Amendment to Annual Report of a Foreign Private Issuer — Form 20-F
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 20-F/A Valley of the Rio Doce Company 190 966K
2: EX-1 Instrument Corresponding to Articles of Incorp 17 51K
3: EX-8 List of Subsidiaries 1 9K
4: EX-10.1 Stock Purchase Agreement 33 129K
13: EX-10.10 Consent of Deloitte and Touche Tohmatsu 1 11K
14: EX-10.11 Consent of Arthur Andersen S/C 1 10K
15: EX-10.12 Consent of Arthur Andersen S/C 1 11K
16: EX-10.13 Consent of Deloitte and Touche Tohmatsu 1 10K
17: EX-10.14 Consent of Arthur Andersen S/C 1 10K
18: EX-10.15 Consent of Deloitte and Touche Tohmatsu 1 11K
19: EX-10.16 Consent of Kpmg 1 11K
20: EX-10.17 Consent of Deloitte and Touche Tohmatsu 1 11K
21: EX-10.18 Consent of Arthur Andersen S/C 1 10K
22: EX-10.19 Consent of Deloitte and Touche Tohmatsu 2 14K
5: EX-10.2 Consent of Pricewaterhousecoopers 1 11K
23: EX-10.20 Consent of Deloitte and Touche Tohmatsu 1 10K
24: EX-10.21 Consent of Trevisan 1 10K
25: EX-10.22 Consent of Deloitte and Touche Tohmatsu 1 11K
26: EX-10.23 Consent of Deloitte and Touche Tohmatsu 1 10K
27: EX-10.24 Consent of Mineral Resources Development Inc 1 11K
6: EX-10.3 Consent of Deloitte and Touche Tohmatsu 1 11K
7: EX-10.4 Consent of Deloitte and Touche Tohmatsu 1 11K
8: EX-10.5 Consent of Deloitte and Touche Tohmatsu 1 11K
9: EX-10.6 Consent of Kpmg 1 11K
10: EX-10.7 Consent of Kpmg LLP 1 10K
11: EX-10.8 Consent of Deloitte and Touche Tohmatsu 1 11K
12: EX-10.9 Consent of Deloitte and Touche Tohmatsu 2 13K
| Page | (sequential) | | | | (alphabetic) | Top |
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- Alternative Formats (Word, et al.)
- Additional Information
- Alumina
- Bauxite
- Contingency Reserve
- CVRD Group
- Defaults, Dividend Arrearages and Delinquencies
- Description of Securities Other than Equity Securities
- Directors, Senior Management and Employees
- Exhibits
- Financial Information
- Financial Statements
- Fiscal Incentive Investment Reserve
- Forward Looking Information
- Identity of Directors, Senior Management and Advisers
- Index to Consolidated Financial Statements
- Information on the Company
- Kaolin
- Key Information
- Major Shareholders and Related Party Transactions
- Manganese
- Material Modifications to the Rights of Security Holders and Use of Proceeds
- Mining Terms
- Notes to the Consolidated Financial Statements
- Offer Statistics and Expected Timetable
- Operating and Financial Review and Prospects
- Part I
- Part Ii
- Part Iii
- Pellets
- Potash
- Presentation of Financial Information
- Presentation of Information Concerning Reserves
- Quantitative and Qualitative Disclosures About Market Risk
- Registered Capital
- Reserved]
- The Offer and Listing
- Unrealized Income Reserve
- 10.A. Share Capital
- 10.B. Memorandum and Articles of Association
- 10.C. Material Contracts
- 10.E. Taxation
- 10.F. Dividends and Paying Agents
- 10.G. Statement by Experts
- 10.H. Documents on Display
- 10.I. Subsidiary Information
- 1.A. Directors and Senior Management
- 1.B. Advisers
- 1.C. Auditors
- 3.A.1-2. Selected Financial Data
- 3.A.3. Exchange Rates
- 3.B. Capitalization and Indebtedness
- 3.C. Reasons for the Offer and Use of Proceeds
- 3.D. Risk Factors
- 4.A.1-3. Incorporation of the Company
- 4.A.4. Development of the Company
- 4.A.5. Capital Expenditures and Divestitures
- 4.A.6. Current Capital Expenditures and Divestitures
- 4.A.7. Public Takeover Offers
- 4.B., 4.C. and 4.D. Business Overview, Organizational Structure and Property, Plants and Equipment
- 5.A.1. Changes
- 5.A.2. Inflation
- 5.A.3. Currency Fluctuations
- 5.A.4. Government Policies
- 5.A. Operating Results
- 5.B.1. Liquidity
- 5.B.2. Debt
- 5.B.3. Budgeted Capital Expenditures
- 5.B. Liquidity and Capital Resources
- 5.D. Trend Information
- 6.A., 6.B. and 6.C. Directors and Senior Management, Compensation and Board Practices
- 6.D. Employees
- 6.E. Share Ownership
- 7.A. Major Shareholders
- 7.B. Related Party Transactions
- 7.C. Interests of Experts and Counsel
- 8.A.1-6. Consolidated Statements and Other Financial Information
- 8.A.7. Legal Proceedings
- 8.A.8. Dividend Distributions
- 8.B. Significant Changes
- 9.A.1-3. Offering Details
- 9.A.4. Price History of Stock
- 9.A.5-7. Listing Details
- 9.B. Plan of Distribution
- 9.C. Markets
- 9.D., 9.E. and 9.F. Selling Shareholders, Dilution and Expenses of the Issue
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| 1 | 1st Page - Filing Submission
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| 4 | Mining Terms
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| 7 | Presentation of Financial Information
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| " | Presentation of Information Concerning Reserves
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| 8 | Forward Looking Information
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| 9 | Part I
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| " | Item 1. Identity of Directors, Senior Management and Advisers
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| " | 1.A. Directors and Senior Management
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| " | 1.B. Advisers
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| " | 1.C. Auditors
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| " | Item 2. Offer Statistics and Expected Timetable
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| 10 | Item 3. Key Information
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| " | 3.A.1-2. Selected Financial Data
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| 12 | 3.A.3. Exchange Rates
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| 14 | 3.B. Capitalization and Indebtedness
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| 15 | 3.C. Reasons for the Offer and Use of Proceeds
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| " | 3.D. Risk Factors
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| 21 | Item 4. Information on the Company
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| " | 4.A.1-3. Incorporation of the Company
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| 22 | 4.A.4. Development of the Company
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| 23 | Pellets
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| " | Manganese
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| 26 | 4.A.5. Capital Expenditures and Divestitures
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| " | 4.A.6. Current Capital Expenditures and Divestitures
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| " | 4.A.7. Public Takeover Offers
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| " | 4.B., 4.C. and 4.D. Business Overview, Organizational Structure and Property, Plants and Equipment
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| 45 | Kaolin
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| " | Potash
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| 52 | CVRD Group
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| 56 | Bauxite
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| 57 | Alumina
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| 65 | Item 5. Operating and Financial Review and Prospects
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| " | 5.A. Operating Results
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| " | 5.A.1. Changes
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| 69 | 5.A.2. Inflation
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| 70 | 5.A.3. Currency Fluctuations
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| " | 5.A.4. Government Policies
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| " | 5.B. Liquidity and Capital Resources
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| " | 5.B.1. Liquidity
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| 71 | 5.B.2. Debt
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| 72 | 5.B.3. Budgeted Capital Expenditures
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| 73 | 5.D. Trend Information
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| 77 | Item 6. Directors, Senior Management and Employees
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| " | 6.A., 6.B. and 6.C. Directors and Senior Management, Compensation and Board Practices
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| 82 | 6.D. Employees
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| 83 | 6.E. Share Ownership
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| " | Item 7. Major Shareholders and Related Party Transactions
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| " | 7.A. Major Shareholders
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| 88 | 7.B. Related Party Transactions
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| " | 7.C. Interests of Experts and Counsel
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| " | Item 8. Financial Information
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| " | 8.A.1-6. Consolidated Statements and Other Financial Information
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| " | 8.A.7. Legal Proceedings
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| 89 | 8.A.8. Dividend Distributions
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| 91 | 8.B. Significant Changes
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| " | Item 9. The Offer and Listing
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| " | 9.A.1-3. Offering Details
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| " | 9.A.4. Price History of Stock
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| " | 9.A.5-7. Listing Details
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| " | 9.B. Plan of Distribution
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| " | 9.C. Markets
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| 92 | 9.D., 9.E. and 9.F. Selling Shareholders, Dilution and Expenses of the Issue
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| " | Item 10. Additional Information
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| " | 10.A. Share Capital
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| " | 10.B. Memorandum and Articles of Association
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| 94 | Contingency Reserve
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| " | Unrealized Income Reserve
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| " | Fiscal Incentive Investment Reserve
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| 100 | 10.C. Material Contracts
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| 101 | 10.E. Taxation
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| 104 | Registered Capital
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| 106 | 10.F. Dividends and Paying Agents
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| 107 | 10.G. Statement by Experts
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| " | 10.H. Documents on Display
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| " | 10.I. Subsidiary Information
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| " | Item 11. Quantitative and Qualitative Disclosures About Market Risk
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| 111 | Item 12. Description of Securities Other than Equity Securities
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| " | Part Ii
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| " | Item 13. Defaults, Dividend Arrearages and Delinquencies
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| 112 | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
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| " | Item 15. [Reserved]
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| " | Item 17. Financial Statements
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| " | Part Iii
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| " | Index to Consolidated Financial Statements
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| 113 | Item 19. Exhibits
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| 123 | Notes to the Consolidated Financial Statements
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 2000
Commission file number: 000-26030
COMPANHIA VALE DO RIO DOCE
(Exact name of Registrant as specified in its charter)
VALLEY OF THE RIO DOCE COMPANY
(Translation of Registrant's name into English)
FEDERATIVE REPUBLIC OF BRAZIL
(Jurisdiction of incorporation)
AVENIDA GRACA ARANHA, NO. 26
20005-900 RIO DE JANEIRO, RJ, BRAZIL
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
[Enlarge/Download Table]
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Preferred class A shares, no par value per share New York Stock Exchange*
American depositary shares (as evidenced by American
depositary receipts) each representing one preferred class
A share New York Stock Exchange
---------------
* Shares are not listed for trading, but only in connection with the
registration of American depositary shares pursuant to the requirements of the
New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the
Act: NONE
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: NONE
The number of issued shares of each class of stock of Companhia Vale Do Rio
Doce as of December 31, 2000 was:
249,983,143 COMMON SHARES, NO PAR VALUE PER SHARE
138,575,912 PREFERRED CLASS A SHARES, NO PAR VALUE PER SHARE
1 GOLDEN SHARE, NO PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ].
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X].
Please send copies of notices and communications from the Securities and
Exchange Commission to:
Joseph A. Hall
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
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TABLE OF CONTENTS
[Download Table]
PAGE
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Mining Terms................................................................... iii
Presentation of Financial Information.......................................... vi
Presentation of Information Concerning Reserves................................ vi
Forward Looking Information.................................................... vii
PART I......................................................................... 1
Item 1. Identity of Directors, Senior Management and Advisers............... 1
1.A. Directors and Senior Management......................................... 1
1.B. Advisers................................................................ 1
1.C. Auditors................................................................ 1
Item 2. Offer Statistics and Expected Timetable............................. 1
Item 3. Key Information..................................................... 2
3.A.1-2. Selected Financial Data..................................... 2
3.A.3. Exchange Rates.............................................. 4
3.B. Capitalization and Indebtedness............................. 6
3.C. Reasons for the Offer and Use of Proceeds................... 7
3.D. Risk Factors................................................ 7
Item 4. Information on the Company.......................................... 13
4.A.1-3. Incorporation of the Company................................ 13
4.A.4. Development of the Company.................................. 14
4.A.5. Capital Expenditures and Divestitures....................... 18
4.A.6. Current Capital Expenditures and Divestitures............... 18
4.A.7. Public Takeover Offers...................................... 18
4.B., 4.C. and 4.D. Business Overview, Organizational Structure and
Property, Plants and Equipment......................................... 18
Item 5. Operating and Financial Review and Prospects........................ 57
5.A. Operating Results........................................... 57
5.A.1. Changes..................................................... 57
5.A.2. Inflation................................................... 61
5.A.3. Currency Fluctuations....................................... 62
5.A.4. Government Policies......................................... 62
5.B. Liquidity and Capital Resources............................. 62
5.B.1. Liquidity................................................... 62
5.B.2. Debt........................................................ 63
5.B.3. Budgeted Capital Expenditures............................... 64
5.C. Research and Development, Patents and Licenses, Etc......... 65
5.D. Trend Information........................................... 65
Item 6. Directors, Senior Management and Employees.......................... 69
6.A., 6.B. and 6.C. Directors and Senior Management, Compensation and
Board Practices................................... 69
6.D. Employees................................................... 74
6.E. Share Ownership............................................. 75
[Enlarge/Download Table]
PAGE
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Item 7. Major Shareholders and Related Party Transactions..................... 75
7.A. Major Shareholders.......................................... 75
7.B. Related Party Transactions.................................. 80
7.C. Interests of Experts and Counsel............................ 80
Item 8. Financial Information............................................... 80
8.A.1-6. Consolidated Statements and Other Financial Information..... 80
8.A.7. Legal Proceedings........................................... 80
8.A.8. Dividend Distributions...................................... 81
8.B. Significant Changes......................................... 83
Item 9. The Offer and Listing............................................... 83
9.A.1-3. Offering Details............................................ 83
9.A.4. Price History of Stock...................................... 83
9.A.5-7. Listing Details............................................. 83
9.B. Plan of Distribution........................................ 83
9.C. Markets..................................................... 83
9.D., 9.E. and 9.F. Selling Shareholders, Dilution and Expenses of the
Issue.............................................. 84
Item 10. Additional Information............................................. 84
10.A. Share Capital............................................... 84
10.B. Memorandum and Articles of Association...................... 84
10.C. Material Contracts.......................................... 92
Exchange Controls and Other Limitations Affecting Security
10.D. Holders..................................................... 92
10.E. Taxation.................................................... 93
10.F. Dividends and Paying Agents................................. 98
10.G. Statement by Experts........................................ 99
10.H. Documents on Display........................................ 99
10.I. Subsidiary Information...................................... 99
Item 11. Quantitative and Qualitative Disclosures About Market Risk......... 99
Item 12. Description of Securities Other than Equity Securities............. 103
PART II........................................................................ 103
Item 13. Defaults, Dividend Arrearages and Delinquencies.................... 103
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds........................................................... 104
Item 15. [Reserved]......................................................... 104
Item 16. [Reserved]......................................................... 104
Item 17. Financial Statements............................................... 104
PART III....................................................................... 104
Item 18. Financial Statements............................................... 104
Item 19. Exhibits........................................................... 105
ii
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.
Kaolin........................ A fine white aluminum silicate clay used as a
coating agent, filler, extender and absorbent
in the paper, ceramics and pharmaceutical
industries.
iii
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.
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.
iv
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.
v
PRESENTATION OF FINANCIAL INFORMATION
We have prepared our financial statements appearing in this annual report
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 annual report 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 annual report have been rounded.
---------------------
References to "real," "reais" or "R$" are to Brazilian reais (plural) and
to the Brazilian real (singular), the official currency of Brazil; and
references to "U.S. dollars," "dollars" or "US$" are to United States dollars.
Unless otherwise specified, metric units have been used, e.g. tons refer to
metric tons.
References to "CVRD Group," "us" or "we" are to 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.
PRESENTATION OF INFORMATION CONCERNING RESERVES
The estimates of proven and probable reserves at mines within the CVRD
Group and the estimates of mine life, as of December 31, 2000, included in this
annual report have been calculated according to the technical definitions
required by the U.S. Securities and Exchange Commission, as described in Mining
Terms. We derived estimates of mine life described in this annual report from
such reserve estimates. See Item 3.D. Risk Factors -- Risks Relating to the
Mining Industry.
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.
vi
FORWARD LOOKING INFORMATION
This annual report contains statements which constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Many of the forward looking statements contained in this annual report can
be identified by the use of forward-looking words such as "anticipate",
"believe", "could", "expect", "should", "plan", "estimate", and "potential",
among others. Those statements appear in a number of places in this annual
report and include statements regarding our intent, belief or current
expectations with respect to:
- our direction and future operation,
- 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 Item 3.D. Risk Factors beginning on page 7.
