia Hispano-Brasileira de
Pelotizacao -- Hispanobras:
(1) We have reviewed the accompanying balance sheets of COMPANHIA
HISPANO-BRASILEIRA DE PELOTIZACAO -- HISPANOBRAS (a Brazilian corporation and a
subsidiary of Companhia Vale do Rio Doce), translated into U.S. dollars, as of
September 30, 2001 and 2000, and the related translated statements of income,
changes in stockholders' equity and cash flows for the nine-month periods then
ended. These financial statements are the responsibility of the Company's
management.
(2) We conducted our audits in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
(3) These translated financial statements have been prepared as the basis for
application of the equity method by its stockholders and, accordingly, they
translate the assets, liabilities, stockholders' equity and revenues and
expenses of Companhia Hispano-Brasileira de Pelotizacao -- Hispanobras for that
purpose, as explained in Note 2.
(4) Based on our review, we are not aware of any material modification that
should be made to the accompanying financial statements referred to above for
them to be in conformity with generally accepted accounting principles in the
United States of America.
/s/ Arthur Andersen S/C
Vitoria, Brazil,
October 19, 2001
C-8
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Companhia Italo-Brasileira de
Pelotizacao -- ITABRASCO:
(1) We have reviewed the accompanying balance sheets of COMPANHIA
ITALO-BRASILEIRA DE PELOTIZACAO-ITABRASCO (a Brazilian corporation and a
subsidiary of Companhia Vale do Rio Doce), translated into U.S. dollars, as of
September 30, 2001 and 2000, and the related translated statements of income,
changes in stockholders' equity and cash flows for the nine-month periods then
ended. These financial statements are the responsibility of the Company's
management.
(2) We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
(3) These translated financial statements have been prepared as the basis for
application of the equity method by its stockholders and, accordingly, they
translate the assets, liabilities, stockholders' equity and revenues and
expenses of Companhia Italo-Brasileira de Pelotizacao -- Itabrasco for that
purpose, as explained in Note 2.
(4) Based on our review, we are not aware of any material modification that
should be made to the accompanying financial statements referred to above for
them to be in conformity with generally accepted accounting principles in the
United States of America.
Vitoria, Brazil
/s/ Arthur Andersen S/C
October 19, 2001
C-9
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Companhia Coreano -- Brasileira de Pelotizacao -- KOBRASCO
Vitoria, Brazil
We have reviewed the accompanying consolidated balance sheets of Companhia
Coreano-Brasileira de Pelotizacao -- KOBRASCO as of September 30, 2001 and 2000,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the nine-month periods then ended (all expressed in
United States dollars). These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
October 19, 2001
C-10
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Mineracao Rio do Norte S.A.:
(1) We have reviewed the accompanying balance sheets of MINERACAO RIO DO NORTE
S.A. (a Brazilian corporation), translated into U.S. dollars, as of September
30, 2001 and 2000, and the related translated statements of income, changes in
stockholders' equity and cash flows for the nine-month periods then ended. These
financial statements are the responsibility of the Company's management.
(2) The interim financial statements of the associated company
Alunorte -- Alumina do Norte do Brasil S.A. as of September 30, 2001 and 2000
were reviewed by other auditors. This investment represents 2.10% (3.28% in
2000) of the total assets and 100% of the equity adjustment (100% in 2000). Our
review of such investment is based solely on the report of the other auditors.
(2) We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
(4) These translated financial statements have been prepared as the basis for
application of the equity method by the Company's stockholders and, accordingly,
they translate the assets, liabilities, stockholders' equity and revenues and
expenses of Mineracao Rio do Norte S.A. for that purpose, as explained in Note
2.
(5) Based on our review and on the report of other auditors, as mentioned in
paragraph (2), we are not aware of any material modifications that should be
made to the financial statements referred to in paragraph (1) for them to be in
conformity with generally accepted accounting principles in the United States.
Rio de Janeiro, Brazil,
October 22, 2001.
/s/ ARTHUR ANDERSEN S/C
C-11
Deloitte Touche Tohmatsu
Av. Presidente Wilson 231-22 degrees
20030-021 -- Rio de Janeiro -- RJ
Brasil
Telefone: (21) 524-1281
Fac-simile: (21) 220-3876
www.deloitte.com.br
[DELOITTE TOUCHE TOHMATSU LOGO]
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Companhia Nipo-Brasileira de Pelotizacao -- NIBRASCO
Vitoria, Brazil
We have reviewed the accompanying balance sheets of Companhia Nipo-Brasileira de
Pelotizacao - NIBRASCO as of September 30, 2001 and 2000, and the related
statements of operations, changes in stockholders' equity and cash flows for the
nine-month periods then ended (all expressed in United States dollars). These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE TOUCHE TOHMATSU
October 19, 2001
C-12
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors of
Valesul Aluminio S.A.
We have reviewed the accompanying balance sheets of Valesul Aluminio S.A.
as of September 30, 2001 and 2000 and the related income statements, changes in
stockholders' equity and comprehensive income/losses and cash flows for the
nine-month periods then ended. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with auditing standards generally
accepted in Brazil and in the United States of America. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles in the United States of
America.
As more fully described in Notes 4 and 8 to the financial statements, the
company has adjusted its property, plant and equipment and deferred income taxes
accounting balances as a result of corrections of errors. Consequently, the
Company's financial statements for 2001 and 2000 referred to above have been
restated to conform with these adjustments.
/s/ KPMG Auditores Independentes
Rio de Janeiro, October 19, 2001, except for notes 4 and 8, which date is
January 17, 2002
C-13
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Companhia Siderurgica Nacional
1. We have reviewed the accompanying condensed consolidated balance sheet of
Companhia Siderurgica Nacional (a Brazilian corporation) and subsidiaries,
translated into U.S. dollars, as of September 30, 2000, and the related
translated condensed consolidated statements of operations, cash flows and
changes in stockholders' equity for the nine-month period then ended. These
financial statements are the responsibility of the Company's management.
2. The financial statements of the affiliate CVRD -- Companhia Vale do Rio Doce
as of September 30, 2000 and 1999 were reviewed by other accountants. This
investment represents 14% of the total assets (15% in 1999) and 38% of net
income (28% of net loss in 1999). Our report on such investment is based solely
on the report of other auditors.
3. We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
4. Based on our review and the report of other auditors, as mentioned in
paragraph (2), we are not aware of any material modifications that should be
made to the financial statements referred to above for them to be in conformity
with generally accepted accounting principles in the United States.
5. The balance sheet as of December 31, 1999, presented for comparison purposes
only, was audited by us, and our report dated February 15, 2000 was unqualified.
The condensed consolidated statements of operations, cash flows and changes in
stockholders' equity for the nine-month period ended September 30, 1999, also
presented for comparison purposes, was reviewed by us and our report dated
October 22, 1999 was unqualified.
/s/ Arthur Andersen S/C
Rio de Janeiro, Brazil,
October 20, 2000 (except for Note 11, as to which the date is January 11, 2001)
C-14
Photographs depicting various aspects of our industrial operations.
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34,109,696 AMERICAN DEPOSITARY SHARES
[COMPANHIA LOGO]
COMPANHIA VALE DO RIO DOCE
(VALLEY OF THE RIO DOCE COMPANY)
EACH AMERICAN DEPOSITARY SHARE
REPRESENTS ONE COMMON SHARE
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PROSPECTUS
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MERRILL LYNCH & CO.
ABN AMRO ROTHSCHILD LLC
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
JPMORGAN
MORGAN STANLEY
MARCH 20, 2002
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