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(Exact name of Registrant as specified in its charter)
(Exact name of Registrant as specified in its charter)
Federative Republic of Brazil
(Jurisdiction of incorporation or organization)
Avenida Graça Aranha, No. 26
20030-900 Rio de Janeiro, RJ, Brazil
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class
on Which Registered
Preferred class A shares of CVRD, 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 of CVRD
New York Stock Exchange
Common shares of CVRD, no par value per share
New York Stock Exchange*
American Depositary Shares (as evidenced by American
depositary receipts) each representing one common share of
New York Stock Exchange
8.25% Guaranteed Notes due 2034, issued by Vale Overseas
New York Stock Exchange
6.25% Guaranteed Notes due 2016, issued by Vale Overseas
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 outstanding shares of each class of stock of CVRD as of December 31, 2005 was:
735,803,919 common shares, no par value per share
415,716,278 preferred class A shares, no par value per share
3 golden shares, no par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
CVRD: Yes þ No o
Vale Overseas: Yes þ No o
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
CVRD: Yes o No þ
Overseas: Yes o
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.
CVRD: Yes þ No o
Vale Overseas: Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
CVRD: Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Vale Overseas: Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark which financial statement item the registrant has elected to follow.
CVRD: Item 17 o Item 18 þ
Vale Overseas: Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Aluminum oxide. It is the main
component of bauxite, and extracted
from bauxite ore in a chemical
refining process. It is the
principal raw material in the
electro-chemical process from which
aluminum is produced.
Agência Nacional de Energia
Elétrica, the Brazilian electrical
energy regulatory agency.
The hardest coal type which contains
a high percentage of fixed carbon
and a low percentage of volatile
matter. Anthracite is the highest
rank coal and it contains
approximately 90% fixed carbon, more
than any other form of coal.
Anthracite has a semi-metallic
luster and is capable of burning
with little smoke. Mainly used for
Agência Nacional de Transportes
Terrestres, the Brazilian regulatory
agency for the transportation
A rock composed primarily of
hydrated aluminum oxides. It is the
principal ore of alumina, the raw
material from which aluminum is
A variety of processes whereby
extracted ore from mining is reduced
to particles that can be separated
into mineral and waste, the former
suitable for further processing or
Banco Nacional de Desenvolvimento
Econômico e Social, the Brazilian
National Development Bank.
Coal is a black or brownish-black
solid combustible substance formed
by the decomposition of vegetable
matter without access to air. The
rank of coal, which includes
anthracite, bituminous coal (both
are called hard coal), subbituminous
coal, and lignite, is based on fixed
carbon, volatile matter, and heating
Coal that has been processed in a
coke oven, for use as a reduction
agent in blast furnaces and in
foundries for the purposes of
transforming iron ore into pig iron.
A bituminous hard coal with a
quality that allows the production
of coke. Normally used in coke
ovens for metallurgical purposes.
Physical, chemical or biological
process to increase the grade of the
metal or mineral of interest.
A reddish brown metallic element.
Copper is remarkably conductive,
both thermally and electrically. It
is highly malleable and ductile and
is easily rolled into sheet and
drawn into wire.
Material produced by concentration
of copper minerals contained in the
copper ore. It is the raw material
used by the smelters to produce
Direct Reduction. Process that
removes oxygen from iron ore by
using natural gas. The resulting
product has an iron content of 90% to 92%.
Direct Reduced Iron. Iron ore (lump
or pellets) converted by the Direct
Reduction process, used mainly as a
scrap substitute in electric arc
furnace steel making.
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
A measure of the iron content in the
iron ore that is equivalent to 1%
iron content in one ton of iron ore.
Ferroalloys are alloys of iron that
contain one or more other chemical
elements. These alloys are used to
add these other elements into molten
metal, usually in steel making. The
principal ferroalloys are those of
chromium, manganese, and silicon.
Free on Board. It indicates that
the purchaser pays for shipping,
insurance and all the other costs
associated with transportation of
the goods to their destination.
A precious metal sometimes found
free in nature, but usually found in
conjunction with silver, quartz,
calcite, lead, tellurium, zinc or
copper. It is the most malleable
and ductile metal, a good conductor
of heat and electricity and
unaffected by air and most reagents.
The proportion of metal or mineral
present in ore or any other host
Hot Briquetted Iron. Direct reduced
iron that has been processed into
briquettes. Because DRI (direct
reduced iron) may spontaneously
combust during transportation, HBI
is preferred when the metallic
material must be stored or moved.
A fine white aluminum silicate clay
used as a coating agent, filler,
extender and absorbent in the paper,
ceramics and pharmaceutical
Iron ore or manganese ore with the
coarsest particle size in the range
of 6.35 mm to 50 mm diameter, but
varying slightly between different
mines and ores.
A hard brittle metallic element
found primarily in the minerals
pyrolusite, hausmannite and
manganate. Manganese is essential
to the production of virtually all
steels and is important in the
production of cast iron.
An alcohol fuel largely used in the
production of chemical and plastic
Mineral deposit(s) or mineralized
Refers to a mineralized body that
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
A silvery white metal that takes on
a high polish. It is hard,
malleable, ductible, somewhat
ferromagnetic, and a fair conductor
of heat and electricity. It belongs
to the iron-cobalt group of metals
and is chiefly valuable for the
alloys it forms, such as stainless
steel and other corrosion-resistant
Net ton (the weight of the goods
being transported excluding the
weight of the wagon) kilometer.
Open pit mining
Method of extracting rock or
minerals from the earth by their
removal from an open pit. Open-pit
mines for extraction of ore are used
when deposits of commercially useful
minerals or rock are found near the
surface; that is, where the
overburden (surface material
covering the valuable deposit) is
relatively thin or the material of
interest is structurally unsuitable
for underground mining.
Compounds of oxygen with another
element. For example, magnetite is
an oxide mineral formed by the
chemical union of iron with oxygen.
Pellet feed fines or PFF (Ultra-fine)
Ultra-fine iron ore (less than 0.15
mm) generated by mining and grading.
This material is aggregated into
pellets through an agglomeration
Agglomerated ultra-fine iron ore
particles of a size and quality
suitable for particular steel making
processes. Our pellets range in
size from 8 mm to 18 mm.
Product of smelting iron ore with
coke and limestone in a blast
A potassium chloride compound,
chiefly KCl, used as simple
fertilizer and in the production of
White metal that is obtained in the
electro-chemical process of
reduction of the aluminum oxide.
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.
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
Refers to that part of a mineral
deposit that could be economically
and legally extracted or produced at
the time of the reserve
Ore in its natural (unprocessed)
state, as mined, without having been
Comprises the total ore trade
(exports) between countries using
ocean bulk vessels.
Sinter feed (Fines)
Refers to iron ore with particles in
the range of 0.15 mm to 6.35 mm
diameter. Suitable for sintering.
Refers to the agglomeration of small
particles into a coherent mass by
heating without melting.
The most common type of
semi-finished steel. Traditional
slabs measure 10 inches thick and
30-85 inches wide (and average
approximately 20 feet long), while
the output of the recently developed
“thin slab” casters is approximately
two inches thick. Subsequent to
casting, slabs are sent to the
hot-strip mill to be rolled into
coiled sheet and plate products.
Refers to the type of hard coal that
is suitable to energy generation
after its steaming properties (for
use in thermal power stations).
Metric ton, equaling 1,000 kilograms.
One troy ounce equals 31.103 grams.
Mineral exploitation in which
extraction operations are carried
out beneath the earth’s surface.
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 practices adopted in Brazil (defined as Brazilian GAAP). Brazilian GAAP
is determined by the requirements of Law No. 6,404, dated December 15, 1976, as amended (the
Brazilian Corporate Law), and the rules and regulations of the Comissão de Valores Mobiliários, or
CVM, the Brazilian Securities Commission. We also publish Brazilian GAAP financial statements in
Brazil, which we refer to as our Brazilian Corporate Law financial statements. We use our
Brazilian Corporate 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 translated from Brazilian reais into U.S. dollars on the basis explained in Note 3 to our
financial statements unless we indicate otherwise.
References to “real,”“reais”or “R$” are to Brazilian reais (plural) and to the Brazilian
real (singular), the official currency of Brazil. References to “U.S. dollars,”“dollars” or “US$”
are to United States dollars.
Unless otherwise specified, we use metric units. For example, “tons” refer to metric tons.
References to “CVRD” are to Companhia Vale do Rio Doce. References to “Vale Overseas” are to
Vale Overseas Limited. References to “us” or “we” are to CVRD and, unless where the context
otherwise requires, its consolidated subsidiaries.
References to our “ADSs” or “American Depositary Shares” include both our common American
Depositary Shares (our common ADSs), each of which represents one common share of CVRD, and our
preferred American Depositary Shares (our preferred ADSs), each of which represents one preferred
class A share of CVRD. American Depositary Shares are represented by American depositary receipts
(ADRs) issued by JPMorgan Chase Bank, as depositary.
The estimates of the proven and probable reserves at our mines and the estimates of mine life,
as of December 31, 2005, included in this annual report have been calculated according to the
technical definitions required by the U.S. Securities and Exchange Commission, or the SEC. Our
staff of experienced geologists prepares our reserve estimates. We derived estimates of mine life
described in this annual report from such reserve estimates. We periodically engage independent
mining and geological consultants to review estimates of our mineral reserves. We have adjusted
ore reserve estimates for extraction losses and metallurgical recoveries during extraction for
manganese ore and bauxite deposits. Our reserve estimates of iron ore, kaolin, copper and potash
are reported as in situ tons with adjustments for dilution and mining losses. See Item 3. Key
Information—Risk Factors—Risks Relating to Our Business for a description of risks relating to
reserves and reserves estimates. Except as otherwise indicated, AMEC E&C Services, Inc. (AMEC) has
audited the estimates of proven and probable reserves as of December 31, 2005 presented in this
This annual report contains statements that constitute forward-looking statements within the
meaning of the U.S. 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,”“intend,”“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
our acquisition or divestiture plans;
the implementation of our financing strategy and capital expenditure plans;
the implementation of our operational excellence program;
the exploration of mineral reserves and development of mining facilities;
the depletion and exhaustion of mines and mineral reserves;
the declaration or payment of dividends;
industry trends, including the direction of prices and expected levels of supply and demand;
other factors or trends affecting our financial condition or results of operations; and
the factors discussed under Item 3. Key Information—Risk Factors.
We caution you that forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those in the
forward-looking statements as a result of various factors, including those identified under Item 3.
Key Information—Risk Factors. These risks and uncertainties include factors relating to the
Brazilian economy and securities markets, which exhibit volatility and can be adversely affected by
developments in other countries, factors relating to the iron ore business and its dependence on
the global steel industry, which is cyclical in nature, and factors relating to the highly
competitive industries in which we operate. For additional information on factors that could cause
our actual results to differ from expectations reflected in forward-looking statements, please see
Item 3. Key Information—Risk Factors, and our reports filed with the SEC. Forward-looking
statements speak only as of the date they are made, and we do not undertake any obligation to
update them in light of new information or future developments.
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.
(in US$ except recorded dividends and interest on shareholders’
equity per share in reais and share numbers)
Basic earnings per Common and Preferred
Diluted Earnings per Common and
Preferred Class A Share (2)
Distributions on shareholders’ equity
per share in US$(3)
Distributions on shareholders’ equity
per share in reais(3)
Weighted average number of shares
outstanding (in thousands):
Preferred class A shares(2)
In August 2004, a three for one stock split was carried out. Share and per-share
amounts for all periods give effect to the stock split. The share numbers set forth in
this table do not give effect to the two for one stock split approved by our shareholders
in April 2006.
Each common American depositary share represents one common share and each preferred
American depositary share represents one preferred class A share.
Our distributions to shareholders may take the form of dividends or of interest on
shareholders’ equity. From 1997 to 2003, all distributions were in the form of interest on
shareholders’ equity. From 2004 to 2005, part of the distribution was made in the form of
interest on shareholders’ equity and part as dividends. The amount shown represents
distributions paid during the year.
The Central Bank of Brazil (the “Central Bank”) allows the real/U.S. dollar exchange rate to
float freely, and it has intervened occasionally to control unstable movements in foreign exchange
rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let
the real float freely or will intervene in the exchange rate market through a currency band system
or otherwise. The real may depreciate or appreciate against the U.S. dollar substantially in the
future. For more information on these risks, see Item 3. Key Information—Risk Factors—Risks
Relating to Brazil.
Prior to March 14, 2005, under Brazilian regulations, foreign exchange transactions were
carried out on either the commercial rate exchange market or the floating rate exchange market.
Rates in the two markets were generally the same. The table uses the commercial selling exchange
rate prior to March 14, 2005.
The following table sets forth the selling exchange rate, expressed in reais per U.S. dollar
(R$/US$), for the periods indicated.
Year ended December 31,
May 2006 (until May 23)
Average of the rates of each period, using the average of the exchange rates on the last day of
each month during each period.
Source: Central Bank of Brazil.
On May 23, 2006, the selling exchange rate was R$2.260 per US$1.00.
Due to our dependence on the global steel industry, fluctuations in the demand for steel could
adversely affect our business.
Sales prices and volumes in the seaborne iron ore market depend on the prevailing and expected
level of demand for iron ore in the world steel industry. The world steel industry is cyclical. A
number of factors, the most significant of these being the prevailing level of worldwide demand for
steel products, influence the world steel industry. During periods of sluggish or declining
regional or world economic growth, demand for steel products generally decreases, which usually
leads to corresponding reductions in demand for iron ore.
Driven primarily by strong demand from Chinese steel makers, together with a modest expansion
in other markets, the global seaborne iron ore market experienced high demand and rising iron ore
and pellet prices in 2005. We cannot guarantee how long that demand will remain at current high
levels or the direction of future prices. Sustained declines in world contract prices or sales
volumes for iron ore could have a material adverse effect on our revenues.
The mining industry is an intensely competitive industry, and we may have difficulty effectively
competing with other mining companies in the future.
Intense competition characterizes the worldwide iron ore industry. We compete with a number
of large mining companies. Some of these competitors possess substantial iron ore mineral deposits
at locations closer to our principal Asian and European customers. Competition from iron ore
producers may result in our losing market share and revenues. Our aluminum, manganese ore, copper
concentrate and other activities are also subject to intense competition and are subject to similar
Demand for iron ore and pellets in peak periods may outstrip our production capacity, rendering
us unable to satisfy customer demand.
Our ability to rapidly increase production capacity to satisfy increases in demand for iron
ore is limited. In periods when customer demand exceeds our production capacity, we generally
satisfy excess customer demand by reselling iron ore and pellets purchased from joint ventures or
third parties. If we are unable to satisfy excess customer demand by purchasing from joint
ventures or third parties, we may lose customers. Similarly, because it takes time to increase
production capacity, we may fail to complete our iron ore expansion projects in time to take
advantage of the current high levels of worldwide demand for iron ore. In addition, operating at
or above full capacity may expose us to higher costs, including demurrage fees due to capacity
restraints in our mines, railroads and ports.
Adverse economic developments in our principal markets, especially China, could reduce demand
for our products, leading to lower revenues and profitability.
The world economy is the primary driver of demand in the global seaborne market for iron ore
and pellets. In recent years, China has been the main driver of our sales increases. In 2005,
20.0% of our iron ore and pellet gross revenues were attributable to customers in China, and
customers in China accounted for 15.0% of our total gross revenues. During the same period, 14.2%
of our gross revenues were attributable to customers from Asian countries other than China and
28.4% were attributable to sales to European customers. A weakened global economy or a weakened
economy in specific markets where we sell our products, such as China, could reduce demand, leading
to lower revenues and profitability.
Aluminum and copper are actively traded on world commodity exchanges and their prices are
subject to significant fluctuations.
Aluminum and copper are sold in an active world market and traded on commodity exchanges, such
as the London Metal Exchange and the New York Mercantile Exchange (NYMEX). Prices for these metals
are subject to wide fluctuations and are affected by many factors, including actual and expected
global economic and political conditions, levels of supply and demand, the availability and cost of
substitutes, inventory levels maintained by producers, investments by commodity funds and others,
and actions of participants in the commodity markets. Prices for these metals are more volatile
than iron ore and pellet prices because they respond more quickly to actual and expected changes in
A reduction of global demand for Brazilian steel and/or agriculture products could reduce the
demand for our logistics services.
The Brazilian agriculture and steel industries are currently the primary drivers of demand for
our logistics services to customers. In 2005, approximately 78.6 % of our logistics revenues were
attributable to these markets. A reduction in world demand for Brazilian steel and/or agriculture
products could reduce demand for our logistics services and harm the profitability of our logistics
Our reserve estimates may be materially different from mineral quantities that we may actually
recover, our estimates of mine life may prove inaccurate 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 have the potential to be economically mined and processed under present and anticipated
conditions to extract 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.
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 lead to revision of estimates. Reserve estimates and estimates of mine life may
require revision based on actual production experience and other factors. For example,
fluctuations in the market prices of ores and 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 may not be able to replenish our reserves, which could adversely affect our mining prospects.
We engage in mineral exploration, which is highly speculative in nature, involves many risks
and frequently is nonproductive. Our exploration programs, which involve significant capital
expenditures, may fail to result in the expansion or replacement of reserves depleted by current
production. If we do not develop new reserves, we will not be able to sustain our current level of
production beyond the remaining life of our existing mines.
Even if we discover mineral deposits, we remain subject to drilling and production risks, which
could adversely affect the mining process.
Once mineral deposits are discovered, it can take a number of years from the initial phases of
drilling until production is possible, during which the economic feasibility of production may
change. Substantial time and expenditures are required to:
establish ore reserves through drilling;
determine appropriate mining and metallurgical processes for optimizing the recovery of
metal contained in ore;
obtain environmental and other licenses;
construct mining, processing facilities and infra-structure required for greenfield properties; and
obtain the ore or extract the metals from the ore.
If a project proves not to be economically feasible by the time we are able to exploit it, we
may incur substantial write-offs. In addition, potential changes or complications involving
metallurgical and other technological processes arising during the life of a project may result in
cost overruns that may render the project not economically feasible.
We may experience delays, higher than expected costs, difficulties in obtaining environmental
permits and other obstacles when implementing our capital expenditure projects.
We are investing heavily to further increase our production capacity, logistics capabilities
and to expand the scope of minerals we produce. Our expansion and mining projects are subject to a
number of risks that may make them less successful than anticipated, including:
we may encounter delays or higher than expected costs in obtaining the necessary
equipment or services to build and operate our projects;
we may fail to obtain or experience delays or higher than expected costs in obtaining
the required environmental permits to build our projects;
changes in market conditions may make our projects less profitable than expected at the
time we initiated work on the project; and
adverse mining conditions may delay and hamper our ability to produce the expected
quantities of minerals.
If we are unable to successfully manage these risks, our growth prospects and profitability
We face rising extraction costs over time as reserves deplete.
Reserves are gradually depleted in the ordinary course of a given mining operation. As mining
progresses, distances to the primary crusher and to waste deposits become longer and pits become
steeper. As a result, over time, we usually experience rising unit extraction costs with respect
to each 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.
An increase in fuel costs may adversely affect our business.
Our operations rely in part on oil and gas, which represented 10.1% of our cost of goods sold
in 2005. Fuel costs are a major component of our total costs in our logistics and pellets
businesses, and indirectly affect numerous other areas of our business, including our mining and
aluminum-related businesses. An increase in oil and gas prices adversely affects margins in our
logistics, mining, pellets and aluminum-related businesses.
We are involved in ongoing antitrust proceedings that could result in divestitures, fines or
other restrictions that could harm our business.
We are currently involved in seven proceedings before the Conselho Administrativo de Defesa
Econômica, or CADE, which is the primary Brazilian antitrust regulator. Five of these proceedings
involve post-transaction review of acquisition or joint venture transactions, which is required for
nearly all of our acquisitions and joint ventures. The remaining two proceedings are administrative
proceedings alleging that we have engaged in illegal anticompetitive conduct in connection with our
logistics business. We intend to defend these claims vigorously, but cannot predict their outcome.
If CADE were to find that we have engaged in anticompetitive conduct, it could order us to cease
the conduct and/or to pay fines.
CADE recently rendered its decision in connection with its post-transaction review of our
acquisitions of Socoimex, Samitri, Ferteco, Belém and CAEMI, and the agreement to unwind the
cross-shareholdings between us and Companhia Siderúrgica Nacional, or CSN. On August 10, 2005,
CADE issued a decision approving these acquisitions, subject to certain conditions. Under the
conditions set forth in CADE’s decision, we must either (i) fully waive our preemptive rights
relating to the Casa de Pedra iron ore mine and restructure our equity stake in MRS Logística or
(ii) sell all our assets that were previously owned by Ferteco Mineração S.A., a company we
acquired in 2001 and consolidated in August 2003. For more information, see Item 8. Financial
Information—Legal Proceedings. If we are required to implement the steps called for in CADE’s
decision, our iron ore and logistics operations may be adversely affected.
Our principal shareholder could have significant influence over our company.
On April 30, 2006, Valepar owned 53.3% of our outstanding common stock and 32.3% of our total
outstanding capital. For a description of the ownership of our shares, see Item 7. Major
Shareholders and Related Party Transactions—Major Shareholders—Principal Shareholder. As a result
of its share ownership, Valepar can control the outcome of any action requiring shareholder
approval, except for the appointment of certain directors and certain members of our fiscal
council. Further, the Brazilian government owned three golden shares of CVRD that give it limited
veto powers over certain actions that we could otherwise take. For a detailed description of the
veto powers granted to the Brazilian
government by virtue of its ownership of these golden shares, see
Item 10. Additional Information—Common Shares and Preferred Shares—General.
Many of our operations depend on joint ventures; our business could be adversely affected if our
joint venture partners do not observe their commitments.
We currently operate important parts of our pelletizing, electric energy, aluminum, bauxite,
coal and steel 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 make
capital contributions, purchase products and, in some cases, provide managerial talent. If any of
our joint venture partners fails to observe its commitments, the affected joint venture may not be
able to operate in accordance with its business plans or we may have to increase the level of our
investment to give effect to these plans. For more information on our joint ventures, see Item 4.
Information on the Company—Lines of Business.
Our market risk management strategy may not be effective.
We are exposed to traditional market risks such as fluctuations in interest rates, exchange
rates and commodity prices. In order to protect ourselves against market volatility, our Board of
Directors has approved a risk management policy. See Item 11. Quantitative and Qualitative
Disclosures About Market Risk. Our strategy may not be successful in minimizing our exposure to
these fluctuations, and we may fail to identify correlations between the various market risks to
which we are subject. In addition, to the extent we partially hedge our commodity price exposure,
we may limit the upside benefits that we would otherwise experience if commodities prices were to
Failure to maintain effective internal control over financial reporting could harm investor
confidence in the integrity of our financial information, which could have an adverse impact on
the trading price of our securities.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on
Form 20-F for the fiscal year ending December 31, 2006, we will be required to furnish a report by
our management on our internal control over financial reporting. Such report will contain, among
other matters, an assessment of the effectiveness of our internal control over financial reporting
as of the end of the fiscal year, including a statement as to whether or not our internal control
over financial reporting is effective. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by management. Such report
will also contain a statement that our auditors have issued an attestation report on management’s
assessment of such internal controls.
If we identify material weaknesses in our internal control over financial reporting and we are
unable to correct them in a timely manner, our management may be unable to conclude in its internal
control report that our internal control over financial reporting is effective, which could cause
investor confidence in the integrity of our financial reporting to suffer, lead to a decline in the
trading price of our securities or limit our ability to access the capital markets.
We may not have adequate, if any, insurance coverage for some business risks that could lead to
economically harmful consequences to us.
Our businesses are generally subject to a number of risks and hazards, including:
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. As a result, accidents or other negative developments involving
our mining, production or transportation facilities could have a material adverse effect on our
If we are unable to successfully manage the health and safety risks to which our business
exposes our employees, our business may be adversely affected.
We operate in regions where tropical diseases are prevalent, and we are developing a potential
coal mining operation in Mozambique, where AIDS, malaria and other contagious diseases endemic to
that area are a major public health issue. If we are unable to adequately protect our employees
from these diseases or are unable to ensure the health and safety of our employees, our business
may be adversely affected.
We may face a shortage in our supply of mining equipment due to increased consumption by mining
companies that exceeds suppliers’ capacity.
Although manufacturers of mining and drilling equipment have increased their capacity in the
last two years, the capacity increases were not sufficient to compensate for the significant
increase in demand for mining equipment. The increase in delivery lead times is expected to
continue, which may lead to higher costs and delays in our production.
In particular, since early 2004, the global mining industry has experienced shortages of
off-the-road (“OTR”) tires. There are only five radial tire factories worldwide and each is
working at maximum capacity. Although the three major suppliers have announced more than US$300
million in investments to increase capacity over the next three years, these capacity increases are
not expected to meaningfully reduce the risk of shortages before late 2007. In response to these
shortages, mining industry participants are exploring alternatives, such as bias ply tires, which
have lower performance ratings than radial tires. If we are unable to secure sufficient OTR tires
or alternative tires to maintain our operations, we may suffer temporary reductions in our
Actions by protestors, including from indigenous communities that live near our mining sites,
may hamper our mining and logistic operations.
Protestors, including from indigenous communities living in areas where we operate, may take
actions to disrupt our operations in an effort to influence us to continue or increase the level of
support we provide to such communities. Additionally, protestors from such communities may take
actions to hamper the operations of certain of our railroads, in an effort to influence other
institutions, such as local governments, to respond to their social claims. Future efforts by
protestors to disrupt our operations could have an adverse impact on our results of operations.
Risks Relating to Brazil
The Brazilian government has historically 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
substantial changes in policy, as often occurs in other emerging economies. The Brazilian
government’s actions to control inflation and carry out other policies have in the past involved
wage and price controls, currency devaluations, capital controls and
limits on imports, among other things. Our business, financial
and results of operations may be adversely affected by factors in Brazil including:
monetary policy and interest rate increases;
fiscal policy and tax changes;
international trade policy including tariff and non-tariff trade barriers;
foreign exchange controls;
energy shortages; and
other political, social and economic developments in or affecting Brazil.
Inflation and 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 in the past experienced extremely high rates of inflation, with annual rates of
inflation reaching as high as 2.567% in 1993 (as measured by the Índice Geral de Preços do Mercado
published by Fundação Getúlio Vargas, or IGP-M Index). More recently, Brazil’s rates of inflation
were 25.3% in 2002, 8.7% in 2003, 12.4% in 2004, 1.2% in 2005 and 0.27% in the four months ended
April 30, 2006 (as measured by the IGP-M Index). Inflation, governmental measures to combat
inflation and public speculation about possible future actions have in the past had significant
negative effects on the Brazilian economy, and have contributed to economic uncertainty in Brazil
and to heightened volatility in the Brazilian securities markets. If Brazil experiences
substantial inflation in the future, our costs may increase, our operating and net margins may
decrease and, if investor confidence declines, the price of our securities may fall. Inflationary
pressures may also curtail our ability to access global financial markets and may lead to further
government intervention in the economy, which could involve the introduction of government policies
that may adversely affect the overall performance of the Brazilian economy.
Fluctuations in the value of the real against the U.S. dollar may result in uncertainty in the
Brazilian economy and the Brazilian securities market and could have a material adverse effect
on our net income and cash flow.
The Brazilian currency has historically suffered frequent devaluation. In the past, the
Brazilian government has implemented various economic plans and 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 depreciation of the Brazilian currency generally is
correlated with the differential in the inflation rate in Brazil versus the inflation rate in the
U.S., depreciation over shorter periods has resulted in significant fluctuations in the exchange
rate between the Brazilian currency and the U.S. dollar and other currencies.
The real appreciated by 11.8% against the U.S. dollar in 2005, and appreciated by 10.7% during
the first four months of 2006. The exchange rate between the real and the U.S. dollar may continue
to fluctuate and may rise or decline substantially from current levels.
Depreciation of the Brazilian real against the U.S. dollar reduces the U.S. dollar value of
the dividends paid to holders of our American Depositary Shares. We attempt to mitigate this risk
by setting our dividends in U.S. dollars. However, shareholders are still exposed to currency
volatility risk for a period of at least two weeks, as the U.S. dollar value of dividends is
converted into reais at least two weeks prior to its distribution due to operational requirements
to process the dividend payment. Exchange rate volatility may have an impact on the price of our
shares and bonds and can have a significant impact on our net income. Depreciation of the real
relative to the U.S. dollar may require us to
record substantial foreign exchange and monetary losses on our U.S.
dollar-denominated debt, whereas appreciation of the real against the U.S. dollar generally leads
to the opposite effect. These foreign exchange and monetary gains or losses can be substantial,
which can make our earnings from one period to the next more volatile. Exchange rate variations
also have a substantial impact on our revenues and costs, because most of our revenues are in U.S.
dollars and most of our costs are in reais. As a result, appreciation of the real against the U.S.
dollar generally results in lower revenues and higher costs, which can hurt our operating
profitability. Exchange rate variations also influence the Brazilian economy and inflation rates,
which may lead the Brazilian government to adopt policies that may have an adverse impact on our
business. For additional information about historical exchange rates, see Item 3. Key
Access to and the cost of borrowing in international capital markets for Brazilian companies are
influenced by investor perceptions of risk in Brazil and other emerging economies, which may
hurt our ability to finance our operations at an acceptable cost or reduce the trading price of
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. Economic crises in one
or more emerging market countries may reduce overall investor appetite for securities of emerging
market issuers. Past economic crises in emerging markets, such as in Southeast Asia, Russia and
Argentina, have resulted in significant outflows of U.S. dollars from Brazil and caused Brazilian
companies to face higher costs for raising funds, both domestically and abroad, and have
effectively impeded the access to international capital markets for extended periods. We cannot
assure you that international capital markets will remain open to Brazilian companies or that
prevailing interest rates in these markets will be advantageous to us. In addition, future
financial crises in emerging market countries may have a negative impact on the Brazilian markets,
which could adversely affect the trading price of our securities.
Brazilian government policies in the energy sector may have an adverse impact on the cost or
supply of electricity for our aluminum-related and ferroalloy operations.
We are a significant consumer of Brazil’s electricity production, and accounted for 4.4% of
total consumption in Brazil in 2005. Electricity costs are a significant component of the cost of
producing aluminum and ferroalloys and represented 7.3% of our total cost of goods sold in 2005.
Brazil faced a shortage of electric energy during the second half of 2001, which led to an
energy-rationing program that required a decrease in electric energy consumption by at least 20%.
As a result of this program, we experienced a temporary reduction in our aluminum and ferroalloy
production, both of which use significant amounts of electricity. Although the electric energy
shortages ended in late 2001, and energy-use restrictions were lifted in March 2002, we cannot
assure you that Brazil will not experience future electric energy shortages. Future shortages and
government policies to respond to or prevent shortages may have an adverse impact on the cost or
supply of electricity for our aluminum and ferroalloy operations.
The Brazilian power generation business depends on concessions granted by the government and
is regulated and supervised by ANEEL. A new law for the electricity sector was approved by the
Brazilian Congress in March 2004 and established public auctions in order to trade excess electric
energy available in the market. Lower prices established in these auctions could discourage
investments in additional generation capacity, which would increase the risk of energy shortages in
the future. Changes in the laws, regulations or governmental policies regarding the power sector
or concession requirements could lower the returns we are expecting from our investments in power
generation. For more information on the regulations governing our energy production, see Item 4.