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, and the current electricity shortage in Brazil.
The information in this annual report, including the information set forth under
Item 3. Key Information, identifies important factors that could cause these
differences.
vii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
1.A. DIRECTORS AND SENIOR MANAGEMENT
See Item 6.A., 6.B. and 6.C. Directors and Senior Management, Compensation
and Board Practices -- Board of Directors and -- Executive Officers.
1.B. ADVISERS
Davis Polk & Wardwell acts as our U.S. legal adviser. The firm's address
is:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
U.S.A.
1.C. AUDITORS
PricewaterhouseCoopers Auditores Independentes acts as our independent
public accountants. The firm's address is:
PricewaterhouseCoopers Auditores Independentes
Rua da Candelaria 65
15th Floor
Rio de Janeiro, Brazil
PricewaterhouseCoopers is a member of the Instituto Brasileiro de
Contadores, or IBRACON, the Brazilian Institute of Accountants.
We have retained Mineral Resources Development, Inc., or MRDI, to audit and
verify some of our estimates of proven and probable reserves and mine life as of
December 31, 2000. The firm's address is:
Mineral Resources Development, Inc.
1710 So. Amphlett Blvd., Suite 302
San Mateo, California 94402-2706
U.S.A.
Unless specifically stated, our reserve estimates have not been audited by
MRDI.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
1
ITEM 3. KEY INFORMATION
3.A.1-2. SELECTED FINANCIAL DATA
The table below presents selected consolidated financial information as of
and for the periods indicated. You should read this information together with
our consolidated financial statements appearing in this annual report.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(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
Cost of products and services...... (2,724) (2,653) (2,272) (1,806) (2,429)
Selling, general and administrative
expenses......................... (245) (207) (171) (138) (225)
Research and development........... (59) (51) (48) (27) (48)
Employee profit sharing plan....... (51) (46) (29) (24) (29)
Restructuring costs................ -- (87) (9) -- --
Other income (expenses)............ 40 (67) (170) (161) (220)
--------- --------- --------- --------- ---------
Operating income................... 546 637 854 920 984
--------- --------- --------- --------- ---------
Non-operating income (expenses):
Financial income (expenses)...... (63) (3) 151 (33) (107)
Foreign exchange and monetary
gain/ Translation gain
(loss)........................ 14 7 (108) (213) (142)
Gain on sale of investments...... -- -- -- -- --
Other............................ (56) (12) (5) (4) (4)
--------- --------- --------- --------- ---------
(105) (8) 38 (250) (253)
--------- --------- --------- --------- ---------
Income before income taxes, equity
results, minority interests and
extraordinary items.............. 441 629 892 670 731
Income taxes benefit (charge)...... 43 (32) -- (33) 32
Equity in results of affiliates and
joint ventures................... 115 155 80 41 260
Change in provision for losses and
write-downs on equity
investments...................... (21) (59) (273) (268) 62
Minority interests................. (4) (2) (1) 2 1
Extraordinary items (net of
taxes)(1)........................ -- (372) -- -- --
--------- --------- --------- --------- ---------
Net income......................... US$ 574 US$ 319 US$ 698 US$ 412 US$ 1,086
========= ========= ========= ========= =========
Total cash distributions........... US$ 146 US$ 302 US$ 607 US$ 452 US$ 246
---------------
(1) Extraordinary items in 1997 relate to transactions in connection with the
first step of our privatization.
2
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(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
---------- ---------- ---------- ---------- ----------
Extraordinary items..... -- (0.96) -- -- --
Net income.............. US$ 1.48 US$ 0.10 US$ 1.80 US$ 1.07 US$ 2.82
========== ========== ========== ========== ==========
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
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
Weighted average number of
shares outstanding (in
thousands):
Common shares........... 249,983 249,983 249,983 249,983 249,983
Preferred shares(2)..... 138,576 138,563 137,965 134,917 134,917
---------- ---------- ---------- ---------- ----------
Total................ 388,559 388,546 387,948 384,900 384,900
========== ========== ========== ========== ==========
3
[Enlarge/Download Table]
AT DECEMBER 31,
---------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(IN MILLIONS OF US$)
BALANCE SHEET DATA
Current assets................. US$2,469 US$2,603 US$2,845 US$2,490 US$2,502
Property, plant and equipment,
net.......................... 5,451 5,557 5,261 3,943 3,955
Investments in affiliated
companies and joint ventures
and other investments........ 1,714 1,666 1,557 1,203 1,795
Other assets................... 1,580 1,791 1,385 1,052 1,543
--------- --------- --------- --------- ---------
Total assets.............. 11,214 11,617 11,048 8,688 9,795
========= ========= ========= ========= =========
Current liabilities............ 1,846 2,057 2,030 2,072 2,136
Long-term liabilities.......... 1,099 1,157 1,169 601 1,061
Long-term debt(4).............. 1,256 1,428 1,389 1,321 2,020
Minority interest.............. 71 69 68 3 9
--------- --------- --------- --------- ---------
Total liabilities......... 4,272 4,711 4,656 3,997 5,226
--------- --------- --------- --------- ---------
Stockholders' equity:
Capital stock................ 1,313 1,288 1,740 1,927 1,927
Additional paid-in capital... 180 498 498 498 498
Reserves and retained
earnings.................. 5,449 5,120 4,154 2,266 2,144
--------- --------- --------- --------- ---------
Total stockholders'
equity.................. US$6,942 US$6,906 US$6,392 US$4,691 US$4,569
--------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity.... US$11,214 US$11,617 US$11,048 US$ 8,688 US$ 9,795
========= ========= ========= ========= =========
---------------
(2) Each American depositary share represents one preferred class A 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.
3.A.3. 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 these 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.
4
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$1.00 on March 3, 1999. Since then, the real/U.S. dollar exchange rate has
been established by the interbank market, and has fluctuated considerably. In
the past, the Central Bank has only intervened occasionally to control extreme
movements in the foreign exchange rate. It is not yet possible to predict
whether the Central Bank will continue to let the real float freely or if the
real will remain at its present level. Accordingly, it is not possible to
predict what impact the Brazilian government's exchange rate policies may have
on us. The Brazilian government could impose a band system in the future or the
real could devalue or appreciate substantially. See Item 3.D. Risk
Factors -- Risks Relating to Brazil -- Fluctuations in the value of the real
against the value of the U.S. dollar may result in uncertainty in the Brazilian
economy and the Brazilian securities market and could lower the value of our
securities.
The following table sets forth the commercial selling rate, expressed in
reais per U.S. dollar (R$/US$) for the periods indicated.
[Enlarge/Download Table]
AVERAGE FOR
PERIOD-END PERIOD LOW HIGH
---------- ----------- ----- -----
YEAR ENDED
December 31, 1996....................................... 1.039 1.008(1) 0.973 1.041
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
August 31, 2001......................................... 2.552 2.502(2) 2.446 2.559
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
---------------
(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 February 25, 2002, the commercial selling rate was R$2.4062 per US
$1.00.
5
3.B. CAPITALIZATION AND INDEBTEDNESS
The table below sets forth our current liabilities and capitalization at
December 31, 2000.
[Download Table]
AT DECEMBER 31,
2000
--------------------
(IN MILLIONS OF US$)
--------------------
Current liabilities
Current portion of long-term debt......................... $ 280
Short-term debt........................................... 465
Other..................................................... 1,391
------
Total current liabilities......................... $2,136
======
Long-term liabilities
Long-term debt
Secured................................................ $ 450
Unsecured.............................................. 1,570
------
Total long-term debt.............................. 2,020
Loans from related parties................................ 21
Other..................................................... 1,040
------
Total long-term liabilities....................... 3,081
------
Minority interest........................................... 9
------
Shareholders' equity
Preferred shares -- 600,000,000 shares authorized and
138,575,913 issued..................................... 709
Common shares -- 300,000,000 shares authorized and
249,983,143 issued..................................... 1,279
Treasury shares -- 3,659,311 preferred and 7,300 common
shares................................................. (61)
Additional paid-in capital.................................. 498
Retained earnings........................................... 5,184
Other cumulative comprehensive income....................... (3,040)
------
Total shareholders' equity........................ 4,569
------
Total capitalization.............................. $9,795
======
We often use joint venture and affiliated company ownership structures with
domestic and foreign partners to finance our large-scale projects. On occasion,
we enter into guarantees to support the debt of these joint ventures and
affiliated companies. As of December 31, 2000, we had extended guarantees for
borrowings of joint ventures and affiliated companies in an aggregate amount of
US$788 million, of which US$607 million was denominated in U.S. dollars and the
remaining US$181 million was denominated in Brazilian currency. These guarantees
do not appear in the table above.
At December 31, 2000, US$353 million of our total long-term debt was
guaranteed by non-CVRD Group entities pursuant to a transaction which arose out
of our privatization.
6
3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
3.D. RISK FACTORS
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 in January 1999, and decreased
again to 9.9% in 2000. 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 Item 5.A.2. 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.
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
7
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 devalued 48% against the U.S. dollar, and in 2000 it
devalued 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 40%
against the U.S. dollar during the period from January 1, 2001 to October 31,
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 the 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 Item 3.A.3. 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.
More recently, Argentina is experiencing a financial crisis that is the result
of its difficulties to service its large financial debt. This crisis has caused
decreases in Brazilian stock and bond prices. Events such as these may adversely
affect our ability to borrow funds at an acceptable interest rate and raise
equity capital when needed. Since approximately 59.7% of our long-term debt at
December 31, 2000 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 is facing a
shortage of energy as a result of economic growth, inadequate expansion of
electric generation in past years and current unfavorable hydrological
conditions. In response, the Brazilian government has imposed an energy
rationing program to alleviate the energy shortage, which aims to decrease
energy consumption by at least 20%. This program has had a negative impact upon
the country's economic performance and inflation levels. The percentage of
energy reduction might be higher than 20% depending on the type of activity.
Aluminum and ferro-alloy activities are categorized as electric intensive
activities and are required to decrease their energy consumption by 25%. As a
result of this program, we have planned a temporary reduction of our aluminum
and ferro-alloy production. Because there remains a great deal of uncertainty as
to the severity and duration of this crisis, the likelihood of the success of
the imposed hydrological measures and the terms of eventual governmental
measures in the future, we are unable to assess fully the impact that the
government rationing program will have on our operations.
RISKS RELATING TO OUR BUSINESS
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
8
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 from 829,609 tons produced
during the same time period in 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 EFFECTIVELY COMPETE 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.
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.
Our iron ore, aluminum, gold and other mining activities are affected by
cyclical and other uncontrollable changes in world market prices for these
products. Moreover, several countries (in particular, countries in the former
Soviet Union) possess substantial reserves of and production capacity for a
variety of metals, such as iron ore, aluminum and gold, which are not currently
used at full capacity. If these countries were to substantially increase
production, global prices of these metals could decline significantly. Prolonged
declines in world market prices 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 Item 4.B., 4.C. and 4.D.
Business Overview, Organizational Structure and Property, Plants and
Equipment -- Lines of Business -- Non-Ferrous Minerals -- Regulatory Matters.
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
9
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 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. Changes in the laws, regulation 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 the business. For more
information on the regulations governing our energy business, see Item 4.B.,
4.C. and 4.D. Business Overview, Organizational Structure and Property, Plants
and Equipment -- Non-Ferrous Minerals -- Regulatory Matters.
OUR OPERATIONS ARE ALSO REGULATED BY BRAZILIAN ENVIRONMENTAL LAWS. CHANGES TO
THESE LAWS IN THE FUTURE MAY ADVERSELY AFFECT OUR MINING AND ENERGY BUSINESS.
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, 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 Item 4.B., 4.C. and 4.D. Business Overview,
Organizational Structure and Property, Plants and Equipment -- Environmental
Matters and Item 8.A.7. Legal Proceedings.
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,
10
- 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 risks that are typical in our
business 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 FUTURE 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.
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 observe their obligations to contribute
capital, purchase
11
products and, in some cases, provide managerial talent. If any of our joint
venture partners do 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 those plans. For more information on our use of joint ventures,
see Item 4.B., 4.C. and 4.D. Business Overview, Organizational Structure and
Property, Plants and Equipment -- Lines of Business -- Ferrous
Minerals -- Pellets, -- Lines of Business -- Non-Ferrous Minerals -- Current
Copper Prospects, -- Lines of Business -- Logistics, -- Lines of
Business -- Energy and -- Lines of Business -- Holdings -- Aluminum Business --
Bauxite, -- Alumina and -- Aluminum.
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 discounted 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.
WE ARE VULNERABLE TO ADVERSE DEVELOPMENTS AFFECTING OTHER ECONOMIES.
In 2000, 7.1% of our consolidated gross operating revenues were
attributable to sales to Japanese customers, 8.4% were attributable to sales to
other Asian customers and 28.1% were attributable to sales to European
customers. A number of Asian economies, including 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% of our outstanding
common stock and 27.5% of our outstanding total capital. For a description of
our principal shareholder, see Item 7.A. Major Shareholders -- Principal
Shareholder. As a result of its stock ownership, Valepar has significant
influence in determining the outcome of any action requiring shareholder
approval, such as the election of the members of our board of directors.
BNDESPAR, a wholly-owned subsidiary of BNDES, the Brazilian development bank,
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 the preferred special share, see Item 10.B. Memorandum and
Articles of Association -- Common Shares and Preferred Shares -- General.
12
WE FACE A NUMBER OF LEGAL CHALLENGES TO OUR PRIVATIZATION.
Numerous lawsuits challenging the legality of our privatization are
pending, including a number of class-action lawsuits. If a substantial number of
claims were to be decided against us, these unfavorable decisions could, in the
aggregate, adversely affect the course of our privatization process and have a
material adverse effect on investors in our securities. See Item 8.A.7. Legal
Proceedings.
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 Item
11. Quantitative and Qualitative Disclosures about 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.
The Brazilian government may impose restrictions on capital outflow that
would hinder or prevent the custodian who acts for the American depositary share
depositary from converting proceeds from the preferred class A 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 preferred class A shares, as the case may be, 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 for the American depositary
shares, will hold the reais it cannot convert for the account of the American
depositary receipt holders 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.
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 preferred
class A 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 Item 10.A. -- Share Capital.
ITEM 4. INFORMATION ON THE COMPANY
4.A.1-3. INCORPORATION OF THE COMPANY
Our legal and commercial name is Companhia Vale do Rio Doce. We are a
limited liability company, or sociedade anonima, duly organized on January 11,
1943, and existing under the laws of the Federative Republic of Brazil. We are
organized for an unlimited period of time. 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.
13
4.A.4. DEVELOPMENT OF THE COMPANY
RECENT DEVELOPMENTS
The following discussion describes some of the important recent
developments in our businesses.
Mining
In 2000, we acquired an additional 815 million proven and probable tons of
iron ore reserves, and an additional 24.5 million tons per year of iron ore
production capacity. At December 31, 2000, in our wholly-owned and
majority-owned operations, we had 3.5 billion tons of proven and probable iron
ore reserves and 130 million tons per year of iron ore production capacity. In
April 2001, we acquired an additional 15 million tons of iron ore production
capacity and 263 million tons of other mineral deposits. We describe significant
mining acquisitions below.
Samitri. In May 2000, we acquired a controlling interest in S.A. Mineracao
da Trindade, known as Samitri. 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., described below.
Socoimex. 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 the 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, we
merged Socoimex into the CVRD Group.
Ferteco. 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. Ferteco accounted for 3%
of world iron ore production in 2000.
Additionally, Ferteco owns 9.8% of the total capital of MRS Logistica S.A.,
a Brazilian railroad company. MRS has 1,612 kilometers of track linking the
states of Rio de Janeiro, Sao Paulo and Minas Gerais, with a capacity to
transport 80 million tons per year. Ferteco also operates a marine terminal
through its wholly owned subsidiary, Companhia Portuaria Bafa de Sepetiba S.A.,
in the port of Sepetiba, Rio de Janeiro.
Baovale. 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 of tons in our proven and probable reserves. In return, Baosteel paid us
US$18.9 million for its 50% stake 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.
Belem. 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
14
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.
Caemi. 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. Caemi
accounted for 4% of world iron ore production in 2000. 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.
Pellets
In 2000, we acquired two additional pelletizing joint ventures, bringing to
six the number of pelletizing joint ventures in which we participate. Our
pelletizing joint ventures have a combined annual production capacity of 35.8
million tons. Of this total, 17.9 million tons corresponded to our equity
ownership in the pelletizing joint ventures as of December 31, 2000, and thus
represented our attributable share. In addition, as of December 31, 2000, our
wholly-owned pelletizing operations had a combined annual production capacity of
5.2 million tons. In April 2001, we acquired an additional 4 million tons of
annual production capacity of pellets through our acquisition of Ferteco.
Samarco. Samarco is one of the world's largest exporters of pellets. We
acquired a controlling interest in Samarco through our Samitri acquisition,
described above. When we acquired Samitri, Samitri owned 51% of Samarco, and the
remaining 49% of Samarco was held by Broken Hill Proprietary Company Limited, or
BHP, the Australian mining concern. Samitri subsequently sold a 1% share of
Samarco to BHP for US$8 million in order to equalize the parties' ownership
interests.
GIIC. In October 2000, we spent US$91 million to acquire 50% of Gulf
Industrial Investment Co., or GIIC. We financed this investment, our first in
the Middle East, with cash flows from operations. The other 50% interest in GIIC
is held by Gulf Investment Corporation, a Persian Gulf-region investment bank.
Based in Bahrain, GIIC operates one of the largest independent iron ore
pelletizing plants in the world, with an annual production capacity of 4 million
tons. GIIC also operates a port that is equipped to receive vessels up to
100,000 tons, a thermoelectric generator and a desalinating plant.
Sao Luis. 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.
We have financed this through cash flow from operations. At December 31, 2000,
we had spent approximately US$54 million in the Sao Luis Plant. We are investing
US$181 million to construct this plant, which will be located in our Northern
System.
Manganese
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
15
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.
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 hydroelectric
power generation projects. We currently hold stakes in nine hydroelectric power
generation projects (Igarupava, Porto Estrela, Funil, Curdorga, Aimores, Capim
Bronco I, Capim Branco II, Foz do Chupeco and Santa Isabel), which have a total
projected capacity of 3,364 MW. The Igarupava and Porto Estrela power plants
started operations in September 1999 and 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 schedule to start
operations yet. 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.
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:
[Download Table]
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
16
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.
In April 2001, Valepontocom launched Multistrata. Multistrata was designed
to create an electronic marketplace for logistics services, particularly
railroads, in the Mcrcosur 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.
As of December 31, 2000, we had invested US$22 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. Due to the evolving and uncertain
nature of e-commerce, we are unable to predict if and when these operations will
be profitable.
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 Item 6.D. Employees. We
continue to explore the divestiture of Celmar S.A. and of our forestry
subsidiary, Florestas Rio Doce S.A. See Item 4.B., 4.C and 4.D. Business
Overview -- Organizational Structure and Property, Plant and
Equipment -- Holdings -- Pulp and Paper Business. 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 is expected to close 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.
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$249
million, to VALIA, our employee pension fund. For more information on this
contribution to VALIA, see Item 6.D. Employees.
17
As part of the unwinding transaction, CSN granted us the following rights
of first refusal relating to CSN's Casa de Pedra mine, each of which lasts for a
period of 30 years:
- the right to purchase any iron ore produced by the mine beyond CSN's
internal requirements,
- the right to purchase or to rent the mine should CSN decide to sell or
lease it, and
- the right to become a joint venture partner should CSN decide to form a
pelletizing joint venture with a third party with iron ore produced by
the mine.
In return, we have granted CSN a right of first refusal to participate with
us in the construction of any new steel producing facilities that we undertake
in the next five years.
This transaction, as a whole, is subject to review by the Brazilian
antitrust authorities.
We do not expect the unwinding of our cross-holding relationships with CSN
to have any significant impact on our operations and financial results.
4.A.5. CAPITAL EXPENDITURES AND DIVESTITURES
The table below sets forth our capital expenditures by business area for
the periods indicated. Our capital expenditures have historically been more
intensive in the second half of the year.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
BUSINESS AREA 1998 1999 2000
------------- --------- --------- ---------
(IN MILLIONS OF US$)
Ferrous..................................................... US$346 US$183 US$354
Non-ferrous................................................. 32 56 50
Logistics................................................... 1 4 14
Energy...................................................... 20 18 19
Corporate center............................................ 13 4 10
------ ------ ------
Total.................................................. US$412 US$265 US$447
====== ====== ======
Capital expenditures relating to ferrous products increased 86% from US$201
million in 1999 to US$373 million in 2000, primarily due to the acquisition of
locomotives for transportation of iron ore (US$72 million) and the construction
of the Sao Luis pelletizing plant (US$40 million).
For a description of our divestitures, see Item 4.A.4. Development of the
Company -- Divestitures.
4.A.6. CURRENT CAPITAL EXPENDITURES AND DIVESTITURES
See Item 5.B.3. Budgeted Capital Expenditures, for a description of
budgeted capital expenditures.
See Item 4.A.4. Development of the Company, for a description of current
divestitures.
4.A.7. PUBLIC TAKEOVER OFFERS
Not applicable.
4.B., 4.C. AND 4.D. BUSINESS OVERVIEW, ORGANIZATIONAL STRUCTURE AND PROPERTY,
PLANTS AND EQUIPMENT
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. Through
joint ventures, we have major investments in the production of aluminum.
18
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. 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 a mineral
exploration program were US$48 million in 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. 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. We currently perceive favorable investment opportunities in the
Brazilian electricity sector and are taking advantage of them to invest in
hydroelectric power generation projects. See Item 4.B., 4.C. and 4.D. Business
Overview, Organizational Structure and Property, Plants and Equipment -- Lines
of Business -- Energy.
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. Aluvale currently holds a 50.3% voting
interest in our alumina refining joint venture, Alumorte, which has a nominal
production capacity of 1.5 million tons of alumina per year. 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 joint
ventures have a
19
combined production capacity of 500,000 tons of aluminum per year. Our
integrated aluminum operations rank among the largest in Latin America in terms
of production volume.
BUSINESS 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 other mineral
deposits.
- 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 have 65.4% iron content on average and our Southern System
reserves have 55.0% iron content on average. 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 advantage. 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.
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
20
our ownership percentages in these pelletizing joint ventures, see Item 4.B.,
4.C. and 4.D. Business Overview, Organization Structure and Property, Plants and
Equipment -- Lines of Business -- Ferrous Minerals -- Pellets.
Pipeline of Copper Development Projects
We have joint venture interests in five Brazilian copper development
projects containing approximately 1.6 billion tons of mineral deposits with a
weighted-average grade of 0.93%. 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
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. Independent studies indicate that Albras is among the top
5% lowest cash costs producers of primary aluminum in the industry. In
consequence, 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
interest 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 this production capacity.
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 three privatized railroads, including Centro-Atlantica, which interconnects
with the Vitoria-Minas railroad using the same track gauge, and therefore
increases its volumes. 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$1,424 million in 2000 on operating revenues of
US$4,069 million. The ratio of our long-term debt to shareholders' equity at
December 31, 2000 was 0.44:1.0, and therefore we 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 our aluminum and gold production against
price volatility in order to avoid volatility in our cash flow.
21
BUSINESS STRATEGY
Before 1997, CVRD was 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 quickly transformed ourselves into 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. 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
22
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, 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 Item 4.B., 4.C. and 4.D. Business Overview, Organizational
Structure and Property, Plants and Equipment -- Lines of Business -- Non-Ferrous
Minerals -- Current Copper Prospects -- 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.
Developing Power Generation Projects
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.
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.
23
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. See Item 4.B., 4.C., and 4.D. Business Overview,
Organizational Structure and Property, Plants and Equipment -- Lines of
Business -- Holdings.
FERROUS MINERALS
Our ferrous minerals business segment comprises 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.
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.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
(IN MILLIONS OF US$)
REVENUES CLASSIFIED BY GEOGRAPHIC DESTINATION
Export sales:
Latin America............................................ US$177 US$149 US$224
United States............................................ 185 147 252
Europe................................................... 751 621 969
Middle East.............................................. 135 146 209
Japan.................................................... 299 351 544
Asia, other than Japan................................... 456 575 651
Other.................................................... 1 -- --
-------- -------- --------
2,004 1,989 2,849
-------- -------- --------
Domestic sales............................................. 776 639 1,000
-------- -------- --------
Total................................................. US$2,780 US$2,628 US$3,849
======== ======== ========
REVENUES CLASSIFIED BY CATEGORY
Iron ore................................................... US$1,970 US$1,859 US$2,710
Pellets.................................................... 683 632 769
Manganese and ferro-alloys................................. 127 137 370
-------- -------- --------
Total................................................. US$2,780 US$2,628 US$3,849
======== ======== ========
24
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.
[Enlarge/Download Table]
PROVEN AND PROBABLE
RESERVES
--------------------------
ORE
MINE 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
Morro Agudo 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 Morro Agudo 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.
25
[Enlarge/Download Table]
COMMENCEMENT PROJECTED OUR OWNERSHIP
OF OPERATIONS EXHAUSTION DATE INTEREST PRODUCTION
------------- --------------- ------------- ----------------------
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
MINE 1998 1999 2000
---- ----- ----- ------
(PERCENT) (IN MILLIONS OF TONS)
SOUTHERN SYSTEM
Itabira District
Caue............................. 1942 2014 100% 19.9 17.8 20.1
Conceicao........................ 1957 2014 100 19.3 18.8 19.8
Dois Corregos.................... -- -- -- -- -- --
Total Itabira District........... -- -- -- 39.2 36.6 39.9
---- ---- -----
Timbopeba.......................... 1984 2006 100 7.5 7.4 7.6
Gongo Soco Complex(1).............. 2000 2010 100 0.2 0.7 6.6
Capanema/Ouro Fino................. 1982 2003 51 4.6 3.7 5.3
Fazendao........................... 1997 -- 100 1.1 0.9 1.2
Samitri
Alegria Complex(2)............... 2000 2040 100 -- -- 9.4
Agua Limpa Complex(3)............ 2000 2009 100 -- -- 3.7
Corrego do Meio Complex(4)....... 2000 2006 100 -- -- 1.5
---- ---- -----
Total Samitri...................... -- -- -- -- -- 14.6
---- ---- -----
Urucum(5).......................... 1993 -- 100 0.7 0.6 0.7
---- ---- -----
TOTAL SOUTHERN SYSTEM............ -- -- -- 53.3 49.9 75.9
---- ---- -----
NORTHERN SYSTEM
Carajas(6)......................... 1986 2021 100 45.8 44.0 47.6
---- ---- -----
TOTAL CVRD GROUP................... 99.1 93.9 123.5
==== ==== =====
---------------
(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.
26
Integrated Systems
[INTEGRATED SYSTEMS MAP]
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 each system 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
27
mines of the Southern System are located in a region called the Iron Quadrangle
in the State of Minas 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, Morro Agudo 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 65%,
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 round-trip 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).
28
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 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 have housing and other
facilities for the people in a nearby township.
PELLETS
We conduct our pellet business primarily through participations in joint
ventures and also at the parent company level, as shown below:
[PELLETS LEVEL CHART]
29
The table below sets forth information regarding pellet production by us
and our joint ventures for the periods indicated.
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
PELLET PRODUCER 1998 1999 2000
--------------- ----- ----- -----
(IN MILLIONS OF TONS)
CVRD........................................................ 4.7 4.8 5.0
Itabrasco................................................... 3.4 3.4 3.3
Hispanobras................................................. 3.9 3.6 3.8
Nibrasco.................................................... 7.5 6.1 8.5
Kobrasco.................................................... 0.4 3.8 4.4
Samarco..................................................... -- -- 12.7
GIIC........................................................ -- -- 3.6
---- ---- ----
Total..................................................... 19.9 21.7 41.3
==== ==== ====
Percentage DR pellets....................................... 29.1% 25.9% 23.5%
Except for GIIC, which is in Bahrain, and Samarco, which is in Ponta do
Ubu, all of our pelletizing operations take place in the Southern System at our
Tubarao complex.
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
December 31, 2000, we had invested approximately US$54 million in the Sao Luis
plant and expect to spend an additional US$127 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.
[Enlarge/Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
JOINT VENTURE 1998(1) 1999(1) 2000(1)
------------- ------- ------- -------
(IN MILLIONS OF TONS)
Kobrasco................................................... 0.4 4.1 4.7
Itabrasco.................................................. 3.6 3.6 3.6
Hispanobras................................................ 4.3 4.0 4.1
Nibrasco................................................... 8.2 6.6 9.3
Samarco.................................................... -- -- 1.9
GIIC....................................................... -- -- 2.0
---- ---- ----
Total.................................................... 16.5 18.3 25.6
==== ==== ====
---------------
(1) Shipments in 2000, 1999 and 1998 represent iron ore sold and iron ore
delivered to the joint ventures on a tolling basis.
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.
30
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
52.6% of our total export shipments in 2000. Our 10 largest customers
collectively purchased 40.0 million tons of iron ore and pellets from us,
representing 50.3% of our 2000 iron ore and pellet shipments and approximately
45% 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 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 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 Item 4.B., 4.C., and 4.D. Business Overview, Organizational Structure and
Property, Plants and Equipment -- Logistics -- Ports and Terminals -- 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.
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
31
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.,
- Quebec Cartier Mining Co. (Canada),
- Luossavaara Kiinmavaara 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.
32
MANGANESE AND FERRO-ALLOYS
We conduct our manganese and ferro-alloy business primarily through
affiliates and joint ventures, as shown below:
[FLOW CHART]
In 2000, we were the largest Brazilian manganese ore producer, with total
shipments of approximately 1.7 million tons. We had US$281 million in gross
revenues in 2000 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.
The Brazilian government, as part of its energy rationing program, required us
as of June 1, 2001 to decrease energy consumption by 25% for ferro-alloy related
activities. In June 2001, in response to these governmental measures, we 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. We estimate our revenue loss to be 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, our long-term plan is to continue to expand our ferro-alloy
operations. For information on the risks associated with the Brazilian
government's energy rationing program, see Item 3.D. Risk Factors -- Risks
Relating to Brazil -- The Brazilian government's energy rationing program could
adversely affect us.
33
The table below sets forth information regarding our manganese reserves as
of December 31, 2000. The estimates of mineral reserves have been audited and
verified by MRDI.
[Enlarge/Download Table]
PROVEN AND PROBABLE RESERVES
------------------------------------------
MINE TYPE ORE TONNAGE GRADE(3)(4)
---- ------------- ------------ -----------
(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.
(4) The subtotal and total figures include weight-averaged ore grades.
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.
[Enlarge/Download Table]
PRODUCTION
---------------------
COMMENCEMENT OF PROJECTED OUR OWNERSHIP FOR THE YEAR ENDED
MINE OPERATIONS EXHAUSTION DATE INTEREST DECEMBER 31,
---- --------------- --------------- ------------- ---------------------
1998 1999 2000
----- ----- -----
(IN MILLIONS OF TONS)
Azul.................. 1986 2014 100% 1.3 0.9 1.4
Urucum................ 1976 2035 100% 0.3 0.2 0.3
--- --- ---
Total............... 1.6 1.1 1.7
=== === ===
The table below sets forth information regarding our ferro-alloy
production.
[Enlarge/Download Table]
PRODUCTION PRODUCTION IN
PLANT CAPACITY 2000
----- ----------------- -------------
(IN THOUSANDS (IN THOUSANDS
OF TONS PER YEAR) OF TONS)
RDME..................................................... 140.0 119.7
CPFL/SIBRA............................................... 311.6 273.9
NES...................................................... 45.0 37.5
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.
34
The table below sets forth information regarding our non-ferrous revenues
and sales by geographic market for the periods indicated.
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1998 1999 2000
----- ----- -----
(IN MILLIONS OF US$)
REVENUES CLASSIFIED BY GEOGRAPHIC DESTINATION
Export sales:
Latin America............................................. $ -- $ -- $ --
United States............................................. 145 139 156
Europe.................................................... -- -- 35
Japan..................................................... -- -- 4
Asia, other than Japan.................................... -- 4 3
---- ---- ----
145 143 198
Domestic sales.............................................. 124 96 90
---- ---- ----
Total..................................................... $269 $239 $288
==== ==== ====
REVENUES CLASSIFIED BY CATEGORY
Gold........................................................ $168 $155 $156
Potash...................................................... 101 84 85
Other minerals.............................................. -- -- 47
---- ---- ----
Total..................................................... $269 $239 $288
==== ==== ====
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, at December 31, 2000, we operated
three gold mines. We are one of the largest gold producers in Latin America,
with a total gold production of 535,100 troy ounces of refined gold for 2000. We
were responsible for approximately 32% of all gold produced on an industrial
scale in Brazil during 2000. Gold sales generated US$156 million of gross
operating revenues in 2000.