Information on the Company—Regulatory Matters.
Our mining and logistics activities depend on authorizations of regulatory agencies, and changes
in regulations could have an adverse effect on our business.
Our mining and logistics activities in Brazil depend on authorizations and concessions by
regulatory agencies of the Brazilian government. Our exploration, mining, mineral processing and
logistics activities are also subject to Brazilian laws and regulations, which can change at any
time. If these laws and regulations change in the future, modifications to our technologies and
operations could be required, and we could be required to make unexpected capital expenditures.
For a more detailed discussion about the authorizations and concessions by regulatory
agencies of the Brazilian government upon which our mining and logistics activities depend,
see Item 4. Information on the Company—Regulatory Matters.
Brazilian environmental laws may adversely affect our mining and energy businesses.
Our operations often involve using, handling, disposing and discharging hazardous materials
into the environment or the use of natural resources, and are therefore subject to the
environmental laws and regulations of Brazil. Environmental regulation in Brazil has become
stricter in recent years, and it is possible that more regulation or more aggressive enforcement of
existing regulations will adversely affect us by 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.
Our projects often require us to obtain or renew environmental licenses. Difficulties in
obtaining those licenses may lead to construction delays or cost increases and in some cases may
lead us to abandon a project.
We are also subject to Brazilian environmental legislation that requires companies undertaking
projects with significant environmental impact to pay an “environmental compensation” fee in the
amount of at least 0.5% of the total investment in the venture. There are numerous uncertainties
about how this law will be applied in practice. If the level of the fees actually charged were
increased above 0.5%, it would significantly increase our costs and, depending on the magnitude of
the fees involved, could have a material adverse effect on our liquidity and return on investments.
Uncertainties regarding calculation and payment of these fees may strain our relations with the
Brazilian environmental authorities or lead to delays in obtaining necessary environmental permits.
Brazilian laws restricting development in the Amazon region for legal reserve purposes may
place limits on our ability to expand certain of our operations and to fully exploit our mineral
rights in those regions. See Item 4. Information on the Company—Regulatory Matters—Environmental
Several Brazilian states in which we operate are currently considering implementing water
usage fees under the National Hydrological Resources Policy. This may require us to pay usage fees
in the future for water rights that we currently use for free, which could considerably increase
our costs in areas where water resources are scarce.
In addition, we are currently a defendant in an action brought by the municipality of Itabira,
in the state of Minas Gerais, Brazil, which alleges that our iron ore mining operations have caused
environmental and social damages in Itabira. 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. Information on the Company—Regulatory Matters—Environmental Matters and Item 8.
Financial Information—Legal Proceedings.
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 outflows whenever there is a
serious imbalance in Brazil’s balance of payments or reason to foresee a serious imbalance. This
would hinder or prevent the custodian who acts on behalf of the depositary for the American
Depositary Shares from converting proceeds from the shares underlying the American Depositary
Shares into U.S. dollars and remitting those proceeds abroad.
The Brazilian government imposed remittance restrictions for approximately six months in 1989
and early 1990. If enacted in the future, similar restrictions would hinder or prevent the
conversion of dividends, distributions or the proceeds from any sale of shares from reais into U.S.
dollars and the remittance of the U.S. dollars abroad. In that event, the custodian, acting on
behalf of the depositary, will hold the reais it cannot convert for the account of the holders of
American depositary receipts who have not been paid. The depositary will not invest the reais and
will not be liable for interest on those amounts. Furthermore, any reais so held will be subject
to devaluation risk.
If you exchange American Depositary Shares for the underlying shares, you risk losing the
ability to remit foreign currency abroad and Brazilian tax advantages.
The Brazilian custodian for the shares underlying our American Depositary Shares will obtain
an electronic registration from the Central Bank to entitle it to remit U.S. dollars abroad for
payments of dividends and other distributions relating to the shares underlying our American
Depositary Shares or upon the disposition of the underlying shares. If you decide to exchange your
American Depositary Shares for the underlying shares, you will be entitled to continue to rely, for
five business days from the date of exchange, on the custodian’s electronic registration.
Thereafter, you may not be able to obtain and remit U.S. dollars abroad upon the disposition of, or
distributions relating to, the underlying shares unless you obtain your own electronic registration
by registering your investment in the underlying shares under Resolution No. 2,689 of the National
Monetary Council, which entitles foreign investors to buy and sell securities on the São Paulo
stock exchange, or BOVESPA. For more information regarding these exchange controls, see Item 10.
Additional Information—Exchange Controls and Other Limitations Affecting Security Holders. If you
attempt to obtain your own electronic registration, you may incur expenses or suffer delays in the
application process, which could delay your ability to receive dividends or distributions relating
to the underlying shares or the return of your capital in a timely manner. We cannot assure you
that the custodian’s electronic registration or any certificate of foreign capital registration
obtained by you will not be affected by future legislative changes, or that additional restrictions
applicable to you, the disposition of the underlying shares or the repatriation of the proceeds
from disposition will not be imposed in the future.
Because we are not obligated to file a registration statement with respect to preemptive rights
relating to our shares, you may be unable to exercise those preemptive rights.
Holders of American depositary receipts that are residents of the United States may not be
able to exercise preemptive rights, or exercise other types of rights, with respect to the
underlying shares. Your ability to exercise preemptive rights is not assured unless a registration
statement is effective with respect to those rights or an exemption from the registration
requirements of the Securities Act is available. We are not obligated to file a registration
statement relating to preemptive rights with respect to the underlying shares or to undertake steps
that may be needed to make exemptions from registration available, and we cannot assure you that we
will file any registration statement or take such steps. If a registration statement is not filed
and an exemption from registration does not exist, JPMorgan Chase Bank, as depositary for our
American Depositary Shares, will attempt to sell the preemptive rights, and you will be entitled to
receive the proceeds of the sale. However, the preemptive rights will expire if the depositary
cannot sell them. For a more complete description of preemptive rights with respect to the
underlying shares, see Item 10. Additional Information—Common Shares and Preferred
Holders of our American Depositary Shares may encounter difficulties in the exercise of voting
Holders of our common and preferred class A shares are entitled to vote on shareholder
matters. You may encounter difficulties in the exercise of some of your rights as a shareholder if
you hold our American Depositary Shares rather than the underlying shares. For example, if we fail
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.
Our corporate affairs are governed by our bylaws and the Brazilian Corporate Law, which differ
from the legal principles that would apply if we were incorporated in a jurisdiction in the United
States or elsewhere outside Brazil. Under the Brazilian Corporate Law, holders of our common and
preferred class A shares may have fewer and less well-defined rights to protect their interests
relative to actions taken by our Board of Directors or by Valepar than under the laws of some
jurisdictions outside Brazil.
Although Brazilian law imposes restrictions on insider trading and price manipulation, the
Brazilian securities markets are not as highly regulated and supervised as the U.S. securities
markets or markets in certain other jurisdictions. In addition, rules and policies against
self-dealing and regarding the preservation of minority shareholder interests may be less
well-developed and enforced in Brazil than in the United States, which could potentially
disadvantage you as a holder of the underlying shares and American Depositary Shares. For example,
when compared to Delaware general corporation law, Brazilian corporate law and practice has less
detailed and well-established rules and judicial precedents relating to the review of management
decisions against duty of care and duty of loyalty standards in the context of corporate
restructurings, transactions with related parties, and sale-of-business transactions. In addition, shareholders in Brazilian companies ordinarily
In addition, as a foreign private issuer, we are not required to follow many of the corporate
governance rules that apply to U.S. domestic issuers with securities listed on the New York Stock
Exchange, or the NYSE. For more information concerning our corporate governance policies, see Item
6. Directors, Senior Management and Employees.
We are the world’s largest producer and exporter of iron ore and pellets, the largest metals
and mining company in the Americas and one of the largest private sector companies in Latin America
by market capitalization. We hold exploration claims that cover 8.7 million hectares (21.5 million
acres) in Brazil, and 19.8 million hectares (48.9 million acres) in Angola, Argentina, Australia,
Chile, Gabon, Guinea, Mongolia, Mozambique, Peru and South Africa. We operate large logistics
systems, including railroads and ports that are integrated with our mining operations. Directly
and through affiliates and joint ventures, we have major investments in the aluminum-related,
energy and steel businesses. We are investing in copper, nickel and coal exploration, and our
first copper mine began operations in June 2004.
Our main lines of business are:
Ferrous minerals (75% of 2005 consolidated gross operating revenues). We operate two
fully integrated world-class systems in Brazil for producing and distributing iron ore (the
Northern System and the Southern System), consisting of mines, railroads and port and
terminal facilities, and a third system consisting of MBR’s mines and port facilities. At
December 31, 2005, we had a total of 7,981 million tons of proven and probable iron ore
reserves in our three systems in Brazil, with an average grade of 52.1% iron in our
Southern System, 66.8% in our Northern System and 59.8% in MBR’s iron ore mines. We also
operate ten pellet-producing facilities, six of which are joint ventures with partners, and
have a 50% stake in a joint venture that owns and operates two pelletizing plants. We are
one of the world’s largest producers of manganese ore and ferroalloys.
Non-ferrous minerals (5.4% of 2005 consolidated gross operating revenues). We are the
world’s third largest producer of kaolin and Brazil’s sole producer of potash. Our Sossego
copper mine in Carajás, in the state of Pará, Brazil, began production of copper
concentrate in June 2004 and is Brazil’s largest producer of copper.
Aluminum-related operations (10.5% of 2005 consolidated gross operating revenues).
Through subsidiaries and joint ventures, we conduct major operations in the production of
aluminum-related products. They include:
Bauxite mining, which we conduct through our 40.0% interest in Mineração Rio do
Norte S.A., or 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, has a
nominal production capacity of 16.3 million tons per year and produced 17.2 million
tons of bauxite in 2005. We are developing a wholly owned bauxite mine in the
Paragominas region, in the state of Pará, that is expected to begin commercial
production in the first half of 2007.
Alumina refining, which we conduct via our 57.0% interest in our alumina
refining subsidiary, Alunorte-Alumina do Norte do Brasil S.A., or Alunorte, which
currently has a nominal production capacity of 4.4 million tons of alumina per year,
including the latest expansion, through the construction of stages 4 and 5, which added
1.8 million tons to the plant’s annual capacity. We are currently developing another
two stages, scheduled to start up by 2008, which are expected to bring the plant’s
annual capacity to 6.3 million tons. We are also negotiating the terms of a potential
joint venture with Aluminum Corporation of
China Limited (Chalco) to construct a new alumina
refinery in the state of Pará.
Aluminum metal smelting, which we conduct through our subsidiary, Albras -
Alumínio Brasileiro S.A., or Albras, which produces aluminum ingots and in which we
have a 51.0% interest, and our joint venture, Valesul Alumínio S.A., or Valesul, which
produces aluminum ingots, billets and alloys and in which we have a 54.5% interest.
These companies currently have a combined production capacity of approximately 540,000
tons of aluminum per year.
Logistics (9.1% of 2005 consolidated gross operating revenues). We are a leading
provider of logistics services in Brazil, with railroad, coastal shipping and port handling
operations. Each of the iron ore complexes of our Northern and Southern Systems
incorporates an integrated railroad network linked to automated port and terminal
facilities, and is designed to provide our mining products, general cargo and passenger
rail transportation, bulk terminal storage and ship loading services to us and third
parties. In 2005, our railroads transported approximately 66% of the total freight tonnage
transported by Brazilian railroads, or 146.5 billion ntk of cargo, of which 119.6
billion ntk were our iron ore and pellets.
Other investments. In addition to our core mining activities, we currently have
investments in three steel companies, and our Board of Directors recently approved a joint
venture, Ceará Steel, with Dongkuk, a Korean steelmaker, and Danieli, an Italian equipment
provider. This slab plant will be located in the state of Ceará, Brazil and CVRD will
invest US$25 million. Our Board of Directors has also approved an investment stake in
Companhia Siderúrgica do Atlântico, a joint venture with ThyssenKrupp Stahl AG, to build a
slab plant in the state of Rio de Janeiro, Brazil. We will invest a total of US$200
million in Companhia Siderúrgica do Atlântico. We are in the process of conducting
feasibility studies to determine whether to implement joint ventures with Baosteel Shanghai
Group Corporation (Baosteel), Arcelor Group (Arcelor) and Posco to construct and operate
steel slab plants in São Luís, in the state of Maranhão. We also hold stakes in eight
hydroelectric power generation projects with a total projected capacity of 2,509 MW (of
which our share is 991.4 MW), six of which are already under operation, and the remainder
of which are scheduled to start operations within the next four years.
Through our mineral prospecting and development activities in Brazil, we have acquired
extensive experience in exploration techniques and processes, and maintain an active mineral
exploration program in Brazil and overseas. In 2005, our mineral exploration efforts were focused
on copper, gold, nickel, manganese ore, iron ore, kaolin, bauxite, potash, phosphate, coal, diamond
and platinum group metals.
CVRD and Vale Overseas
CVRD’s legal and commercial name is Companhia Vale do Rio Doce. CVRD is a stock corporation,
or sociedade por ações, duly organized on January 11, 1943, and existing under the laws of the
Federative Republic of Brazil.
CVRD was privatized in three stages between 1997 and 2002, beginning with the sale by the
Brazilian government of a controlling stake in CVRD to Valepar in 1997. The last stage of the
privatization took place in 2002, when the Brazilian government sold a remaining minority stake of
common shares through a global equity offering. CVRD is organized for an unlimited period of time.
Its head offices are located at Avenida Graça Aranha, No. 26, 20030-900 Rio de Janeiro, RJ,
Brazil, and its telephone number is 55-21-3814-4540.
Vale Overseas is a finance company wholly owned by CVRD. It was registered and incorporated
as a Cayman Islands exempted company with limited liability on April 3, 2001. Vale Overseas is
incorporated for an indefinite period of time. Its registered office is at Walker House, P.O. Box
908 GT, Mary Street, Georgetown, Grand Cayman, Cayman Islands. Vale Overseas’ business is to issue
debt securities to finance CVRD’s activities. It has no other operations or employees.
Our goal is to strengthen our competitiveness among the leading global mining companies by
focusing on diversified growth in mining operations, principally through organic growth. We are
pursuing disciplined capital management in order to maximize return on invested capital and total
return to shareholders. Although we are emphasizing organic growth in our core businesses, we may
pursue strategic acquisitions in order to create value for our shareholders.
Over the past several years, we have developed a robust long-term strategic planning process.
We have ambitious long-range plans in each of our principal business areas, including substantial
capital expenditures for organic growth through 2012.
The following paragraphs provide some highlights of our major strategies.
Maintaining Our Leadership Position in the Iron Ore Market
In 2005, we continued to consolidate our leadership in the seaborne iron ore market, with an
estimated 32.2% of the total 670 million tons traded in the year. We are committed to maintaining
our position in the global iron ore market by strengthening relationships with clients, focusing
our product line to capture industry trends, increasing our production capacity in line with demand
growth and controlling costs. We believe that our strong relationships with major customers
(reinforced through long-term contracts), tailored product line and high quality products will help
us to achieve this goal.
We are also taking steps to encourage several steel makers to develop slab plants in Brazil in
order to create additional demand for our iron ore.
Growing Our Logistics Business
We believe that the quality of our railway assets and our many years of experience as a
railroad and port operator, together with the lack of efficient transportation for general cargo in
Brazil, position us as a leader in the logistics business in Brazil. We are also expanding the
capacity of our railroads through the purchase of additional locomotives and wagons to serve the
increasing needs of our own businesses and of our customers.
Increasing Our Aluminum-Related Activities
We plan to develop and increase production capacity in our aluminum-related operations,
focusing on the upstream portion of the production chain, developing low-cost bauxite and alumina
projects. We have large undeveloped high-quality bauxite reserves and opportunities for low-cost
expansions in our alumina refinery. We are working on the development of these opportunities. We
are also investing in mineral exploration to increase our bauxite reserves. We may pursue
acquisitions and/or partnerships in the production of primary aluminum to guarantee demand for our
Developing Our Copper Resources
We believe that our copper projects, which are all situated in the Carajás region, in the
state of Pará, can be among the most competitive in the world in terms of investment cost per ton
of ore. Our copper mines will benefit from our infrastructure facilities serving the Northern
Investing in Nickel and Coal
We are pursuing various opportunities to become a large global player in the nickel and coal
businesses. As an important supplier of raw materials to the steel industry, nickel and
metallurgical coal will complement our portfolio of products.
Globalization of Multi-Commodity Exploration Efforts
We are engaged in an active mineral exploration program, with efforts in several countries and
regions around the globe, including Angola, Argentina, Australia, Brazil, Chile, Gabon, Guinea,
Mozambique, Mongolia, Peru and South Africa. We are mainly seeking new
deposits of copper, gold, manganese ore, iron ore,
nickel, kaolin, bauxite, phosphate, potash, coal, diamond and platinum group metals. Mineral
exploration is an important part of our organic growth strategy.
Power Generation Projects
Energy management and efficient supply have become a priority for us. Driven by structural
changes in the industry and regulatory uncertainties, and by the risk of rising electricity prices
and energy shortages, we have invested in seven consortia to develop eight hydroelectric power
generation plants and we plan to use the electricity from these projects for our internal needs.
As a large consumer of electricity, we expect that investing in power projects will help protect us
against volatility in the price of energy.
Recent Acquisitions, Dispositions and Significant Changes
following discussion describes significant acquisitions, dispositions and other changes in
our business in 2005 and 2006 to date.
Ore and Pellets
Brucutu expansion project. We plan to expand the capacity of our Brucutu mine in two
phases. Phase I of the Brucutu expansion project is expected to be completed in the third quarter
of 2006, which would bring the nominal production capacity to 12 million tons per year. Phase II
is expected to be completed in the third quarter of 2007, bringing capacity to 24 million tons per
year. We are currently conducting studies in contemplation of expanding the production capacity at
Brucutu to 30 million tons per year.
Carajás expansion. We are expanding the iron ore production capacity of Carajás to 100
million tons per year. This project is in the detailed planning phase for engineering and related
equipment, works and services supply processes. We expect that our total capital expenditures for
this project will be approximately US$366 million. Conclusion of this project is scheduled for
Samarco expansion. We are increasing pellet production capacity at Samarco, our 50% joint
venture with BHP Billiton. The expansion at Samarco is expected to add 7.6 million tons per year
of capacity to Samarco and to involve an investment of US$1,183 million including the construction
of an iron ore concentration plant, a pelletizing plant and a second pipeline. Samarco has
targeted startup for the first half of 2008. Samarco will obtain its own financing for the
Fábrica Nova iron ore mine. Our greenfield iron ore project at Fábrica Nova, which has a
capacity of 15 million tons per year, began operations in the second quarter of 2005 and produced
7.8 million tons in 2005.
Itabiritos project. We are building a concentration plant (with a capacity of 10 million tons
per year), an ore pipeline (4 km in length) and a pelletizing plant with a capacity to produce 7
million tons of pellets per year at an estimated cost of US$759 million, and have targeted startup
Acquisition of Rio Verde Mineração. In January 2006, we acquired the mineral resources, land
and mining equipment of Rio Verde Mineração for US$47 million. Rio Verde Mineração is
located in the Iron Quadrangle region of the state of Minas Gerais, near the operations
of MBR in the municipality of Nova Lima.
Stock merger with CAEMI. In May 2006, we completed a stock merger with our controlled company
CAEMI. Pursuant to the stock merger, all preferred shares of CAEMI owned by its non-controlling
shareholders were exchanged for new preferred shares issued by us, and CAEMI became our
wholly-owned subsidiary. The exchange ratio was one CAEMI share per 0.04115 CVRD preferred class A
Paragominas project. We are developing a new wholly owned bauxite mine located in
Paragominas, in the state of Pará, which is expected to begin commercial production in the first
half of 2007 with an initial capacity of 5.4 million tons per year and a capital expenditure of
US$352 million. By 2008, its capacity will reach 9.9 million tons per year, which will require an
additional investment of US$196 million. The bauxite produced at
Paragominas will be used to supply Alunorte’s expansion needs. The bauxite quality will be similar to
MRN’s, and the
project will use the strip mining method of extraction and have a beneficiation
plant including milling and a 244-kilometer long slurry pipeline.
Alunorte expansion. We are increasing alumina production capacity at our Alunorte refinery,
and we expect to increase capacity from 4.4 to 6.2 million tons per year at an estimated investment
of US$846 million. Expected startup for this project is in 2008.
ABC refinery project. We are discussing with Chalco a potential joint investment in an
alumina greenfield refinery in the state of Pará, near the existing facilities of Alunorte in
Brazil (ABC refinery), expected to have an initial capacity of 1.8 million tons per year. Bauxite
for the project would be supplied from our Paragominas bauxite mine. If the terms of the project
are agreed, the first stage of the refinery is expected to be completed and operational within
three years. We signed a framework agreement and two memoranda of understanding with Chalco, but
the project remains subject to the negotiation of final documentation and receipt of approvals from
the Boards of Directors of both companies.
118. We plan to develop the 118 copper mining project, located in the state of Pará, Brazil.
In 2005, pursuant to our Mineral Risk Agreement with BNDES, we entered into a specific agreement
under which we will pay to BNDES a variable percentage of any net revenues produced by 118. We
currently estimate that capital expenditures for the project will amount to approximately US$232
million and have targeted startup for the first half of 2008. The estimated production capacity of
the project is 36,000 tons of copper cathode per year.
Vermelho. In July 2005, our Board of Directors approved the investment to develop the
Vermelho nickel project. The Vermelho nickel project is located in the Carajás region in the state
of Pará, Brazil, 70 km south of our Carajás iron ore mines and 15 km east of our Sossego copper
mine. As currently planned, its estimated production capacity is 46,000 tons per year of metallic
nickel, and 2,800 tons per year of metallic cobalt. We estimate that our total capital
expenditures to develop the project will amount to approximately US$1.2 billion, and currently
expect the project to begin operations on or about the fourth quarter of 2008.
Onça Puma. In a series of transactions in late 2005 and early 2006, we acquired all the
shares of Canico Resources Corp. for US$806 million. Canico owns the Onça Puma nickel laterite
project, an iron-nickel deposit located in the Brazilian state of Pará. According to a feasibility
study, the plant will have a nominal capacity to produce 57,000 tons of nickel per year and we
currently estimate that its development will require investments of US$1.1 billion. Production is
scheduled to begin in 2008. We are developing the engineering project and studies to assess
synergies between Onça Puma and the Vermelho nickel project.
In September 2005, we completed our capacity expansion project at the Taquari-Vassouras potash
mine, increasing its capacity from 600,000 tons per year to 850,000 tons per year. We expect a
significant increase in production in 2006.
In March 2005, CVRD won an international bidding process to explore the Bayóvar phosphate
deposit located in the Piura region in Peru. CVRD will have the right to evaluate and develop a
multipurpose maritime terminal in the Piura region to ship phosphate and leverage other projects in
northern Peru. The feasibility study is expected to be completed in the second quarter of 2007.
We are pursuing several efforts to become a large global player in the coal business.
Mozambique coal mine feasibility study. In November 2004, CVRD won an international
auction to explore coal deposits in the Moatize region, in the north of Mozambique for
US$122.8 million. We own 95% of the winning consortium; American Metals & Coal
International (AMCI), an American coal producer, owns the remaining 5%. Moatize is
believed to have coal reserves that might allow the extraction of coking and thermal coal.
The project’s conceptual study has been concluded and the feasibility study is expected to
be completed in the second half of 2006. If the project proceeds, the total investment
will include mine development costs, the construction of a maritime terminal for ship
loading, related investments and social projects.
Shandong coke and coal projects. In July 2004, we agreed to acquire a 25% stake in a
joint venture with the Yankuang Group (Yankuang), one of the largest coal producers in
China, and with Itochu Corporation, a Japanese trading company. Our equity investment
commitment was approximately US$26 million. The purpose of the joint venture is to operate
a plant in Jining City, Shandong province, China, that would produce two million tons of
coke and 200,000 tons of methanol per year. In December 2004, the Chinese government
approved the incorporation of the joint venture, which is named Shandong Yankuang
International Coking Company Limited. After the incorporation, we made an initial capital
contribution of US$10.6 million. Currently, we own a 25% interest, Yankuang holds a 70%
equity interest and Itochu holds the remaining 5%. As currently planned, the plant would
begin operations in 2006 and we have the right to off take approximately 25% of the plant’s
production, which will be exported primarily to Brazil. We are also exploring with
Yankuang the possibility of participating in a joint venture to develop a new coal mine in
the city of Zhaolou, Shandong province, China. The Zhaolou mine has an expected production
capacity of approximately 3.0 million tons of coal per year, and if the project proceeds,
the mine is expected to start operations in 2007.
Belvedere. In July 2005, we signed an agreement with the Australian mining companies
Aquila Resources Limited and AMCI Holdings for an exploration study of the Belvedere Coal
Underground Project, or Belvedere. Belvedere is an estimated 2.7 billion ton hard coking
coal resource located in the state of Queensland, Australia. At the conclusion of the
pre-feasibility study, we have the option to acquire a 51% interest in Belvedere at a price
of US$90 million. We have further options to increase our stake in the project to 100% by
acquiring our partners’ interests at a fair market value determined at the time of our
exercising each option.
Steel slab projects. We are taking steps to encourage several steel makers to develop slab
plants in Brazil in order to create value and additional demand for our iron ore.
Ceará Steel. In November 2005, we agreed to acquire a minority stake in Ceará Steel, an
export-oriented steel slab project in the state of Ceará, Brazil, with a nominal capacity
of 1.5 million tons of slabs per year. The main shareholders are Dongkuk Steel, a Korean
steel maker, and Danieli, an Italian equipment supplier, and we will invest US$25 million.
The total cost of the project will be US$750 million and we will be the
exclusive supplier of pellets for Ceará Steel. The plant is expected to start production
in 2009 and we have put options to divest our stake in the future.
ThyssenKrupp — Companhia Siderúrgica do Atlântico (CSA). In December 2004, we signed a
memorandum of understanding with ThyssenKrupp Stahl A.G., one of the largest European steel
makers, for the construction of a 4.4 million ton integrated slab plant in state of Rio de
Janeiro, Brazil. The project has been formally approved by both ThyssenKrupp Stahl A.G.
and CVRD, and is now being implemented. Commissioning of the plant is foreseen for 2009,
and our Board of Directors has approved an investment of
US$200 million in CSA. We intend to have a
put option to divest our stake in the future.
Baosteel. In February 2004, we agreed with Baosteel, China’s largest steel maker, to
study the feasibility of a joint venture to build and operate an integrated steel plant to
produce 4 million tons of slabs per year in São Luís, in the state of Maranhão. The basic
engineering and formal feasibility study for the project have been concluded, but issues
related to environmental licensing have delayed the final decision regarding this project.
Arcelor has also participated in the feasibility study, but no agreement has been reached
regarding its potential participation in the project.
Posco. In September 2004, we signed a memorandum of understanding with Posco, the
largest Korean steel maker, to carry out a pre-feasibility study for the construction of an
integrated slab plant in São Luís, in the state of Maranhão. The pre-feasibility has been
concluded and submitted to Posco. The project is pending approval by Posco to proceed.
Aimorés hydroelectric power plant. In July 2005, the Aimorés hydroelectric power plant began
operations with the start up of its first turbine. The plant reached full operation in December
2005 with the start of the third turbine.
Start up of Capim Branco I. The Capim Branco I project obtained its operational license
during December 2005, which allowed for the filling of the reservoir. This milestone allowed the
project to begin commercial operations in February 2006.
Power Purchases. Under new electricity sector regulations, we conducted a successful power
purchase bid in a governmental auction in August 2005 for the supply of electricity to several of
our units. We have also negotiated a new long-term supply agreement for the pelletization units of
the Tubarão Complex, in the state of Espírito Santo, for the next 10 years. Both deals should
generate savings for us of approximately US$80 million.
Dispositions and Asset Sales
In line with our strategy, we have continued to pare down our holdings of non-strategic
assets. We summarize below our key dispositions and asset sales since the beginning of 2005.
QCM. In July 2005, our subsidiary CAEMI sold its shareholdings in Quebec Cartier Mining
Company, or QCM, an iron ore and pellets producer with operations in Quebec, Canada, for US$126
million, to Dofasco Inc. This transaction completed our compliance with the undertakings required
by the antitrust authorities of the European Union in connection with the acquisition of CAEMI.
Foz do Chapecó and Santa Isabel hydroelectric power projects. In February 2006, we sold to
Furnas Centrais Elétricas for approximately R$10 million our 40% stake in the consortium to build
and operate the Foz do Chapecó hydroelectric power plant. The closing of this transaction is
subject to certain conditions precedent, including ANEEL’s approval of the transfer of control and
the revision of the timetable for the project. We are also continuing our efforts to return the
concessions for the Santa Isabel hydroelectric power project to ANEEL due to difficulties related
to environmental issues.
Nova Era Silicon. In February 2006, we sold to our partner JFE Steel Corporation our 49%
stake in Nova Era Silicon, a ferrosilicon producer with operations in the state of Minas Gerais,
Brazil, for US$14 million.
Our principal lines of business consist of mining and logistics. We also invest in energy to
supply part of our consumption. For internal management purposes, we group our aluminum-related
operations together with our other significant equity participations in other companies.
The operations of MBR are reflected in the above table as of September 2003, the date
on which we acquired and began consolidating its operations.
We conduct our iron ore business primarily at the parent company level and through our
subsidiaries Urucum Mineração S.A., or Urucum, and MBR.
The table below sets forth information regarding our proven and probable iron ore reserves and
projected exhaustion dates as of December 31, 2005. The projected exhaustion dates are estimated
based on our estimates of future production levels.
Average product recovery after beneficiation is 73.2%. The run-of-mine is sent to Cauê
Concentration Plant and Conceição Concentration Plant. The production is declared in Cauê
Average product recovery after beneficiation is 73.8%.
Average product recovery after beneficiation is 84%.
Average product recovery after beneficiation is 100% (direct shipping).
Average product recovery after beneficiation is 100% (direct shipping).
Average product recovery after beneficiation is 84%.
Reserves were not reported for 2005 due to the mine’s depleted state.
Average product recovery after beneficiation is 71.5%.
Average product recovery after beneficiation is 100% (direct shipping).
Average product recovery after beneficiation is 77.8%.
CVRD’s ownership interest is 51%. Reserves were not reported for 2005 due to the mine’s
Average product recovery after beneficiation is 79%.
Average product recovery after beneficiation is 70%. The run-of-mine is sent to Fábrica
Average product recovery after beneficiation is 92%.
Average product recovery after beneficiation is 100% (direct shipping). In 2004, we
entered into an agreement to lease the Andrade iron ore mine, but we only started to run this
mine in January 2005.
Average product recovery after beneficiation for Pico and Sapecado is 82%. Average product
recovery after beneficiation for Galinheiro is 81%.
Average product recovery after beneficiation is 81%.