35
The table below sets forth information regarding estimated gold proven and
probable reserves as of December 31, 2000. The estimates of mineral reserves
have been audited and verified by MRDI.
[Enlarge/Download Table]
PROVEN AND PROBABLE RESERVES
------------------------------------------------
ORE CONTAINED METAL
MINE(1) ORE TYPE TONNAGE GRADE(3) GOLD RECOVERY(3) RECOVERABLE GOLD
------- ----------- --------- ---------- --------- ----------- -----------------------------
(MILLIONS (MILLIONS OF
OF TONS) (GRAM/TON) (TONS) (PERCENT) (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 as of 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 for the periods indicated. The projected exhaustion dates are
based on 2000 production levels.
[Enlarge/Download Table]
PRODUCTION
---------------------------------
PROJECTED FOR THE YEAR ENDED DECEMBER 31,
COMMENCEMENT EXHAUSTION ---------------------------------
MINE OF OPERATIONS DATE 1998 1999 2000
---- ------------- ---------- --------- --------- ---------
(THOUSANDS OF TROY OUNCES)(1)
Igarape Bahia.................. 1991 2002 359.4 357.5 333.9
Fazenda Brasileiro............. 1984 2009 170.4 141.2 154.6
Almas.......................... 1985 2000 16.4 16.0 13.2
Caete.......................... 1996 2000 13.3 17.4 11.0
Itabira........................ 1984 2002 22.9 20.0 22.4
------ ------ ------
Total........................ 582.4 552.1 535.1
====== ====== ======
Average total cash cost of
production (US$ per troy
ounce)(1).................... US$175 US$143 US$165
---------------
(1) One troy ounce equals 31.103 grams.
Our gold mines are located in the states of Minas Gerais, Bahia, Tocantins
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 99.99% purity. Our gold is
insured from the time we place it in its mine vaults until it reaches the
customer.
As of December 31, 2000, our proven and probable gold reserves represented
three years of production at 2000 output levels. In 2000, we had expenditures of
US$8.5 million for gold exploration and resource
36
development, 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$1.0 million were reimbursed under the Mineral Risk Contract.
See -- Current Copper Prospects -- Mineral Risk Contract.
Drilling has indicated that our largest gold mine, Igarape Bahia, has gold
mineralization at three distinct levels. We expect that mineralization at the
uppermost level, which consists primarily of oxidized gold ore, will be depleted
by mid 2003. We are currently studying the commencement of mining in the second
and third ore zones in which gold mineralization exists with ores of other
metals, mainly copper. The second zone is a transition zone which changes from
oxide-based ore to sulfide, and the third zone consists entirely of sulfide ore.
Sulfide ore requires substantially more expensive processing technology than
oxide ore, which may result in higher unit production costs for gold. As the
mine transitions from predominantly oxide ore to sulfide ore, we will have to
invest significant amounts of capital in equipment to process the refractory
ore. We have not yet invested in such processing equipment, and if we decide not
to undertake such investments, gold production at Igarape Bahia will likely
decline.
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 75.6% and 81.2%, 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 2000, Para
Pigmentos reported revenues of US$34 million and a net loss of US$9.0 million.
Currently, Para Pigmentos has approximately US$114 million of long-term debt
outstanding, of which we guarantee US$73 million. Para Pigmentos is conducting a
four phased investment program to increase production capacity in response to an
expected increase in the demand for kaolin.
The table below sets forth the schedule for the investment program which
Para Pigmentos expects to carry out through 2007:
[Enlarge/Download Table]
EXPECTED
INVESTMENT PHASE PRODUCTION TOTAL INVESTMENT DATE OF COMPLETION
---------------- ---------- -------------------- ------------------
KT/YEAR (IN MILLIONS OF US$)
I....................................... 320 $140.0 2000
II...................................... 600 29.0 2001
III..................................... 800 24.4 2003
IV...................................... 1,000 26.3 2007
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 net revenues of US$84.9
million from potash sales in 2000.
37
CURRENT COPPER PROSPECTS
At December 31, 2000, our copper mining exploration and development
projects were conducted through the following joint ventures:
[Joint Venture Line Graph]
The table below sets forth information, at December 31, 2000, regarding the
status and potential productivity of our copper (Cu) prospects, all but one of
which features a gold (Au) byproduct:
[Enlarge/Download Table]
TOTAL EXPECTED ANTICIPATED
PROJECT STATUS OTHER MINERAL DEPOSITS CAPITAL EXPENDITURES START-UP DATE
------- ---------------- ---------------------- -------------------- -------------
(MILLIONS OF TONS) (IN MILLIONS OF US$)
Sossego.............. Full feasibility 313 at 1.02% Cu and $ 486 2004
May 2001 0.3 g/t Au
Salobo............... Pre-feasibility 784 at 0.96% Cu and 1,005 2007
in progress 0.6 g/t Au
Project 118.......... Pre-feasibility 100 at 0.80% Cu 170 2004
in progress
Alemao............... Advanced 170 at 1.60% Cu and 550 2006
Exploration 0.90 g/t Au
Cristalino........... Advanced 300 at 0.40% Cu and 500 2006
Exploration 0.2 g/t Au
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 2000 were US$48 million and
the budget for 2001 is US$45 million.
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 as of December 31, 1997, to 6.2 million hectares as of December 31,
2000.
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 deposits 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.
38
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, as of December 31, 2000, we
and BNDES each had remaining commitments to contribute an additional US$93.2
million 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 US$205 million, the contract provides that each party may either choose to
match the other party's contributions, or may choose to have its financial
interest proportionally diluted. If a party's participation in the project is
diluted to an amount lower than 40% of the amount invested in connection with
exploration and development projects, then the Mineral Risk Contract provides
that the diluted party will lose (1) all the rights and benefits provided for in
the Mineral Risk Contract and (2) any amount previously contributed to the
project.
Under the Mineral Risk Contract, BNDES has agreed to compensate us for our
contribution of existing development and ownership rights in the Carajas region
through a finder's fee production royalty on mineral resources that are
discovered and placed into production. This finder's fee is equal to 3.5% of the
revenues derived from the sale of gold, silver and platinum group metals and
1.5% of the revenues derived from the sale of other minerals, including copper,
except for gold and other minerals discovered at Serra Leste, for which the
finder's fee is equal to 6.5% of revenues.
39
LOGISTICS
At December 31, 2000, our logistics business, which comprises the
transportation of third party products and passengers, operated through the
following subsidiaries and joint ventures:
[Logistic Flow Chart]
The table below sets forth information regarding our third party logistics
revenues and sales by geographic market for the periods indicated.
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1998 1999 2000
----- ----- -----
(IN MILLIONS OF US$)
Export market
Latin America............................................. $ 5 $ 13 $ 30
United States............................................. 36 34 64
Europe.................................................... 40 31 75
Middle East............................................... 2 3 6
Japan..................................................... 31 9 15
Asia, other than Japan.................................... 15 9 5
Others...................................................... 6 1 --
---- ---- ----
135 100 195
Domestic sales.............................................. 396 318 403
---- ---- ----
$531 $418 $598
==== ==== ====
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. 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 197 locomotives,
7,603 ore-cars, 5,639 cars for
40
general cargo and 61 passenger cars. In 2000, the Vitoria-Minas railroad carried
a total of 111.9 million tons of iron ore and other cargo, of which 81.3 million
tons consisted of cargo transported for third parties. The Vitoria-Minas
railroad also carried approximately one million passengers in 2000.
The principal cargo of the Vitoria-Minas railroad consists of:
- iron ore, carried for us and other Brazilian mining companies,
- 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.
The growing number of agricultural products consumed in the Vitoria-Minas
region should lead to their increased transportation by railroad. 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.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
CARGO 1998 1999 2000
----- --------- --------- ---------
(THOUSANDS OF TONS)
Third Party
Iron ore and pellets.................................. 57,033 53,292 56,986
Steel................................................. 5,042 4,745 5,542
Coal.................................................. 4,236 4,223 4,905
Pig iron.............................................. 2,016 2,042 2,585
Limestone and dolomite................................ 1,932 2,149 2,609
Grain................................................. 1,752 1,655 2,410
Cooking coal.......................................... 779 525 854
Oil................................................... 362 285 334
Other................................................. 3,523 4,143 4,284
------- ------- -------
Third party subtotal............................... 76,675 73,059 80,509
------- ------- -------
CVRD Group
Iron ore.............................................. 26,473 26,322 29,338
Wood pulp............................................. 708 726 756
Other................................................. 925 722 1,281
------- ------- -------
CVRD Group subtotal................................ 28,106 27,770 31,375
------- ------- -------
Total.............................................. 104,781 100,829 111,884
======= ======= =======
Carajas Railroad. The Carajas railroad, in the Northern System, starts at
our Carajas iron ore mines in the state of Para. We operate this railroad under
a 30-year renewable concession granted by the Brazilian government. This
railroad 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 84 locomotives, 3,970 ore-cars, 741 cars for general
cargo and 37 passenger cars. In 2000, the Carajas railroad carried a total of
51.9 million tons of iron ore and other cargo, of which 5.2 million tons, or
10%, consisted of cargo transported for third parties. The Carajas railroad also
carried approximately 475,000 passengers in 2000.
41
The table below sets forth information regarding the cargo the Carajas
railroad transported for the periods indicated.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
CARGO 1998 1999 2000
----- -------- -------- --------
(THOUSANDS OF TONS)
Iron ore
CVRD Group............................................. 43,881 41,683 45,353
Third party............................................ 2,242 2,246 2,544
Manganese ore
CVRD Group............................................. 898 807 1,339
Pig iron................................................. 1,243 1,321 1,526
Vehicles................................................. 306 120 142
Fuels.................................................... 399 383 394
Soy beans................................................ 357 426 491
Other.................................................... 120 114 127
------ ------ ------
Total.................................................. 49,446 47,100 51,916
====== ====== ======
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 in 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. In 2000, Centro-Atlantica reported net revenues of US$120 million, and
a net loss of US$40.7 million.
We also hold a 30% stake in the Malha Nordeste railroad through Companhia
Ferroviaria do Nordeste, known as CFN. 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. In 2000, CFN reported net revenues of
US$9.8 million and a net loss of US$17.7 million.
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 a 18.3%
interest in this consortium, which was incorporated as Ferrovias Bandeirantes
S.A., or Ferroban. We entered into this concession, which is renewable for an
additional 30-year period, for a price of US$205.7 million. Ferroban is a 4,236
kilometer railroad linking the states of Sao Paulo, Minas Gerais, Parana, Mato
Grosso and Mato Grosso do Sul. In 2000, Ferroban reported net revenues of
US$65.7 million and a net loss of US$38.3 million.
Through Ferteco, we acquired a 9.8% total interest in MRS Logistica S.A.,
representing a 17.2% voting interest. MRS is a 1,612 kilometer railroad linking
the states of Rio de Janeiro, Sao Paulo and Minas Gerais with a capacity to
transport 80 million tons per year.
42
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:
[Download Table]
CONCESSION
RAILROAD EXPIRATION DATE
-------- ---------------
Centro-Atlantica............................................ August 2026
MRS......................................................... December 2026
Vitoria-Minas............................................... June 2027
Carajas..................................................... June 2027
Malha Nordeste.............................................. December 2027
Malha Paulista.............................................. 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. See -- Ferrous Minerals -- Pellets -- Distribution -- Iron Ore
and Pellets. We also use our ports and terminals to handle third party cargo. In
2000, 32% by weight 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. During 1998, we finalized the construction of two new
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 general cargo and
fertilizing transportation.
The table below sets forth information on cargo shipped through our
Tubarao/Praia Mole marine terminal by tonnage for the periods indicated.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
CARGO 1998 1999 2000
----- -------- -------- --------
(THOUSANDS OF TONS)
Iron ore and pellets
CVRD Group............................................. 37,768 42,017 39,397
Third party............................................ 34,065 23,433 31,629
Coal..................................................... 7,160 7,497 8,252
Grain.................................................... 1,327 1,302 1,889
Coking coal.............................................. 973 603 999
Pig iron................................................. 1,774 1,867 2,081
Fertilizers.............................................. 292 405 334
Other.................................................... 1,339 3,023 4,770
------ ------ ------
Total.................................................. 84,698 80,147 89,351
====== ====== ======
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.
43
The table below sets forth information on cargo shipped through our Ponta
da Madeira marine terminal by tonnage for the periods indicated.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
CARGO 1998 1999 2000
----- -------- -------- --------
(THOUSANDS OF TONS)
CVRD Group
Iron ore............................................... 42,921 41,531 46,178
Manganese ore.......................................... 920 787 1,293
Third Party
Pig iron............................................... 1,197 1,223 1,533
Soy beans.............................................. 372 451 561
------ ------ ------
Total.......................................... 45,410 43,992 49,565
====== ====== ======
Additional Investments. We hold a 50% interest in the Rio Doce Pasha
marine terminal located at the Port of Los Angeles in Los Angeles, California.
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.
In September 1994, we licensed the Inacio Barbosa Maritime Terminal, a
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 the City of Vitoria, in the state of Espirito Santo. During 2000, we
shipped 1,833,000 tons of cargo.
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.
Shipping
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 due to its lack of overall profitability. 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 loss of US$18 million
in 2000, compared to an operating loss of US$35 million in 1999. In addition to
the overall lack of profitability, our decision to sell is also a result of the
significant investment we would have needed to undertake to replace our existing
dry-bulk shipping 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 26 vessels in 2000.
The table below sets forth information on the cargo our shipping operations
transported for the periods indicated.
44
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
CARGO 1998 1999 2000
----- -------- -------- --------
(THOUSANDS OF TONS)
Iron ore
CVRD Group............................................. 3,317 1,328 3,058
Third party............................................ 13,780 12,514 15,608
Coal..................................................... 7,986 6,541 7,452
Other.................................................... 7,175 8,142 9,031
------ ------ ------
Total.................................................. 32,258 28,525 35,149
====== ====== ======
Major customers of Docenave in 2000 included 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 some 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.
ENERGY
In 2000, we consumed 13.8 TWh of electricity. 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. 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.
45
We are entering the energy business through the following investments:
[CVRD ENERGY FLOW CHART]
We hold a 38.1% stake in the Igarapava hydroelectric power plant, which has
an installed capacity of 210 MW and is located in Rio Grande, on the border
between the states of Sao Paulo and Minas Gerais. The Igarapava plant started
operations in September 1999. Our share of the power produced by the plant goes
to the operational units in Itabira and Timbopeba, in Minas Gerais.
We hold a 33.3% stake in the Porto Estrela hydroelectric power plant, which
has an installed capacity of 112 MW and is located on the Santo Antonio River,
state of Minas Gerais. The Porto Estrela plant, a recently completed project
which began operating in September 2001, supplies the energy needs of the
Tubarao pelletizing complex in the state of Espirito Santo.
The Aimores plant is an ongoing hydroelectric generation project located in
the Rio Doce basin in Minas Gerais. We expect the Aimores plant to start
operations in April 2004 with a projected installed capacity of 330 MW. We own a
51.0% stake in Aimores, and our portion of the electricity generated from this
plant will go to our industrial units located in the state of Minas Gerais.
In January 2000, we made the winning bid in an auction held by ANEEL, the
Brazilian electricity regulatory agency, for the concession to build and operate
the Candonga hydroelectric power plant, located on the Rio Doce, in the state of
Minas Gerais. We have a 50.0% stake in the consortium which is to build a plant
with an expected installed capacity of 120 MW, scheduled to start operations in
January 2004.
In June 2000, we purchased a stake in the Funil hydroelectric power plant
project, located in Rio Grande, in the state of Minas Gerais, which has an
expected installed capacity of 180 MW. Plant construction began in October 2000,
and the plant is scheduled to start operations in April 2003. We have a 51.0%
stake in this project.