Our iron ore mining and related operations are concentrated in three systems in Brazil, the
Southern System, the Northern System and the MBR System. The Southern System is located in the
states of Minas Gerais, Espírito Santo and Rio de Janeiro, and the Northern System is located in
the states of Pará and Maranhão. Each of our Northern and Southern Systems includes iron ore
reserves and other mineral deposits, mines, ore processing facilities and integrated railroad and
terminal transportation facilities. Our railroads connect the Northern System mines to the Ponta
da Madeira Maritime Terminal Complex and the Southern System mines to the Tubarão Maritime Terminal
Complex. A small part of the iron ore produced in our Southern System is transported via MRS
Logística, a railway company in which we have, directly and indirectly, 37.2% of the voting capital
and 40.5% of the total capital, to our wholly owned CPBS maritime terminal (Sepetiba terminal).
The operation of these separate systems, each with its own transportation capability, enhances the
reliability of service to our customers. We also operate the MBR System which similarly contracts
freight services from MRS Logística to transport all of its products from its mines in the Iron
Quadrangle region in the state of Minas Gerais, to the Guaiba Island maritime terminal in the state
of Rio de Janeiro.
The Southern System is an integrated system consisting of iron ore mines, the Vitória a Minas
railroad, and the Tubarão Maritime Terminal (located in Vitória, in the state of Espírito Santo).
The iron ore mines of the Southern System are divided into four mining areas (Itabira, Centrais
Mines, Mariana and Oeste Mines) and located in a region called the Iron Quadrangle in the state of
Minas Gerais, in the southeast of Brazil. The Southern System is accessible by road or by spur
tracks of the Vitória a Minas railroad. Transportation of the iron ore produced in the Southern
System is discussed below in Item 4. Information on the Company—Line of Business—Logistics.
Iron ore in the Southern System is mined by open pit methods. These ore reserves have high
ratios of itabirite ore relative to hematite ore. Itabirite is a quartz-hematite rock with an
average iron content ranging from 35% to 60% requiring concentration to achieve shipping grade,
which is above a 64% average iron content. Hematite is a high-grade ore with an average iron
content of approximately 66%. 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 in the beneficiation plants located at the mining sites.
In 2005, we produced 53% of the electric energy consumed in the Southern System at our
Igarapava, Porto Estrela, Funil, Candonga and Aimorés hydroelectric power plants.
The Northern System is an integrated system, including open pit mines and an ore processing
complex in the Carajás region, in the state of Pará, the Carajás railroad and the Ponta da Madeira
Maritime Terminal, in the state of Maranhão. The mines are located 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. 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 northern range, which is
divided into five main mining bodies (N4E, N4W, N5W, N5E and N5EN). Industrial scale mining
operations began in 1985.
Because of the high iron content (66.8% on average) in the Northern System, we do not have to
operate a concentration plant at Carajás. The beneficiation process consists simply of sizing
operations, including screening, hydrocycloning, crushing and filtration. This allows us to
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. After the beneficiation process, our Carajás railroad
transports Northern System iron ore to the Ponta da Madeira Maritime Terminal.
Our complex in Carajás is accessible by road, air and rail. It obtains electrical power at
market rates from regional utilities. To support our Carajás operations we have housing and other
facilities in a nearby township.
We operate some of our iron ore activities through our subsidiary MBR. MBR operates mines in
the Iron Quadrangle in the state of Minas Gerais and ships through its own maritime terminal on
Guaiba Island in Sepetiba Bay, in the state of Rio de Janeiro. MRS Logística plays a major role in
MBR’s operations, transporting all of MBR’s iron ore destined for the Guaíba Island maritime
MBR presently operates three major mining complexes:
the Pico complex, which includes Pico, Sapecado and Galinheiro mines, with a major and
three secondary plants;
the Vargem Grande complex, comprising Tamanduá, Capitão do Mato and Abóbodas mines, with
one major beneficiation plant; and
the Paraopeba complex, consisting of Jangada (with a beneficiation plant) and Capão
Xavier (Mutuca plant) mines.
All MBR mines are served by MRS Logística. Lump ore, sinter feed fines and pellet feed fines,
in addition to hematitinha, a product used essentially by domestic pig-iron producers, are produced
mostly via wet beneficiation processes from run-of-mine of the open pit mining operations.
Casa de Pedra Iron Ore Mine
In March 2001, as part of the negotiation to unwind the cross-shareholdings with CSN, CSN
granted us the following rights of first refusal relating to CSN’s Casa de Pedra iron ore mine,
each of which lasts for a period of 30 years:
the right to purchase at market prices any iron ore produced by the mine beyond CSN’s
the right to purchase or lease 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.
On August 10, 2005, CADE issued a decision approving certain of our acquisitions, which
imposed certain conditions on us, including a full waiver of our preemptive rights relating to the
Casa de Pedra iron ore mine. See Item 3. Key Information – Risk Factors – We are involved in
ongoing antitrust proceedings that could result in divestitures, fines or other restrictions that
could harm our business.
The table below sets forth information regarding pellet production by our plants and our joint
venture partners as of April 30, 2006.
Our Direct or
Total Pellet Production (1)
Indirect Share of
for the Year Ended
(in millions of tons)
Tubarão, Fábrica and São Luis
Ponta do Ubú
Total production by joint venture entity.
In March 2006, we temporarily suspended operations of our São Luís pelletizing plant.
Whereas we continue to see a persistent global excess demand for iron ore fines and lumps, with
expansion in demand mainly driven by China, the seaborne demand for pellets, which is more
concentrated in North America and Europe, has declined. We expect to resume operations at our São
Luis pelletizing plant as soon as the current level of excess inventories is eliminated.
We sell pellet feed to our pelletizing joint ventures at market-based prices. Historically,
we have supplied all of the iron ore requirements of our wholly owned pelletizing plants and our
joint ventures, except for Samarco and GIIC, to which we supply a portion of their needs. Besides
blast furnace pellets, some of the pellets we and our pelletizing joint ventures produce are direct
reduction pellets, which are used in steel mills that use the direct reduction process rather than
blast furnace technology.
We are the operator of the pelletizing joint ventures located in the Tubarão Port area. In
2005, we received US$66 million in fees for operating these joint ventures.
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 steel making 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.
Most of our iron ore and pellets are shipped to Asia and Europe, with customers in China,
Japan, South Korea, France and Germany accounting for approximately 48.7% of our total iron ore and
pellets shipments in 2005. In 2005, China accounted for 21.2% of our iron ore and pellets sales,
Brazil accounted for 22.6% and Europe 28.7%. Our 10 largest customers collectively purchased 125
million tons of iron ore and pellets from us, representing 49.2% of our 2005 iron ore and pellet
shipments and 49% of our total iron ore and pellets revenues. With the exception of Arcelor, which
accounted for 13.3% of our sales of iron ore and pellets in 2005, no individual customer accounted
for more than 10% of our sales of iron ore and pellets for any of the three years ended December31, 2005.
We strongly emphasize customer service in order to improve our competitiveness. We work with
our customers to understand their principal objectives and to provide them with iron ore solutions
to meet specific customer needs. To provide tailored solutions, we take advantage of our large
number of iron ore mines and pellet plants to produce multiple iron ore products with different
grades of iron, silica and alumina, and varying physical properties. We believe that our ability
to provide our customers with a total iron ore solution and the quality of our products are very
important advantages helping us to improve our competitiveness in relation to competitors who may
be more conveniently located geographically. In addition to offering technical assistance to our
customers, CVRD operates sales support offices in Tokyo, Japan; Saint Prex, Switzerland; New York,
U.S. and Shanghai, China. 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
timely deliveries. Our central sales office in Rio de Janeiro coordinates the activities of these
offices. MBR’s sales support offices are located in The Hague, The Netherlands and Shanghai,
(Iron Ore and Pellets)
Our ownership and operation of transportation systems designed for the efficient
transportation of iron ore products complement our iron ore mining business in the Northern and
Southern Systems. We operate an integrated railroad and terminal network in each of our Northern
and Southern Systems. These networks transport our iron ore products from interior mining
locations to maritime terminals and Brazilian customers. For a more detailed description of the
networks see –Logistics below.
We do not own or operate an integrated transportation system for our MBR System. Instead we
enter into freight contracts with MRS to transport our iron ore products at market rates from MBR’s
mines to its maritime terminal on Guaiba Island.
In general, the international iron ore market is highly competitive. Several large producers
operate in this market. The principal factors affecting competition are price, quality, range of
products offered, reliability, operating costs and transportation costs. In 2005, the Asian market
(primarily China, Japan and South Korea) and the European market were the primary markets for our
Our biggest competitors in the Asian market are located in Australia and include subsidiaries
and affiliates of BHP Billiton PLC and Rio Tinto Ltd. 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 that can produce the intended final product in the most economic and efficient
manner. Our iron ore has low impurity levels and other properties that generally lead to lower
processing costs. For example, the alumina content of our iron ore is very low compared to
Australian ore. Our ore also has high iron grade, which improves productivity in blast furnaces,
which is important during periods of high demand. Second, steel mills often develop sales
relationships based on a reliable supply of a specific mix of iron ore. We
have a customer-oriented marketing policy and place specialized personnel in direct contact
with our clients to determine the blend that best suits each particular client. We sell most of
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, in the Northern and Southern Systems, our
ownership of the process of transporting iron ore to our ports makes it easier for us to ensure
that our products get to our ports on schedule and at competitive costs.
We are competitive in the European market for the reasons we described above, as well as the
proximity of the Ponta da Madeira and Tubarão port facilities to European customers. Our principal
competitors in Europe are:
Kumba Resources (South Africa);
Luossavaara Kiirunavaara AB — LKAB (Sweden);
Sociétè Nationale Industrielle et Minière — SNIM (Mauritania);
Rio Tinto PLC (UK), Rio Tinto Ltd (Australia) and their subsidiaries and affiliates; and
BHP Billiton (Australia) and its subsidiaries and affiliates.
The Brazilian iron ore market is competitive with a wide range of smaller producers and
integrated steel producers such as CSN and Mannesmann. Although pricing is relevant, 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
Brazilian sales. Prices to Brazilian customers are based on global reference prices discounted by
the transportation costs to their facilities. Therefore, prices to these clients are lower than to
customers located outside Brazil.
Ore and Ferroalloys
We conduct our manganese ore and ferroalloy businesses through four subsidiaries, Rio Doce
Manganèse Europe (RDME), Rio Doce Manganese Norway AS (RDMN), Rio Doce Manganês S.A. (RDM) and
Urucum Mineração S.A. (Urucum). In 2005, we were one of the largest producers in the global
seaborne market, with total shipments of approximately 907 thousand tons of manganese ore and 529
thousand tons of ferroalloys. We had US$571 million in gross revenues in 2005 from manganese ore
and ferroalloy sales.
We produce manganese ore products from the Azul mine in the Carajás region in the state of
Pará and from the Urucum mine in the Pantanal region in the state of Mato Grosso do Sul, Brazil.
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.
We also operate minor mines in the states of Minas Gerais and Bahia.
Our manganese ore mines produce three types of manganese ore products:
metallurgical ore used primarily for the production of ferroalloys;
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 table below sets forth information regarding our manganese ore mines and manganese ore
production for the periods indicated. We own 100% of all mines.
For the Year Ended
Proven and Probable Reserves
In million of tons
Morro da Mina(5)
Bahia mines (6).
Reserves reported as run-of-mine wet tons, in millions of tons.
Reported as run-of-mine Mn% grade.
Average product recovery after beneficiation is 78% of ROM tons.
Average product recovery after beneficiation is 75% of ROM tons.
Morro da Mina mine is located in the state of Minas Gerais. Average product recovery
after beneficiation is 88% of ROM tons.
There are no proven and probable manganese reserves at the mines located in the state
We currently operate eight plants that produce ferroalloys and special alloys – Santa
Rita, Barbacena, Ouro Preto, São João del Rey (all located in the state of Minas Gerais), Simões
Filho (in the state of Bahia), Corumbá (in the state of Mato Grosso do Sul), RDME (in Dunkerque,
France) and RDMN (in Mo I Rana, Norway). The production of ferroalloys consumes significant
amounts of electricity corresponding to 11.8% of our total consumption in 2005. For information on
the risks associated with potential energy shortages, see Item 3. Key Information—Risk Factors.
The table below sets forth information regarding our production in 2005:
(In thousands of
tons per year)
Rio Doce Manganèse Europe (RDME)
Rio Doce Manganese Norway (RDMN)
Rio Doce Manganês S.A. (RDM)
Urucum Mineração S.A.
Nova Era Silicon S.A. (NES) (1)
Sold in February 2006.
Given the global excess supply that resulted in inventory accumulation and falling
ferroalloy prices, we decided to shut down our ferroalloy plant in Norway between August and
November 2005. We also decided to operate our ferroalloy plant in France below its nominal
capacity. As ferroalloy inventories were consumed and prices stabilized, we resumed full capacity
operation at our Norwegian and French plants in December 2005. On the other hand, given the
weakness in Brazilian demand for ferroalloys, we have decided to shut down temporarily three
furnaces of our Simões Filho plant, in the state of Bahia, Brazil, since January 2006.
(Manganese Ore and Ferroalloys)
The markets for manganese ore and ferroalloys are highly competitive. Competition in the
manganese ore market takes place in two segments. High-grade (40% Mn or more) manganese ore
competes on a global seaborne basis, while low grade ore competes on a regional
some ferroalloys high-grade ore is mandatory, while for some others high and low grade ores are
complementary. Besides manganese ore content, cost and physical-chemical features play an
important role in competition (e.g. moisture, impurities). The main suppliers of high-grade (HG)
ores are located in South Africa, Gabon and Australia. The main producers of low-grade (LG) ores
are located in Ukraine, China, Ghana, Kazakhstan, India and Mexico. CVRD is one of the world’s
largest suppliers of
manganese ores, with HG ores in our Azul and Urucum mines, and LG ores in the smaller mines in
the states of Minas Gerais and Bahia. The ferroalloy market is characterized by a large number of
market players who compete primarily on the basis of price (which is a function of lower costs).
CVRD produces several types of ferroalloys, such as manganese ferro-silicon alloys (SiMnFe),
ferro-manganese high-carbon alloys (HCFeMn), ferro-manganese mediumcarbon alloys (MCFeMn) and cored
wire (special alloys). The principal competitive factors in this market are costs of manganese
ore, electricity, logistics and carbon. We compete both with standalone producers and integrated
producers that also mine their own ore. Our competitors are located principally in manganese ore
or steel producing countries.
We have a 25% interest in Henan Longyu Energy Resources Co., Ltd. (Longyu), a joint venture
with Yongcheng Coal & Energy Co, one of the largest coal producers in China, and Baosteel
International, the largest steel producer in China. Longyu is located in the Henan province, China.
We expect Longyu to produce around 4.5 million tons per year of coal when it is fully operational.
We invested US$86.4 million for a 25% equity participation in Longyu, and have the right to off
take 25% of coal produced by the joint venture. In January 2006, CVRD received its first trial
shipment of coal, approximately 40 thousand tons, from China to Brazil.
Our non-ferrous minerals business segment includes the production of non-ferrous minerals,
such as kaolin, potash and copper. The table below sets forth information regarding our
non-ferrous minerals gross revenues for the periods indicated.
The operations of CADAM are reflected in the above table as of September 2003, the date
on which we acquired and began consolidating its operations.
We conduct our kaolin business through CADAM S.A. (“CADAM”), which began operations in 1976,
and Pará Pigmentos S.A. (“PPSA”), which began operations in 1996. PPSA and CADAM are subsidiaries
of CAEMI. CAEMI holds 82.04% of PPSA total capital and 61.48% of CADAM total capital. These
companies produce kaolin for paper coating and conduct research and development in other uses for
kaolin products to create a more diversified portfolio.
Average recovery of Century product is 55% of the ore tons.
PPSA sold approximately 515 thousand tons of kaolin in 2005, generating revenues of US$68
million. PPSA’s open pit Rio Capim mine and beneficiation plant are located in Ipixuna, in the
state of Pará. These operations are linked to the land and port facilities in Barcarena, also in
the state of Pará, via an 180km pipeline. The beneficiated kaolin is pumped through a slurry
pipeline. In 2005, PPSA reached the production capacity of 600,000 tons per year, which enhances
the portfolio of products that may be offered to customers. In July 2004, PPSA signed a contract
with International Paper, the world’s largest paper producer, to supply 110,000 tons of kaolin per
year between 2005 and 2009. Sales under the contract started in July 2005. PPSA produces the
following products: Century, Century S, Paraprint, Paraplate and Paralux. They are sold mainly in
the European, Asian and North American markets.
CADAM sold approximately 703 thousand tons of kaolin in 2005, generating revenues of US$109
million. CADAM is located on the border of the states of Pará and Amapá, in the Amazon area in
Northern Brazil. CADAM’s reserves are principally concentrated in the open-pit Morro do Felipe
mine, in Mazagão, in the state of Amapá. The beneficiation plant and private port are situated on
the west bank of the Jari river, in Munguba, in the state of Pará.
We conduct our potash operations at the parent company level. We lease a potash mine
(Taquari-Vassouras mine) in Rosario do Catete, in the state of Sergipe, Brazil, from Petrobras –
Petróleo Brasileiro S.A. (Petrobras), a Brazilian state-owned oil company. The lease was signed
in 1991 for a period of 25 years, and is renewable for another 25 years. The mine is the only
potash mine in Brazil and has a current nominal capacity of 850,000 tons per year. Taquari –
Vassouras is an underground mine with a depth that varies from 430 to 640 meters. In 2005, we
produced 641 thousand tons of potash with total shipments of 640 thousand tons, and we had gross
revenues of US$149 million. All sales from Taquari – Vassouras mine are destined for the Brazilian
For the Year Ended
Proven and Probable Reserves
(in thousands of tons per year)
Taquari – Vassouras(1)
Expressed as dry in situ metric tons; equivalent to 5.9Mt of KCl. Average mining
extraction is 46% of the in situ ore, giving 8.8Mt of recoverable ore and 2.7Mt of
The mine began operations in 1986.
Sossego is our first copper mine and began commercial production of copper concentrate in June
2004. The Sossego copper mine is located in Carajás, in the state of Pará. We conduct our Sossego
operation at the parent company level. In 2005, we shipped 398 thousand tons of
and we had gross revenues of US$391 million.
The Sossego copper mine has two main ore bodies, Sossego and Sequeirinho. The copper ore is
mined by open pit method and the run-of-mine is processed by means of standard primary crushing and
conveying, SAG milling (a semi-autogenous mill which uses a large rotating drum filled with ore,
water and steel grinding balls which transforms the ore into a fine slurry), ball milling, copper
concentrate flotation, tailings disposal, concentrate thickening, filtration and load out.
Projected annual operating capacity is 15 million tons of run-of-mine, to produce an average of
140,000 tons of copper contained in concentrate (30% grade). The operation is still in the ramp-up
process, which will continue throughout 2006. The ramp-up phase has been longer than expected
because of operational challenges requiring equipment changes. The concentrate is trucked to a
storage terminal in Parauapebas and then transported via the Carajás railroad to the Ponta da
Madeira maritime terminal in São Luís, in the state of Maranhão.
Production of copper
concentrate for the
Year Ended (tons)
Proven and Probable Reserves
0.98% Cu and 0.271
We have constructed an 85-kilometer road to link Sossego to the Carajás air and rail
facilities and a power line that allows us to purchase electrical power at market rates. We have a
long-term energy supply contract with Eletronorte, which sells us energy from the Tucuruí
hydroelectric power plant located on the Tocantins river.
We have four copper projects: Salobo, Cristalino, Alemão and 118. Salobo, in which we own a
100% stake, has a feasibility study in progress, Cristalino, in which we own a 50% stake, has a
pre-feasibility study concluded and Alemão, in which we own a 67% stake, has a pre-feasibility
study in progress. BNDES is our partner in Cristalino and Alemão. In addition, we and BNDES are
prospecting the Carajás region for new copper exploration projects. See Item 4. Information on
the Company—Lines of Business—Mining—Mineral Risk Contract.
We are constructing a semi-industrial plant to process copper using the hydrometallurgical
route. The objective of this plant, which will have capacity to produce 10,000 tons of copper
cathodes per year, is to test a new technological route to produce the metal from copper sulphide
concentrates. We will use copper concentrate from the Sossego mine to feed the plant, which is
expected to start up by the second quarter of 2007 and be productive for two years. We estimate
that this period will be sufficient to prove the feasibility of industrial production through the
hydrometallurgical route, supporting the construction of a larger plant to process copper ore from
other deposits owned by CVRD, including the Salobo project. The capital expenditures estimated for
the construction of this semi-industrial plant amount to US$58 million.
In October 2005, our Board of Directors approved our investment in the 118 copper mining
project, located in the state of Pará, Brazil. In 2005, in compliance with the Mineral Risk
Contract we have with BNDES, we have entered into a specific agreement with BNDES, which
establishes that CVRD shall pay to BNDES a specified percentage of 118 net revenues that varies in
accordance with copper market prices. As an example, if the copper price on the London Metal
Exchange is US$1.00 per pound, we must pay 3.8% of 118 net revenues to BNDES. We currently
estimate that capital expenditures for the project will amount to approximately US$232 million and
have targeted startup for the first half of 2008. The estimated production capacity of the project
is 36,000 tons of copper cathode per year.
Mineral Prospecting and Development
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 Angola,
Argentina, Australia, Brazil, Chile, Gabon, Guinea, Mozambique, Mongolia, Peru and South Africa and
focus on copper, gold, nickel,
ore, kaolin, bauxite, coal, potash, phosphates, diamond
and platinum group metals.
Among the large variety of projects in which we are engaged in conceptual and feasibility
studies, the most important are the following:
copper exploration projects in Salobo, Cristalino and Alemão sites, located in the state of Pará, Brazil;
a phosphates exploration project in Bayóvar deposit located in the department of Piura, Peru;
a potash exploration project in the province of Neuquen, on the banks of Colorado river in Argentina;
coal exploration projects in the Moatize region, in the north of Mozambique (Moatize
Project), and in the state of Queensland, Australia (Belvedere Project); and
a bauxite exploration project in Pitinga region, in the state of Amazonas, Brazil.
Feasibility studies were concluded for the following projects, for which our Board of
Directors has already approved the investments:
Vermelho nickel project, located in the state of Pará, Brazil; and
118 copper project, also located in the state of Pará, Brazil.
For the Onça Puma nickel project, we are reviewing the feasibility study prepared by Canico
Resources Corp. before seeking Board of Directors approval for further investments.
The costs of exploration and feasibility studies are recorded as expenses until the economic
viability of mining activities is established (see Note 3 to our financial statements). The
capital expenditures budget for mineral exploration (included in the research and development
budget) for 2006 is US$491 million.
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 2.5 million identified hectares of land in the Carajás 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 ore deposits already identified and
subject to development were specifically excluded from the Mineral Risk Contract.
Pursuant to the Mineral Risk Contract, we and BNDES each agreed to provide US$205 million,
which represents half of the US$410 million in expenditures estimated as necessary to complete
geological exploration and mineral resource development projects in the region. In April 2004, the
Mineral Risk Contract was renewed for an additional period of five years or until the total value
of US$410 million is spent (including disbursements already made, which amounted to US$392.8
million as of December 31, 2005), whichever occurs first.
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 March 31, 2006, the remaining contributions towards
exploration and development activities totaled US$5 million. The contract provides that each party
may choose not to contribute and have its financial interest proportionally diluted. If a party’s
participation in the Mineral Risk Contract is diluted to an amount lower than 40% of the amount
invested in connection with exploration and development projects, then it provides that the diluted
party will lose all the rights and benefits provided for in the Mineral Risk Contract and any
amounts 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 Carajás 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 in the Serra Leste region, state of Pará, for which the finder’s fee is
equal to 6.5% of revenues.
The table below sets forth information regarding our consolidated bauxite, alumina and
aluminum gross revenues for the periods indicated. These figures do not include the revenues of
our unconsolidated joint ventures.
MRN. MRN, the largest bauxite operation in the world, produces bauxite for sale to our joint
venture partners and us. Excess production may be sold to customers. MRN operates three open-pit
bauxite mines, which produce high quality bauxite. In addition, MRN controls substantial
additional high quality bauxite resources that it believes can be produced economically in the
future. MRN had gross revenues of US$432 million and net income of US$160 million in 2005. MRN’s
mines are located in the northern region of the state of Pará.
The table below sets forth information regarding MRN’s bauxite reserves as of December 31,2005.
Proven and Probable Reserves(1)
(millions of tons)
Mineração Rio do Norte S.A.
CVRD’s ownership of MRN’s bauxite reserves is 40%.
Expressed as available Al203.
Expressed as dry product metric tons. Recovery of dry product from dry ROM bauxite
ranges from 69 to 82%, depending on the deposit, with a weighted average of 74%.
Operations at MRN’s mines commenced in 1979. For 2003, 2004 and 2005 production equaled
14.4, 16.7, and 17.2 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 60,000 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
completed the expansion of its capacity from 11.0 million tons to 16.3 million tons in 2003.
Our MRN bauxite joint venture produces bauxite for sale on a take-or-pay basis to us and our
joint venture partners at a price that is determined by a formula linked to the price of aluminum
for three-month contracts in the London Metal Exchange and to the price of alumina exported from
Australia. Our Alunorte alumina subsidiary, which we began consolidating in July 2002, purchases
all of its bauxite requirements from MRN.
Paragominas project. We hold active mining rights in the Paragominas region in the state of
Pará, where a new wholly-owned bauxite mine is expected to begin commercial production in the first
half of 2007 to supply Alunorte’s new expansion with 5.4 million tons per year of wet 12% moisture
bauxite. The bauxite quality will be similar to MRN’s, and the project will use the strip mining
method of extraction, and have a beneficiation plant including milling and a 244-kilometer long
slurry pipeline. We expect that total capital expenditures on this project will be approximately
US$352 million. Additionally, our Board of Directors has approved a further expansion at
Paragominas, which will require an additional investment of approximately US$196 million to produce
an additional 4.5 million tons. After the conclusion of these two stages of expansion, we expect
the Paragominas mine to achieve a nominal production capacity of 9.9 million tons by 2008.
The table below sets forth information regarding the Paragominas bauxite reserves as of
December 31, 2005.
Proven and Probable Reserves (1)
(millions of tons)
Expressed as dry product metric tons. Planned product recovery is an average of 70% of the
dry ROM tons.
Alunorte began operations in July 1995 and produces alumina by refining bauxite that MRN
supplies. The Alunorte plant concluded its first expansion of capacity (stage 3) in 2003 and its
second expansion (stages 4 and 5) in the first quarter of 2006, reaching a nominal production
capacity of 4.4 million tons of alumina per year and becoming the largest alumina refinery in the
world. In 2005, Alunorte produced 2.6 million tons. Alunorte sells alumina to Albras, Valesul and
unaffiliated customers. The Alunorte plant is located in the city of Barcarena, in the state of
Pará, next to Albras’ aluminum production facilities. This allows Alunorte and its principal
customer, Albras, to share infrastructure and other resources. Alunorte had gross revenues of
US$625 million and net income of US$121 million in 2005. This refinery has one of the lowest
conversion costs in the world (US$79.16 per ton in 2005).
Each Alunorte partner must purchase on a take-or-pay basis all alumina produced by Alunorte in
proportion to its respective interest. The partners each pay the same price, which is determined
by a formula based on the price of aluminum for three-month contracts on the London Metal Exchange.
The table below sets forth information regarding Alunorte’s alumina production for the periods
We are currently investing in a further expansion through the construction of stages 6
and 7, which will require investments of US$846 million and add 1.8 million tons per year of
capacity to the plant. Alunorte’s capacity is expected to reach 6.3 million tons per year by 2008.
Albras and Valesul each produce aluminum using alumina provided by Alunorte. Alunorte
supplied all of Albras’ alumina requirements and 54.5% of Valesul’s alumina requirements in 2005.
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 the Americas, with a
nominal capacity of 445,000 tons per year. Albras started its operations in 1985 at a plant
located in Barcarena, in the state of Pará. Albras had gross revenues of US$808 million and net
income of US$101 million in 2005.
The Albras partners must purchase on a take-or-pay basis all aluminum produced by Albras in
proportion to their ownership interests. We generally market our aluminum in the global markets to
clients in the aluminum industry.
The table below sets forth information regarding Albras’ recent aluminum production.
Albras purchases electrical power from Eletronorte, a state-owned electric power utility.
Eletronorte generates electricity at the Tucuruí hydroelectric power plant located on the
Tocantins river. This plant is the sole source of electrical power in the region in
required for Albras’ operations. Albras consumes approximately one-quarter of the non-peak period
output of the Tucuruí plant.
In May 2004, Albras successfully executed an auction to purchase electricity for a 20-year
period. This agreement became effective beginning June 2004. The basic purchase price is R$ 53.00
per MWh, indexed to the general market price index, IGP-M, as calculated by Fundação Getúlio
Vargas. In addition to the basic price, a premium is paid that is linked to the amount by which
the price of primary aluminum exceeds US$1,450.00 per ton, as registered at the London Metal
Exchange (LME). See Item 4. Information on the Company—Regulatory Matters—Energy.
Valesul. Valesul started its operations in 1982 and operates a plant located in the state of
Rio de Janeiro with a nominal capacity of 95,000 tons per year. Valesul produces primary aluminum
and aluminum alloys in the form of ingots and billets. Valesul’s aluminum products are sold
primarily in the Brazilian market on a spot basis. Valesul had gross revenues of US$229 million
and net income of less than US$1 million in 2005. Valesul sells directly to its own clients.
Valesul produced 92.6, 95.8 and 94.0 tons of aluminum and aluminum alloys and recycled 11.7, 14.4
and 16.7 tons of third-party aluminum scrap in 2005, 2004 and 2003, respectively.
Valesul currently obtains a portion of its electrical energy requirements from four wholly
owned small hydroelectric power plants located in the state of Minas Gerais, a portion from the
Machadinho hydroelectric power plant, in the state of Santa Catarina, in which Valesul has a share
of 7.28%, and the remainder from a third-party power company at market rates. Valesul is able to
supply 40% of its own energy requirements. Valesul is currently engaged in litigation regarding
the rates that Light – Serviços de Eletricidade S.A., or Light, the electricity utility company of
the state of Rio de Janeiro, charges Valesul for the transmission of electricity. See Item 8.
Financial Information—Legal Proceedings.
in Bauxite, Alumina and Aluminum
The global aluminum market is highly competitive. The largest producers are Alcoa, Rusal,
Alcan, Norsk Hydro, BHP Billiton and Chalco. The alumina and bauxite markets are also competitive,
but are much smaller, because many of the major aluminum-producing companies have integrated
bauxite, alumina and aluminum operations.
Bauxite. Most of global bauxite production is not traded, as it is dedicated to integrated
alumina refineries. Competition in the bauxite market is based primarily on two key factors:
quality of bauxite and reliability of supply. 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. We use a major part of our take of MRN’s bauxite
production to supply Alunorte.