We have a 46.0% stake in the consortium that made the winning bid at the
auction held by ANEEL last November for the Capim Branco I and II concessions
(Capim Branco Energy Complex), located on the Rio Araguari, in the state of
Minas Gerais. The plants have an expected installed capacity of 240 MW and 210
MW, respectively, and are due to be constructed consecutively. Capim Branco I
and Capim Branco II are scheduled to start operations in 2004.
We have a 40% stake in a consortium which won a 35-year public concession
to build and explore the Foz do Chapeco hydroelectric power plant. The first
unit of this power plant must be operational by July 2006. The concession was
auctioned by ANEEL on June 28, 2001. The plant will be located on the Uruguai
River, on the border of the states of Santa Catarina and Rio Grande do Sul, and
has an expected capacity of 855 MW.
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$504 million. We cannot assure you that the aggregate
cost will not escalate or that the projects will be completed on schedule.
46
Due to the current energy shortage, and in response to the Brazilian
government's energy rationing program, we temporarily reduced our aluminum and
ferro-alloy production. For a description of these measures, see Item 3.D. Risk
Factors -- Risks Relating to Brazil -- The Brazilian government's energy
rationing program could adversely affect us, Item 4.B., 4.C., and 4.D. Business
Overview, Organizational Structure and Property, Plants and Equipment -- Lines
of Business -- Ferrous Minerals -- Manganese and Ferro-Alloys,
-- Holdings -- Aluminum Business -- Aluminum -- Albras and
-- Holdings -- Aluminum Business -- Aluminum -- Valesul.
HOLDINGS
Our holdings are comprised primarily of our aluminum operations, our pulp
and paper business and our interests in the steel industry. We are currently
selling our pulp and paper business, as well as some of our interests in the
steel industry.
The table below sets forth information regarding our holdings revenues and
sales by geographic market for the periods indicated.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1999 2000
----------------- ----------------- -------------------------
PULP & PULP & PULP &
PAPER ALUMINUM PAPER ALUMINUM PAPER ALUMINUM STEEL
------ -------- ------ -------- ------ -------- -----
(IN MILLIONS OF US$)
Export market
Latin America............................ $-- $105 $ -- $ 5 $ -- $ 23 $--
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
--- ---- ---- ---- ---- ---- --
$88 $484 $111 $380 $142 $363 $1
=== ==== ==== ==== ==== ==== ==
47
ALUMINUM BUSINESS
At December 31, 2000, our aluminum business operated through the following
subsidiaries and joint ventures:
[ALUMINUM BUSINESS 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.
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. In 2000, gross revenues from aluminum products totaled US$362
million.
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$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 as
of December 31, 2000. The estimates of mineral reserves have been audited and
verified by MRDI.
[Enlarge/Download Table]
PROVEN AND PROBABLE
RESERVES(1)
------------------------
ORE
MINE TYPE TONNAGE GRADE
---- -------- ------------ ---------
(MILLIONS OF (% A1203)
TONS)
Mineracao Rio do Norte(2)........................... Open pit 166.8 50.5
48
---------------
(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 1998, 1999 and 2000, production equaled
10.1, 11.0 and 11.2 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 2000, it produced 1.6 million tons.
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$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 December 31, 2000, represents
an annual commitment of US$90 million.
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 2003, a project which is expected to
cost approximately US$325 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 366,000 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$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.
49
The table below sets forth information regarding Albras's recent aluminum
production and our recent purchases from Albras.
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
ALUMINUM 1998 1999 2000
-------- ----- ----- -----
(THOUSANDS OF TONS)
Albras production........................................... 342.0 358.0 366.0
Our purchases from Albras................................... 174.0 183.0 187.0
As of December 31, 2000, Albras had US$674 million of long term outstanding
debt, of which US$247 million was denominated in Japanese yen (approximately 90%
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. See Item
11. Quantitative and Qualitative Disclosures About Market Risk -- Commodity
Price Risk.
Albras has obtained a financing package with BNDES aimed at financing the
expansion of the Albras plant from approximately 366,000 tons per year to
approximately 406,000 tons per year. In 2001, Albras is set to invest US$28.4
million in this expansion project, which is due for completion by 2001.
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.
We currently benefit from a contract between Albras and Eletronorte
pursuant to which Albras is able to purchase electricity at very 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. See -- Energy.
Due to the current energy shortage and the Brazilian government's energy
rationing program which establishes an energy consumption decrease of 25% for
aluminum related activities, we plan to reduce aluminum production at Albras by
50,000 tons, from the previously planned 378,000 tons to 328,000 tons. Despite
this mandatory temporary reduction, our long-term plan is to continue to expand
our aluminum operations. For information on the risks associated with the
Brazilian government's energy rationing program, see Item 3.D. 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$148 million and net income of US$21 million in 2000.
The table below sets forth information regarding Valesul's recent primary
aluminum production, third party scrap recycled by Valesul and our recent
tolling acquisitions from Valesul.
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
ALUMINUM 1998 1999 2000
-------- ----- ----- -----
(THOUSANDS OF TONS)
Valesul production.......................................... 93.6 91.7 93.8
Third party scrap recycled.................................. 15.4 20.1 19.5
Our acquisitions from Valesul............................... 59.8 50.7 --
50
At the end of 1999, Aluvale and Billiton, Valesul's shareholders, decided
to terminate the tolling agreement in force since 1987. Consequently, as of
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 internal 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 the self-sufficient power supply in peak
hours.
Due to the current energy shortage and the Brazilian government's energy
rationing program which establishes an energy consumption decrease of 25% for
aluminum related activities, we plan to reduce 2001 aluminum production at
Valesul by 13,000 tons from the previously planned 93,000 tons to 80,000 tons.
Valesul will decrease the production of ingots, a commodity traded on the London
Metal Exchange. Valesul will 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, our long-term plan is to
continue to expand our aluminum operations. For information on the risks
associated with the Brazilian government's energy rationing program, see Item
3.D. Risk Factors -- Risks Relating to Brazil -- The Brazilian government's
energy rationing program could adversely affect us.
Competition in Bauxite, Alumina and Aluminum
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.
51
PULP AND PAPER BUSINESS
At December 31, 2000, our pulp and paper business operated through the
following subsidiaries and joint ventures:
[PULP AND PAPER BUSINESS 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. See Item 4.A.4. Development of the Company -- Divestitures.
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 INVESTMENTS
At December 31, 2000, our steel business operated through the following
joint ventures:
[STEEL INVESTMENTS 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$10 million worth of preferred shares of
Gerdau S.A., a publicly listed steel holding company, which shares we intend to
sell in the future. We also intend to cease owning shares in Usiminas in the
future. After this sale, our only steel investments will be in CST, Siderar, and
one steelmaker in the United States, CSI. CSI is the principal purchaser of
slabs from CST, with whom we have an exclusive supply contract for iron ore and
pellets. In addition, our participation in CSI gives us access to and experience
52
dealing with the U.S. market, where we currently have a very small market share.
For these reasons, we intend to hold our investment in CSI.
The following table sets forth information on our continuing interests in
makers of steel products.
[Enlarge/Download Table]
INVESTMENT LOCATION 2000 PRODUCTION 2000 NET REVENUES PRINCIPAL PRODUCTS
---------- ------------- --------------------- ----------------------- --------------------
(MILLIONS OF TONS)(1) (IN MILLIONS OF US$)(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
---------------
(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$246 million at December 31, 2000. The
aggregate net book value of these investments was US$90 million at December 31,
2000. The aggregate net book value of our total investments in steel producing
companies (including CSI, a privately held company) was US$376 million at
December 31, 2000. We earned US$27 million in dividends from these investments
in 2000.
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.
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
53
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
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
54
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.
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
55
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%.
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.
56
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.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A. OPERATING RESULTS
5.A.1. CHANGES
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.
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).
57
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.
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.
58
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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO 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 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
59
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 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 rate of devaluation in 1999 as compared with 1998 was 36.0% and the
weighted-average rate 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 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.
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 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.
60
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 shareholder's 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 losses 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$93 million tax valuation allowance reversal.
The following table provides a comparison of the pre-tax results of the
major affiliates as adjusted for the effects of exchange losses.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
PRE-TAX INCOME PRE-TAX INCOME
PRE-TAX EXCHANGE BEFORE PRE-TAX EXCHANGE (LOSS) BEFORE
LOSS LOSSES EXCHANGE LOSSES LOSS LOSSES EXCHANGE LOSSES
------- -------- --------------- ------- -------- ---------------
(IN MILLIONS OF US$)
Albras........................ $296 $378 $82 $83 $102 $ 19
Alunorte...................... 193 213 20 18 36 18
Bahia Sul..................... 71 127 56 92 34 (58)
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.
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.
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 as of December 31, 1999.
5.A.2. INFLATION
As measured by the IGP-M Index, published by the Fundacao Getulio Vargas,
the Brazilian inflation rate was approximately 9.2% in 1996, 7.7% in 1997, 1.8%
in 1998, 20.1% in 1999 and 9.9% in 2000.
61
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.
As of 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.
5.A.3. CURRENCY FLUCTUATIONS
Most of our sales will continue to be 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 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 dollar-denominated, a
relatively weak real causes us to record monetary and foreign-exchange losses.
5.A.4. GOVERNMENT POLICIES
Brazilian economic, fiscal, monetary and political policies and factors
have affected us in the past and will affect us in the future. In addition, we
are affected by these policies and factors in the markets where we sell our
products, principally Europe and Asia. See Item 3.D. Risk Factors for a
description of some of these policies and factors that can affect our results of
operations.
Brazilian government policies can also affect your rights as a holder of
our American depositary shares. See Item 10.D. Exchange Controls and Other
Limitations Affecting Security Holders.
5.B. LIQUIDITY AND CAPITAL RESOURCES
5.B.1. 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. As of December 31, 2000, we had cash
and cash equivalents of US$1,211 million.
62
SOURCES OF FUNDS
Operating activities provided net cash flows of US$1,424 million in 2000
compared to US$1,336 million in 1999 and US$1,372 million 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$176 million in 2000 compared to using net cash
flow 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.
As of December 31, 2000, our aggregate outstanding debt was US$2,658
million, consisting of short-term debt of US$617 million, including US$152
million in loans from joint ventures and affiliated companies in connection with
the CVRD Group's cash management system, and long-term debt (excluding current
portion) of US$2,041 million, including US$21 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.
USES OF FUNDS
Investing activities, primarily including acquisitions, other capital
expenditures and investments in and loans to joint ventures and affiliated
companies, consumed net cash flows of US$1,489 million in 2000 compared to
US$469 million in 1999 and US$631 million in 1998.
Other significant uses of cash included:
- repayment of debt, which consumed US$444 million in 2000, US$347 million
in 1999 and US$326 million in 1998, and
- payment of dividends and interest on shareholders' equity, which consumed
US$246 million in 2000, US$452 million in 1999 and US$607 million in
1998.
5.B.2. DEBT
Our long-term debt consists principally of U.S. dollar-denominated notes
and borrowings. At December 31, 2000, approximately US$450 million of our debt
was secured by liens on some of our assets.
Except for the perpetual notes, which have no scheduled maturity date, all
of our currently outstanding long-term debt is likely to mature by 2011 in
accordance with the schedule below.
[Download Table]
YEAR ENDED DECEMBER 31, (IN MILLIONS
----------------------- OF US$)(1)
2002........................................................ $ 236
2003........................................................ 625
2004........................................................ 580
2005........................................................ 170
2006........................................................ 107
2007 and thereafter......................................... 247
No due date (perpetual notes)............................... 55
------
Total..................................................... $2,020
======
---------------
(1) Excludes US$21 million in loans from related parties.
We use derivative instruments to manage our exposure to interest rate
fluctuations. See Item 11. Quantitative and Qualitative Disclosures About Market
Risk. Giving effect to these instruments, at December 31, 2000, our
weighted-average effective interest rate on long-term debt was 9.34%.
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Some of our long-term debt instruments contain restrictive financial
covenants. We were in compliance with such covenants as of December 31, 2000,
and we believe that we will be able to operate within the terms of such
financial covenants for the foreseeable future. None of these covenants directly
restrains our ability to pay dividends on equity securities at the parent
company level.
5.B.3. BUDGETED CAPITAL EXPENDITURES
The table below sets forth our capital expenditures budget for 2001.
[Download Table]
2001 BUDGETED
BY BUSINESS AREA EXPENDITURES
---------------- --------------
(IN MILLIONS
OF US$)
Ferrous..................................................... $568 62.6%
Non-ferrous................................................. 64 7.1
Logistics................................................... 74 8.1
Energy...................................................... 181 19.9
Corporate center............................................ 21 2.3
---- -----
Total..................................................... $908 100.0
==== =====
Structural changes in the production of iron ore and steel have been
generating a growing global demand for pellets, and smoothing the volatility of
the pellet market. See Item 4.B., 4.C. and 4.D. Business Overview,
Organizational Structure and Property, Plants and Equipment -- Business
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. In 2001, we have set aside US$114
million for the Sao Luis pellet plant construction project. Completion is
expected in the first quarter of 2002. Once the plant commences operations, we
expect it to have an annual production capacity of 6 million tons. We estimate
the total investment cost for the Sao Luis plant at US$181 million, the
equivalent of US$40 per ton of pellets.
Similarly, we and our partners in the Tubarao pelletizing complex have
approved a capacity expansion from a current 25 million tons to 28.2 million
tons of pellets per year. Completion is scheduled for 2003. The total cost is
estimated at US$98 million, US$30.50 per ton, which is lower than the figure for
the Sao Luis plant, a greenfield project. Our expenditure on this project in
2001 will be US$27 million.
To increase productivity and meet the demand increase that we anticipate
from the construction of the Sao Luis pelletizing plant and enlargement of the
Tubarao plants, we have set aside investments of US$170 million for iron ore
mining and US$8 million for logistics. In the Southern System, we intend to
spend US$3 million on increasing capacity of the Gongo Soco mine from 7 to 8.4
million tons, US$16 million on extending the useful life of the Timbopeba mine
and of the Capanema beneficiation plant and US$4 million on enlarging and
improving the stock yard. In the Northern System, we intend to spend US$15
million in the construction of a new pier at the Ponta da Madeira Port Terminal,
increasing the port's capacity to 56 million tons, and US$27 million on
expanding capacity of iron ore stocking facilities. In addition, we intend to
spend about US$80 million on projects to improve the infrastructure for the
operation of the Sao Luis pellet plant.
The future deregulation of the electricity market, and the demand pressures
created by a growing economy, indicate a trend of rising electricity prices in
Brazil. Investment in energy, for which we have a budget of US$181 million in
2001, is therefore expected to become a powerful tool in controlling and
reducing costs. This budget includes US$116 million which will be absorbed by
the ongoing hydroelectric projects at Aimores, Porto Estrela, Candonga, Funil
and Capim Branco I and Capim Branco II.
Most of the capital expenditures budget relating to replacement and
improvement is expected to be allocated toward the Southern System, to be spent
mainly on modernization and increasing the capacity of the mines and the Vitoria
Minas railroad. We will modernize control and maintenance systems for the
railroad and will replace a number of processing systems in the mines.
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5.C. 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 US$48 million,
US$27 million and US$48 million on geological exploration in 1998, 1999 and
2000, respectively.
5.D. TREND INFORMATION
Several factors will affect our future results of operations, liquidity and
capital resources, including:
- contract prices for iron ore and pellets and world market prices for
aluminum and gold,
- the level of demand in the seaborne market 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.
[Enlarge/Download Table]
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
---------------
(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.
65
(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 Item 11. Quantitative and Qualitative
Disclosures about 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$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 Item 11. Quantitative and Qualitative Disclosures about 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.
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Inflation
The following table sets forth the Brazilian inflation rate as measured by
the IGP-M Index, published by the Fundacao Getulio Vargas.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- --------- ----
(PERCENT)
Brazilian inflation rate.................................... 7.7 1.8 20.1 9.9 10.4
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 have not materially
affected our results of operations as such increases were offset by productivity
gains and by the favorable foreign exchange effects on these costs.
67
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 years ended December 31, 2000, 1999 and 1998, the prevailing
market rate was 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$11.93, 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 has partially reduced the restrictions on the use
of energy and has announced that they will be eliminated as of March 1, 2002.