Alumina. Competition in the alumina market is based primarily on quality, reliability of
supply and price, which is directly related to lower costs. We believe that Alunorte is
competitive in the alumina market because of the high quality of its alumina, its advantages in
scale and technology, low conversion cost, its efficient port facilities, and the ongoing
commitment of its shareholders to purchase a substantial portion of its annual production. We use
a substantial portion of our share of Alunorte’s alumina production to supply the Brazilian market
(Albras and Valesul), and sell the remainder to customers in other countries, such as Canada,
Argentina and Norway.
Aluminum. As primary aluminum is a commodity, competition in the aluminum market 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. We generally market aluminum
to customers in Asia and Europe.
Our logistics business comprises the transportation of customers’ products and passengers. We
conduct this business at the parent company level, by operating the Vitória a Minas and Carajás
railroads, the Tubarão port complex, the Inácio Barbosa maritime terminal and the Ponta da Madeira
maritime terminal, as well as through subsidiaries. Our subsidiaries include Cia. Portuária Baía
de Sepetiba, or CPBS, and Terminal de Vila Velha S.A., or TVV, which operate ports and terminals;
Navegação Vale do Rio Doce S.A. – Docenave, or Docenave, and DCNDB Overseas S.A., or DCNDB, which
conduct shipping activities; and Ferrovia Centro-Atlântica S.A., or FCA, which operates railroads.
The operations of CAEMI and FCA are reflected in the above table as of September
2003, the date on which we acquired and began consolidating their operations.
Vitória a Minas railroad. The Vitória a Minas railroad links our Southern System mines in the
Iron Quadrangle region in the state of Minas Gerais with the Tubarão Port, in Vitória, in the state
of Espírito Santo. We operate this 905-kilometer railroad under a 30-year renewable concession,
which expires in 2027. The Vitória a 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 Vitória a Minas railroad. The
Vitória a Minas has a daily capacity of 312,000 tons of iron ore. In 2005, the Vitória a Minas
railroad carried a total of 68.7 billion ntk of iron ore and other cargo (of which 18.3 billion
ntk, or 26.7%, consisted of cargo transported for customers, including iron ore for Brazilian
customers). The Vitória a Minas railroad also carried approximately 1.1 million passengers in
The principal cargo of the Vitória a Minas railroad consists of:
iron ore and pellets, carried for us and customers;
steel, coal, pig iron, limestone and other raw material carried for customers with steel
mills located along the railroad;
agricultural products, such as soybean, soybean meal and fertilizers; and
other general cargo, such as building materials, pulp, fuel and chemical products.
We charge market rates (which are limited by the tariffs fixed by ANTT) for customer freight,
including pellets 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.
Carajás railroad. We operate the Carajás railroad under a 30-year renewable concession, which
expires in 2027. This railroad, located in the Northern System, starts at our Carajás iron ore
mine in the state of Pará, and extends 892 kilometers to our Ponta da Madeira Maritime terminal
complex facilities located near the São Luís Port in the state of Maranhão. The Carajás railroad
consists of one line of track, with spur tracks and turnouts to permit the passage of trains in
opposite directions. The Carajás railroad has a daily capacity of 200,000 tons of iron ore. In
2005, the Carajás railroad carried a total of 69.5 billion ntk of iron ore and other cargo (of
which 5.0 billion ntk, or 7.2%, consisted of cargo transported for customers, including iron ore
for Brazilian customers). The Carajás railroad also carried approximately 369 thousand passengers
in 2005. The main cargo of the Carajás railroad consists of iron ore, principally carried for us.
In the third quarter of 2006, we also intend to begin operations of the largest capacity train in
Latin America. This train, which will have 312 cars, measures 3.2 kilometers long and weighs 319
gross tons, will help us meet the growing demand for sources of the Carajás railroad.
Ferrovia Centro-Atlântica. Our subsidiary FCA 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, Espírito Santo, Minas Gerais, Rio de Janeiro and Goiás and Brasília, the
Federal District, Brazil. It connects with our Vitória a Minas railroad near the cities of Belo
Horizonte, in the state of Minas Gerais and Vitória, in the state of Espírito Santo. FCA operates
on the same track gauge as our Vitória a Minas railroad. The section of the network of
Ferroban-Ferrovias Bandeirantes S.A. (Ferroban) between Araguari and Vale Fértil rail station, near
the city of Uberaba, in the state of Minas Gerais, has been operated by FCA since 1998 and in
January 2002, FCA began operating the section between Vale Fértil in the state of Minas Gerais and
Boa Vista Nova in the state of São Paulo, Brazil. This connection allows FCA to reach the Santos
Port, in the state of São Paulo. In November 2005, FCA consolidated a portion of Ferroban’s
spun-off assets related to the operation of the section between Araguari, in the state of Minas
Gerais, and Boa Vista Nova, in the state of São Paulo. As a result of this consolidation, FCA
directly holds the railroad concession related to this section and no longer holds a stake in
Ferroban’s capital. In 2005, the FCA railroad transported a total of 10.7 billion ntk of cargo for
MRS. We own, directly and indirectly, 37.2% of the voting capital and 40.5% of the total
capital in MRS. MRS is a 1,674-kilometer railroad, which links the states of Rio de Janeiro, São
Paulo and Minas Gerais and transported 107 million tons in 2005. MRS operates under a 30-year
renewable concession granted in 1996. As a result of our acquisitions of CAEMI and Ferteco, our
current participation in the voting capital of MRS is higher than the limit of 20%, imposed at the
time of the bid for the MRS railroad concession. CADE has approved these acquisitions, subject to
certain conditions, including restructuring of our equity stake in MRS. We are currently
contesting certain procedural defects in the CADE decision. See Item 3. Risk Factors–Risks Related
to Our Business – We are involved in ongoing antitrust proceedings that could result in
divestitures, fines or other restrictions that could harm our business and Item 8. Financial
Information—Legal Proceedings. On April 13, 2006, ANTT published a resolution requiring us to (i)
sell those common shares we hold in MRS as a result of our acquisition and consolidation of Ferteco
which are covered by the MRS Shareholders Agreement; or (ii) (a) cause the shareholders of MRS to
approve certain changes in the capital structure of MRS, or (b) waive our voting and veto rights
specifically in connection with the MRS shares we hold as a result of our acquisition and
consolidation of Ferteco. The ANTT resolution also recommends that we comply with the CADE
decision requirement that we unify our MRS shareholding in a single block. On May 10, 2006, we
informed the ANTT of our decision to waive our voting and veto rights in connection with the MRS
shares mentioned above, which represent 10.9% of the total capital stock and 19.3% of voting
capital stock of MRS. See Item 4. Information on the Company – Regulatory Matters – Railroads.
Ports and Terminals
We operate ports and terminals principally as a means to complete the distribution of our iron
ore and pellets to seaborne vessels serving the export seaborne market. See Item 4. Information
on the Company—Lines of Business—Mining—Ferrous Minerals—Pellets—Distribution (Iron Ore and
Pellets). We also use our ports and terminals to handle third-party cargo. In 2005, 19% of the cargo handled by our ports and
terminals represented cargo handled for third parties.
Tubarão Port. The Tubarão Port, which covers an area of approximately 18 square kilometers,
is located near the Vitória Port in the state of Espírito Santo. The iron ore maritime terminal
located in this area has two piers. Pier I can accommodate two vessels at a time, one of up to
170,000 DWT on the southern side and one of up to 200,000 DWT on the northern side. Pier II can
accommodate one vessel of up to 360,000 DWT at a time, limited at 20 meters draft plus tide. In
Pier I there are two ship loaders, which can load up to a combined total of 14,000 tons per hour.
In Pier II there are two ship loaders that work alternately and can each load up to 16,000 tons per
hour. In 2005, 84.1 million tons of iron ore and pellets were shipped through the terminal for us.
Praia Mole Terminal, also located in the Tubarão Port, is principally a coal terminal and handled
11.3 million tons in 2005. We operate a grain terminal called Terminal de Produtos Diversos, in
the Tubarão area, which handled 5.5 million tons of grains and fertilizers in 2005. We also
operate a bulk liquid terminal that handled 1.1 million tons in 2005.
Vitória Port. Until September 2006, CVRD is authorized to operate the Paul Terminal, which
specializes in pig iron handling and is located near the Vitória Port, in the state of Espírito
Santo. This terminal has one pier that can accommodate one vessel of up to 75,000 DWT, which can
load up to 900 tons per hour. The Paul Terminal handled 2.2 million tons of pig iron in 2005.
Ponta da Madeira maritime terminal. The Ponta da Madeira maritime terminal is located near
the Itaqui Port in the state of Maranhão. The terminal facilities can accommodate three 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. In February 2004, Pier III began operations. Pier III has two
berths, can accommodate vessels of up to 220,000 DWT and has a maximum loading rate of 8,000 tons
per hour in each berth.
Cargo shipped through our Ponta da Madeira maritime terminal consists principally of our own
iron ore production. Other cargo includes manganese ore and copper concentrate produced by us and
pig iron and soybeans for third parties. In 2005, 70.1 million tons were handled through the
terminal for us and 4.3 million tons for customers.
Inácio Barbosa maritime terminal (TMIB). Since November 1994, CVRD has operated the Inácio
Barbosa maritime terminal located in the state of Sergipe. This terminal was built by Petrobras –
Petróleo Brasileiro S.A. and transferred to Sergiportos, a state-owned company. In December 2002,
Petrobras took over control of Inácio Barbosa maritime terminal in exchange for the cancellation of
a liability of the state of Sergipe. CVRD and Petrobras entered into an agreement in December
2002, which allows CVRD to run this terminal for a period of ten years ending in December 2012. In
2005, 954 thousand tons of fuel and agricultural and steel products were shipped through Inácio
Barbosa maritime terminal.
Terminal de Vila Velha S.A. (TVV). In May 1998, we entered into a 25-year lease for the
Capuaba maritime terminal in Vitória, in the state of Espírito Santo. To run this terminal CVRD
established Terminal de Vila Velha S.A. (TVV). TVV is a terminal for loading and unloading of
containers, in addition to being an alternative for general cargo and automobile operations in
Southeast and Midwest Brazil. It is connected to the Vitória a Minas railroad and with easy access
to the BR101 and BR262 highways. The terminal is formed by berths 203 and 204 at the Capuaba Quay
and has a 450-meter berth area and retro-area measuring nearly 100 thousand square meters. It has
a covered storage area measuring 13,300 square meters and a yard with capacity for 3,300
containers. TVV is equipped with two quays cranes, two portainers and four transtainers. In 2005,
165.6 thousand containers and 54 thousand tons of general cargo were shipped through TVV.
Cia. Portuária Baía de Sepetiba (CPBS) – Itaguaí maritime terminal, CPBS is a wholly-owned
subsidiary that operates the Itaguaí terminal, in the Sepetiba Port, in the state of Rio de
Janeiro. Itaguaí’s maritime terminal has a pier that allows the loading of ships of up to 18.1
meters and up to 230,000 DWT. In 2005, the terminal uploaded approximately 21 million tons of iron
Guaíba Island maritime terminal. MBR has its own maritime terminal on Guaiba Island, also in
the Sepetiba Port. The iron ore terminal has a pier that allows the loading of ships of up to
300,000 DWT. In 2005, the terminal uploaded approximately 39 million tons of iron ore.
We operate in three distinct shipping areas: seaborne dry bulk transportation services,
coastal shipping liner service and tug boat services.
In seaborne dry bulk transportation service, we carried 4.325 million tons of dry bulk,
generating gross revenues of US$30 million in 2005. The table below sets forth information on the
volume of cargo that our seaborne dry bulk shipping service carried for the periods indicated.
For the transportation of the cargo shown above for 2005, we operated a fleet of bulk
vessels, which is comprised of three capesize vessels owned by us and a few other capesize and
panamax vessels chartered on a spot basis. Our own capesize vessels have been trading worldwide
carrying primarily iron ore. The chartered vessels (two capesize and eight panamax) have been
contracted for the transportation of iron ore from Ponta da Madeira maritime terminal, in the state
of Maranhão, to Praia Mole Terminal, in the Tubarão Port, in the state of Espírito Santo. We
intend to sell our remaining three capesize vessels by the end of 2006.
The coastal shipping liner service is operated by five vessels, chartered on a bare boat
basis, which cover the South American east coast from Buenos Aires, in Argentina to Fortaleza, in
the state of Ceará, in the northeast of Brazil, providing weekly service. This service generated
gross revenues of US$75 million with 93,813 twenty equivalent units (teus) transported in 2005.
We also operate a fleet of sixteen tug boats (seven owned and nine chartered) in the ports of
Vitória in the state of Espírito Santo, Trombetas in the state of Pará, São Luís in the state of
Maranhão and Aracaju in the state of Sergipe. These services generated gross revenues of US$26
million in 2005.
Competition in the logistics industry. Our railroads compete with road transport, including
trucks, with the main factors being cost, safety and shipping time. We also have many competitors
in the coastal shipping liner service.
Investments in Steelmaking
We have investments in the following joint ventures in the steel business, as of April 30,2006:
Our Direct or Indirect
Share of Capital
(in millions of US$)
CSI (California, United States)
heavy steel plates;
The market value of our investments in Usiminas and Siderar, both of which are publicly
traded companies, was US$566 million and US$142 million, respectively, at December 31, 2005. The
aggregate net book value of these investments was US$423 million at December 31, 2005. The
aggregate net book value of our total investments in steel producing companies (including CSI, a
privately held company) was US$584 million at December 31, 2005. We earned US$90 million in
dividends from these investments in 2005.
Since the third quarter of 2005, Nucor Corporation and we have jointly operated an
environmentally friendly pig iron project in Northern Brazil. The project utilizes two
conventional mini-blast furnaces to produce approximately 380,000 metric tons of pig iron per year,
using iron ore from our Carajás mines in Northern Brazil. The charcoal source is exclusively from
eucalyptus trees grown in a cultivated forest of 82,000 acres with the total project encompassing
approximately 200,000 acres. We and Nucor own a joint venture company, Ferro Gusa Carajás S.A., to
operate the facility. We have a 50% take of Ferro Gusa Carajás S.A. output. Approximately 78% and
22% of the voting shares are held by CVRD and Nucor, respectively.
In 2005, we consumed 16.9 TWh of electricity. Energy management and efficient supply have
become priorities for us, driven by the uncertainties associated with changes in the regulatory
framework, which increased the risk of rising electricity prices and electrical energy shortages,
such as the one Brazil experienced in the second half of 2001. We perceived favorable investment
opportunities in the Brazilian electricity sector and took advantage of them by investing in the
eight hydroelectric power generation projects set forth in the table below. We plan to use the
electricity produced by these projects for our internal needs. We may experience construction
delays in certain generation projects due to environmental and regulatory issues, which may lead to
higher costs. Analysis of each project’s feasibility and investments will depend on the new laws
and regulations applicable to the electricity sector, which are currently under review by the
Brazilian Federal government, and their impact on electricity prices and supply. As a large
consumer of electricity, we expect that investing in power projects will help to reduce costs and
protect us against energy price volatility.
We currently have six hydroelectric power plants under operation and two under construction.
Our total projected investment in these hydroelectric projects is
estimated at approximately US$880 million. We cannot assure you that the aggregate cost will not escalate or that the projects will
be completed on schedule. We also hold 43.85% of a consortium that has the concession right to
build the Santa Isabel hydroelectric power plant at the Araguaia river, Brazil. In 2005, we
continued our efforts to return the concessions for the Santa Isabel hydroelectric project to ANEEL
due to difficulties in obtaining the necessary environmental license to begin its construction. In addition, some of our affiliates generate part of their own electric energy. The following
table sets forth information regarding our power generation projects as of April 30, 2006:
(in millions of US$)
Rio Doce basin, in
the state of Minas
Rio Doce basin, in
the state of Minas
Capim Branco I (3)
Araguari river, in
the state of Minas
Capim Branco II (3)
Araguari river, in
the state of Minas
Tocantins river, on
the border of the
states of Maranhão
Rio Grande river,
in the state of
Rio Grande, on the
border of the
states of São Paulo
and Minas Gerais.
river, in the state
of Minas Gerais.
In February 2006, we sold to Furnas Centrais Elétricas for approximately R$10 million
our 40% stake in the consortium to build and operate the Foz do Chapecó hydroelectric power
plant. The closing of this transaction is subject to certain conditions precedent,
including ANEEL’s approval of the transfer of control.
Projected date for commencement of the first unit of the project.
Capim Branco I and Capim Branco II are two different plants operated by the same
In July 2005, Aimorés began operations with the start up of three turbines. It has an
installed capacity of 330 MW and generation capacity of 172 average MW, equivalent to 1,560,720 MWh
The Capim Branco I project obtained its operational license during December 2005, which
allowed for the filling of the reservoir. This milestone allowed the project to begin commercial
operations in February of 2006.
Under the Brazilian Constitution, all mineral resources in Brazil belong to the Brazilian
government. The Brazilian Constitution requires that mining companies incorporate in accordance
with Brazilian law.
The Brazilian Constitution and Mining Code impose on mining companies various regulatory
restrictions relating to, among other things:
the manner in which mineral deposits are exploited,
the health and safety of workers,
the protection and restoration of the environment,
the prevention of pollution, and
the promotion of local communities where mines are located.
Mining companies in Brazil can only prospect and mine for mineral resources pursuant to
prospecting authorizations or mining concessions granted by the National Mineral Production
Department, Departamento Nacional de Produção 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.
Pursuant to Article 20 of the Brazilian Constitution of 1988, as implemented by Law No.
8,001/1990, the Brazilian government charges us a royalty, known as Compensação Financeira pela
Exploração de Recursos Minerais (CFEM), on the revenues from the sale of minerals we extract, net
of taxes, insurance costs and costs of transportation. The annual rates we pay on our products
bauxite, potash and manganese ore, 3%;
iron ore, kaolin, copper, nickel and fertilizers, 2%; and
The Mining Code and ancillary mining laws and regulations also impose other financial
obligations. For example, mining companies must compensate landowners for the damages and loss of
income caused by the use and occupation of the land (either for exploitation or exploration) and
must also share with the landowners the results of the exploration based on 50% of the CFEM.
Mining companies must also compensate the government for damages caused to public lands. 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.
We are currently engaged in a series of administrative and other legal proceedings alleging
that we have failed to collect the proper amount of CFEM. In addition, we are discussing with DNPM
what is the CFEM rate applicable to potash. Because potash is used as a fertilizer, we believe the
applicable rate is the 2% rate that applies to fertilizers, but DNPM has asserted that CFEM should
be levied on all potash products, regardless of how they are used, at the higher rate of 3% that
generally applies to potash products. See Item 8. Financial Information—Legal Proceedings.
The Brazilian government, acting through the Ministry of Transportation and the ANTT,
regulates and supervises the policies for the railroad transportation sector. The Federal
government may grant private companies concessions for the construction, operation or commercial
exploration of railroads. Railroad concession contracts granted by the Federal government impose certain shareholder ownership limitations. For FCA,
the concession contract provides that each shareholder can only own up to 20% of the voting capital
of the concessionaire, unless otherwise permitted by ANTT. The 20% ownership limitation does not
apply to our Vitória a Minas and Carajás railroads. We are in compliance with the requirements
imposed by the concession contracts for our FCA railroad operations, for which we have received an
authorization from the ANTT for our current 99.99% ownership stake.
The MRS concession contract also provides that each shareholder can only own up to 20% of the
voting capital of the concessionaire, unless otherwise permitted by ANTT. However, as a
consequence of our acquisitions of CAEMI and Ferteco in 2003, we increased our stake in MRS to
37.2% of the voting capital and 40.5% of the total capital. On April 13, 2006, ANTT published a
resolution requiring us to (i) sell those common shares we hold in MRS as a result of our
acquisition and consolidation of Ferteco which are covered by the MRS Shareholders Agreement; or
(ii) (a) cause the shareholders of MRS to approve certain changes in the capital structure of MRS,
or (b) waive our voting and veto rights specifically in connection with the MRS shares we hold as a
result of our acquisition and consolidation of Ferteco. The ANTT resolution also recommends that
we comply with the CADE decision requirement that we unify our MRS shareholding in a single block.
On May 10, 2006, we informed the ANTT of our decision to waive our voting and veto rights in
connection with the MRS shares mentioned above, which represent 10.9% of the total capital stock
and 19.3% of voting capital stock of MRS. See Item 4. Information on the Company—Lines of
Business—Logistics and Item 8. Financial Information—Legal Proceedings.
The ANTT also sets different tariff limits for railroad services for each of the
concessionaires and each of the different products transported. So long as these limits are
respected, the actual prices charged can be negotiated directly with the users of such services.
The power industry in Brazil is regulated by the Brazilian government, acting through the
Ministry of Mines and Energy and ANEEL. The role of ANEEL is to implement and enforce policies and
regulations designated by the Ministry of Mines and Energy and aimed at organizing and regulating
the electricity sector and power companies. ANEEL should ensure consumers an efficient and
economical energy supply through regulation enforcement and the monitoring of prices and the
operational efficiency of power companies.
Under the law governing the electricity sector, concessions grant exclusive rights to generate
and transmit or to distribute electricity in a particular area for a period of time that should be
sufficient for the concessionaire to recover its investment. The concessions for power generation
are granted for up to 35 years and may be renewed at the Federal government’s discretion for an
additional period of up to 35 years. Concessionaires (distributors) are required to supply
electricity for public services, on a continuing basis, in sufficient quantity and within approved
standards of quality, provided.
Given the hydrologic and integrated nature of the Brazilian electricity generation matrix,
Decree No. 2655/1998 created the Mecanismo de Realocação de Energia (Energy Reallocation
Mechanism), known as MRE, as a mechanism for sharing hydrological risk, and consequently reducing
generation volatility among all generators. In order to implement the MRE, 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 allowed to enter into contracts to sell up to 100% of its Assured
Energy. To the extent a generator has signed contracts for the sale of its Assured Energy, and as
long as MRE members as a whole are able to meet MRE Assured Energy levels, it receives payments
based on these contractual terms, regardless of its level of actual generation. If all MRE members
meet their contracted energy and there is a surplus of energy remaining, the net regional surplus
generation is allocated among generators in different regions and this energy surplus may be sold
in the wholesale market.
All contracts for wholesale energy purchases and sales are currently recorded in the wholesale
market, Câmara de Comercialização de Energia Elétrica, or CCEE. The CCEE is a nonprofit private
entity subject to the authorization, regulation and supervision of ANEEL, and is responsible for
operating the wholesale energy market and for ensuring that energy transactions in the short-term
market are settled and cleared in an efficient manner. The CCEE is primarily designed to effect
the settlement of differences between the amount of energy contracted under bilateral contracts of
the several market agents (generators, distributors, traders and large consumers), and the amount of energy actually consumed and produced. The settlement is done in accordance with
the CCEE spot prices, which are expressed in R$/MWh and are calculated for each settlement period
for each sub-market.
In March 2004, the Brazilian government approved Law No. 10,848/2004, for the electricity
sector. Although the full regulations under the law have not yet been enacted and some conditions
are regulated in Decree No. 5163/2004, this law created an even tighter regulated sector,
especially in the generation segment. The new law transfers jurisdiction of some regulatory areas
from ANEEL to the Ministry of Mines and Energy. Under this new law, all consumers of electricity,
including large consumers, such as CVRD, must contract the totality of their energy needs through
contracts and penalties may apply for errors above 5% of consumed energy. This law created two
parallel markets for energy: a regulated market, in which a distributor will enter into contracts
to supply its regulated customers, subject to regulated prices, and an unregulated market, in which
a consumidor livre, or free consumer, will enter contracts with independent power producers at
prevailing market prices. Regulated consumers may migrate to the unregulated market. However,
consumers must wait until the termination of their long-term contracts.
The energy trading commission, CCEE, created by the new law to replace the Mercado Atacadista
de Energia, or MAE, will be responsible for settling all energy transactions between distributors,
consumers, traders and generators. Apart from the replacement of the MAE by CCEE as the wholesale
energy market, we do not expect significant changes in the settlement procedures for short-term
transactions. Other factors which have not yet been determined include sectorial contributions,
including the regulated prices that ANEEL will charge self-generators for the use of transmission
lines, and the way in which energy projects will be auctioned.
In 2005, the new regulatory framework was consolidated, with the regulation of issues
particularly relevant for CVRD, including Resolution No. 166, which exempts self-producers such as
CVRD from certain regulatory fees levied on the energy used by the producers themselves, and Decree
No. 5,597, which allows industrial units to opt between accessing the transmission systems directly
or indirectly through a distributor. Decree No. 5,597 is particularly important for our
operations, because it allows us to more efficiently access our energy supply, incurring lower
costs and obtaining higher quality.
Other important milestones were reached in 2005, such as the power purchase auctions for
distribution companies and the competitive auctions for new generation licenses. The auction for
new generation licenses should help ensure supply for the next few years but there is still
uncertainty regarding the reliability of supply beyond 2010.
Because the regulation for the sector is relatively recent and not yet fully implemented, we
cannot be certain of the material impact that this new law could have on our energy business.
Changes in the regulatory environment could adversely impact our energy investments. Valesul is
currently engaged in litigation regarding the rates that Light charges Valesul for the transmission
of electricity. See Item 8. Financial Information—Legal Proceedings.
Federal, state and municipal legislation contain provisions for the control and protection of
the environment in Brazil. These laws govern 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, and the control
of water resources under the National Hydrological Resources Policy, which establishes hydrologic
use rights and the fees applicable to that use. It is possible that environmental regulations will
become stricter in the future. Any strengthening of these laws may lead to greater costs for
In order to conduct our mining, energy generation and industrial activities, we must prepare
environmental impact assessments and submit them to authorities that oversee the granting of
environmental permits. We seek to comply with all legal requirements and to achieve good
relationships with interested parties, especially communities located near our operations. Our
environmental management system is designed to provide a systematic approach to environmental
Under Brazilian Federal Law No. 9,605/1998, non-compliance with environmental laws and
regulations can result in criminal penalties, such as imprisonment and other restrictions 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 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,
develop, expand and operate facilities that use natural resources or may pollute the environment.
We seek to obtain the legally required licenses for each of our facilities and activities. In some
cases, this process requires a significant amount of time for the preparation of comprehensive
environmental reports and their evaluation, as well as for the establishment of appropriate
programs for environmental education of communities residing in areas affected by the proposed
projects. We have entered into agreements with the appropriate federal and state governmental
environmental authorities with respect to facilities where environmental non-compliance has been
detected in order to make these facilities compliant.
Environmental Compensation. Environmental Law No. 9,985/2000 requires us to pay
“environmental compensation” to state and federal authorities, in order to create and maintain
protected sites, in the amount of at least 0.5% of the total investment of each venture with a
material environmental impact. There are a number of uncertainties regarding the scope and
application of this law, including what rate will be applied by the federal or state governments’
environmental agencies, how such a rate will be applied and under what basis an investment will be
Legal Reserve. Under the Brazilian Forest Code, as amended, the exploration of economic
activities in the Amazon basin can only reach 20% of a project’s land. We have a number of
projects in the Amazônia Legal region (comprised by the states of Acre, Amazonas, Amapá, Pará,
Rondônia, Roraima and Tocantins, as well as part of the states of Mato Grosso and Maranhão), such
as the mining sites of CVRD, MRN, PPSA and CADAM. We are currently below the exploitation
threshold in all of these projects. However, some of our mines may approach this threshold as we
expand our operations. There are a number of uncertainties regarding the scope and application of
the Brazilian Forest Code, as amended, in particular where a company has pre-existing operations,
as is the case with our current mining operations.
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 environment-related investments in our facilities and in employee
training programs (approximately US$44.5 million in 2005). We are also investing to develop
environmental projects directed at the communities located near our facilities (approximately US$9
million in 2005).
Water Use. We are intensive water users in eleven states with hydrological resources that
vary from very high water availability in the Amazon region to the scarcity in the northeast of
Brazil. The Hydrological Resources Management System that is being implemented throughout CVRD
includes evaluation of the availability of water in the areas where we operate and programs to
rationalize and control water use. We continually monitor new water
legislation and regulations and take particular interest in requirements adopted under the
National Policy of Hydrological Resources, established by Law No. 9,433/1997, which defines the
conditions for obtaining water use grants and for effluents disposal. CVRD also participates in
the National Council of Hydrological Resources and the Local River Basin Committees, which provides
the strategic approach and taxation criteria for each basin. Water use taxation has been discussed
since 2002. Valesul, which is located in the Paraíba river basin, in the state of Rio de Janeiro
is the first of our affiliates to be requested to pay a fee for water use and began paying nominal
fees in 2004. No decision has yet been made in any other region where CVRD operates.
ISO Certifications. Our environmental management system is based on International
Organization for Standardization (ISO) standard 14001. We have obtained 20 certificates covering
iron ore and manganese ore production, pelletizing and ferroalloys plants, port operations, our
research center, operations of the aluminum production cycle (alumina and aluminum) and kaolin
production facilities. Samarco and MRN are also certified under this standard.
Environmental Control Systems: As a mining company, air emissions control is one of our main
objectives, including in our pelletizing plants. Control equipment and systems, such as stockpiles
and road water aspersion and use of chemical dust suppressants or installation of filters and
electrostatic precipitators at our facilities are complemented by comprehensive monitoring systems
and control software. Besides achievement of legal compliance, air quality in the installations and its effects in the neighboring communities
are continuously evaluated and we make necessary investments for air quality improvement.
With respect to improvements in water quality, we strive to treat and control the pollutants
disposed into the sea and local rivers or other water sources and also use extensive water
recycling in our operations. We are researching new processes and technologies for the improvement
of water use and recycling and treatment.
Through our comprehensive waste management system, we aim to achieve greater control of the
generation and disposal of our waste, to develop opportunities to reuse, recycle and to reduce
In 2003, our mine decommissioning manual was developed, which described a complete set of
directives, including technical practices and procedures to be followed during mine closures. The
manual outlines procedures for the rehabilitation and monitoring of degraded areas, the main steps
and sequence to be followed during closure, and any liabilities that may result after mine closure.
The manual also provides standardized basic criteria and procedures, based on the directives of
the CVM and the SEC (FAS 143), for cost evaluation, the establishment of current budgets, future
decommissioning and reclamation (see Note 4 to our consolidated financial statements).
Our environmental program also includes reforestation projects, which are intended to protect
the soil against erosion and to create buffers between our activities and communities in the
surrounding areas. We partner with universities and governmental research entities to conduct
extensive research to develop procedures for reforestation, soil protection using native species of
the managed regions and for the improvement of the growth and growth rate of seedlings.
Comprehensive fauna and flora investigations are performed as an ongoing activity, mainly in the
Carajás region, to comprehend and avoid the environmental risks involved in investing in
potentially sensitive areas.
We also participate in the maintenance and preservation of approximately 1.3 million hectares
of Brazilian forests, including the National Carajás Forest in the Amazon, and we own and preserve
the Vale do Rio Doce Natural Reserve, one of the remaining areas of the Atlantic Forest in the
state of Espírito Santo. In 2005, US$1.4 million was spent on this activity.
In the last twenty years we have provided support to the indigenous communities in the areas
of education, health, infrastructure development and technical assistance with the aim of enhancing
life quality and self-sustainability of these communities. Expenditures on these programs amounted
to US$7.4 million in 2005.
In the first quarter of 2006, protesters blocked the Carajás railroad on three occasions.
These blockages had a negative impact on our iron ore shipments, causing a reduction of
approximately one million tons. We immediately took all legal measures required to remove the
protestors. Although we will defend ourselves vigorously against such actions, and will continue
to provide support to the communities that live in the vicinity of the Carajás railroad, future
efforts by protestors to disrupt our logistic operations could have a negative impact on our
activities. See Item3. Risk Factors–Risks Related to Our Business – Actions by protestors, including from
indigenous communities that live
The table below sets forth our historical capital expenditures by business area for the
periods indicated. See Item 5. Overview—Key Factors Affecting Revenues and Results of
Operations—Divestitures and Asset Sales, for a description of our divestitures.
2005 Capital Expenditures and Budgeted Capital Expenditures for 2006
The information above on capital expenditures is based on average monthly exchange rates. The
consolidated statement of cash flows presents information on additions to investments, additions to
property, plant and equipment and acquisitions recognized on an accrual basis. The value of
acquisitions still unpaid or partially paid is registered as “increase in liabilities, suppliers”
in the consolidated statement of cash flow.
also track our capital expenditures on the basis of daily cash disbursements. On this
basis, during the year 2005, CVRD made capital expenditures and other investments of US$4,161
million, of which US$2,604 million was in organic growth, composed of US$2,314 million in projects
and US$290 million in research and development; while US$757 million was invested in maintaining
existing business, and US$800 million in acquisitions. Total capital expenditures in 2005,
excluding spending on acquisitions and other investments, were US$3,361 million. The difference
between these figures and our accounting figures is due to carry over of due payments in the amount
of US$258 million and differences in exchange rates of US$398 million.
In 2005, CVRD concluded three important projects: the Aimorés hydroelectric power plant, the
Fábrica Nova iron ore mine and the expansion of our Taquari-Vassouras potash mine. See Item 4 –
Acquisitions, Asset Sales and Significant Changes in 2005 and 2006.
In our financial planning for 2006, we have budgeted US$4,626 million for capital expenditures
in 2006. Of this total, 86.2%, or US$3,558 million, will be growth capital expenditures and the
remaining US$1,068 million will be capital expenditures for maintaining existing operations
(“stay-in-business capital expenditures”).
The following table describes our expenditures for our main investment projects in 2005 and
our budgeted expenditures for projects in 2006, together with estimated total expenditures for each
Carajás iron ore
mines to 85 million
tons per year
This project will
add 15 million tons
per year to our
and is scheduled to
be completed in the
third quarter of
Carajás iron ore
mines to 100
million tons per
This project will
add 15 million tons
per year to our
and is scheduled to
be completed in the
second half of
Brucutu iron ore
Phase I of the
project is expected
to be completed in
the second quarter
of 2006, bringing
capacity to 12
million tons per
of Phase II is
planned for the
first quarter of
capacity to 24
million tons per
year. Studies are
in progress for
expansion to 30
million tons per
Fazendão iron ore
Project for 14
million tons per
year of run-of-mine
(ROM) iron ore.
Work is planned to
begin in the first
half of 2006, with
and start-up in the
fourth quarter of
Fábrica iron ore
Project to expand
capacity by 5
million tons per
year from 12 to 17
million tons per
year, with targeted
start-up in the
fourth quarter of
Expansion of the
Project to expand
systems and cargo
build new cargo
scheduled for the
first quarter of
located in the
state of Minas
nominal capacity of
7 million tons per
year, and an iron
plant. Start up is
targeted for the
second half of
capacity of 7
million tons per
year located at the
for 2008. This
project is subject
to CVRD Board of
Acquisition of a
25% stake, in
the Chinese coal
Coking Ltd, to
metallurgical coke. The project has
of 2 million tons
per year of coke
and 200,000 tons
per year of
scheduled for the
first half of 2006.
118 copper mine
118 is expected to
capacity of 36,000
tons per year of
equipment has been
is scheduled for
the first half of
Vermelho nickel mine
of 46,000 tons per
year of metallic
nickel and 2,800
tons per year of
cobalt. The main
equipment has been
ordered. The EPCM
Work on obtaining
license is in
of the mine is
scheduled for the
fourth quarter of
Alunorte: stages 4
Stages 4 and 5 will
capacity to 4.4
million tons per
year from the
current 2.4 million
tons per year.
Stage 4 and 5 were
completed in the
first quarter of
Our construction of
the first module of
this mine with
of 5.4 million tons
per year is
scheduled to be
completed in the
first quarter of
construction of the
will carry bauxite
from the mine to
Barcarena, state of
Pará, is expected
to be completed on
Alunorte: stages 6
Stages 6 and 7 will
to 6.26 millions
tons per year, with
for the second
quarter of 2008.
The second module
of Paragominas will
add 4.5 million
tons per year of
bauxite to the
of 5.4 million tons
per year achieved
on the first
is scheduled for
the second quarter
EFVM, EFC, FCA:
In 2006, we expect
to purchase 22
locomotives (all of
them for iron ore
1,426 wagons (150
for general cargo
1,276 for iron ore
Capim Branco I and
These two power
plants on the
Araguari river in
the state of Minas
Gerais will have
of 240MW and 210MW
Capim Branco I
in the first
quarter of 2006,
while the start-up
of Capim Branco II
is planned for the
first quarter of
Located on the
between the states
of Maranhão and
Tocantins. It will
capacity of 1,087
is planned for the
first half of 2006,
start-up of its
first rotor is
expected for the
second half of
Steel joint ventures
Steel slab project
located at Ceará
state, with nominal
of 1.5 million tons
scheduled to start
Steel slab project
located at Rio de
Janeiro state, with
capacity of 4.4
million tons per
are scheduled to
start in 2009.
In addition to these projects, CVRD has budgeted US$491 million for research and
development. Of the total budgeted, 57% is expected to be spent in Brazil and 43% in South
America, Africa, Asia and Australasia.
All figures reported in the table above are presented on a cash basis, according to our
financial planning for 2005 and 2006.
In 2005, we saw our third consecutive year of record growth in revenues, operating income and
net income. In spite of increasing cost pressures – due primarily to higher prices for equipment
and raw materials reflecting the high production levels in the mining industry, higher costs for
fuel and energy, and the appreciation of the real against the U.S. dollar – we generated net income
of US$4,841 million in 2005, an 88.1% increase over 2004. Our results were driven primarily by a
73.9% increase in operating income, reflecting a 58.6% increase in net revenues and improved
overall operating margins, which increased from 38.7% of net revenues in 2004 to 42.5% in 2005.
The increase in revenues reflected strong demand and rising prices for our principal products
driven principally by continued strong demand from China and expanded demand from our other markets
in Asia and Europe, as well as high production levels supported by new projects coming on stream,
operation at full capacity at most of our units and productivity gains. The higher overall
operating income margins resulted primarily from a significant increase in average selling prices
for iron ore and pellets. The increase in iron ore and pellet operating margins more than offset
operating margin declines in our other operating segments.
In recent years, we have experienced a significant increase in demand, particularly from
China. Demand for our iron ore products is a function of global demand for steel, which is, in
turn, heavily influenced by worldwide economic activity. Global demand for steel has been growing
since 2002. Global demand for seaborne iron ore grew at a rate of approximately 11% in 2005.
Demand for iron ore and pellets exceeded our production capacity throughout 2005, and we
expect that this situation will also prevail in 2006. We continue to invest to increase capacity,
and our programmed iron ore production for 2006 is higher than in 2005, but we continue to face
excess demand. We expect to continue purchasing and reselling iron ore from third parties to meet
the shortfall. In 2005, we purchased 16.4 million tons of iron ore and pellets from third parties,
and we expect these purchases to remain at similar levels in 2006.
Demand for aluminum-related products
Demand for aluminum-related products is driven primarily by world economic conditions. In
recent years, China has been the primary driver of demand in the aluminum sector. World demand
continues to be strong, especially for alumina.
Demand for transportation services
Demand for our customers’ transportation services in Brazil is primarily driven by growth in
the Brazilian economy, mainly in the agricultural and steel sectors. Demand for rail
transportation grew more slowly in 2005 than in recent years, but we expect renewed growth in 2006 particularly due to the recovery in
agricultural production. We are better positioned to meet demand after enlarging our wagon and
locomotive fleets and improving the reliability of our rail networks, particularly FCA.
Capacity expansions are a key factor influencing our revenues. We continue to invest in
expanding capacity at a large number of facilities. Completed expansions that had a significant
effect on 2005 results included the following:
Our greenfield iron ore project at Fábrica Nova, which has a capacity of 15 million tons
per year, began operations in the second quarter of 2005 and produced 7.8 million tons in
We completed our capacity expansion project at the Taquari-Vassouras potash mine in
September 2005, increasing its capacity from 600,000 tons per year to 850,000 tons per
year. We expect a significant increase in production in 2006.
We purchased 125 locomotives and 5,414 wagons in 2005 to expand the general cargo and
iron ore transportation capacity of our railroads.
In 2006, we expect to complete the following major projects:
An expansion project at Carajás, designed to increase the nominal capacity of the mine
to 85 million tons per year from the current 70 million tons per year, is expected to be
completed in the second half of 2006.
Phase I of the Brucutu iron ore mine, with nominal production capacity of 12 million
tons per year, is targeted for completion in the third quarter of 2006.
The expansion of our Tubarão Port in the Southern System is targeted for completion by
Our Yankuang metallurgical coke plant, with an estimated production capacity of 2
million tons of coke per year and 200,000 tons per year of methanol, is targeted to begin
production in the first half of 2006.
Stages 4 and 5 of the expansion of Alunorte, designed to increase nominal capacity to
4.4 million tons per year from the current 2.4 million tons per year, were completed in the
first quarter of 2006.
We are purchasing an additional 22 locomotives (all for iron ore transportation) and
1,426 wagons (primarily for iron ore transportation).
See Item 4. Information on the Company—Capital Expenditures for more details concerning our
2006 capital expenditures budget.
Ores and metals
Iron ore. Our iron ore sales are made pursuant to long-term supply contracts, which provide
for annual price adjustments. Cyclical changes in the global demand for steel products affect
sales prices and volumes in the world iron ore market. Different factors influence prices for iron
ore, 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 ore) in the ore.
Fines, lump ore and pellets typically command different prices. We generally conduct annual price
negotiations beginning in November of each year and ending early in the following year. Due to the
wide variety of iron ore and pellet quality and physical characteristics, iron ore and pellets are
not considered commodities. 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
Reference Prices for Europe in US$ cents/metric ton Fe unit
Standard sinter feed
Blast furnace pellets
Driven by continued high levels of demand in the global seaborne iron ore market,
customer demand for iron ore and pellets continued to exceed our production capacity in 2005.
Reflecting this excess demand, we reached agreements with major steelmakers in February 2005 under
which our reference prices for iron ore and pellets increased by an average of 71.5% and 86.67%
respectively. These price increases had a significant positive effect on our gross revenues in
2005. Our reference prices per Fe unit for Carajás iron ore fines increased across-the-board in
2005 by 71.5% from 2004 levels, after increasing by 18.62% in 2004 from 2003 levels. We
experienced similar trends in the market for pellets, where reference prices increased by 86.67% in
2005, after increasing by 20.1% in 2004.
In May 2006, we reached agreements with major steelmakers under which our reference prices for
Carajás (SFCJ) and Southern System (SSF) iron ore fines increased by 19.0% relative to 2005. Blast
furnace pellet prices, both from the Tubarão and São Luís plants, will be reduced by 3.0% relative
Aluminum-related operations. Aluminum is sold in an active world market where prices are
determined by reference to prices prevailing on terminal markets, such as the London Metal Exchange
and the New York Mercantile Exchange or NYMEX, at the time of delivery. The following table sets
forth the three-month average market prices for aluminum on the London Metal Exchange for the
We are engaged in the production and sale of bauxite, alumina and aluminum primarily through
several joint ventures. Some of them are consolidated subsidiaries and others are unconsolidated,
and we account for them on the equity method. The basic arrangements are as follows:
MRN (an unconsolidated joint venture) produces bauxite. It sells on a take-or-pay basis
to us and the other joint venture partners, at a price that is determined by a formula
linked to the price of aluminum for three-month contracts in the London Metal Exchange and
to the price of alumina exported from Australia.
Alunorte (a consolidated subsidiary) produces alumina. It purchases all of its bauxite
requirements from MRN, and its annual purchase commitment for 2005 was approximately US$150
million. It sells alumina on a take-or-pay basis to us and the other joint-venture
partners in proportion to their respective interests, at a price which is determined by a
formula based on the price of aluminum for three-month contracts on the London Metal
Exchange. In 2005, Alunorte’s alumina production was sold 60.2% to clients located in
other countries than Brazil, 33.4% to Albras, and 6.4% to Valesul.
Albras (a consolidated subsidiary) produces primary aluminum. It sells on a take-or-pay
basis to us and the other joint-venture partners, in proportion to their respective
interests. We sell the aluminum we purchase from Albras directly to customers.
Valesul (an unconsolidated joint venture) also produces aluminum. We do not have a
take-or-pay commitment to Valesul, which sells aluminum products directly to its customers.
Manganese ore and ferroalloys. Manganese ore and ferroalloy prices are influenced by trends
in the steel market. Manganese ore prices are generally negotiated on an annual basis using a
benchmark established in the Japanese market based on the reference price for the related
ferroalloys. Ferroalloy prices are negotiated in open bids, quarterly contracts (particularly in
Europe) or on a spot basis. They are influenced by a number of factors and are more volatile than
prices for manganese ore. Among the principal factors are the price of manganese ore, the
inventories held by producers or traders, occasional interruptions in production and anti-dumping
tariffs in the main markets (U.S., Europe, Japan and South Korea). Average manganese ore prices
increased 11.2%, rising from US$75.8 per ton in 2004 to US$84.3 per ton in 2005. Average
ferroalloy prices decreased 11.5%, from US$957.1 per ton in 2004 to US$846.8 per ton in 2005,
reflecting oversupply in the ferroalloy market due to significant global production growth in 2004.
Given the global excess supply that resulted in inventory accumulation and falling ferroalloy
prices, we decided to shut down our ferroalloy plant in Norway between August and November 2005.
We also decided to operate our ferroalloy plant in France below its nominal capacity. As
ferroalloy inventories were consumed and prices stabilized, we resumed full capacity operation at
our Norwegian and French plants in December 2005. On the other hand, given the weakness in
Brazilian demand for ferroalloys, we have decided to shut down temporarily three furnaces of our
Simões Filho plant, in the state of Bahia, Brazil, since January 2006.
Potash and kaolin. Our average selling prices for potash increased 18.3%, from US$196.8 per
ton in 2004 to US$232.9 per ton in 2005. Our average kaolin prices increased 6.1% from US$136.7
per ton in 2004 to US$145.0 per ton in 2005.
Copper. We sell our copper concentrate in an active world market where prices are determined
on the basis of (i) prices on terminal markets, such as the London Metal Exchange and the COMEX, at
the time of delivery and (ii) treatment and refining charges negotiated with each customer. World
copper prices increased 40.5% in 2005 relative to 2004. These high prices reflect increased global
demand, primarily from China, and the historically low level of inventories.
Logistics. We earn our logistics revenues primarily from fees charged to customers for the
transportation of cargo via our railroads, ports and ships. Most of these revenues are earned by
our railways, and nearly all of our logistics revenues are denominated in reais.
Prices in the Brazilian railroad market are
subject to maximum levels set by the Brazilian regulatory authorities, but they primarily reflect
competition with the trucking industry.
Currency Exchange Rates
Most of our revenues are U.S. dollar-denominated, while most of our costs (other than debt
service expenses) are denominated in reais. As a result, the strength of the real in recent years
has had a negative effect on our reported financial results from operations. On the other hand,
because most of our debt is dollar-denominated, appreciation of the real causes us to record
foreign exchange gains. Changes in exchange rates had a negative effect on our operating income in
2005. The average R$/US$ exchange rate was R$ 2.9257 during 2004 and R$ 2.4341 during 2005,
representing a 16.8% appreciation of the real. The U.S. dollar depreciated by 11.0% from year-end
2004 to year-end 2005, compared to 8.1% from year-end 2003 to year-end 2004, resulting in higher
foreign exchange and monetary gains in 2005 than in 2004.
Acquisitions and Dispositions
We have made several significant acquisitions and dispositions in recent years. See Item 4.
Information on the Company—Business Overview—Recent Acquisitions, Dispositions and Significant
Changes in 2005 and 2006 for more details concerning our recent acquisitions and dispositions.
Some of our acquisitions do not immediately affect our financial performance, because investments
over a period of time are required before they produce revenues. The acquisition of CAEMI in
September 2003, however, contributed substantially to our increased revenues in 2004. Our
performance was also affected by our divestitures of our last remaining gold mine, Fazenda
Brasileiro, in August 2003; Sepetiba Tecon S.A. and Companhia Ferroriária do Nordeste – CFN in
November 2003; and our stake in CST in July and December 2004. We recorded gains on our sale of
our stake in CST amounting to US$404 million in 2004 and gains of US$126 million on our sale of our
stake in Quebec Cartier Mining in 2005.
Inflation in Brazil
As measured by the IGP-M Index, the Brazilian inflation rate was approximately 8.7% in 2003,
12.4% in 2004 and 1.2% in 2005. In the first four months of 2006, the Brazilian inflation rate was
approximately 0.27%. Most of our costs are incurred in Brazil in reais, while most of our revenues
are earned outside of Brazil in U.S. dollars. Inflation has a negative impact on our operating
margins, which has been accentuated in 2004 and 2005 by appreciation of the real against the U.S.
Our principal operating expenses consist of cost of goods sold, selling, general and
administrative expenses and research and development expenses.
Cost of goods sold. Our cost of goods sold consists principally of costs for raw
materials (especially bauxite purchased under take-or-pay arrangements from MRN, and iron
ore and pellets purchased from third parties), services (especially mine waste removal and
freight), materials and supplies, labor, fuel, energy, and depreciation and depletion.
Selling, general and administrative expenses. Our selling, general and administrative
expenses consist principally of the expenses of our corporate headquarters.
Research and development expenses. Our research and development expenses consist
primarily of investments related to mineral exploration and studies for the development of
projects. We expect our research and development investments to increase in 2006.
We are subject to a number of Brazilian taxes. The main taxes are:
Value-added taxes and revenue taxes – Our gross revenues include value-added taxes that
we collect on our sales operations. Net operating revenues represent gross revenues less
value-added taxes and revenue taxes. Value-added tax (ICMS) is paid to the state fiscal
authorities and revenue taxes (PIS and COFINS) to the federal fiscal authorities. These taxes (ICMS, PIS and COFINS) are
recorded under the line
item “taxes on revenues”. Export sales are currently exempt from both value-added and
Income tax and social contribution on profits – Income taxes in Brazil include the
federal income tax and a social contribution on profits, which represents an additional
federal tax. The statutory composite tax rate is 34%, composed of 25% federal income tax
rate plus a 9% social contribution on profits rate.
Our gross operating revenues rose to US$13,405 million in 2005, a 58.1% increase over 2004.
Our net operating revenues increased 58.6% to US$12,792 million in 2005. The following table
summarizes our gross revenues by product and our net operating revenues for the periods indicated:
Iron ore. Gross revenues from iron ore increased by 85.1% from US$3,995 million in 2004
to US$7,396 million in 2005, driven primarily by a 66.3% increase in average selling prices and a
11.4% increase in shipments of iron ore. The price increases resulted mainly from the 71.5% rise
in iron ore prices agreed with major steelmakers in February 2005, which was retroactive to January
for most clients in Europe and to April for most clients in Asia. We also increased our shipments
of iron ore by 23.1 million tons, or 11.4%, compared to 2004. The increase in shipments was made
possible by higher production at our existing mines, initial production increases under capacity
expansion projects at Capão Xavier and Fábrica Nova, and an increase in iron ore purchases from
third parties from 15.9 million tons to 16.4 million tons, in response to strong demand growth.
Pellets. Gross revenues from pellets increased by 81.4%, from US$1,148 million in 2004 to
US$2,083 million in 2005. The increase was driven primarily by a 77.8% rise in average selling
prices. The price increases reflect the 86.67% rise in pellet prices we established with major
steelmakers in February 2005, which was retroactive to January for most clients in Europe and to
April for most clients in Asia. Total shipments in 2005 of 28.5 million tons were 3.6% higher
than the 27.5 million tons in the same period in 2004, primarily reflecting higher production at
our pelletizing plants in response to demand.
Manganese ore and ferroalloys. Gross revenues from sales of manganese ore and ferroalloys
decreased by 18.5%, from US$701 million in 2004 to US$571 million in 2005. Because of lower market
prices for ferroalloys, we reduced production during 2005. See Item 5. Operating and Financial
Review and Prospects—Overview—Prices—Manganese ore and ferroalloys. As a result:
Gross revenues from ferroalloys decreased by 21.0%, from US$625 million in 2004 to
US$494 million in 2005, due to a 14.1% decrease in sales volume and an 11.5% decrease
in average selling prices.
Gross revenues from manganese ore remained stable, at US$76 million in 2004 and
US$77 million in 2005, reflecting an 11.2% increase in average selling prices and a
9.5% decrease in volume.
Potash. Gross revenues from sales of potash increased by 20.2%, from US$124 million in 2004
to US$149 million in 2005. The increase was driven by an 18.3% rise in average selling prices,
reflecting strong demand. Sales volume increased by 1.6%.
Kaolin. Gross revenues from sales of kaolin increased by 7.9%, from US$164 million in 2004 to
US$177 million in 2005 due principally to a 6.1% increase in average selling prices. Volume
remained relatively stable.
Logistics services. Gross revenues from logistics services increased by 38.7% from US$877
million in 2004 to US$1,216 million in 2005. The increase reflects the appreciation of the real,
since our prices are generally denominated in reais, as well as price increases in reais. In
Revenues from railroad transportation increased by 44.0%, from US$612 million in
2004 to US$881 million in 2005. Average prices increased by 50.0%. Volume shipped
Revenues from port operations increased by 32.9%, from US$173 million in 2004 to
US$230 million in 2005. Average prices increased by 25.7%. Volume increased by 6.7%.
Revenues from shipping increased by 14.1%, from US$92 million in 2004 to US$105
million in 2005. Average selling prices increased by 25.0%. Volume decreased by 5.0%
due to operational problems with one of our ships.
Aluminum-related products. Gross revenues from aluminum-related products increased 12.6%,
from US$1,250 million in 2004 to US$1,408 million in 2005. The main drivers were:
An 11.4% increase in gross revenues from sales of aluminum, from US$739 million in
2004 to US$823 million in 2005. This increase was mainly driven by an 8.9% rise in
average selling prices, reflecting strong worldwide demand for aluminum. Volume
increased by 4.0% due to production increase.
A 15.9% increase in gross revenues from sales of alumina, from US$458 million in
2004 to US$531 million in 2005. The increase in alumina gross revenues resulted from a
2.2% increase in sales volume and an increase in worldwide demand for alumina that
drove a 13.5% increase in average selling prices.
Gross revenues from sales of bauxite remained stable, at US$54 million in 2005,
compared to US$53 million in 2004. An 11.3% increase in average selling prices due to
a general rise in worldwide bauxite prices was partially offset by an 8.3% decrease in
volume, reflecting higher consumption of bauxite by our Alunorte subsidiary, which
reduced the amount of bauxite available for sale to clients.
Copper. Copper production at CVRD started in June 2004. Gross revenues from sales of copper
nearly doubled to US$391 million in 2005 from US$201 million in 2004, when we had only seven months
of copper production. The output from our Sossego copper mine in 2005 was lower than initially
expected due to the need to replace equipment because of harder than expected rock conditions. The
new equipment started to operate in the fourth quarter of 2005. Problems with the ball mill caused
significant production decreases in the first quarter of 2006. We do not expect to reach full
capacity in 2006. Gross revenues in 2005 were also positively impacted by copper prices, which
continue to post record levels, reflecting strong Chinese demand, disruptions in production
worldwide and lower levels of reported inventories.
Other products and services. Gross revenues from other products and services decreased 26.3%,
from US$19 million in 2004 to US$14 million in 2005.
Like other mining and metals companies, we are currently experiencing high prices for
equipment, replacement parts, energy, raw materials and services. The appreciation of the real
against the U.S. dollar has increased these pressures for us, because approximately 70% of our
costs are denominated in reais. The following table summarizes our operating costs and expenses
for the periods indicated.
General. Total cost of goods sold increased 52.6%, from US$4,081 million in 2004 to US$6,229
million in 2005. This increase resulted primarily from the following factors:
The average value of the real increased 16.8% against the U.S. dollar in 2005
compared to the 2004. Because approximately 70% of our costs and expenses are
denominated in reais, this led to increased U.S. dollar costs.
Material costs increased by US$646 million, or 58.3%, in 2005, driven primarily by
the rise in the price of raw materials and fuel, as well as expanded production and an
increase in prices for spare parts.
Outsourced services costs increased by US$670 million, or 82.4%, in 2005, driven
primarily by higher sales volumes, increases in rail freight charges, increased waste
material removal in the mines and higher prices for maintenance services.
Cost of iron ore and pellets purchased from other mining companies increased by
60.5%, reflecting price increases in 2005 as well as higher volumes purchased. Iron
ore purchased from third party suppliers in 2005 increased to 16.4 million tons, 3.2%
more than the 15.9 million tons purchased in 2004.
Energy costs increased by US$141 million, or 44.8%, in 2005 driven primarily by
higher electricity prices under the Albras long-term energy supply contract. In
addition to the basic price, the seller participates in earnings from our sale of
primary aluminum when the price exceeds US$1,450.00 per ton, as registered at the
London Metal Exchange (LME). The LME price has exceeded the threshold during the
entire contract to date.
Cost of ores and metals. Cost of ores and metals sold increased by 60.4% to US$4,620 million
in 2005 from US$2,881 million in 2004, primarily due to higher input prices, the appreciation of
real against the U.S. dollar and the increased production. The cost of ores and metals during 2005
also reflected a US$130 million increase in costs related to our Sossego copper mine, which began
operations in June 2004.
Cost of logistics services. Cost of logistics services increased by 37.4%, from US$513
million in 2004 to US$705 million in 2005 due to higher cargo volumes, higher fuel costs, higher
freight costs charged by MRS and the appreciation of the real against the U.S. dollar.
Cost of aluminum-related products. Cost of aluminum-related products increased by 32.5%, from
US$674 million in 2004 to US$893 million in 2005, primarily reflecting higher prices for the
bauxite Alunorte acquires from MRN, higher fuel prices, and higher prices under the Albras
long-term energy supply contract.
Cost of other products and services. Cost of other products and services decreased from US$13
million 2004 to US$11 million in 2005.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 28.5%, from US$452 million in 2004 to
US$581 million in 2005. The increase resulted primarily from higher selling expenses due to the
increase in sales volume, an annual increase in the salary of administrative employees and the
appreciation of the real against the U.S. dollar.
Research and development expenses
Research and development expenses increased by 81.0%, from US$153 million in 2004 to US$277
million in 2005, due to increase in mineral exploration and project studies in several regions,
including South America, Asia, Africa and Australia.
Other costs and expenses
Other costs and expenses decreased from US$188 million in 2004 to US$176 million in 2005. The
decrease resulted primarily from a lower loss provision relating to ICMS taxes.
Operating Income by Segment
The following table provides information concerning our operating income by segment and as a
percentage of revenues for the periods indicated.
Our operating income increased as a percentage of net operating revenues from 38.7% in
2004 to 42.5% in 2005. This increase was driven primarily by higher revenues and operating margins
in the iron ore and pellets businesses. In each of these segments, higher prices more than offset
the production cost increases described above.
The improvement in the iron ore and pellet segments was partially offset by a decline in the
operating margins of most of our other segments:
We had net non-operating expenses of US$12 million in 2005, compared to net non-operating
expenses of US$120 million in 2004. This change primarily reflects:
The positive impact of exchange rate movements on our net U.S.-dollar
denominated liabilities caused by the appreciation of the real, which was 11.0% in
2005 and 8.1% in 2004.
An increase in financial income from US$82 million in 2004 to US$123 million in
2005 due mainly to an increase in treasury funds invested.
A decrease in financial expenses from US$671 million in 2004 to US$560 million
in 2005, principally due to a reduction in average debt.
A gain on sale of investments in 2005 of US$126 million due to the sale of
Quebec Cartier Mining Company in July 2005, compared to a gain of US$404 million in
2004, due to the sale of CST.
In 2005, we recorded a net income tax expense of US$880 million, compared to US$749 million in
2004. The effective tax rate on our pretax income was 16.2% in 2005 and 24.9% in 2004. Our
effective tax rate is lower than the statutory rate because (i) income of some non-Brazilian
subsidiaries is subject to lower rates of tax, (ii) we are entitled to deduct the amount of our
distributions that we characterize as interest on shareholders’ equity and (iii) we benefit from
tax incentives applicable to our earnings on production in particular regions of Brazil. The
effective tax rate decreased in 2005 because a higher proportion of our income was generated by
non-Brazilian subsidiaries or eligible for tax incentives.
Affiliates and Joint Ventures
Our equity in the results of affiliates and joint ventures and provisions for losses on equity
investments resulted in a gain of US$760 million in 2005, compared to a gain of US$542 million in
2004. The following table summarizes the composition of our equity in results of affiliates and
joint ventures and provisions for losses on equity investments for the periods indicated.
Equity in results of affiliates and joint ventures and
provision for losses on equity investments
Total equity in results of affiliates and joint ventures and
provisions for losses
Ferrous Minerals. Our equity in the results of iron ore and pellet affiliates and joint
ventures and provisions for losses on equity investments amounted to a gain of US$435 million in
2005, compared to a gain of US$170 million in 2004. The improvements at each of these affiliates
were due to strong demand in the market for iron ore and pellets and higher prices.
Logistics. In 2005, our equity in the results of logistics affiliates and joint ventures and
provisions for losses on equity investments amounted to a gain of US$54 million, compared with a
gain of US$33 million in 2004, reflecting improved results at MRS Logística.
Aluminum-related. Our equity in the results of our aluminum-related affiliates and joint
ventures and provisions for losses on equity investments was US$65 million in 2005, compared to
US$71 million in 2004. This decrease resulted primarily from lower results at Valesul due to higher fuel and energy costs, which
more than offset improved results at MRN.
Steel. In 2005, we recorded a net gain of US$197 million in respect of our equity in the
results of steel affiliates and joint ventures, compared to a net gain of US$271 million in 2004.
The decrease primarily reflects the impact of the sale of CST in 2004 and declining results at CSI
in 2005, both of which were partially offset by improved 2005 performance at Usiminas resulting
primarily from higher average selling prices.
Coal. In 2005, we recorded equity in the results of our Longyu coal joint venture of US$9
million. In January 2006, CVRD received its first trial shipment of coal, approximately 40
thousand tons, from China to Brazil.
Our gross operating revenues rose to US$8,479 million in 2004, a 52.9% increase over 2003.