For a discussion about the possible consequences and risks associated with
energy shortages, see Item 3.D. Risk Factors -- Risks Relating to Brazil, and
Item 4.B., 4.C. and 4.D. Business Overview, Organizational Structure and
Property, Plants and Equipment -- Lines of Business -- Holdings.
Divestitures
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:
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31,
------------------
2000 1999 1998
---- ---- ----
Decrease in gross revenues.................................. 6.3% 4.9% 5.6%
Decrease (increase) in net income........................... 7.4 (6.8) 1.3
Decrease in total assets.................................... 7.4 7.8 --
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.
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
68
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%.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A., 6.B. AND 6.C. DIRECTORS AND SENIOR MANAGEMENT, COMPENSATION AND BOARD
PRACTICES
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.
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 its 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
shareholders' meeting held in April 2001. For a description of this agreement,
see Item 7.A. Major Shareholders -- Principal Shareholder.
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The table below lists the current members of the board of directors.
[Enlarge/Download Table]
YEAR
NAME FIRST ELECTED POSITION AGE
---------------------------------------- ------------- ------------------------ ---
Luiz Tarquinio Sardinha Ferro(1)........ 1999 Chairman of the Board... 39
Joao Moises de Oliveira(1).............. 2001 Board Member............ 55
Erik Persson(1)......................... 2001 Board Member............ 47
Jose Marques de Lima(1)................. 2000 Board Member............ 42
Octavio Lopes Castello Branco Neto...... 2001 Board Member............ 43
Romeu do Nascimento Teixeira(1)......... 2001 Board Member............ 68
Renato da Cruz Gomes(1)................. 2001 Board Member............ 48
Fabio de Oliveira Barbosa............... 2000 Board Member............ 39
Francisco Valadares Povoa(2)............ 1997 Board Member............ 51
---------------
(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.
[Enlarge/Download Table]
YEAR
NAME FIRST ELECTED POSITION AGE
---------------------------------------- ------------- ------------------------ ---
Jose Ricardo do Carmo(1)................ 2000 Board Member............ 47
Ricardo Carvalho Giambroni(1)........... 2001 Board Member............ 44
Octavio Mauro Muniz Freire Alves(1)..... 2001 Board Member............ 40
Eleazar de Carvalho Filho............... 2001 Board Member............ 43
Antonio Joao Martins Torres(1).......... 2001 Board Member............ 60
Romulo de Mello Dias(1)................. 2001 Board Member............ 39
Renato Augusto Zagallo Villela dos 2001 Board Member............ 45
Santos................................
Otto de Souza Marques Junior(2)......... 1997 Board Member............ 53
---------------
(1) Appointed by Valepar.
(2) Appointed by our employees.
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 Funciunarios 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 Siderugica
Belgo Mineira, Companhia Siderugica Nacional and Sao Paulo Alpargatas S.A.
Erik Persson. Mr. Persson has served as a member of our board of
directors since April 25, 2001. Since June 2000, he has been working as a
planning director of PREVI -- Caixa de Previdencia dos Funcionarios do
Banco do Brasil. 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
70
June 1999, he was appointed as an executive officer of PREVI. From 1984 to
1998, he worked for Banco do Brasil S.A. 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 on 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 JP 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 Bradespar. In 2000, he
was appointed as an executive officer of Bradespar S.A. 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 secretrary 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 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. He also sits on the board of Valepar,
Valepontocom, Rio Doce Manganese Europe, or RDME, Salobo Metais, CSI and
Nova Era Silicon, or NES. 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.
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.
71
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.
[Enlarge/Download Table]
YEAR OF
NAME APPOINTMENT POSITION AGE
---- ----------- --------------------------------- ---
Roger Agnelli.................... 2001 Chief Executive Officer 41
Armando de Oliveira Santos 2001 Executive Officer (Ferrous
Neto........................... Minerals) 51
Antonio Miguel Marques........... 2001 Executive Officer (Holdings and
Business Development and Non-
Ferrous) 44
Guilherme Rodolfo Laager......... 2001 Executive Officer (Logistics) 44
Gabriel Stoliar.................. 2001 Executive Officer (Finance and
Investor Relations, and Planning
and Control) 46
Carla Grasso..................... 2001 Executive Officer (Human
Resources and Corporate Services) 39
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., 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.
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 and 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 Miquel Marques. Mr. Marques was appointed as an executive
officer of our holdings business development and non-ferrous minerals area
in October 2001. 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 Votarantim Group. Mr Marques has a
degree in engineering from the Universidade Federal de Ouro Preto. He
received his post-graduate degree in Mineral
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Treatment at the Universidade Federal de Minas Gerais (UFMG) and obtained
an MBA from COPPEAD, at Universidade Federal do Rio de Janeiro (UFRJ).
Guilherme 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 our 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).
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 class A 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 council and the
respective alternate. The terms of the members of the fiscal council expire at
the next ordinary annual shareholders' meeting following their election.
The table below lists the current members of the fiscal council.
[Download Table]
YEAR OF
NAME APPOINTMENT
---- -----------
Luis Carlos Angelotti....................................... 2001
Ronaldo Camillo............................................. 2000
Marcos Fabio Coutinho....................................... 1999
Claudia Torres Teixeira..................................... 2000
Eliseu Martins.............................................. 1997
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The table below lists the alternate members of the fiscal council.
[Download Table]
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 general 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.
For the year ended December 31, 2000, we paid approximately R$4.5 million
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.
During 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 refunds for expenses they incur in connection with
transportation and accommodation, whenever such expenses are necessary for the
performance of their functions. For the year ended December 31, 2000, none of
our board members and executive officers had any financial or other interests in
transactions involving us which was not in the ordinary course of business.
6.D. EMPLOYEES
The table below sets forth the number of our employees by category as of
the dates indicated.
[Download Table]
AT DECEMBER 31,
------------------------
1998 1999 2000
------ ------ ------
Mining (other than gold)................................... 5,620 4,478 4,948
Transportation............................................. 3,733 4,514 4,525
Gold....................................................... 594 588 555
Other operational(1)....................................... 535 504 511
Administrative............................................. 491 659 903
------ ------ ------
Total.................................................... 10,973 10,743 11,442
====== ====== ======
---------------
(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. 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.
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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 2000, we
contributed approximately US$37 million, respectively, to VALIA to fund the new
plan and the old plan. 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.
6.E. SHARE OWNERSHIP
During the privatization process, the Brazilian government sold 11,120,919
common shares, representing approximately 4.5% of the outstanding common shares,
and 8,744,308 preferred class A shares, representing approximately 6.3% of the
outstanding preferred class A shares, in an offering restricted to our current
and retired employees. Substantially all of the shares sold 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 the controlling block held by Valepar by exchanging their
common shares for equity in Valepar. See Item 7.A. Major Shareholders -- The
Privatization. In addition, Investvale, as any investor, may from time to time
acquire and sell our shares in the market. At December 31, 2000, Investvale
owned 9,995,369 common shares, representing approximately 4% of our total common
shares, and 430,000 preferred class A shares.
As of December 31, 2000, the representative of our employees in the board
of directors (as well as his alternate) also held 80,231 quotas in Investvale.
None of our other directors or executive officers holds an ownership interest in
Investvale.
The total number of common shares owned by members of our board of
directors as of February 26, 2002, was 17. The total number of preferred shares
owned by members of our board of directors as of February 26, 2002, was 209. Our
executive officers do not own any of our shares.
Our by-laws authorize us to establish stock option plans, but to date we
have not done so.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. MAJOR SHAREHOLDERS
The table below sets forth certain information regarding share ownership of
the common and preferred shares as of February 26, 2002, by each person who we
know to be the owner of more than 5% of any class of our outstanding capital
stock, and by all directors and executive officers as a group.
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[Enlarge/Download Table]
PERCENT OF
SHARES OWNED CLASS
------------ ----------
COMMON SHARES
Valepar S.A.(1)............................................. 105,443,070 43.0%
Brazilian Government (National Treasury).................... 39,393,919 16.1
BNDES....................................................... 39,394,922 16.1
BNDESPAR(2)................................................. 11,672,271 4.8
Litel Participacoes S.A.(2)................................. 25,272,641 10.3
Directors and executive officers as a group(3).............. 17 --
PREFERRED SHARES(4)
Directors and executive officers as a group................. 209 --
GOLDEN SHARE
Brazilian Government........................................ 1 100.0
---------------
(1) Certain shareholders of Valepar are legally required to transfer their
common shares to Valepar. After this transfer, Valepar will hold 53.3% of
our common shares.
(2) Excludes common shares owned directly by Valepar, in which this shareholder
has an ownership interest. See the table below for information on Valepar's
shareholders.
(3) Share ownership of all directors and officers, as a group, decreased from
14,399 common shares at December 31, 2000, to 17 common shares at February
26, 2002, due to the fact that former members of our board of directors, who
individually owned some of our shares, ceased owning them as a result of our
unwinding transactions with CSN.
(4) The Brazilian government (National Treasury) owns 5,075,341 preferred shares
representing 3.7% of the outstanding preferred shares and BNDESPAR owns
1,251,980 preferred shares representing 0.9% of the outstanding preferred
shares. These ownership amounts will not change as a result of this
offering.
The table below sets forth information as of February 26, 2002 regarding
Valepar S.A. share ownership and Litel Participacoes S.A. share ownership.
[Enlarge/Download Table]
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 financial services company.
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(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
Brazilian government 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
Brazilian government 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 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.
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
the sale by the Brazilian government of a 32% stake in our common shares, 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.
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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.
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.
[Enlarge/Download Table]
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.
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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,
- 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 Brazilian Government and BNDES
From time to time, in the ordinary course of our business, we enter into
transactions with other entities which the Brazilian government owns or
controls. See Item 7.B. 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 Item
4.B., 4.C. and 4.D. Business Overview, Organizational Structure, Property,
Plants and Equipment -- Holdings -- Aluminum Business -- Aluminum. No other
entity controlled by the Brazilian government, 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
Item 4.B., 4.C. and 4.D. Business Overview, Organizational Structure, Property,
Plants and Equipment -- Non-Ferrous Minerals.
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 Brazilian government 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.
79
Golden Share
The Brazilian government holds one 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 Item 10.B.
Memorandum and Articles of Association -- Common Shares and Preferred Shares.
Since the privatization, the Brazilian government has not exercised its
veto rights and, consequently, has refrained from interfering in our
decision-making process.
7.B. RELATED PARTY TRANSACTIONS
At December 31, 2000, we had extended guarantees for borrowings obtained by
affiliates and joint ventures in the amount of US$788 million of which US$607
million is denominated in U.S. dollars and the remaining US$181 million in
Brazilian currency. See note 15(a) to our consolidated financial statements.
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.
7.C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A.1-6. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
For our consolidated financial statements see Item 18. Financial
Statements.
8.A.7. 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 labour 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
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
80
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.
8.A.8. DIVIDEND DISTRIBUTIONS
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 Item
10.B. Memorandum and Articles of Association -- Common Shares and Preferred
Shares.
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
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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.
We will make cash distributions on preferred class A 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 Item 10.E. 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
February 25, 2002 of R$2.4062 per US$1.00. We stated amounts gross of any
applicable withholding tax.
[Enlarge/Download Table]
U.S. DOLLARS U.S. DOLLARS
PER SHARE AT PER SHARE AT
YEAR PAYMENT DATE PAYMENT DATE FEBRUARY 25, 2002
---- ------------ ------------ -----------------
1997 May 30.................................................... 0.48 0.20
September 2............................................... 0.30 0.13
1998 May 8..................................................... 0.88 0.42
August 31................................................. 0.64 0.31
1999 January 15................................................ 0.44 0.27
March 31.................................................. 0.29 0.21
August 20................................................. 0.57 0.46
2000 March 1................................................... 0.66 0.49
2001 February 20............................................... 1.66 1.38
2001 December 10............................................... 0.98 0.96
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8.B. SIGNIFICANT CHANGES
Not applicable.
ITEM 9. THE OFFER AND LISTING
9.A.1-3. OFFERING DETAILS
Not applicable.
9.A.4. PRICE HISTORY OF STOCK
The table below sets forth trading information for our 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.), our preferred
shares and our common shares, as reported by the BOVESPA, for the periods
indicated.
[Enlarge/Download Table]
REAIS PER REAIS PER PREFERRED U.S. DOLLARS PER PREFERRED
COMMON SHARE CLASS A SHARE AMERICAN DEPOSITARY SHARE
----------------- ------------------- ---------------------------
HIGH LOW HIGH LOW HIGH LOW
------- ------- -------- -------- ------------ ------------
1997.......................... R$33.00 R$17.00 R$31.50 R$18.40 US$28.51 US$16.87
1998.......................... 27.00 10.00 29.10 13.00 25.13 11.38
1999.......................... 42.00 9.80 50.00 13.80 26.50 10.87
2000.......................... 52.40 33.00 59.00 38.82 33.13 19.75
2001.......................... 55.00 42.70 58.70 44.00 26.98 18.65
1Q00........................ 52.40 33.00 59.00 42.00 33.13 22.75
2Q00........................ 46.00 35.00 53.50 40.01 29.00 22.62
3Q00........................ 49.00 41.21 54.00 44.97 29.75 24.44
4Q00........................ 46.50 37.00 47.80 38.82 25.56 19.75
1Q01........................ 51.00 42.70 53.60 44.00 26.98 23.05
2Q01........................ 54.00 46.50 58.60 49.05 25.70 22.05
3Q01........................ 55.00 46.40 55.00 45.50 23.15 18.65
4Q01........................ 54.00 47.00 58.70 49.60 23.61 19.00
August 2001.............. 53.99 50.80 52.88 51.01 21.25 20.11
September 2001........... 52.50 46.40 53.79 45.50 20.11 18.65
October 2001............. 54.00 50.60 56.40 51.40 20.92 19.00
November 2001............ 53.60 47.00 58.70 49.60 22.65 20.20
December 2001............ 53.40 48.00 55.00 51.48 23.61 21.35
January 2002............. 55.40 50.00 56.50 50.70 23.45 21.52
9.A.5-7. LISTING DETAILS
Not applicable.
9.B. PLAN OF DISTRIBUTION
Not applicable.
9.C. MARKETS
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
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1999 by the Madrid stock exchange in order to enable trading of Latin American
equity securities in euro denomination.
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.
9.D., 9.E. AND 9.F. SELLING SHAREHOLDERS, DILUTION AND EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. SHARE CAPITAL
For a description of our common and our preferred shares, including voting
rights and preemptive rights, see Item 10.B. Memorandum and Articles of
Association -- Common Shares and Preferred Shares.
The table below provides a recent history of changes in our share capital.
[Enlarge/Download Table]
PREFERRED CLASS A
COMMON SHARES SHARES
------------- -----------------
Shares authorized...................................... 300,000,000 600,000,000
Shares issued prior to December 31, 1999............... 249,983,143 138,575,912
Shares repurchased prior to December 31, 1999.......... -- (3,659,311)
Shares outstanding on December 31, 1999................ 249,983,143 134,916,601
Shares repurchased during 2000......................... (7,300) --
Shares outstanding on December 31, 2000................ 249,975,843 134,916,601
Shares repurchased during 2001......................... (4,707,870) 3,659,220
Shares outstanding on December 31, 2001................ 245,267,973 138,575,821
Shares repurchased during January 2002................. -- (4,900)
Shares repurchased during February 2002................ -- 240
Shares outstanding on February 26, 2002................ 245,267,973 138,571,161
10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION
COMPANY OBJECTS AND PURPOSES
Clause 2 of the by-laws defines our corporate purpose to include (1)
working mineral deposits in Brazil and abroad by mining, concentrating,
processing, transporting, shipping and trading minerals, (2) building, operating
and exploiting railway traffic, (3) operating maritime terminals, including
support for in port navigation, (4) exploiting, processing and trading forestry
materials, (5) engaging, in Brazil and abroad, in other activities in support of
our corporate purpose, including research, industrial processing, trading,
importing and exporting goods and rendering services, and (6) incorporating or
investing in corporations acting within the scope of our corporate purpose.