Our net operating revenues increased 50.8% to US$8,066 million in 2004. The following table
summarizes our gross revenues by product and our net operating revenues for the periods indicated:
Iron ore. Gross revenues from iron ore increased by 50.1% from US$2,662 million in 2003
to US$3,995 million in 2004, driven primarily by a 25.1% increase in shipments of iron ore and a
19.9% increase in average selling prices. The increase in shipments was driven primarily by the
consolidation of CAEMI for the entire year in 2004 compared to only four months in 2003. CAEMI
accounted for 42.7 million tons of shipments and gross revenues of US$840 million in 2004, compared
with 13.9 million tons of shipments and gross revenues of (US$240 million) in 2003. The remaining
increase in shipments resulted from higher production at our existing mines (primarily Carajás) and
an increase in purchases from third parties from 9.2 million tons to 15.9 million tons. The prices
reflect the 18% increase in iron ore price agreed with major steelmakers in January 2004.
Pellets. Gross revenues from pellets increased by 37.0%, from US$838 million in 2003 to
US$1,148 million in 2004. The increase was driven by an 16.4% increase in volume shipped,
reflecting the demand for our pellets as well as the full operation of our pelletizing plant in São
Luís, which contributed 2.4 million tons, and an 18.7% increase in average selling prices. The
price increases reflect the 19% increase in pellet prices agreed with major steelmakers in January
Manganese ore and ferroalloys. Gross revenues of manganese ore and ferroalloys increased by
100.9%, from US$349 million in 2003 to US$701 million in 2004. This increase resulted from:
A 108.3% increase in gross revenues from ferroalloys, from US$300 million in 2003 to
US$625 million in 2004. The increase was driven by strong demand for our principal
ferroalloy products from the steel industry and the impact of a full year of ferroalloy production from RDMN in 2004, which
drove a 22.7% increase in sales volume, and a 74.7% increase in average selling prices.
A 55.1% increase in gross revenues of manganese ore, from US$49 million in 2003 to US$76
million in 2004. Revenues were positively affected by 36.8% increase in average selling
prices compared to 2003 while volumes increased by 13.2%.
Potash. Gross revenues from sales of potash increased by 31.9%, from US$94 million in 2003 to
US$124 million in 2004, driven by a 41.1% increase in average selling prices, reflecting strong
demand. The higher average selling prices were partially offset by lower sales volume, which
decreased 6.5% in 2004. Shipments were lower in 2004 because the production was limited as a
result of the expansion project at our Taquari-Vassouras potash mine, which is designed to increase
its annual production capacity from 600,000 tons to 850,000 tons.
Kaolin. Gross revenues from sales of kaolin increased by 70.8%, from US$96 million in 2003 to
US$164 million in 2004. US$92 million of our kaolin revenues derives of the consolidation of CADAM
through CAEMI, for a full year in 2004, as opposed to US$31 million over four months in 2003.
Total volume shipped increased by 84.6%, driven primarily by the CAEMI acquisition. The volume
growth was partially offset by a 3.9% decrease in average selling prices, reflecting higher
international freight costs.
Copper. We began selling copper concentrate from our Sossego copper mine in June 2004.
During the period from June 2004 to the end of 2004, gross revenues from sales of copper
concentrate amounted to US$201 million.
Logistic services. Gross revenues from logistic services increased by 45.2% from US$604
million in 2003 to US$877 million in 2004. The improved performance in logistics revenues reflects
our efforts to add railroad capacity to exploit opportunities provided by agricultural production,
especially grains, and increased shipments due to higher Brazilian steel production in 2004. Our
gross revenues were also positively affected by the consolidation of FCA beginning September 2003.
In particular, the increase in gross revenues from logistic services reflects:
A 64.1% increase in gross revenues from railroad transportation, from US$373 million in
2003 to US$612 million in 2004. Of the US$239 million increase in revenues, US$156 million
resulted from our consolidation of FCA. The increase reflects a 37.1% increase in volume
transported, reflecting the FCA acquisition, the strong demand for general cargo services,
which continued to exceed supply, and the expansion of our rolling stock through the
addition of wagons and locomotives, as well as a 19.4% increase in average selling prices, reflecting higher prices due to the appreciation of the real, as
well as higher real-denominated prices due to increased demand and inflation.
A 20.1% increase in gross revenues from port operations, from US$144 million in 2003 to
US$173 million in 2004. The increase in port operations gross revenues was driven by a
15.0% increase in average selling prices, reflecting the appreciation of the real as well
as higher real-denominated prices due to high demand and inflation.
A 5.7% increase in gross revenues from shipping, from US$87 million in 2003 to US$92
million in 2004.
Aluminum-related products. Gross revenues from aluminum-related products increased 46.7%,
from US$852 million in 2003 to US$1,250 million in 2004. The main drivers were:
A 130.9% increase in gross revenues from sales of aluminum, from US$320 million in 2003
to US$739 million in 2004. Of the US$419 million increase, the consolidation of Albras was
responsible for US$384 million, and the remainder is largely due to the increased worldwide
demand for aluminum and improvements that helped expand production. Sales volume increased
by 104.8% and the average selling price rose by 20.0%. The price increase primarily
reflects strong worldwide demand for aluminum.
A 43.2% increase in gross revenues from sales of bauxite, from US$37 million in 2003 to
US$53 million in 2004. This increase was largely the result of a 41.0% increase in volume
sold. The price remained relatively stable, reflecting that bauxite prices are established
based on the aluminum and alumina prices of the three previous quarters, excluding the
quarter immediately preceding price negotiations.
A 7.5% decrease in gross revenues from sales of alumina, from US$495 million in 2003 to
US$458 million in 2004. The decrease in alumina gross revenues resulted primarily from a
32.6% decrease in sales volume due to the consolidation of Albras beginning January 1, 2004
and to higher revenues in 2003 due to resales of alumina purchased in the spot market. The
decline in sales volume more than offset a 37.1% increase in average selling prices for
alumina driven by the increase in worldwide demand for alumina.
Gold. Our gold production declined significantly effective August 15, 2003, with the selling
of our Fazenda Brasileiro mine. Our gold production now consists solely of gold produced as a
by-product of our iron ore operations at Itabira. The copper concentrate we produce in our Sossego
mine contains gold. We record all revenues received in respect of the copper concentrate under
Other products and services. Gross revenues from other products and services decreased 34.5%,
from US$29 million in 2003 to US$19 million in 2004, primarily reflecting the sale, in 2003, by
RDMN of excess energy to third parties in the Norwegian market during the conversion of its plants
Operating costs and expenses
The following table summarizes our operating costs and expenses for the periods indicated.
General. Total cost of goods sold increased 30.5%, from US$3,128 million in 2003 to US$4,081
million in 2004. This increase resulted, in part, from the consolidation of Albras, CAEMI and FCA
for the full year in 2004, compared with only four months for CAEMI and FCA in 2003 and no
consolidation of Albras in 2003. CAEMI and FCA accounted for US$236 million of our cost of goods
sold in 2003 and Albras,
CAEMI and FCA accounted for US$708 million in 2004. The other major
factors behind the increase in cost of goods sold during 2004 were:
Material costs, including fuel and gas, increased by US$301 million, or 39.6%, in 2004,
driven primarily by the significant increase in our total production, resulting primarily
from the consolidation of CAEMI, FCA and Albras which accounted for US$123 million of the
total US$301 million increase, as well as increased prices of fuel and gas.
Appreciation of the real against the U.S. dollar and the concurrent increase in
inflation as measured by the IGP-M, which reached 12.4% in 2004, led to increased costs,
when translated into U.S. dollars, because the majority of our costs and expenses are
denominated in reais.
Cost of outsourced services increased by US$239 million, or 42.6%, in 2004, resulting
mainly from an increase in costs for outsourced logistics services resulting from our
consolidation of CAEMI beginning in September 2003. Unlike our Northern and Southern
systems, where we use our own railroads, CAEMI uses a third-party logistics provider—MRS—to
transport its iron ore to the port. CAEMI accounted for US$184 million in outsourced
logistics costs in 2004 compared with US$94 million in 2003. In 2004, our Minas do Meio
mines in the Southern System also transported a portion of their output via MRS, for a
total freight cost of US$73 million in 2004 compared with US$39 million in 2003, reflecting
higher volumes transported as well as higher prices.
Expenditures on purchases of products other than iron ore and pellets decreased by 32.0%
from US$604 million in 2003 to US$411 million in 2004 due mainly to the consolidation of
Albras, which contributed US$240 million.
Energy expenses increased by US$172 million in 2004 compared to 2003, driven primarily
by the consolidation of Albras, which accounted for US$137 million of the total increase.
Demurrage costs increased from US$46 million in 2003 to US$83 million in 2004,
reflecting congestion in the ports due to high demand.
Cost of ores and metals. Cost of ores and metals sold increased by 39.4% to US$2,881 million
in 2004 from US$2,066 million in 2003, primarily due to increased sales volumes of iron ore and
pellets, copper and manganese and ferroalloys. A portion of the increase in the cost of ores and
metals sold also reflects the higher costs associated with purchases of iron ore from third parties
to meet excess demand. We purchased 15.9 million tons in 2004, up from 9.2 million tons in 2003.
The cost of ores and metals during 2004 also includes US$484 million in costs generated by the full
consolidation of CAEMI, compared with four months in 2003, and the beginning of copper operations.
Cost of logistic services. Cost of logistic services increased by 38.6%, from US$370 million
in 2003 to US$513 million in 2004. Of the US$143 million increase, US$125 million relates to the
consolidation of FCA for the full 2004 compared with four months in 2003.
Cost of aluminum-related products. Cost of aluminum-related products remained stable, from
US$678 million in 2003 to US$674 million in 2004.
Cost of other products and services. Cost of other products and services remained stable,
from US$14 million in 2003 to US$13 million in 2004.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 70.6%, from US$265 million in 2003 to
US$452 million in 2004. This increase resulted primarily from the full consolidation of CAEMI, FCA
and Albras over the full year in 2004, compared to four months of results from CAEMI and FCA and no results for Albras for
2003. Taken together, CAEMI, FCA and Albras accounted for US$88 million of the US$187 million
increase. The remainder primarily reflects increase in sales expenses due to the increase in
revenues sales and increase in salaries as well as the monetary exchange variation.
Research and development expenses increased 86.6%, from US$82 million in 2003 to US$153
million in 2004. This increase is in line with CVRD’s expansion plans intended to diversify its
production and expand production of existing products to meet world demand.
Other costs and expenses
Other costs and expenses decreased by US$199 million in 2003 to US$188 million in 2004. These
costs and expenses primarily reflect provisions for contingencies.
Operating Income by Segment
The following table provides information concerning our operating income by segment and as a
percentage of revenues for the periods indicated.
Our operating income increased as a percentage of net operating revenues from 30.7% in
2003 to 38.7% in 2004. This increase was driven primarily by higher operating margins in the iron
ore, pellets, manganese and ferroalloy businesses due to higher prices, higher operating margins in
the aluminum business due to the consolidation of Albras, and the start up of copper operations.
We also experienced a substantial improvement in the operating margins of our kaolin business,
reflecting an increase in volume sold and lower unit costs due to the consolidation of CADAM for a
full year in 2004, compared to only four months in 2003, which more than offset a decline in
average selling prices. The improvement in these businesses was partially offset by declines in
margins in the railroad segment reflecting the consolidation of FCA and declines in alumina segment
operating profitability due to the consolidation of Albras.
Non-operating income (Expenses)
The following table details our non-operating income (expenses) for the periods indicated.
We had net non-operating expenses of US$120 million in 2004, compared to net
non-operating income of US$10 million in 2003. This change primarily reflects:
The effect of the 8.1% depreciation of the U.S. dollar from year-end 2003 to year-end
2004 on our net U.S. dollar-denominated liabilities (mainly short and long-term debt, less
cash and cash equivalents), which generated a net foreign exchange gain of US$79 million in
2004, compared to a gain of US$222 million in 2003 (where the depreciation from year-end
2002 to year-end 2003 was 18.2%).
A decrease in financial income from US$102 million in 2003 to US$82 million in 2004 due
to reductions in interest rates and the balance of cash equivalents from bonds.
An increase in financial expenses from US$351 million in 2003 to US$671 million in 2004,
principally due to the consolidation of CAEMI, FCA and Albras, which accounted for US$165
million of the increase. The remainder of the increase reflects an increase in average
outstanding debt and losses on derivative contracts for alumina and aluminum during 2004
and the premium paid related to the repurchase by us of a portion of Vale Overseas’
outstanding 8.625% Enhanced Guaranteed Notes due 2007.
A gain of US$404 million in 2004, reflecting the sale of our stake in CST compared to a
net gain of US$17 million reflecting the selling of Fosfertil.
In 2004, we recorded a net tax expense of US$749 million, compared to a net tax expense of
US$297 million in 2003. The difference resulted primarily from:
An increase in tax expense at nominal statutory rates from US$562 million in 2003 to
US$1,021 million in 2004 due to higher pre-tax income.
A tax benefit of US$247 million in respect of exempt foreign income in 2004, compared to
a US$59 million expense in 2003. This change resulted primarily from the effects of the
foreign exchange variations on exempt foreign assets.
Accrual of a US$240 million expense related to the difference on tax basis of equity
investments in 2004, compared to a US$56 million expense in 2003. This resulted mainly
from the effect of the sale of CST.
Accrual of a US$57 million expense related to write-offs of derivative-related deferred
tax assets as a result of a change in the applicable tax legislation under which we can no
longer deduct payments or losses on derivative investments, effective January 1, 2005.
A tax benefit of US$77 million compared to US$53 million registered in 2003. The US$77
million tax benefit relates primarily to a reversal of tax valuation allowances at Albras
and Alunorte due to an increase in actual and expected future taxable income that made it
more likely than not that Albras and Alunorte would be able to use their tax loss
Affiliates and Joint Ventures
Our equity in the results of affiliates and joint ventures and provisions for losses on equity
investments resulted in a gain of US$542 million in 2004, compared to a gain of US$306 million in
2003. The following table summarizes the composition of our equity in results of affiliates
Equity in results of affiliates and joint ventures and
provision for losses on equity investments
Total equity in results of affiliates and joint ventures and
provisions for losses
Ferrous Minerals. Our equity in the results of iron ore and pellet affiliates and joint
ventures and provisions for losses on equity investments amounted to a gain of US$170 million in
2004, compared to a gain of US$133 million in 2003. The improvements at each of these affiliates
were due to strong demand in the market for iron ore and pellets. Samarco contributed US$117
million in 2004 compared to US$70 million in 2003, reflecting higher prices and a write-off of
value-added tax credits due to agreements with the local government, which amounted to US$37
million which was recorded in 2003.
Logistics. In 2004, our equity in the results of logistics affiliates and joint ventures and
provisions for losses on equity investments amounted to a gain of US$33 million, compared with a
net loss of US$52 million in 2003. The net loss in 2003 primarily reflected a provision for losses
related to impairment of assets registered by FCA prior to its consolidation in September 2003.
Aluminum-related. Our equity in the results of our aluminum-related affiliates and joint
ventures and provisions for losses on equity investments was US$71 million in 2004, compared to
US$147 million in 2003. This decrease is due to the consolidation of Albras in 2004, partially
offset by improvements in the performance of the other aluminum-related companies.
In 2004, our aluminum-related affiliates recorded exchange gains due to the effects of the
appreciation of the real on their foreign currency denominated debt. In addition to exchange rate
effects, the operating results of Valesul and MRN in 2004 were influenced by the following factors:
Valesul. In 2004, Valesul generated net income of US$26 million on gross revenues of
US$204 million, compared to net income of US$18 million in 2003 on gross revenues of US$172
million. CVRD’s portion of the net income of Valesul was US$14 million in 2004, compared
to US$10 million in 2003. The improvement of the results was driven by higher average
MRN. In 2004, MRN generated net income of US$142 million on gross revenues of US$351
million, compared to net income of US$81 million in 2003 on gross revenues of US$276
million. Our portion of the net income of MRN was US$57 million in 2004 and US$33 million
in 2003. The revenue increase was driven by a 16.5% increase in sales volume, driven
primarily by higher demand, as well as an 11% increase in average selling price.
Steel. In 2004, we recorded a net gain of US$271 million in respect of our equity in the
results of steel affiliates and joint ventures, compared to a net gain of US$81 million in 2003.
The improved performance at Usiminas, CST (during the period prior to the sale of our interest) and
CSI were due to strong demand in the market for steel, which drove an increase in sales volumes and
average selling prices. The improved performance at CST also reflects the reversal of US$23
million of provisions for contingencies and the final court decision in the “Plano Verão” lawsuit
(income tax deductibility of certain charges) for US$75 million. The improved performance at
Usiminas primarily reflects higher selling prices and sales volumes. CSI’s net income increased in
2004 primarily due to an 11.7% increase in sales volume and a 47.7% increase in average selling
prices, reflecting better margins.
Our principal uses of funds are for capital expenditures, dividend payments and repayment of
debt. We have historically met these requirements by using cash generated from operating
activities and through short-term and long-term debt. We believe these sources of funds, together
with our cash and cash equivalents on hand, will continue to be adequate to meet our currently
anticipated capital requirements.
from time to time, we review acquisition and investment opportunities and will,
if a suitable opportunity arises, make selected acquisitions and investments to implement our
business strategy. We generally fund acquisitions and investments through internally generated
funds, the issuance of debt or a combination of these methods.
In 2006, we expect our major cash needs to include repayment or refinancing of the US$1,218
million in current portion of long-term debt on our balance sheet at year-end 2005, as well as
budgeted capital expenditures of US$4.6 billion and announced minimum dividend payments for 2006 of
US$1.3 billion. We expect to meet these cash needs primarily through a combination of operating
cash flow, cash and cash equivalents on hand, and new debt, including the $1.0 billion of
guaranteed notes due 2016 issued by our finance subsidiary Vale Overseas Limited in January 2006.
Sources of Funds
Our principal sources of liquidity are cash and cash equivalents on hand and cash flow from
operating activities. At December 31, 2005, we had cash and cash equivalents of US$1,041 million.
Our operating activities generated positive cash flows of US$5,161 million in 2005.
CVRD has committed credit facilities for the purpose of improving the efficiency
of its cash management and reducing debt refinancing risks during moments of instability in
financial markets. Currently, we have a credit facility in an amount
of US$650 million that is available through 2007, with an amortization period if
drawn down of two years, and a US$500 million revolving credit line
that is available through 2011. We have not made use of the
funds available under our credit facilities.
We believe we are well positioned to raise additional capital given our access to global
capital markets. Currently, we are rated BBB+ by Standard & Poor’s, being the only Brazilian
entity with such rating, Baa3 by Moody’s and BBBlow by Dominion Bond Rating Services. Improving
our credit rating continues to be an important strategic goal.
Uses of Funds
In 2005, our net cash flow used in investing activities was US$4,646 million. Capital
expenditures amounted to US$4,817 million. In 2006, we have budgeted US$4,626 million for capital
expenditures. This amount includes expenditures on projects as well as expenditures for
maintenance and exploration. For more information about the specific projects for which we have
budgeted funds, see Item 4. Information on the Company—Capital Expenditures.
We paid total dividends and interest on shareholders equity of US$1.3 billion in 2005. The
announced minimum dividend amount for 2006 is US$1.3 billion. In April 2006, the first installment
of this dividend was approved by our Board of Directors in the amount of US$650 million and was
paid on April 28, 2006. See Item 8. Financial Information—Dividends and Interest on Shareholders’
At December 31, 2005, we had aggregate outstanding debt of US$5,010 million, consisting of
short-term debt of US$1,295 million (including US$1,218 million in current portion of long-term
debt and US$62 million of loans from related parties), and long-term debt (excluding current
portion) of US$3,715 million (including US$1 million of loans from related parties). At December31, 2005, approximately US$1,015 million of our debt was secured by liens on some of our assets.
Our short-term debt consists primarily of U.S. dollar-denominated trade financing, mainly in
the form of export prepayments and export sales advances with foreign and Brazilian financial
Our major categories of long-term indebtedness (including the current portion of long-term
debt and excluding the accrued charges) are as follows:
U.S. dollar-denominated foreign loans and financing (US$2,442 million at December 31,2005). These loans primarily include export financing lines, import finance from export
credit agencies, loans from commercial banks and multilateral organizations. The loans generally bear floating rate
interest at spreads over LIBOR.
U.S. dollar-denominated fixed rate notes (US$1,213 million at December 31, 2005). We
have issued several series of fixed rate bonds through our finance subsidiary Vale Overseas
Limited with a CVRD guarantee.
U.S. dollar-denominated export securitizations (US$427 million outstanding at December31, 2005). We have a US$550 million securitization program based on existing and future
receivables generated by our subsidiary CVRD Overseas Ltd from exports of iron ore and
pellets to six of our customers in Europe, Asia and the United States. The securitization
transaction is divided into three fixed rate tranches and one floating rate tranche.
Perpetual notes (US$75 million at December 31, 2005). We have issued perpetual notes
that are exchangeable for 48,000 million preferred shares of MRN. Interest is payable on
the notes in an amount equal to dividends paid on the underlying preferred shares relating
to periods beginning with the 2000 fiscal year.
Domestic debt (US$659 million at December 31, 2005). We have a series of Brazilian
loans, principally from BNDES, most of which are indexed to U.S. dollars, and the remainder
of which are linked to baskets of currencies or floating rates in Brazil.
Some of our long-term debt instruments contain financial covenants. Our principal covenants
require us to maintain certain ratios, such as debt to equity, net debt to EBITDA and interest
coverage. We were in full compliance with our financial covenants as of December 31, 2005, and we
believe that our existing covenants will not significantly restrict our ability to borrow
additional funds as needed to meet our capital requirements. We believe we will be able to operate
within the terms of our financial covenants for the foreseeable future. None of these covenants
directly restricts our ability to pay dividends on equity securities at the parent company level.
At the time of the first stage of our privatization in 1997, we issued debentures to our
shareholders. The terms of the debentures were established 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 certain mineral resources that were not
taken into account in determining the minimum purchase price of our shares in the privatization.
In accordance with the debentures deed, holders have the right to receive semiannual payments equal
to an agreed percentage of our net revenues (revenues less value-added tax, transport fee and
insurance expenses related to the trading of the products) from certain identified mineral
resources that we owned at the time of the privatization, to the extent that we exceed defined
thresholds of sales volume relating to certain mineral resources, and from the sale of mineral
rights that we owned at that time. Our obligation to make payments to the holders will cease when
the relevant mineral resources are exhausted.
We made no payments under the shareholder debentures in 2003. The total payments made under
the shareholder debentures amounted to US$2 million in 2004, relating to 2003 results. The total
payments made under the shareholder debentures amounted to US$5 million in 2005, relating to 2004
results. We also made a payment of US$2 million in April 2006, relating to 2005 results. See Note
18 to our consolidated financial statements for a description of the terms of the debentures.
The following table summarizes our long-term debt, short-term debt, operating lease
obligations, purchase obligations and Alunorte take-or-pay obligations at December 31, 2005. This
table excludes other obligations that we may have, including pension obligations (discussed in Note
17 to our consolidated financial statements).
Payments Due by Period
Less than 1
(in millions of
Long-term debt (1)
Operating lease obligations
Purchase obligations (2)
Take-or-pay obligation (MRN)(3)
Figures do not reflect the January 2006 issuance of US$1 billion in 2016 notes.
Amounts, including for purchases of iron ore from mining companies located in Brazil,
are based on 2005 prices.
We are committed under a take-or-pay agreement to purchase bauxite from MRN at a price
that is determined by a formula based on prevailing world prices of aluminum.
At December 31, 2005, our off-balance sheet arrangements consisted solely of guarantees. At
December 31, 2005, we had extended guarantees for borrowings obtained by affiliates and joint
ventures in the amount of US$5 million, of which US$4 million is denominated in U.S. dollars and
the remaining US$1 million is denominated in reais. We expect no losses to arise as a result of
these guarantees. We have made fee charges for extending these guarantees in the case of Samarco.
See Note 18 to our consolidated financial statements for more information concerning these
We believe that the following are our critical accounting policies. We consider an accounting
policy to be critical if it is important to our financial condition and results of operations and
requires significant judgments and estimates on the part of our management. For a summary of all
of our significant accounting policies, see Note 3 to our consolidated financial statements.
Our reporting currency is the U.S. dollar, but our functional currency for the majority of our
operations is the real. In accordance with Statement of Financial Accounting Standards (SFAS) 52 –
“Foreign Currency Translation,” we translate statement of income items to reflect the approximate
results that would have occurred if each transaction had been translated using the exchange rate in
effect on the date that the transaction was recognized. Because the separate translation of every
transaction is impractical, an appropriate weighted average exchange rate for the period is used.
In most cases, we translate our statement of income accounts and those of subsidiaries that use the
real as their functional currency into U.S. dollars at weighted average monthly rates for the
relevant reporting period. In the case of material exceptional items, we translate the amounts
into U.S. dollars using the exchange rate on the date of the transaction. Additionally, during
periods of high exchange rate volatility, we use estimated daily rates to translate our foreign
exchange and monetary losses or gains, financial income and financial expenses. The determination
of the appropriate weighted average exchange rate requires significant management judgment and
estimates. In 2005, the dollar depreciated by approximately 11.0%
against the real and generated a credit for the year recorded directly in the cumulative
account of US$1,013 million.
Mineral Reserves and Life of Mines
We regularly evaluate and update our estimates of proven and probable mineral reserves. Our
proven and probable mineral reserves are determined using generally accepted estimation techniques
and are audited by AMEC E&C Services, Inc. (AMEC), an expert in mineral engineering. Calculating our reserves
requires us to make assumptions about future conditions that are highly uncertain, including future
ore prices, foreign currency exchange rates, inflation rates, mining technology, availability of
permits and production costs. Changes in some or all of these assumptions could have a significant
impact on our recorded proven and probable reserves.
One of the ways we use our ore reserve estimates is to determine the mine closure dates used
in recording the fair value liability for our asset retirement obligations and the periods over
which we amortize our mining assets. Any change in our estimates of total expected future mine or
asset lives could have an impact on the depreciation, depletion and amortization charges recorded
in our consolidated financial statements under cost of goods sold. Changes in the estimated lives
of our mines could also significantly impact our estimates of environmental and site reclamation
costs, which are described in greater detail below.
Environmental and Site Reclamation 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.
Under SFAS 143 — “Accounting for Asset Retirement Obligations.” SFAS 143 requires that we
recognize a liability for the fair value of our estimated asset retirement obligations in the
period in which they are incurred, if a reasonable estimate can be made. We consider the
accounting estimates related to reclamation and closure costs to be critical accounting estimates
we will not incur most of these costs for a number of years, requiring us to make
estimates over a long period;
reclamation and closure laws and regulations could change in the future or circumstances
affecting our operations could change, either of which could result in significant changes
to our current plans;
calculating the fair value of our asset retirement obligations in accordance with SFAS
143 requires us to assign probabilities to projected cash flows, to make long-term
assumptions about inflation rates, to determine our credit-adjusted risk-free interest
rates and to determine market risk premiums that are appropriate for our operations; and
given the significance of these factors in the determination of our estimated
environmental and site reclamation costs, changes in any or all of these estimates could
have a material impact on net income. In particular, given the long periods over which
many of these charges are discounted to present value, changes in our assumptions about
credit-adjusted risk-free interest rates could have a significant impact on the size of our
Our Environmental Department developed a guide which defines the rules and procedures that
should be used to evaluate our asset retirement obligations. The future costs of retirement of all
of our mines and sites are estimated annually, considering the actual stage of exhaustion and the
projected exhaustion date of each mine and site. The future estimated retirement costs are
discounted to present value using a credit-adjusted risk-free interest rate. At December 31, 2005,
we estimated the fair value of our aggregate total asset retirement obligations to be approximately
Impairment of Long-Lived Assets and Goodwill
We evaluate our investments and long-lived assets, which primarily include identifiable
property, plant and equipment, for impairment whenever events or changes in circumstances indicate
that the balance sheet carrying value of the asset may not be recoverable.
If the asset is determined to be impaired, we
record an impairment loss, and write down the asset, based upon the amount by which the carrying
amount of the asset exceeds the higher of net realizable value and value in use. We generally
determine value in use by discounting expected future cash flows using a risk-adjusted pre-tax
discount rate that we believe is appropriate to the risks inherent in the asset. In order to
estimate future cash flows, we must make various assumptions about matters that are highly
uncertain, including future production and sales, product prices (which we estimate based on
current and historical prices, price trends and related factors), recoverable reserves, operating
costs, environmental and site reclamation costs and planned capital costs. Arriving at assumptions and estimates concerning these matters is a
complex and often subjective process. These assumptions and estimates can be affected by a variety
of matters, including external factors such as industry and economic trends, and internal factors
such as changes in our business strategy and our internal forecasts. Although we believe the
assumptions and estimates we have made in the past have been reasonable and appropriate, different
assumptions and estimates could materially impact our reported financial results. More
conservative assumptions of the anticipated future benefits from these businesses would result in
greater impairment charges, which would decrease net income and result in lower asset values on our
balance sheet. Conversely, less conservative assumptions would result in smaller impairment
charges, higher net income and higher asset values.
In assessing potential impairment of our equity investments, we evaluate the carrying value of
our listed equity investments relative to publicly available quoted market prices. If the quoted
market price is below carrying value, and we consider the decline to be other than temporary, we
write down our equity investments to quoted market value. For investments for which quoted market
prices are not readily available, we evaluate the investments for impairment whenever the
performance of the underlying entity indicates that impairment may exist. In such cases, the fair
value of the investments is estimated principally based on discounted estimated cash flows using
assumptions similar to those described above.
In relation to goodwill, each year on September 30, we use a two-step process to test for the
recoverability of goodwill for each of our reporting units. Step one requires a comparison of the
fair value of the reporting unit to the book value of its net assets. The fair value of the net
assets is based on discounted cash flows using assumptions similar to those used in the process
described above. Step two requires an estimate of the fair value of the individual assets and
liabilities within the reporting unit. In 2005, after conducting impairment tests, we concluded
that no write-down was necessary.
Derivatives and Hedging Activity
SFAS 133 – “Accounting for Derivative Financial Instruments and Hedging Activities,” as
amended by SFAS 137, SFAS 138 and SFAS 149, requires that we recognize all derivative financial
instruments as either assets or liabilities on our balance sheet and measure such instruments at
fair value. Changes in the fair value of derivatives are recorded in each period in current
earnings or in other comprehensive income (outside net income), in the latter case depending on
whether a transaction is designated as an effective hedge. We have not designated any derivative
financial instruments as hedges and the fair value adjustments to our derivatives were thus
recorded in current net income. If we had designated our hedging instruments as permitted under
SFAS 133, there would have been corresponding fair value adjustments, for certain of our hedging
instruments, to the related hedged items in the case of fair value hedges or directly to
shareholders’ equity in the case of cash flow hedges. In 2005, we recorded a charge of US$101
million in relation to fair value adjustments on derivative instruments.
In accordance with SFAS 109 — “Accounting for Income Taxes,” we recognize deferred tax effects
of tax loss carryforwards and temporary differences in our consolidated financial statements. We
record a valuation allowance when we believe that it is more likely than not that tax assets will
not be fully recoverable in the future.
When we prepare our consolidated financial statements, we estimate our income taxes based on
regulations in the various jurisdictions where we conduct business. This requires us to estimate
our actual current tax exposure and to assess temporary differences that result from differing
treatment of certain items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which we show on our consolidated balance sheet. We must then assess
the likelihood that our deferred tax assets will be recovered from future taxable income. To the
extent we believe that recovery is not likely, we establish a valuation allowance. When we
establish a valuation allowance
or increase this allowance in an accounting period, we record a tax
expense in our statement of income. When we reduce the valuation allowance, we record a tax
benefit in our statement of income.
Determining our provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance to be recorded against our net deferred tax assets requires significant
management judgment and estimates and assumptions about matters that are highly uncertain. For
each income tax asset, we evaluate the likelihood of whether some portion or all of the asset will
not be realized. The valuation allowance made in relation to accumulated income tax losses depends
on our assessment of the probability of generation of future taxable profits within the legal entity in which the related deferred tax asset is recorded based on our
production and sales plans, selling prices, operating costs, environmental costs, group
restructuring plans for subsidiaries and site reclamation costs and planned capital costs.
We disclose material contingent liabilities unless the possibility of any loss arising is
considered remote, and material contingent assets where the inflow of economic benefits is
probable. We discuss our material contingencies in Note 18 to our financial statements.
We account for contingencies in accordance with SFAS 5 – “Accounting for Contingencies,” which
requires that we record an estimated loss from a loss contingency when information available prior
to issuance of our financial statements indicates that it is probable that a future event will
confirm that an asset has been impaired or a liability has been incurred at the date of the
financial statements, and the amount of the loss can be reasonably estimated. In particular, given
the uncertain nature of Brazilian tax legislation, the assessment of potential tax liabilities
requires significant management judgment. By their nature contingencies will only be resolved when
one or more future events occur or fail to occur – and typically those events will occur a number
of years in the future. Assessing such liabilities, particularly in the uncertain Brazilian legal
environment, inherently involves the exercise of significant management judgment and estimates of
the outcome of future events.
The provision for contingencies at December 31, 2005, totaling US$1,286 million, consists of
provisions of US$229 million, US$210 million, US$816 million and US$31 million for labor, civil,
tax and other claims, respectively.
Employee Post-retirement Benefits
We sponsor a defined benefit pension plan covering substantially all of our employees. We
account for these benefits in accordance with SFAS No. 87 “Employers’ Accounting for Pensions.”
The determination of the amount of our obligations for pension benefits depends on certain
actuarial assumptions. These assumptions are described in Note 17 to our consolidated financial
statements and include, among others, the expected long-term rate of return on plan assets and
increases in salaries. In accordance with U.S. GAAP, actual results that differ from our
assumptions are accumulated and amortized over future periods and generally affect our recognized
expenses and recorded obligations in such future periods.
Consolidation of Variable Interest Entities
We perform evaluations of each of our equity affiliates and joint ventures to determine if
they constitute variable interest entities, or VIEs, as defined under Interpretation No. 46R,
“Consolidation of Variable Interest Entities,” or FIN 46R. Applying FIN 46R, we determined that
Albras is a VIE and that we are its primary beneficiary. We accordingly have consolidated Albras
with effect from January 1, 2004.
FIN 46R requires the primary beneficiary of a variable interest entity to consolidate that
entity. A variable interest entity is created when (i) the equity investment at risk is not
sufficient to permit the entity from financing its activities without additional subordinated
financial support from other parties or (ii) equity holders either (a) lack direct or indirect
ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the
entity or (c) do not have the right to receive expected residual returns of the entity if they
occur. The primary beneficiary of a variable interest entity is the party that absorbs a majority
of the variable interest entity’s expected losses, receives a majority of the entity’s expected
residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.
Expected losses are the expected negative
variability of an entity’s net assets exclusive of its variable interests, and expected residual
returns are the expected positive variability in the fair value of an entity’s assets, exclusive of
variable interests. Prior to the issuance of FIN 46R, an enterprise generally consolidated an
entity when the enterprise had a controlling financial interest in the entity through ownership of
a majority voting interest.
Quantifying the variability of VIEs is complex and subjective, requiring consideration and
estimates of a significant number of possible future outcomes as well as the probability of each
outcome occurring. The results of each possible outcome are allocated to the parties holding interests in the VIE and, based on
the allocation, a calculation is performed to determine which party, if any, has a majority of the
potential negative outcomes (expected losses) or a majority of the potential positive outcomes
(expected residual returns). Calculating expected losses and expected residual returns requires
modeling potential future results of the entity, assigning probabilities to each potential outcome,
and allocating those potential outcomes to the VIE’s interest holders. If our estimates of possible
outcomes and probabilities are incorrect, it could result in the inappropriate consolidation or
deconsolidation of the VIE.
Our Board of Directors, sets general guidelines and policies for our business and monitors the
implementation of those guidelines and policies by our executive officers. 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 Corporate 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 bylaws state that the Board of Directors must consist
of eleven members and eleven alternates. Our employees have the right to appoint one director and
an alternate. Under the Brazilian Corporate Law, members of the Board of Directors must be
shareholders of CVRD. Members of the Board of Directors are elected for two-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.
Ten of our current directors and nine of our current alternate directors were appointed to
their positions by Valepar, our principal shareholder, pursuant to Valepar’s shareholders’
agreement and the provisions of the Brazilian Corporate Law. For a description of the procedures
under which our directors are elected, see Item 10. Additional Information—Memorandum and Articles
of Incorporation—Common Shares and Preferred Shares—General. For a description of Valepar’s
shareholders’ agreement, see Item 7. Major Shareholders and Related Party Transactions—Major
Directors of CVRD
The table below lists the current members of the Board of Directors. All of our directors
were elected or re-elected, as the case may be, in 2005, and their terms will expire in 2007.
Appointed by Valepar and approved at the annual shareholders’ meeting.
Appointed by the members of the Board of Directors in April 2006 to replace Mr. Jaques
Wagner, who resigned in March 2006. Mr. Pires’ appointment will be confirmed by the
shareholders in the first shareholders’ meeting to take place after the annual shareholders
meeting, held on April 27, 2006.
Appointed by our employees and approved at the annual general shareholders’ meeting.
The table below lists the alternate members of the Board of Directors.
Gerardo Xavier Santiago (1)
Rita de Cássia Paz Andrade Robles (1)
Sérgio Ricardo Lopes de Farias (1)
José Mauro Guahyba de Almeida (1)
Rômulo de Mello Dias (1)
João Moisés de Oliveira (1)
Hidehiro Takahashi (1)
Wanderlei Viçoso Fagundes (1)
José Horta Mafra Costa (2)
Appointed by Valepar and approved at the annual shareholders’ meeting.
Appointed by our employees and approved at the annual shareholders’ meeting in 2005.
We have summarized below the business experience, areas of expertise, and principal
outside business interests of our current directors:
Sérgio Ricardo Silva Rosa. Mr. Rosa joined our Board of Directors in April 2003 and
was designated as Chairman in May 2003. Mr. Rosa is currently the chief executive officer
of PREVI — Caixa de Previdência dos Funcionários do Banco do Brasil, or Previ, where he has
been an executive officer since 2000. He is also a director of Valepar S.A., or Valepar,
and chief executive officer of Litel Participações S.A., or Litel. Mr. Rosa has been a
director of Brasil Telecom Participações since December 2000, and of Sauípe S.A. since May
2001. Prior to joining Previ, Mr. Rosa served as President of the Confederação Nacional dos
Bancários from June 1994 to May 2000. From January 1995 to December 1996, Mr. Rosa was an
alderman of the municipality of São Paulo. He received his degree in journalism from
Universidade de São Paulo.
Erik Persson. Mr. Persson joined our Board of Directors in April 2001. Mr. Persson
was a planning officer at Previ from June 2000 to May 2003 and has been serving as a pension
officer since June 2003. He has worked at Banco do Brasil S.A. since 1977. Mr. Persson has
also served as a director of Valepar and Previ since April 2001, and has held an officer
position in SEEB and FEEB, both in Rio Grande do Sul, since 1990. He received his degree in
economics from Universidade Federal do Rio Grande do Sul – UFRGS.
Jorge Luiz Pacheco. Mr. Pacheco joined our Board of Directors in April 2003. Mr.
Pacheco has been manager of strategic investments at Previ since December 2000, and prior to
this time worked at Banco do Brasil S.A. since 1973. He has also served as a director of
Valepar and a director of Litel, and has held an officer position in the fiscal council of Companhia Siderúrgica Belgo-Mineira.
He received his degree in economics from Faculdade de Ciências Econômicas — FCPE — Cândido
Mendes/RJ, and post-graduate degrees in finance and business management from IBMEC/RJ.
Arlindo Magno de Oliveira. Mr. Oliveira joined our Board of Directors in April 2003.
Since 1974, he has served in a variety of positions at Banco do Brasil S.A. such as customer
service manager. Mr. Oliveira also joined Previ in 1974, and since then, has served as
member of the fiscal council, officer for deliberations and executive officer for planning,
and currently he serves as Previ’s deliberative board member. From April to September 2002,
Mr. Oliveira was the executive officer in charge of finance and management at CEDAE –
Companhia Estadual de Água e Esgoto. He also acted as a director of several companies,
including Companhia de Eletricidade do Estado da Bahia — COELBA, Companhia Energética do Rio
Grande do Norte — COSERN, CPFL Energia S.A., CPFL Geração de Energia S.A. and ENERCAN — Campos Novos Energia S.A. He received a degree on economics from Universidade Federal
Fluminense – UFF and his post-graduate degree in finance from IBMEC/RJ.
Luciano Siani Pires. Mr. Pires joined our Board of Directors in May 2005. Mr. Pires
is the chief of the Holding Management department at BNDES, the Brazilian development bank.
From 2003 to 2005, Mr. Pires was a consultant at McKinsey & Company. Mr. Pires is a member
of the Board of Directors of Suzano Bahia Sul Papel e Celulose S.A. and Tele Norte Leste
Participações S.A. He received his degree in engineering from Pontifícia Universidade
Católica do Rio de Janeiro – PUC-RJ, and his MBA, summa cum laude, from New York Unversity
Stern School of Business.
Renato da Cruz Gomes. Mr. Gomes joined our Board of Directors in April 2001. Mr. Gomes
has been an executive officer of Bradespar S.A. since 2000. From 1976 through 2000, Mr.
Gomes held a variety of positions within BNDES and has participated on the boards of
directors of many companies, in the last 15 years, namely Aracruz, Iochpe Maxion, Bahia Sul,
Globo Cabo and Latasa. He was also a member of the advisory board of Fator Sinergia — Fundo
de Investimento de Valores Mobiliários em Ações and the investment committee of Bradesco
Templeton Value and Liquidity Fund. Mr. Gomes has been an executive officer of Valepar
since April 2001 and is an alternate member of Valepar’s Board of Directors. He received
his degree in engineering from Universidade Federal do Estado do Rio de Janeiro – UFRJ, and
his post-graduate degree in management development from SDE.
Mário da Silveira Teixeira Júnior. Mr. Teixeira joined our Board of Directors in May
2003. In July 1971, Mr. Teixeira joined Bradesco S.A. Corretora de Títulos e Valores
Mobiliários, where he served as an executive officer from March 1983 to January 1984, when
he was appointed as head department officer of Banco Bradesco S.A. In 1992 he became
managing officer, in 1998 vice-president and from March 1999 until July 2001 he was a member
of the Board of Directors. From July 2001 to March 2002, Mr. Teixeira was CEO of Bradespar
and, in March 2002, he returned to the Board of Directors of Banco Bradesco S.A. In
addition, he is a director of Valepar S.A., VBC Participações S.A., VBC Energia S.A.,
Companhia Paulista de Força e Luz — CPFL, CPFL Energia S.A., CPFL Geração de Energia S.A.,
Companhia Piratininga de Força e Luz, Vice-chairman of the Board of Directors of Banco
Bradesco S.A., non-voting member of the Managing Board of Banco Espírito Santo S.A., located
in Lisbon, Portugal, and Vice-chairman of the Board of Directors of BES Investimento do
Brasil S.A. – Banco de Investimento. He also served as Vice-President of ANBID – Associação
Nacional dos Bancos de Investimento, member of the Management Board of ABRASCA – Associação
Brasileira das Companhias Abertas, and director of Companhia Siderúrgica Nacional — CSN,
Latasa S.A., Globo Cabo S.A., São Paulo Alpargatas S.A and Tigre S.A. Tubos e Conexões. Mr.
Teixeira received a degree in civil engineering and business administration from Mackenzie
Presbyterian University, São Paulo.
Hiroshi Tada. Mr. Tada joined our Board of Directors in April 2005. Since 1968, Mr.
Tada has served in a variety of positions at Mitsui & Co. Ltd., or Mitsui, where he is
currently the Executive Vice President. He received his degree in engineering from the
University of Kyoto, Japan and an Advanced Management degree from Harvard University.
Oscar Augusto de Camargo Filho. Mr. Camargo Filho joined our Board of Directors in
October 2003. He is currently a partner of CWA Consultoria Empresarial. From 1999 to 2003,
Mr. Camargo Filho served as Chairman of the Board of Directors of MRS Logística. From 1973
to 2003, he held various positions with CAEMI, including CEO and member of its Board of
Directors. From 1963 until 1973, he held a variety of positions within Motores Perkins
S.A., including commercial officer and sales and services manager. He received his law
degree from Faculdade de Direito at the Universidade de São Paulo.
Francisco Augusto da Costa e Silva. Mr. Costa e Silva joined our Board of Directors in
April 2005. He is also a partner of Bocater, Camargo, Costa e Silva — Advogados Associados,
a law firm in Rio de Janeiro. Mr. Costa e Silva also serves as a director of Banco do Brasil
S.A., Comitê de Ética da Associação dos Analistas e Profissionais de Investimento do Mercado
de Capitais (APIMEC), and the development committee of Pontifícia Universidade Católica do
Rio de Janeiro (PUC/RJ). He started his career at Banco Nacional do Desenvolvimento
Econômico e Social — BNDES, where he held a variety of positions, including executive
officer. Previously, he served on the Board of Directors of several companies and entities
namely Solpart Participações S.A., Aracruz Celulose S.A., Pisa Papel de Imprensa S.A.,
Fundação de Assistência e Previdência Social do BNDES -FAPES and Rio de Janeiro Stock
Exchange — BVRJ. Mr. Costa e Silva also served as President of the CVM and of the Council
of Securities Regulators of the Americas — COSRA, joined Comissão da Moeda e do Crédito -
COMOC and the Supplemental Pension Plan Council and served on the executive committee of the
International Organization of Securities Commissions — IOSCO. Mr. Costa e Silva received
his law degree from Universidade do Estado da Guanabara, currently Universidade do Estado do
Rio de Janeiro — UERJ, and his MBA degree from COPPEAD, at Universidade Federal do Rio de
Janeiro — UFRJ.
Eduardo Fernando Jardim Pinto. Mr. Jardim Pinto joined our Board of Directors in April
2005. Since 1983 he has held several positions with us and currently he serves as a
specialized train conductor and President of STEFEM, the railroad employees union in the
State of Maranhão. He received his degree in electronic engineering from CEFET, Rio de
Janeiro, and is currently pursuing a law degree at Faculdade São Luiz.
Mr. Barbosa also serves as Vale Overseas’ principal executive officer and Mr. Moretzsohn
also serves as Vale Overseas’ principal financial officer. Mr. Barbosa’s experience is summarized
below under — Executive Officers.
Fernando Ramos Nóbrega. Mr. Nóbrega serves as the general manager — Development of New
Ventures. From 1999 to 2005, he served as the general manager — Finance of CVRD. He has
been a board member at Itabrasco, Nibrasco, Hispanobras and Kobrasco since 1998 and a board
member at GIIC since 2003. During the year 2000, Mr. Nóbrega was the financial and
administrative director of FCA. Prior to that he held a variety of positions at CVRD and
Rio Doce America, Inc., New York. Mr. Nóbrega obtained an engineering degree from
Universidade Federal do Rio de Janeiro (UFRJ) and an Executive MBA from New York University
Bernardeth Vieira de Souza. Mrs. Vieira de Souza is the general manager — Treasury for
CVRD. Mrs. Vieira de Souza obtained an Accounting and Business Administration degree from
Universidade do Estado do Rio de Janeiro — UERJ and a masters degree in Management and
Administration of Cash Flow from Fundação Getúlio Vargas (FGV-RJ).
Leonardo Moretzsohn de Andrade. Mr. Moretzsohn joined Vale Overseas’s Board of
Directors in March 2005. Mr. Moretzsohn joined CVRD in 1983, and since then has held several
positions within CVRD. Currently he is the CVRD’s internal controls head officer. He is
also a member of the Board of Directors of Valesul, the president of the board of trustees
of Valia and a member of the Financial and Operational Committee of CSI. From 1998 until
2001, he worked at RDI as manager in the pulp department, and during that period he was also
a member of BENECEL — BENELUX Pulp and Paper Agents Association. He received his degree in
economics from Universidade de Brasilia and has a post-graduate degree in engineering
projects from COPPE/UFRJ and an MBA in Company Management from FGV.
The executive officers are our legal representatives and are responsible for day-to-day
operations and the implementation of the general policies and guidelines set forth by the Board of
Directors. Our bylaws provide for a minimum of six and a maximum of nine executive officers. The
Board of Directors appoints executive officers for two-year terms and may remove them at any time.
According to the Brazilian Corporate Law, 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.
The table below lists our current executive officers. The term of each of our executive
officers expires in 2007.
Executive Officer (Holdings, Energy and Business Development)
José Auto Lancaster Oliveira
Executive Officer (Non-Ferrous Minerals)
Guilherme Rodolfo Laager
Executive Officer (Logistics)
Executive Officer (Planning and Control)
Executive Officer (Human Resources and Corporate Services)
Tito Botelho Martins
Executive Officer (Corporate Affairs)
We have summarized below the experience, areas of expertise, and principal outside
business interests of our current executive officers.
Roger Agnelli. Mr. Agnelli was appointed CEO and President of CVRD in July 2001. Prior
to his appointment, he was the Chairman of the Board of Directors of CVRD from May 2000
until July 2001. Mr. Agnelli developed his professional career at the Bradesco financial
group from 1981 to 2001, where he reached the position of executive director of Banco
Bradesco in 1998, remaining in that office until the year 2000; he was also President and
CEO of Bradespar from March 2000 to July 2001. Due to his activities in the areas of
investment, mergers and acquisitions, and asset management, he was a member of the board of
directors of several major companies in Brazil, such as Companhia Paulista de Força e Luz,
Companhia Siderúrgica Nacional, Latas de Alumínio S.A. — LATASA, VBC Energia, Brasmotor,
Mahle Metal Leve, Rio Grande Energia and Serra da Mesa Energia. Mr. Agnelli also was a
director of UGB Participações and Vice-President of ANBID — Brazil’s National Association of
Investment Banks. He is a member of the Economic and Social Development Council (CDES), an
advisory body to the President of Brazil, and a member of the International Investments
Council, formed to advise the President of South Africa, Dr. Thabo Mbeki. Mr. Agnelli is
the President of the China-Brazil Business Council and a member of the board of directors of
Asea Brown Boveri (ABB), Duke Energy Corporation and Suzano Petroquímica S.A.. He recently
became a member of the International Advisory Committee of the New York Stock Exchange
(NYSE), a member of the board of directors of Petrobras — Petróleo Brasileiro S.A. and was
invited to join the International Advisory Council of Brookings Institution. Mr. Agnelli
has a degree in economics from the Fundação Armando Álvares Penteado, in São Paulo, Brazil.
Fabio de Oliveira Barbosa. Mr. Barbosa was appointed as our chief financial officer in
May 2002. Until May 2006, he was the Chairman of the Board of Directors of CAEMI. Prior to
that, Mr. Barbosa served as a member of our Board of Directors from April 2000 to March
2002. Previously, he served as chairman of the Board of Directors of BANESPA — Banco do
Estado de São Paulo S.A.,
and also served as a board member of the following companies:
Banco do Brasil S.A., Caixa Econômica Federal, CST and TELESP—Telecomunicações de São Paulo.
Prior to joining us, Mr. Barbosa has served as secretary of the National Treasury at the
Ministry of Finance since July 1999, after serving as assistant secretary in the previous
four years. From 1992 to 1995, he served as adviser to the Executive Board of the World
Bank, in Washington D.C. From 1990 to 1992, he was Deputy and Head of the Fiscal Policy
Unit at the Ministry of Economy and Finance. From 1988 to 1990, he was economic advisor and
head of the Economic Analysis Unit, both at the Ministry of Planning. Prior to that time,
Mr. Barbosa held a variety of positions at the Ministry of Industry and Commerce, the Paraná
State Development Institute, the Ministry of Labor and the Institute for Applied Economic
Research. He has a B.A. degree in Economics from Universidade Federal de Minas Gerais and a
M.A. (abd) in Economics from the Universidade de Brasília (UnB).
José Carlos Martins. Mr. Martins was appointed as an executive officer of our ferrous
minerals division in April 2005, and he was originally appointed as an executive officer of
holdings, energy and business development in April 2004. He has over 30 years of experience
in the metals industry. He was an officer and president of Aços Villares from 1986 to 1996
and chief managing officer of the steel area at CSN, from 1997 to 1999. In 1999, Mr.
Martins became President of Latasa, one of the largest aluminum can producers in Latin
America. Upon the purchase of Latasa by Rexam, a United Kingdom company, in 2003, he became
president and CEO of Rexam’s South American beverage can division, Rexam Beverage Can South
America. Mr. Martins has a B.A. degree in Economics from Pontifícia Universidade Católica
de São Paulo.
Murilo Ferreira. Mr. Ferreira was appointed as an executive officer of our holdings,
energy and business development areas in April 2005. He joined us in 1977 and has vast
experience in several areas of CVRD, particularly Aluminum and Ferroalloys, and in 1998 he
was appointed executive officer of commerce and finance at Vale do Rio Doce Alumínio S.A. -
ALUVALE, a holding company of CVRD that was merged into CVRD in December 2003. Mr. Ferreira
was the CEO of ALBRAS — Alumínio Brasileiro S.A. Aside from being the Director of the
Department of Aluminum since December 2003, Mr. Ferreira is also a member of the Board of
Directors of MRN — Mineração Rio do Norte S.A., Valesul Alumínio S.A. and ALUNORTE — Alumina
do Norte do Brasil S.A. Mr. Ferreira has a B.A. degree from Escola de Administração de
Empresas, Fundação Getulio Vargas (FGV), and an MBA from EBAP-FGV.
José Auto Lancaster Oliveira. Mr. Oliveira was appointed as an executive officer of
our non-ferrous minerals division in September 2004. He is also a member of the Board of
Directors of Canico Resources Corp. and an officer of Compañia Minera Andino Brasileira
Ltd., Compañia Minera Latino Americana Ltda., Tethys Mining LLC and Vale do Rio Doce Kaolin
S.A. — Valekao. Previously, Mr. Oliveira served as CEO of Mineração Serra do Sossego S.A.,
and exploration manager of the Brazilian subsidiary of British Petroleum. He graduated from
the Federal University of Minas Gerais, Brazil, with a degree in Geology and holds a Ph.D in
Economic Geology by Mackay School of Mines, from the University of Nevada, Reno (United
Guilherme Rodolfo Laager. Mr. Laager was appointed as an executive officer of our
logistics division in September 2001. Mr. Laager served as logistics, procurement and
technology information director for Companhia de Bebidas das Américas — AMBEV from 1989
until August 2000. From 1982 until 1988, Mr. Laager worked for Andersen Consulting and,
from 1979 until 1981, for IESA, International de Engenharia S.A. Mr. Laager has a B.S.
degree in civil engineering from the Universidade Federal do Rio de Janeiro — UFRJ and
obtained an MBA from COPPEAD, also at UFRJ.
Gabriel Stoliar. Since October 2001, Mr. Stoliar has served as the chief planning and
control officer of CVRD. In September 1997, he was originally appointed as an executive
officer of the Corporate Center. He is also director of Usiminas and PPSA. 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 of BNDESPAR. He was appointed 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 analyst 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 — UFRJ, a post-graduate
degree in production engineering and an MBA from PDG/EXE-SDE in Rio de Janeiro.
Carla Grasso. Ms. Grasso was appointed as an executive officer of the human resources
and corporate services area in October 2001. From December 1997 to October 2001, Ms. Grasso
served as the personnel, management and IT officer to CVRD’s Corporate Centre. Before
joining CVRD, she acted as secretary of the Brazilian supplementary social security office,
from January 1994 to November 1997; as advisor to the Ministry of Social Security, from
December 1992 to December 1993; as deputy coordinator of fiscal policy at the Ministry of
Finance, from October to December 1992; as finance advisor and coordinator of the
Macroeconomics and Social areas of the Brazilian Presidency office, from March 1990 to
October 1992; as advisor to the Ministry of Planning, from November 1988 to March 1990; and
as advisor to the Presidency of Sebrae — Serviço Brasileiro de Apoio à Pequena e Média
Empresa, from January to November 1988. In 1997, she was appointed as an executive officer
of Fundação Vale do Rio Doce de Habitação e Desenvolvimento Social. Ms. Grasso has both a
B.A. degree in Economics and an M.A. in Economics from UnB.
Tito Botelho Martins. Mr. Martins was appointed as CVRD’s executive officer for
corporate affairs in April 2006. Mr. Martins joined CVRD in 1985 and has broad experience
in corporate finance issues. He was CVRD’s head officer of the Corporate Finance department
and also chief financial officer of FCA between August 1999 and September 2003. Mr. Martins
has worked in a variety of positions in companies affiliated with CVRD, such as FCA,
Samarco, Ferroban, Açominas, Gulf Industrial Investment Corporation, Itabrasco and
Hispanobrás. Since October 2003, Mr. Martins has been the chief executive
officer of CAEMI and of MBR. Mr. Martins has a graduate degree in economics from the
Universidade Federal de Minas Gerais and has conducted post-graduate studies at several
institutions in Brazil and abroad.
Under the Brazilian Corporate Law, corporations may have a fiscal council, a corporate body
which members are elected by shareholders and are independent of our management and external
auditors. The primary responsibility of the fiscal council under the Brazilian Corporate Law is to
monitor management’s activities and review the financial statements, reporting its findings to the
shareholders. We have established a permanent fiscal council, which may have from three to five
members. In addition, CVRD’s by-laws have empowered our fiscal council to take responsibility for
additional matters as described below.
In compliance with the listed company audit committee rules of the NYSE and the SEC, effective
July 31, 2005, we have designated and empowered our fiscal council to perform the role of the audit
committee in reliance on the exemption set forth in Exchange Act Rule 10A-3(c)(3). This measure
was undertaken pursuant to an amendment to our by-laws approved by the shareholders on July 19,2005. Our Board of Directors has determined that Mr. Aníbal Moreira dos Santos is a financial
Under our by-laws, our Fiscal Council is responsible for establishing procedures for the
receipt, retention and treatment of any complaints related to accounting, controls and audit
issues, as well as procedures for the confidential, anonymous submission of concerns regarding such
matters; recommending and assisting our Board of Directors in the appointment, establishment of
compensation and dismissal of the independent auditors; pre-approving the services to be rendered
by our independent auditors; and overseeing the work performed by the external auditors, with
powers to suspend the payment of compensation to the independent auditors and to resolve
disagreements between management and the auditors regarding financial reporting.
The members of our Fiscal Council must meet applicable eligibility requirements under
Brazilian corporate law. A member of our Fiscal Council cannot (i) hold office as a member of the
Board of Directors, fiscal council or advisory committee of any company that competes with CVRD or
otherwise has conflicting interests with CVRD, unless compliance with this requirement is expressly
waived by a decision taken by the shareholders in a shareholders’ meeting, (ii) be an employee or
member of the management of CVRD or its subsidiaries and affiliates, or (iii) be a spouse or
relative within the third degree by affinity or consanguinity of an officer or director of CVRD.
On April 27, 2006, the shareholders elected or re-elected the current members of the Fiscal
Council and their respective alternates. Holders of preferred class A shares, including the golden
shares, 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 annual shareholders’ meeting following their election.
The table below lists the current members of the fiscal council.
First Year of
Bernard Appy (1)
José Bernardo de Medeiros Neto (2)
Marcelo Amaral Moraes (2)
Aníbal Moreira dos Santos (2)
Appointed by the preferred shareholders.
Appointed by Valepar.
The table below lists the alternate members of the fiscal council.
We have summarized below the experience, areas of expertise, and principal outside business
interests of our current members of fiscal council.
Bernard Appy. Mr. Appy was elected as a member of the fiscal council of CVRD in April
2006. Since April 2006 he holds the office of Secretary of the Ministry of Finance of
Brazil, which he previously held from January 2003 to May 2005. From May 2005 to March
2006, he held the position of Secretary for Economic Policies at the Ministry of Finance of
Brazil. Since 1997, Mr. Appy is a member of faculty of the Economics Department of the
School of Business, Economics and Accounting of Pontifícia Universidade Católica de São
Paulo — PUC-SP. From 1995 to 2002, he was a partner of LCA Consultores Ltda., a consulting
firm in economics. Mr. Appy received a B.A. in Economics from the Universidade de São Paulo
— USP, and concluded M.A. classes in Economics at Universidade Estadual de Campinas
José Bernardo de Medeiros Neto. Since 2005, Mr. Medeiros Neto has served as a member
of fiscal council of CVRD. He is currently the president of AFABB-RS, the association of
former employees of Banco do Brasil S.A., and president of the fiscal council of Previ.
From 1980 to 1982, he was the Chief Executive Officer of Banrisul Financeira S.A. From 1975
to 1980, he was Vice-President of Banco de Desenvolvimento do Estado do Rio Grande do Sul -
BADESUL. He is a former employee of Banco do Brasil S.A., where he worked in various
positions from 1957 to 1974. Mr. Medeiros Neto has a degree in Law from Universidade
Federal do Rio Grande do Sul.
Marcelo Amaral Moraes. Since 2004, Mr. Moraes has served as a member of fiscal council
of CVRD. He is an investment manager of Bradespar S.A. since 2000. From 1995 to 2000, he
worked in the mergers and acquisitions and capital markets departments of Banco Bozano,
Simonsen. In 2004, he was an alternate member of the board of directors of Net Serviços
S.A., and in 2003, he was an alternate member of the board of directors of CVRD. Mr. Moraes
has a B.A. in Economics from Universidade Federal do Rio de Janeiro — UFRJ, and a MBA from
COPPEAD, also at UFRJ.
Aníbal Moreira dos Santos. Since 2005, Mr. Santos has served as a member of fiscal
council of CVRD. He was an executive officer of Caemi Canada Inc., Caemi Canada Investments
Inc., CMM Overseas, Ltd., Caemi International Holdings BV and Caemi International
Investments NV, subsidiaries of CAEMI, from 1998 to 2003, when he retired. From 1983 to
2003, he was chief accounting officer of CAEMI. From 1999 to 2003, he was a member of the
fiscal council of CADAM S.A., and he was an alternate member of the Board of Directors of
MBR and Empreendimentos Brasileiros de Mineração S.A. from 1998 to 2003. Mr. Santos is an
accountant with a degree from Escola Técnica de Comércio da Fundação Getúlio Vargas.