DIRECTORS' POWERS
Under the Brazilian Corporation Law, if a director or an executive officer
has a conflict of interest with the company in connection with any proposed
transaction, the director or executive officer may not vote in any decision of
the board of directors or of the board of executive officers regarding such
transaction and must disclose the nature and extent of the conflicting interest
for transcription in the minutes of the meeting. In any case, a director or an
executive officer may not transact any business with the company, including any
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borrowings, except on reasonable or fair terms and conditions that are identical
to the terms and conditions prevailing in the market or offered by third
parties. Under our by-laws, shareholders set the aggregate compensation payable
to directors and executive officers. The board of directors allocates the
compensation among its members and the executive officers. See Item 6.A., 6.B.
and 6.C. Directors and Senior Management, Compensation and Board
Practices -- Compensation. Our by-laws do not establish any mandatory retirement
age limits.
COMMON SHARES AND PREFERRED SHARES
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 (1) up to 300 million common shares
and (2) 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 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 council and the respective alternate. The preferred class A
shares are not entitled to any preference in the case of our liquidation.
The golden share is a preferred special share. It is required to be held by
the Brazilian government. The preferred 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:
(1) a change in our name;
(2) a change in the location of our head office;
(3) a change in our corporate purpose as regards the working of
mineral deposits;
(4) any liquidation of our company;
(5) 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:
(a) mineral deposits, ore deposits, mines;
(b) railways;
(c) ports and marine terminals;
(6) any change in the by-laws relating to the rights accorded to the
classes of capital stock issued by us; and
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(7) any change in the by-laws relating to the rights accorded the
golden share.
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
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 calculating the distributable amount
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. 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, 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.
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
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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 our 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 submit 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. To date, our board of directors has never determined that
payment of the mandatory dividend was inadvisable. The fiscal council must
review any such determination and report it to the shareholders and to the CVM.
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. See -- Calculation of
Distributable Amount.
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.
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
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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 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 class A 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.
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 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.
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 protection and well-being.
Pursuant to the Brazilian Corporation Law, shareholders voting at a general
shareholders' meeting have the power, among other powers, 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;
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- authorize the issuance of founder's shares;
- 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 are convened by publishing, no fewer than fifteen
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 e
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 general shareholders' meeting to consider
any proposed action subject to the veto rights accorded to the golden share. See
-- Common Shares and Preferred Shares -- 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 general shareholders' meeting
and take part in the discussion of matters submitted for consideration.
Except as otherwise provided by law, resolutions of a general 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 class A
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; (c) creating founders' shares; (d) reducing the
mandatory dividend; (e) changing the corporate purposes; (f) merging us with
another company or consolidating or splitting us; (g) dissolving or liquidating
us; (h) participating in a centralized group of companies as defined under the
Brazilian Corporation Law; and (i) 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 general 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.
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REDEMPTION RIGHTS
Our common shares and preferred shares are not redeemable, except that a
dissenting, or, in certain cases, shareholder is entitled under the Brazilian
Corporation Law to obtain redemption upon a decision made at a general
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 distribution of dividends;
(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 centralized group of companies
as defined under the Brazilian Corporation Law; or
(9) 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
general 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 general shareholders' meeting, unless, in the case of
item (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.
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 general 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 with respect to any issuance
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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 preferred Class A shares, holders of
preferred American depositary receipts will have preemptive rights to subscribe
only to newly issued preferred Class A shares. In the event of a capital
increase which would reduce the proportion of capital represented by preferred
Class A shares, holders of preferred American depositary receipts will have
preemptive rights to subscribe for preferred Class A shares in proportion to
their shareholdings, and for common shares only to the extent necessary to
prevent dilution of their overall interest in us.
PROPOSED AMENDMENTS TO THE BRAZILIAN CORPORATION LAW
A bill to modify the Brazilian Corporation Law is currently being discussed
in the Brazilian Congress. If passed in its current form the bill would enact
the following changes to the Brazilian Corporation Law, subject to our amending
our by-laws to adapt them to the new legislation within one year after
enactment:
- Preferred shares representing 10% of the outstanding shares not held by
the controlling shareholder would be entitled to a representative on our
board of directors;
- We would be required to pay the fair value or the book value of shares,
whichever is higher, in any repurchase or redemption of shares;
- Disputes among our shareholders would be subject to arbitration if
provided for in our by-laws.
- Holders of 10% of our outstanding shares would be entitled to convene a
shareholders' meeting to deliberate with respect to any conflict of
interest of management;
- We would not be able to issue preferred shares in excess of 50% of the
total number of outstanding shares;
- Shareholders would be entitled to withdraw from us upon a spin-off only
if it entailed a change in the corporate purpose, a reduction in
mandatory dividends or the participation in a centralized group of
companies; and
- Insiders would be required to disclose any purchase or sale of our shares
to the CVM and the stock exchange.
The bill may be amended in part or in whole prior to being approved or
rejected by Congress and would still be subject to presidential sanction prior
to being enacted. No assurance can be given that the bill will be enacted in its
current form or at all.
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 to us 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.
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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.
10.C. MATERIAL CONTRACTS
None.
10.D. 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. However, the right to convert
dividend payments and proceeds from the sale of preferred class A shares or
common shares into currency and to remit such amounts outside Brazil is subject
to restrictions under and foreign investment legislation which generally
requires, among other things, that the relevant investment be registered with
the Central Bank.
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 Resolution No. 2,689 affords favorable tax
treatment to foreign investors who are not resident in a tax haven jurisdiction
(i.e. country that does not impose income tax or where the maximum income tax
rate is lower than 20%), as defined by Brazilian tax laws.
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 in the
stock exchanges 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, the Annex V Regulations,
provides for the issuance of depositary receipts in foreign markets in respect
of shares of Brazilian issuers. Accordingly, 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 shares 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 such 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
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Central Bank. Restrictions on the remittance of foreign capital abroad could
hinder or prevent the custodian for the preferred class A shares represented by
American depositary shares, or holders who have exchanged American depositary
shares for preferred class A shares, from converting dividends, distributions or
the proceeds from any sale of preferred class A 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 the preferred class A shares underlying the
American depositary shares could adversely affect holders of American depositary
shares.
We have obtained a certificate of registration in the name of JPMorgan
Chase Bank, the depositary. The custodian on behalf of the depositary maintains
this certificate. Pursuant to this certificate, the custodian and the depositary
are able to convert dividends and other distributions with respect to the
preferred class A shares represented by American depositary shares into foreign
currency and to remit the proceeds outside Brazil. If a holder exchanges
American depositary shares for preferred class A shares, such holder may
continue to rely on the depositary's certificate of capital registration for
only five business days after such exchange. After that, such holder must seek
to register its investment directly with the Central Bank. Thereafter, unless
the holder has registered its investment with the Central Bank, such holder may
not convert into foreign currency and remit outside Brazil the proceeds from the
disposition of, or distributions with respect to, such preferred class A shares.
Such holder generally will be subject to less favorable Brazilian tax treatment
than a holder of American depositary shares. See Item 10.E.
Taxation -- Brazilian Tax Considerations.
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, including
transactions relating to the purchase or sale of shares or the payment of
dividends or interest with respect to shares, are carried out on the commercial
market. Only a Brazilian bank authorized to buy and sell currency in the
commercial market may effect purchases of foreign currencies in that market. In
both markets, rates are freely negotiated, but may be strongly influenced by
Central Bank intervention. See Item 3.A.3. Exchange Rates.
Under Brazilian law, whenever there is a serious imbalance in Brazil's
balance of payments or reasons to foresee a serious imbalance, the Brazilian
government may impose temporary restrictions on the remittance to foreign
investors of the proceeds of their investments in Brazil, and on the conversion
of Brazilian currency into foreign currencies. Such restrictions may hinder or
prevent the custodian or holders who have exchanged American depositary shares
for underlying preferred class A shares from converting distributions or the
proceeds from any sale of such shares, as the case may be, into U.S. dollars and
remitting such U.S. dollars abroad.
10.E. TAXATION
The following summary contains a description of the principal Brazilian and
U.S. federal income tax consequences of the ownership and disposition of
preferred class A 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 preferred class A shares or American
depositary shares.
Holders of preferred class A shares or American depositary shares should
consult their own tax advisors to discuss the tax consequences of the purchase,
ownership and disposition of preferred class A shares or American depositary
shares, including, in particular, the effect of any state, local or other
national tax laws.
We based the summary on the tax laws of Brazil and the United States and
regulations thereunder as in effect on the date hereof, which are subject to
change (possibly with retroactive effect). We also based this summary on the
representations of the Depositary and on the assumption that each obligation in
the Deposit Agreement relating to the American depositary receipts and any
related documents will be performed in accordance with its terms.
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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 preferred class A shares or American depositary shares. Holders of
preferred class A shares or American depositary shares should discuss with their
own tax advisors the tax consequences of the acquisition, ownership and
disposition of the preferred class A shares or American depositary shares in
their particular circumstances.
BRAZILIAN TAX CONSIDERATIONS
The following discussion summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of preferred class A
shares or American depositary shares to a holder who is not domiciled in Brazil
for purposes of Brazilian taxation and, to a holder of preferred class A shares,
who has registered his/her investment in preferred class A shares with the
Central Bank as a U.S. dollar investment (in each case, a non-Brazilian holder).
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 preferred class A shares or
American depositary shares; 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 preferred class A
shares or American depositary shares.
Taxation of Dividends. Dividends, including dividends paid in kind, paid
by us (1) to the depositary in respect of the preferred class A shares
underlying the American depositary shares or (2) to a non-Brazilian holder in
respect of preferred class A shares will generally 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 this 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) 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 (as described below), in which case the applicable rate is 25%.
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 shares; 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 type 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.
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The deposit of preferred class A shares in exchange for American depositary
shares is not subject to Brazilian income tax if the preferred class A shares
are registered under Resolution 2,689 and the respective holder is not located
in a tax haven jurisdiction. If the preferred class A shares are not registered
or if they are registered but the respective holder is located in a tax haven
jurisdiction, the deposit of preferred class A shares in exchange for American
depositary shares may be subject to Brazilian capital gains tax at the rate of
15%. The withdrawal of preferred class A shares in exchange for American
depositary shares is not subject to Brazilian tax. On receipt of the underlying
preferred class A 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 preferred class A shares that occur abroad to a non-Brazilian resident.
Non-Brazilian holders registered under Resolution 2,689 and not located in a tax
haven jurisdiction are subject to income tax imposed at a rate of 15% on gains
realized on sales or exchanges of preferred class A shares that occur in Brazil
or with a resident of Brazil, other than Brazilian stock, future and commodities
exchange. With reference to proceeds of a redemption or of a liquidating
distribution with respect to the preferred class A 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 of the Brazilian stock, future and 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. As of 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 preferred class A
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 Brazilian stock, futures or commodities exchange are subject to
income tax at a rate of 20%, except if such gains are obtained on the spot
market of a Brazilian stock exchange or on variable funds, in which case the
applicable rate is 10% (to be increased to 20% as of January 1, 2002).
Therefore, non-Brazilian holders are subject to income tax imposed at a
rate of 10% (20% on and after January 1, 2002), on gains realized on sales or
exchanges in the spot market in Brazil of preferred class A 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 (1) and such sale is made within
five business days of the withdrawal of such preferred class A 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
shares and non-Brazilian holders of preferred class A shares under Resolution
2,689 will not continue in the future.
Any exercise of preemptive rights relating to the preferred class A shares
will not be subject to Brazilian taxation. Any gain on the sale or assignment of
preemptive rights relating to the preferred class A 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 preferred class A 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 preferred
shares or the
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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 on June, 2002, the Brazilian government is discussing the possibility of
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
preferred class A shares or American depositary shares by a non-Brazilian
holder. There are no Brazilian stamp, issue, registration, or similar taxes or
duties payable by holders of preferred class A shares of American depositary
shares.
Registered Capital. The amount of an investment in preferred class A
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; this registration 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 preferred class A shares. The amount registered
as described is referred to as "Registered Capital."
The registered capital for each preferred class A 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 preferred class A 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 preferred class A 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 preferred class A shares were sold on that day, the average
price on the Brazilian stock exchange on which the greatest number of
preferred class A shares were sold in the fifteen trading sessions
immediately preceding such withdrawal.
The U.S. dollar value of the preferred class A 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 preferred class A shares is 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 preferred
class A shares).
A non-Brazilian holder of preferred class A 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.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
This discussion only applies to U.S. holders, as defined below, who hold
their preferred class A 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 preferred class A shares or American depositary shares as
part of a hedge,
- 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 United States 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. 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 United States 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.
As used herein, the term "United States holder" means a beneficial owner of
preferred class A 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 United States
federal income taxation regardless of its source.
- The term United States 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 preferred class A shares represented by those American
depositary shares. Deposits and withdrawals of preferred class A 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.
This discussion assumes that we are not a passive foreign investment
company for U.S. federal income tax purposes. See -- Passive Foreign Investment
Company Rules below.
Taxation of Dividends. Distributions paid on American depositary shares or
preferred class A shares 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.
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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."
Taxation of Capital Gains. Upon a sale or exchange of preferred class A
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
preferred class A 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 ordinary shares exceeds one year. Any gain or loss will be
U.S. source gain or loss.
If a Brazilian tax is withheld on the sale or disposition of shares, the
amount realized by a U.S. holder will include the gross amount of the proceeds
of such sale or disposition before deduction of the Brazilian tax. See
-- Brazilian Tax Considerations -- Taxation of Gains.
Passive Foreign Investment Company Rules
We do not believe that we will be considered a passive foreign investment
company for U.S. federal income tax purposes. However, it is unclear whether
certain of our income constitutes passive income for these purposes.
Furthermore, the classification as a passive foreign investment company depends
upon the composition of a company's income and assets, and the market value of
its assets from time to time. Therefore, there can be no assurance that we will
not be a passive foreign investment company in any taxable year. If we were
considered a passive foreign investment company for any taxable year during
which a U.S. shareholder holds preferred class A shares or American depositary
shares, certain adverse consequences could apply to the shareholder, including
the imposition of tax at higher rates than would otherwise apply to income
derived from the preferred class A shares or American depositary shares as well
as additional tax form filing requirements.
Information Reporting and Backup Withholding
Information returns may be filed with the Internal Revenue Service in
connection with distributions on the preferred class A 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.
10.F. DIVIDENDS AND PAYING AGENTS
For detailed information regarding dividend entitlement and distribution,
see Item 8.A.8. Dividend Distributions and Item 10.B. Memorandum and Articles of
Association -- Mandatory Dividend, -- Dividend Preference of Preferred Shares
and -- Payments on Shareholders' Equity.
The depositary is JPMorgan Chase Bank, which has its principal office
located in New York, New York. JPMorgan Chase Bank is a commercial bank offering
a wide range of banking and trust services to its customers in the New York
metropolitan area, throughout the United States and around the world.
98
10.G. STATEMENT BY 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 included in
this annual report 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 annual
report, 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 annual report. 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.
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.
10.H. DOCUMENTS ON DISPLAY
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended, and in accordance therewith file reports and other
information with the Commission. Reports and other information filed by us with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 233 Broadway, New York,
New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may obtain copies of these materials by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. You may inspect these reports
and other information at the offices of the New York Stock Exchange, 11 Wall
Street, New York, New York 10005, on which our American depositary shares are
listed.
We file financial statements and other periodic reports with the CVM.
As a foreign private issuer, we are not subject to the proxy rules of
Section 14 of the Securities Exchange Act of 1934 or the insider short-swing
profit reporting requirements of Section 16 of that Act.
10.I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
99
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.
[Enlarge/Download Table]
AT DECEMBER 31,
-----------------------------------------
1999 2000
------------------- -------------------
(IN MILLIONS OF US$, EXCEPT PERCENTAGES)
Floating rate debt
Real-denominated....................................... US$ 196 14.8% US$ 167 8.3%
Foreign currency denominated........................... 537 40.7 1,070 52.9
Fixed rate debt
Real-denominated....................................... -- -- -- --
Foreign currency denominated........................... 588 44.5 783 38.8
-------- ---- -------- ----
Total.................................................... US$1,321 100% US$2,020 100%
======== ==== ======== ====
The table below provides information about our debt obligations as of
December 31, 2000, 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 December 31, 2000. The debt obligations' actual cash flows are
denominated in U.S. dollars or Brazilian reais, as indicated.
[Enlarge/Download Table]
FAIR VALUE
FOR THE YEAR ENDED DECEMBER 31, CASH FLOW FAIR VALUE
------------------------------------------ AT ACCOUNTING
2007 DECEMBER 31, DECEMBER 31,
RATE 2002 2003 2004 2005 2006 TO 2012 TOTAL 2000 2000
------- ---- ---- ---- ---- ---- ------- ------ ------------ ------------
(IN THOUSANDS OF U.S. DOLLARS)
U.S. dollar-
denominated:
Fixed rate
Bonds.............. 9.590% $ 19 $219 $ 0 $ 0 $ 0 $ 0 $ 238 $ 238 $ 199
Bonds.............. 9.730% 30 30 330 0 0 0 390 387 303
Loan............... up to 7% 5 1 2 1 1 1 11 11 9
Loan............... over 7% 35 66 50 68 41 35 295 295 274
---- ---- ---- ---- ---- ---- ------ ------ ------
89 316 382 69 42 36 934 931 785
---- ---- ---- ---- ---- ---- ------ ------ ------
Floating rate
Loan............... up to 7% 198 386 224 80 40 127 1,055 1,055 907
Loan............... over 7% 46 36 32 32 32 31 209 209 163
---- ---- ---- ---- ----
244 422 256 112 72 158 1,264 1,264 1,070
---- ---- ---- ---- ---- ---- ------ ------ ------
Subtotal............. $333 $738 $638 $181 $114 $194 $2,198 $2,195 $1,855
---- ---- ---- ---- ---- ---- ------ ------ ------
Real-denominated:
Floating rate
Loan............... up to 7% 9 10 8 7 8 5 47 47 67
Loan............... over 7% 54 19 17 22 5 0 117 117 100
---- ---- ---- ---- ---- ---- ------ ------ ------
Subtotal............. $ 63 $ 29 $ 25 $ 29 $ 13 $ 5 $ 164 $ 164 $ 167
---- ---- ---- ---- ---- ---- ------ ------ ------
Total................ $396 $767 $663 $210 $127 $199 $2,362 $2,359 $2,022
==== ==== ==== ==== ==== ==== ====== ====== ======
100
INTEREST RATE RISK
We are exposed to interest rate risk in our floating-rate debt. Our
long-term floating-rate debt consists principally of U.S. dollar denominated
notes and borrowings which we have incurred primarily in connection with capital
expenditures, and investments in and loans to joint ventures and affiliated
companies. Our short-term floating-rate debt consists principally of U.S. dollar
denominated trade financing. In general, our foreign currency floating rate debt
is principally subject to changes in the London Interbank Offered Rate, or
LIBOR. Our floating rate debt denominated in reais is principally subject to
changes in the TJLP, as fixed by the Central Bank.
Our interest rate derivatives portfolio generally consists of option trades
which aim to cap our exposure to interest rate fluctuations. A cap is the
maximum rate we will be required to pay on the notional amount of the debt.
Conversely, a floor is the minimum rate we will be required to pay on the
notional amount of the debt. Certain caps are subject to knock-out provisions
which, if triggered, eliminate the protection provided by the cap.
The table below sets forth certain information with respect to our interest
rate derivatives portfolio at December 31, 2000 and 1999:
[Enlarge/Download Table]
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
-------------------------------- ------------------------------
NOTIONAL RATE UNREALIZED NOTIONAL RATE UNREALIZED
TYPE VALUE RANGE GAIN (LOSS) VALUE RANGE GAIN (LOSS) FINAL MATURITY
---- -------- ------- ----------- -------- ----- ----------- --------------
(IN MILLIONS OF US$, EXCEPT RATE RANGES)
Cap................................. $1,200 5-8% $ 3 $1,200 5-8% $10 12/2004
Floor............................... 850 5-6.5 (7) 850 5-6.5 (4) 12/2004
Swap................................ 125 5.5-7.5 (4) -- -- -- 10/2007
--- ---
$(8) $ 6
=== ===
The unrealized loss in the amount of US$8 million represents the amount
payable if all transactions had been settled on December 31, 2000.
EXCHANGE RATE RISK
Our long-term debt is primarily denominated in foreign currencies,
principally the U.S. dollar. Because our revenues are primarily
dollar-denominated, we do not believe that the high incidence of dollar-
denominated debt in our long-term debt portfolio exposes us to an undue amount
of exchange rate risk.
However, a portion of our indebtedness is also denominated in euros and in
Japanese yen, and we use derivatives instruments to protect ourselves against
specific risks associated with exchange rate movements in these foreign
currencies.
The table below sets forth certain information with respect to our exchange
rate derivatives portfolio at December 31, 2000 and 1999. These derivatives are
structured forwards that we have purchased, which will require us to purchase
foreign currencies as specified below:
[Enlarge/Download Table]
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
---------------------------------------- ----------------------------------------
NOTIONAL UNREALIZED NOTIONAL UNREALIZED
TYPE VALUE PRICE RANGE GAIN (LOSS) VALUE PRICE RANGE GAIN (LOSS) FINAL MATURITY
---- -------- --------------- ----------- -------- --------------- ----------- --------------
(IN MILLIONS OF US$, EXCEPT PRICE RANGES)
Yen.................. $15 Y90-100 per US$ $(2) $ 8 Y90-100 per US$ $ 0.6 4/2005
Euro................. 12 US$0.9-1.2 per (2) 13.3 US$0/9-1.2 per (1.1) 4/2005
--- -----
$(4) $(0.5)
=== =====
The unrealized losses in the amounts of US$4 million and US$0.5 million
represent the amounts payable if all transactions had been settled on December
31, 2000 and December 31, 1999, respectively.
101
COMMODITY PRICE RISK
We are also exposed to various market risks relating to the volatility of
world market prices for:
- iron ore, which represented 53.5% of our 2000 consolidated revenues,
- aluminum, which represented 8.9% of our 2000 consolidated revenues, and
- gold, which represented 3.8% of our 2000 consolidated revenues.
We do not enter into derivatives transactions to hedge our iron ore
exposure. See Item 5.D. Trend Information -- Prices.
To manage the risk associated with fluctuations in aluminum prices, our
affiliates Albras and Alunorte engage in hedging transactions involving put and
call options, as well as forward contracts. These derivative instruments allow
Albras and Alunorte to establish minimum average profits for their future
aluminum production in excess of their expected production costs and therefore
ensure stable cash generation. However, they also have the effect of reducing
potential gains from price increases in the spot market for aluminum.
The table below sets forth certain information with respect to Albras's
derivatives portfolio at December 31, 2000 and 1999. We have a 51% voting
capital interest and a 51% total capital interest in Albras.
[Enlarge/Download Table]
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
--------------------------------------------- ---------------------------------------------
UNREALIZED UNREALIZED
TYPE NOTIONAL VALUE PRICE RANGE GAIN (LOSS) NOTIONAL VALUE PRICE RANGE GAIN (LOSS)
---- -------------- ------------- ------------ -------------- ------------- ------------
(TONS OF (IN MILLIONS (TONS OF (IN MILLIONS
ALUMINUM) (US$ PER TON) OF US$) ALUMINUM) (US$ PER TON) OF US$)
Puts purchased........ 42,000 1,450-1,650 $ 2.0 39,000 1,450-1650 $ (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)
----- ------
$(4.9) $(39.1)
===== ======
TYPE FINAL MATURITY
---- --------------
Puts purchased........ 12/2001
Forwards sold......... 12/2006
Calls sold............ 12/2003
The table below sets forth certain information with respect to Alunorte's
derivatives portfolio of December 31, 2000 and 1999. We have a 50.3% voting
capital interest and a 49.3% total capital interest in Alunorte.
[Enlarge/Download Table]
AT DECEMBER 31, 2000 AT DECEMBER 31, 1999
--------------------------------------------- ---------------------------------------------
UNREALIZED UNREALIZED
TYPE NOTIONAL VALUE PRICE RANGE GAIN (LOSS) NOTIONAL VALUE PRICE RANGE GAIN (LOSS)
---- -------------- ------------- ------------ -------------- ------------- ------------
(TONS OF (IN MILLIONS (TONS OF (IN MILLIONS
ALUMINUM) (US$ PER TON) OF US$) ALUMINUM) (US$ PER TON) OF US$)
Puts purchased....... 60,000 1,450-1,650 $ 3.8 -- -- $ --
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
Collars
conditional........ 36,000 1,450-1,550 0.2 -- --
----- -----
(puts
purchased)
1,550-1,750 $(1.4) $ 3.7
===== =====
(calls sold)
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.
102
The table below sets forth certain information with respect to our gold
derivatives portfolio at December 31, 2000.
[Enlarge/Download Table]
AT 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$9 million represents the amount
receivable if all transactions had been settled on December 31, 2000.
The table below sets forth certain information with respect to our gold
derivatives portfolio at December 31, 1999.
[Enlarge/Download Table]
AT DECEMBER 31, 1999
-------------------------------------------------
TYPE QUANTITY UNREALIZED GAIN FINAL MATURITY
---- --------- -------------------- --------------
(OZ.) (IN MILLIONS OF US$)
Forwards sold...................................... 20,000 US$ -- 12/2000
Puts purchased..................................... 374,500 7 12/2004
Calls sold......................................... 1,446,000 (17) 12/2004
------
US$(10)
======
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
103
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
ITEM 17. FINANCIAL STATEMENTS
The Registrant has responded to Item 18 in lieu of responding to this Item.
PART III
ITEM 18. FINANCIAL STATEMENTS
[Download Table]
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
INDEX TO AUDIT REPORTS FROM INDEPENDENT ACCOUNTANTS LISTED
IN 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
104
[Enlarge/Download Table]
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
ITEM 19. EXHIBITS
We file the following documents as part of this annual report:
[Download Table]
EXHIBIT
NUMBER
-------
1 Instrument corresponding to Articles of Incorporation and
By-laws, as revised on April 25, 2001 (English translation).
8 List of Subsidiaries.
10.1 Stock Purchase Agreement dated August 21, 2001 among us and
Shanghai Baosteel Group Corporation.
10.2 Consent of PricewaterhouseCoopers Auditores Independentes
for the three years ended December 31, 2000, 1999 and 1998
(CVRD).
10.3 Consent of Deloitte Touche Tohmatsu for the three years
ended December 31, 2000, 1999 and 1998 (Albras).
10.4 Consent of Deloitte Touche Tohmatsu for the three years
ended December 31, 2000, 1999 and 1998 (Alunorte).
10.5 Consents of Deloitte Touche Tohmatsu for the three years
ended December 31, 2000, 1999 and 1998 (Aluvale).
10.6 Consent of KPMG Auditores Independentes for the three years
ended December 31, 2000, 1999 and 1998 (Bahia Sul).
10.7 Consent of KPMG LLP for the three years ended December 31,
2000, 1999 and 1998 (CSI).
10.8 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2000 and 1999 (Cenibra).
10.9 Consents of Deloitte Touche Tohmatsu for the three years
ended December 31, 2000, 1999 and 1998 (Docenave).
105
[Download Table]
EXHIBIT
NUMBER
-------
10.10 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2000 and 1999 (Docepar).
10.11 Consent of Arthur Andersen S/C for the three years ended
December 31, 2000, 1999 and 1998 (Hispanobras).
10.12 Consent of Arthur Andersen S/C for the three years ended
December 31, 2000, 1999 and 1998 (Itabrasco).
10.13 Consent of Deloitte Touche Tohmatsu for the year ended
December 31, 2000 (Kobrasco).
10.14 Consent of Arthur Andersen S/C for the three years ended
December 31, 2000, 1999 and 1998 (MRN).
10.15 Consent of Deloitte Touche Tohmatsu for the three years
ended December 31, 2000, 1999 and 1998 (Nibrasco).
10.16 Consent of KPMG Auditores Independentes for the two years
ended December 31, 2000 and 1999 (Valesul).
10.17 Consent of Deloitte Touche Tohmatsu for the year ended
December 31, 1998 and 1997 (Valesul).
10.18 Consent of Arthur Andersen S/C for the years ended December
31, 2000 and 1999 (CSN).
10.19 Consents of Deloitte Touche Tohmatsu for the three years
ended December 31, 2000, 1999, and 1998. (Terminal Vila
Velha S.A.).
10.20 Consent of Deloitte Touche Tohmatsu for the year ended
December 31, 2000. (Nova Era Silicon S.A.).
10.21 Consent of Trevisan for the two years ended December 31,
1999 and 1998. (Nova Era Silicon S.A.).
10.22 Consent of Deloitte Touche Tohmatsu for the year ended
December 31, 2000. (Celmar S.A.-Industria de Celulose e
Papel).
10.23 Consent of Deloitte Touche Tohmatsu for the year ended
December 31, 2000. (SIBRA Eletrosiderurgica Brasileira
S.A.).
10.24 Consent of Mineral Resources Development, Inc.
106
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all the requirements for filing
this Annual Report on Form 20-F and has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPANHIA VALE DO RIO DOCE
By: /s/ ROGER AGNELLI
------------------------------------
Roger Agnelli
Chief Executive Officer
By: /s/ GABRIEL STOLIAR
------------------------------------
Gabriel Stoliar
Executive Officer
Date: March 6, 2002
107
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
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
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
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
F-1
[Download Table]
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
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
[Download Table]
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)
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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)
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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 ventures,
net of related
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
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.
(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.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
(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 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".
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
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
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-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
(c) The assets and liabilities acquired as a result of the above
transactions and corresponding goodwill were as follows:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Download Table]
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
[Download Table]
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
[Download Table]
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
[Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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)
[Enlarge/Download Table]
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)
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Download Table]
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
====== ======
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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)
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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:
[Download Table]
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
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
MRN for the three years immediately preceding such 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 $116 in 2000,
1999 and 1998 respectively.
11. SHORT-TERM DEBT
Our short-term borrowings are principally from commercial banks and include
import and export financing denominated in United States dollars, as follows:
[Download Table]
AS OF
DECEMBER 31
-----------
2000 1999
---- ----
Export...................................................... 386 655
Import...................................................... 11 21
Working Capital............................................. 68 14
--- ---
465 690
=== ===
Average annual interest rates on short-term borrowings were 8.18% and 7.13%
in 2000 and 1999, respectively.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
12. LONG-TERM DEBT
[Enlarge/Download Table]
AS OF DECEMBER 31
---------------------------
CURRENT LONG-TERM
LIABILITIES LIABILITIES
----------- -------------
2000 1999 2000 1999
---- ---- ----- -----
Foreign debt
Loans and financing contracted in the following
currencies, maturing up to 2011:
United States dollars................................ 170 336 990 576
Japanese Yen......................................... 10 11 4 5
Others............................................... 2 2 4 6
Fixed Rate Notes -- US$ 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:
[Download Table]
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:
[Download Table]
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:
[Download Table]
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:
[Download Table]
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:
[Enlarge/Download Table]
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
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
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.
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:
[Enlarge/Download Table]
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
===== ===== =====
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
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.
- 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.
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
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
[Download Table]
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.
(b) CHANGE IN PLAN ASSETS
[Download Table]
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
[Download Table]
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
==== ====
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
(d) RECOGNITION OF ADDITIONAL MINIMUM LIABILITY
[Download Table]
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
[Download Table]
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.
Net pension cost includes the following components:
[Enlarge/Download Table]
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.
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
The provision for contingencies and the related judicial deposits are
composed as follows:
[Enlarge/Download Table]
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.
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.
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
(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 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.
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
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.
[Enlarge/Download Table]
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
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
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
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 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.
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
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):
[Enlarge/Download Table]
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-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
[Enlarge/Download Table]
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-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
[Enlarge/Download Table]
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-38
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:
[Enlarge/Download Table]
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-39
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:
[Enlarge/Download Table]
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-40
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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-41
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:
[Download Table]
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:
[Enlarge/Download Table]
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-42
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:
[Enlarge/Download Table]
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:
[Enlarge/Download Table]
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 $180 as at
Decem-
F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN MILLIONS OF UNITED STATES DOLLARS, UNLESS OTHERWISE
STATED (CONTINUED)
ber 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:
[Enlarge/Download Table]
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-44
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:
[Enlarge/Download Table]
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-45
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.
[Enlarge/Download Table]
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-46
INDEX TO AUDIT REPORTS FROM INDEPENDENT ACCOUNTANTS LISTED IN
NOTE 23 TO OUR CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
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
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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
[Download Table]
/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
[Download Table]
/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
[Download Table]
/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
[Download Table]
/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
Dates Referenced Herein and Documents Incorporated by Reference
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