Our bylaws establish five technical and advisory committees to the Board of Directors, as
follows: Executive Development, Strategy, Finance, Accounting, and Governance and Sustainability.
Not all committee members are members of the Board of Directors.
The Executive Development Committee is responsible for reporting on general human
resources policies; recommending compensation levels for our executive officers;
establishing guidelines for evaluating the performance of our executive officers; and
reporting on policies relating to corporate responsibility, such as the environment,
health, safety and social responsibility of the company submitted by the executive
officers. The members of the executive development committee are: João Moisés de
Oliveira, Arlindo Magno de Oliveira, Olga Loffredi and Oscar Augusto de Camargo Filho.
The Strategy Committee is responsible for reviewing and making recommendations to the
Board of Directors concerning the strategic guidelines and strategic plan submitted
annually to the board by our executive officers; the company’s annual and multi-annual
investment budgets; investment and/or divestiture opportunities submitted by executive
officers; and mergers and acquisitions. The members of the strategy committee are: Roger
Agnelli, Gabriel Stoliar, Sérgio Ricardo da Silva Rosa, Oscar Augusto de Camargo Filho,
Demian Fiocca and Mario da Silva Teixeira.
The Finance Committee is responsible for reviewing and making recommendations to the
Board of Directors concerning: the financial policies and the internal financial control
systems of the company; compatibility between the level of distributions to shareholders
and the parameters established in the annual budget; and consistency with the general
policy on dividends and the capital structure of the company. The members of the finance
committee are: Fabio de Oliveira Barbosa, Rômulo de Mello Dias, Ivan Luiz Modesto Schara
and Wanderlei Viçoso Fagundes.
The Accounting Committee is responsible for recommending the appointment of the employee
responsible for internal auditing of the company to the Board of Directors; reporting on
the policies and the company’s annual auditing plan submitted by the employee responsible
for internal auditing, and on its execution; tracking the results of the company’s internal
auditing, and identifying, prioritizing, and submitting actions to be accompanied by the
executive officers; and analyzing the annual report, as well as the financial statements of
the company and making recommendations to the Board of Directors. The members of the
accounting committee are: Inácio Clemente da Silva, Antonio José de Figueiredo Ferreira and
Paulo Roberto Ferreira de Medeiros. None of the members of our accounting committee is a
member of the Board of Directors.
The Governance and Sustainability Committee is responsible for evaluating our corporate
governance practices and the workings of the Board of Directors, and recommending
improvements to the code of ethics and our system of management in order to avoid conflicts
of interests between the company and its shareholders or administrators; and issuing
reports on potential conflicts of interest between the company and its shareholders or
administrators. The members of the governance and sustainability committee are: Renato da
Cruz Gomes, Ricardo Carvalho Giambroni and Ricardo Simonsen.
Significant Corporate Governance Differences
Pursuant to Section 303A.11 of the New York Stock Exchange Listed Company manual, we have
prepared a chart summarizing the ways in which our corporate governance practices differ from those
of U.S. domestic companies under the New York Stock Exchange’s corporate governance rules. This
chart can be accessed on our web
site at http://www.cvrd.com.br/cvrd_us/media/
COMPENSATION OF DIRECTORS, EXECUTIVE OFFICERS, FISCAL COUNCIL MEMBERS AND
Under our bylaws, 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 annual aggregate compensation at the general shareholders’ meeting each year. In
order to establish aggregate director and officer compensation, our shareholders usually take into
account various factors, which range from attributes, experience and skills of our directors and
executive 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 in compliance with our bylaws among the directors and executive officers, in
the latter case, at the recommendation of the Chief Executive Officer. The executive development
committee of our Board of Directors makes recommendations to the board concerning the annual
aggregate compensation of the executive officers. In addition to fixed compensation, our executive
officers are also eligible for bonuses and incentive payments.
For the year ended December 31, 2005, we paid approximately US$14.1 million in aggregate
(including fixed and variable remuneration and benefits in kind granted) to the executive officers
and US$477.1 thousand in aggregate (including fixed and variable remuneration and benefits in kind
granted) to the members of our Board of Directors for services in all capacities. For the year
ended December 31, 2005, no board members or executive officers had any financial or other
interests in transactions involving us, other than in his or her capacity as a board member or
As of April 30, 2006, the total number of common shares owned by our directors and executive
officers, was 41,161, and the total number of preferred class A shares owned by our directors and
executive officers, was 231,889. None of our directors or executive officers beneficially owns one
percent or more of any class of our shares.
During 2005, the monthly amount we paid to each of the members of the fiscal council was
US$4.5 thousand to each member, excluding benefits. We paid an aggregate of US$128.7 thousand to
members of the fiscal council in 2005. In addition, the members of the fiscal council are
reimbursed for travel expenses related to the performance of their functions.
We paid an aggregate of US$106.2 thousand to members of CVRD’s advisory committees in 2005.
In addition, the members of CVRD’s advisory committees are reimbursed for travel expenses related
to the performance of their functions.
Wages and benefits for CVRD and its subsidiaries are generally established on a
company-by-company basis. CVRD establishes its annual wage and benefits programs in July of each
year following negotiations with its unions. In July 2005, CVRD reached an agreement with the
unions for a 6.5% salary increase and maintenance of current benefits, which is valid until June
2006. The provisions of CVRD’s collective bargaining agreements with its unions also apply to
CVRD’s non-union employees. CVRD has never suffered any material economic loss as a result of
labor strikes or stoppages.
Employees of CVRD and most of its subsidiaries are eligible to participate in pension plans
managed by Fundação Vale do Rio Doce de Seguridade Social-VALIA (“Valia”). Sponsored by CVRD,
Valia is a closed, nonprofit, complementary social security plan with financial and administrative
autonomy. Substantially all of the participants in plans sponsored by Valia are participants in a
“new plan” Valia implemented in May 2000. The new plan is primarily a defined contribution plan
with a defined benefit feature relating to service prior to May 2000. Valia also sponsors the “old
plan” which is a defined benefit plan, with benefits based on years of service, salary and social
security benefits. This plan covers retired participants and their beneficiaries, as well as a
relatively small number of employees that declined to transfer from the old plan to the new plan
when it was established in May 2000.
Employees of CAEMI and its subsidiaries, MBR and CADAM, and employees of Alunorte participate
in different pension plans. CAEMI and MBR contribute to an open supplementary pension plan that is
principally a defined contribution, maintained by Bradesco Vida e Previdência S.A. This plan had
its origin in the social security and pension plan maintained by Fundação CAEMI de Previdência
Social and sponsored by CAEMI and MBR. The benefits granted by CAEMI and MBR include pensions for
retirement, disability and death. Benefits related to health care and group life insurance
provided by CAEMI and its subsidiaries to the employees come to an end when the beneficiary leaves
the company, whether retired or not. Employees of CADAM and Alunorte are covered by pension plans
managed by Bradesco Vida e Previdência.
All CVRD employees and their dependants are entitled to supplementary medical assistance,
which offers coverage for outpatient and in-hospital treatment, dental care and prescription drug
costs. Beneficiaries have free choice of care providers, with part of expenses being reimbursed.
Other important fringe benefits offered to employees are an annual amount for school materials,
group life insurance, funeral assistance and reimbursement of nursery school costs for employees’
children up to the age of three years.
CVRD’s bylaws authorize us to establish stock option plans, but to date we have not done so.
Employee Profit Sharing
All CVRD employees receive incentive compensation each year in an amount based on the
performance of CVRD, the performance of the employee’s department and the employee’s individual
performance. Similar incentive compensation arrangements are in place in other companies within
the CVRD group.
Major CVRD Shareholders. The table below sets forth certain information regarding beneficial
ownership of our common and preferred class A shares as of April 30, 2006, by each person we know
to be the beneficial owner of more than 5% of any class of our outstanding capital stock, and by
all directors and executive officers as a group.
Percent of Class
Directors and executive officers as a group
Preferred Class A Shares(3)
Directors and executive officers as a group
See the table below for more information on Valepar’s shareholders. Because each of
the shareholders of Valepar has the right to veto the transfer by Valepar of any shares it
holds in CVRD, each of the Valepar shareholders may be deemed a beneficial owner of the
entire Valepar stake under the rules of the SEC. In general, a person who has or shares
voting power or investment power with respect to securities is treated as a beneficial
owner of those securities. This does not imply that the person has the economic or other
benefits of ownership.
Excludes common shares owned directly by Valepar, in which BNDESPAR has an ownership
The Brazilian government (National Treasury) owns, through Fundo Garantidor das
Parcerias Público-Privadas, 15,226,023 preferred class A shares representing 3.7% of the
outstanding preferred class A shares, and BNDESPAR owns 364,333 preferred class A shares
representing 0.1% of the outstanding preferred class A shares.
Represents less than 1% of the outstanding shares of the class.
Valepar Shareholders. The tables below set forth information as of April 30, 2006
regarding share ownership of the common shares of Valepar S.A. and Litel Participações S.A, after
giving effect to the stock split approved by the Valepar annual shareholders’ meeting on April 28,2006.
Number of Valepar
Percent of Valepar
Common Shares Owned
Common Shares Owned
Litel Participações S.A(1)
Bradespar S.A. (2)
Mitsui & Co. Ltd.
Litel owns 99,568,944 preferred Class B shares of Valepar, which represents 71.41% of
the preferred shares. Litela, an affiliate of Litel owns 39,862,884 preferred Class B
shares of Valepar, which represents 28.59% of the preferred shares.
Bradespar is controlled by a control group consisting of Cidade de Deus — Cia.
Comercial Participações, Fundação Bradesco, NCF Participações S.A. and Nova Cidade de Deus
Litel Participações S.A.
BB Carteira Ativa 0(1)
BB Carteira Ativa II(1)
BB Renda Fixa IV(1)
Directors and Executive Officers as a group
Each of BB Carteira Ativa 0, BB Carteira Ativa II and BB Renda Fixa IV is a Brazilian
investment fund. BB Carteira Ativa 0 is 100% owned by Previ. BB Carteira Ativa II is
59.36% owned by Funcef, 35.8% owned by Petros and 4.84% owned by Fundação Cesp. BB Renda
Fixa IV is 100% owned by Previ. Each of Previ, Petros, Funcef and Fundação Cesp is a
Brazilian pension fund.
Brazilian Government Holdings. In 1997, we were privatized by the Brazilian government,
which sold its voting control to Valepar. As part of the privatization process, the National
Treasury and BNDES, the government-owned development bank, together retained 32% of our common
shares and 4% of our preferred class A shares. On March 20, 2002, as the final step of the
privatization process, the Brazilian government and BNDES each sold 39,393,919 shares, in the form
of common shares or American Depositary Shares, which together represented 32.1% of our outstanding
common shares. Currently, BNDESPAR, a wholly owned subsidiary of BNDES, owns common shares
representing approximately 7.1% of our outstanding common shares and 0.7% of our outstanding
preferred class A shares. The Brazilian government now owns approximately 3.7% of our outstanding
preferred class A shares (not counting shares held by BNDESPAR), and three golden shares 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 golden shares, see Item 10. Additional Information—Common and Preferred Shares—General.
Stock Splits. Our shareholders approved a 3-for-1 stock split at an Extraordinary General
Shareholders’ Meeting held on August 18, 2004. On August 19, 2004, each of our shares listed on
the São Paulo Stock Exchange (BOVESPA), both common (VALE3) and preferred (VALE5), was split into
three shares. In September 2004 each ADR representing our common shares (RIO) or preferred shares
(RIOPR) had a similar split. As a result, the proportion of one ADR to one underlying common or
preferred share was maintained.
In the annual general shareholders’ meeting on April 27, 2006, our shareholders approved a
2-for-1 stock split. Our ADRs will also split 2-for-1, to be effective on June 7, 2006.
Our principal shareholder is Valepar. The shareholders of Valepar have entered into a
shareholders’ agreement, ending in 2017. This agreement:
grants rights of first refusal on any transfer of Valepar shares and preemptive rights
on any new issue of Valepar shares;
prohibits the direct acquisition of CVRD shares by Valepar’s shareholders unless
authorized by the other shareholders;
prohibits encumbrances on Valepar shares (other than in connection with financing our
requires each party generally to retain control of its special purpose company holding
its interest in shares of Valepar, unless the rights of first refusal mentioned above are
allocates Valepar’s and our board seats;
provides for the maintenance by CVRD of a dividend policy requiring CVRD to distribute
50% of CVRD’s net profit for each fiscal year;
provides for the maintenance by CVRD of a capital structure that does not exceed
specified debt to equity thresholds;
requires the Valepar shareholders to vote their indirectly held CVRD shares and to cause
their representatives on CVRD’s Board of Directors to vote only in accordance with
decisions made at Valepar pre-meetings held prior to meetings of CVRD’s Board of Directors
or shareholders; and
establishes supermajority voting requirements for certain significant actions relating
to Valepar or to us.
Pursuant to the shareholders’ agreement, holders of at least 75% of the Valepar common shares
must agree to any of the following matters:
any amendment of CVRD’s bylaws;
any increase of CVRD’s capital stock by share subscription, creation of a new class of shares, change in the characteristics of the existing shares or any capital reduction of
any issuance of any debentures of CVRD, whether convertible into shares of CVRD,
participation certificates upon compensation, call options or any other security of CVRD;
any determination of issuance price for any new shares of capital stock or other
security of CVRD;
any amalgamation, spin-off or merger to which CVRD is a party, as well as any change to
CVRD’s corporate form;
any dissolution, receivership, bankruptcy or any other voluntary act for financial
reorganization or any suspension thereof;
the election and replacement of CVRD’s Board of Directors, including the chairman of the
board, and any officer of CVRD;
the disposal or acquisition of equity participation in any other company by CVRD, as
well as the acquisition of any shares of capital stock of CVRD or Valepar;
the participation by CVRD in a group of companies or in a consortium of any kind;
the execution of distribution, investment, sales exportation, technology transfer,
trademark license, patent exploration, license to use and lease agreements, to which CVRD
will be a party;
the approval and amendment of CVRD’s business plan;
the determination of the compensation of the directors of CVRD, as well as the duties of the board;
any profit sharing among the administrators of CVRD;
the determination of the compensation of CVRD’s officers;
any change in the corporate purpose of CVRD;
the distribution or non-distribution of any dividends on any shares of capital stock of
CVRD other than as provided in CVRD’s bylaws and any payment of interest on shareholders’
the appointment and replacement of CVRD’s independent auditor;
the creation of any “in rem” guarantee, granting of guarantees including rendering of
sureties by CVRD with respect to obligations of any third party, including any affiliates
the passing of any resolution on any matter which, pursuant to applicable law, entitles
a shareholder to withdrawal rights;
the appointment and replacement by the Board of Directors of any representative of CVRD
in subsidiaries, companies related to CVRD or other companies in which CVRD is entitled to
appoint directors and officers; and
any change in the debt to equity threshold, as defined in the shareholders’ agreement.
In addition, the shareholders’ agreement provides that any issuance of participation
certificates by CVRD or any disposition of CVRD’s shares held by Valepar requires the unanimous
consent of all of Valepar’s shareholders.
American Depositary Shares
As of April 30, 2006, American Depositary Shares represented 27.3% of our outstanding common
shares and 49.6% of our outstanding preferred class A shares.
At December 31, 2005, we had extended guarantees for borrowings obtained by affiliates and
joint ventures in the amount of US$5 million, of which US$4 million is denominated in U.S. dollars
and the remaining US$1 million in Brazilian currency. See Note 18 to our consolidated financial
We have commercial relationships in the ordinary course of our business, on an arm’s-length
basis, with a number of companies that are affiliated with shareholders of Valepar, our principal
shareholder. The most significant of these are our sales of iron ore and pellets to CST, in which
Previ holds interests, and to Usiminas, in which both Previ and we hold interests. We also have
arm’s-length commercial relationships in the ordinary course of our business with Mitsui, a
shareholder of Valepar.
In addition, we have commercial relationships with Petrobras — Petróleo Brasileiro S.A.
(Petrobras), a Brazilian state-owned oil company, in which our chief executive officer, Mr. Roger
Agnelli, serves as a member of its board of directors. We lease a potash mine (Taquari-Vassouras
mine) in Rosario do Catete, in the state of Sergipe, Brazil, from Petrobras, and we have an
agreement with Petrobras, under which we operate the Inácio Barbosa maritime terminal for a period
of ten years ending in December 2012. We also have commercial
relationships with Petrobras Distribuidora S.A.-BR, a subsidiary of Petrobras. See Item 4. Information on the Company
-Lines of Business — Non-Ferrous
Minerals — Potash and Item 4. Information on the Company -Lines of
Business — Logistics — Ports and Terminals.
For information regarding investments in affiliated companies and joint ventures and for
information regarding transactions with major related parties, see Notes 18 and 20 to our
consolidated financial statements.
We and our subsidiaries are defendants in numerous legal actions in the normal course of
business, including civil, administrative, tax, social security and labor proceedings. We have set
aside or deposited in court amounts to cover estimated contingency losses due to adverse legal
judgments. We believe that the provisions made against contingent losses are sufficient to cover
probable losses in connection with such actions.
We are currently involved in seven proceedings before the Conselho Administrativo de Defesa
Econômica, or CADE, which is the primary Brazilian antitrust regulator. Five of these proceedings
involve post-transaction review of acquisition or joint venture transactions, which is required for
nearly all of our acquisitions and joint ventures. The other two proceedings are administrative
proceedings alleging that we have engaged in illegal anticompetitive conduct in connection with our
logistics business. We intend to defend these claims vigorously, but we cannot predict their
outcome. If CADE were to find that we have engaged in anticompetitive conduct, it could order us
to cease the conduct and/or to pay fines.
CADE recently rendered its decision in connection with its post-transaction review of our
acquisitions of Socoimex, Samitri, Ferteco, Belém and CAEMI, and the agreement to unwind the
cross-shareholdings between us and Companhia Siderúrgica Nacional, or CSN. On August 10, 2005,
CADE issued a decision approving these acquisitions, subject to certain conditions. Under the
conditions set forth in CADE’s decision, we must either (i) fully waive our preemptive rights
relating to the Casa de Pedra iron ore mine and restructure our equity stake in MRS Logística or
(ii) sell all our assets that were previously owned by Ferteco Mineração S.A., a company we
acquired in 2001 and consolidated in August 2003. On the portion of the decision relating to the
Casa de Pedra mine, the members of CADE were split 3 to 3 and the CADE president issued a
tie-breaking vote against us. We filed a writ of mandamus with the federal courts to challenge the
procedural defects in that part of CADE’s decision related to the Casa de Pedra iron ore mine and
requested an injunction to suspend the effects of the entire decision pending a decision on the
writ of mandamus. The injunction was granted on November 10, 2005 and confirmed, on a preliminary
basis, by the Federal Circuit Court on December 19, 2005. However, on February 2, 2006, the court
issued an unfavorable decision on the writ of mandamus, which we are now appealing. Pending our
appeal of the Federal Circuit Court’s decision, the injunction suspending the effects of the CADE
decision will remain in force. In addition to the writ of mandamus and as a precautionary measure
should we be unsuccessful in our case, we filed a lawsuit with the Federal Court in the Federal
District on May 19, 2006, requesting a declaration of our right to be indemnified for losses and
damages incurred should we have to comply with the portion of the CADE decision relating to the
Casa de Pedra mine, and a determination of the indemnification amount prior to our choosing between
the sale of Ferteco and the Casa de Pedra/MRS option.
The CAEMI acquisition was approved by the European Commission subject to certain conditions,
including the sale of the Quebec Cartier Mining Company (QCM). We disposed of the class B
preferred shares retained by CAEMI in QCM in July 2005. For more details, see Note 7(a) to our
consolidated financial statements.
Numerous lawsuits challenging the legality of the minimum auction price fixed in our 1997
privatization are still pending, including a number of class action lawsuits. The lower courts
issued favorable decisions in these lawsuits that were appealed by their respective plaintiffs. In
the end of 2005, in the cases in which plaintiffs are challenging the price paid for the
controlling block of CVRD, the lower court decisions were overruled by higher courts, which
determined that the proceedings must be submitted back to the lower courts to continue with the
discovery phase under Brazilian rules of civil procedure, regarding the basis for establishing the
minimum price in the privatization program. Such higher court decisions are still subject to
appeal by all defendants. In the remaining cases, in which only irregular features of the
invitation to bid were being argued, the higher courts upheld the favorable decisions. We do not believe that, individually or in the aggregate,
will adversely affect the outcome of the privatization process or otherwise have a material adverse
effect on us.
We are a defendant in a public civil action seeking to annul the concession agreement through
which we and certain other defendants operate the Praia Mole port terminal in the state of Espírito
Santo, Brazil. The case, which was first filed in 1998, is still in its pre-trial stages and we
believe the claim to be without merit.
We are currently a defendant in two separate actions brought by the municipality of Itabira,
in the state of Minas Gerais. In one of the actions, filed in August 1996, the municipality of
Itabira alleges that our Itabira iron ore mining operations have caused environmental and social
damages and claims damages with respect to the degradation of the site of one of our mines, as well
as the immediate restoration of the affected ecological complex and the performance of compensatory
environmental programs in the region. The damages sought, as adjusted from the date of the claim,
amount to approximately US$722 million. 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. Since then, we renewed the operating license and we intend to
continue to comply with the conditions set out in the renewed operating license. 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.
The damages sought, as adjusted from the date of the claim, amount to approximately US$836 million.
We believe that this action is without merit. We are vigorously defending both pending lawsuits.
We are currently a defendant in a series of administrative proceedings brought by DNPM, the
most significant of which were brought against us in March 2006, alleging that we have failed to
pay the full amount of CFEM due in respect of revenues generated by our iron ore and manganese
activities. We believe that the DNPM’s allegations are without merit and intend to vigorously
contest them. The aggregate amount claimed in the administrative proceedings is approximately
US$1.3 billion. If we are not successful in the administrative proceedings, we may be required to
post judicial deposits of the amounts claimed in order to appeal any adverse decision. We are also
a defendant in a similar judicial proceeding brought by the Municipality of Mariana, alleging that
we have failed to pay the full amount of CFEM due with respect to revenues generated by our
pelletization activities. We believe that the Municipality of Mariana’s allegations in the case
are without merit and intend to vigorously contest them. We are also involved in litigation with
the DNPM regarding the applicable percentage of revenues to be applied to calculate the CFEM due on
potash. Please see Item 4. Information on the Company — Regulatory Matters — Mining.
We are engaged in litigation with respect to certain aspects of recent tax regulation that
requires earnings from foreign subsidiaries to be included in the determination of income taxes
payable in Brazil. We obtained an injunction in February 2003, suspending our obligation to pay
amounts in dispute. This injunction continues to be in effect by virtue of a pending appeal that
we filed with the federal appellate courts on September 2005 against an unfavorable decision issued
by lower federal courts on July 2005. We have not recorded provisions for these taxes in our
In accordance with ANEEL Resolution No. 591, dated as of November 2003, ANEEL authorized LIGHT
- Serviços de Eletricidade S.A. (“Light”) to charge consumidores livres or free consumers in the
state of Rio de Janeiro, and among them Valesul, several additional fees included in the tariff for
the use of the distribution system. In January 2004, Valesul commenced litigation contesting the
legality of this charge. In June 2004, Valesul obtained a favorable decision relieving it from the
payment of such fees. Light appealed from this decision and in September 2004, Light obtained a
decision from the higher courts that overruled the decision of the lower courts, thereby forcing
Valesul to resume making payments pending the resolution of the matter. Valesul appealed to the
Supreme Court (Superior Tribunal de Justiça), and is awaiting its decision.
Under our dividend policy, our management proposes to our Board of Directors, no later than
January 31 of each year, a minimum value per share, expressed in U.S. dollars that will be
distributed in that year to our shareholders. Dividends and/or interest on shareholders equity are
determined in U.S. dollars, considering our expected free cash flow generation in the year of
distribution. The proposal establishes two semiannual installments to be paid in the months of April and October of each year. It is submitted to the Board of
Directors in the meetings
scheduled for the months of April and October. Once approved, dividends
and/or interest on shareholders equity are paid in reais, and converted at prevailing exchange
rates on the last business day before the board meetings in April and October of each year.
Management can also propose to the Board of Directors, depending on the evolution of our cash flow
performance, a further payment to shareholders of an additional amount per share over and above the
minimum dividend initially established. For 2006, our management has proposed to the Board of
Directors a minimum dividend of US$1.3 billion. Our normal practice is to pay the same dividend or
interest on shareholders equity on both common and preferred class A shares. On April 12, 2006,
the first installment of this dividend representing US$650 million was approved. This installment
was paid on April 28, 2006.
Dividend distributions based on our dividend policy are subject to two constraints:
Our bylaws 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 as the mandatory dividend, unless the Board of
Directors advises our shareholders at our shareholders’ meeting that payment of the
mandatory dividend for the preceding year is inadvisable in light of our financial
Valepar, our principal shareholder, recommends the distribution of a dividend equal to
at least 50% of the amount of net income with respect to each fiscal year, except in 2005
when it recommended a dividend distribution equal to 43.68% of our net income.
For a discussion on dividend distribution provisions under Brazilian corporate law and our
bylaws, see Item 10. Additional Information.
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 or preferred class A 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 Brazilian withholding tax at varying rates.
Distributions of interest on shareholders’ equity to shareholders, including holders of American
depositary receipts, are currently subject to Brazilian withholding tax. See Item 10. Additional
Information—Taxation—Brazilian Tax Considerations.
By law, we are required to hold an annual shareholders’ meeting by April 30 of each year at
which an annual dividend may be declared. Additionally, our Board of Directors may declare interim
dividends. Under the Brazilian Corporate 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. From 1997 to 2003, all distributions took the form of interest on
shareholders’ equity. In 2004 and 2005, part of the distribution was made in the form of interest
on shareholders’ equity and part as dividends. See Item 10. Additional Information—Common Shares
and Preferred Shares—Payments on Shareholders’ Equity.
We make cash distributions on the common shares and preferred class A shares underlying the
American Depositary Shares in Brazilian currency to the custodian on behalf of the depositary. The
custodian then converts such proceeds into U.S. dollars and causes such U.S. dollars to be
delivered to the depositary for distribution to holders of American depositary receipts. For more
information on Brazilian tax policies regarding dividend distributions, see Item 10. Additional
Information—Taxation—Brazilian Tax Considerations.
The table below sets forth the cash distributions we paid to holders of common shares and
preferred class A shares for the periods indicated. A 3-for-1 stock split occurred in August 2004,
and amounts for prior periods have not been restated to give effect to the split. We have
calculated U.S. dollar conversions using the commercial selling rate in effect on the date of
payment. We stated amounts gross of any applicable withholding tax.
The table below sets forth trading information for our preferred and common American
Depositary Shares, as reported by the New York Stock Exchange and our preferred class A shares and
our common shares, as reported by the BOVESPA, for the periods indicated. Share prices in the
table for periods after August 19, 2004 (for our common and preferred shares) and after September7, 2004 (for our common and preferred ADSs) reflect a 3-for-1 stock split.
U.S. Dollars per Preferred
U.S. Dollars per Common
Reais per Common
Reais per Preferred
Class A American
Class A Share
May 2006 (2)
3-for-1 stock split occurred during this quarter.
Until May 23, 2006. 2-for-1 stock split occurred during this month, only with respect to
common and preferred Class A shares.
Source: Bloomberg LLP.
Our publicly traded share capital consists of common shares and preferred class A shares, each
without par value. Our common shares and our preferred class A shares are publicly traded in
Brazil on BOVESPA, under the ticker symbols VALE3 and VALE5, respectively. Our common shares and
preferred class A shares also trade on the LATIBEX, under the ticker symbols XVALO and XVALP,
respectively. The LATIBEX is an electronic market created in 1999 by the Madrid stock exchange in
order to enable trading of Latin American equity securities in euro denomination.
In December 2003, we agreed to comply with heightened corporate governance and disclosure
requirements established by the BOVESPA in order to qualify as a company admitted to BOVESPA’s
“Level 1 of Corporate Governance Requirements.”
To become a Level 1 company, an issuer must agree to:
ensure that shares of the issuer representing at least 25% of its total capital are
effectively available for trading;
adopt offering procedures that favor widespread ownership of shares whenever making a
comply with minimum quarterly disclosure standards;
follow stricter disclosure policies with respect to transactions made by controlling
shareholders, directors and officers involving securities issued by the issuer;
disclose any existing shareholders’ agreements and stock option plans; and
make a schedule of corporate events available to the shareholders.
Our common American Depositary Shares, each representing one common share, have been traded on
the New York Stock Exchange since March 2002, under the ticker symbol RIO. Our preferred American
Depositary Shares, each representing one preferred class A share, have been traded on the New York
Stock Exchange since June 2000, under the ticker symbol RIOPR. The preferred class A American
Depositary Shares had previously traded in the over-the-counter market since 1994. JPMorgan Chase
Bank serves as the depositary for both the common and the preferred American Depositary Shares. On
April 30, 2006, there were 406,725,905 American Depositary Shares outstanding, representing 49.6%
of our preferred class A shares, 27.3% of our common shares or 35.3% of our total share capital.
Our corporate purpose is defined by our bylaws to include:
the exploitation of mineral deposits in Brazil and abroad by means of extraction,
processing, industrialization, transportation, shipment and commerce of mineral goods;
the building and operation of railways and the exploitation of own or third-party rail
the building and operation of own or third-party maritime terminals, and the
exploitation of nautical activities for the provision of support within the harbor;
the provision of logistics services integrated with cargo transport, comprising
generation, storage, transshipment, distribution and delivery within the context of a
multimodal transport system;
the production, processing, transport, industrialization and commerce of all and any
source and form of energy, also involving activities of production, generation,
transmission, distribution and commerce of its products, derivatives and sub products;
the carrying-on, in Brazil or abroad, of other activities that may be of direct or
indirect consequence for the achievement of its corporate purpose, including research,
industrialization, purchase and sale, importation and exportation, the exploitation,
industrialization and commerce of forest resources and the provision of services of any
kind whatsoever; and
constituting or participating in any fashion in other companies, consortia or
associations directly or indirectly related to its business purpose.
Under the Brazilian Corporate 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 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 bylaws, 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. Directors, Management and Employees—Compensation.
Set forth below is certain information concerning our authorized and issued share capital and
a brief summary of certain significant provisions of our bylaws and the Brazilian Corporate Law.
This description does not purport to be complete and is qualified by reference to our bylaws (an
English translation of which has been filed with the SEC) and to the Brazilian Corporate Law.
Our bylaws authorize the issuance of up to 900 million common shares and up to 1,800 million
preferred class A shares, in each case based solely on the approval of the Board of Directors
without any additional shareholder approval.
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
Holders of preferred class A shares and the golden 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
(i) at least 3% of the book value per share, calculated in accordance with the financial
statements, which serve as reference for the payment of dividends, or (ii) 6% of their pro rata
share of our paid-in capital, whichever is higher. Non-controlling shareholders holding common
shares representing at least 15% of our voting capital, and preferred class A shares representing
at least 10% of our total share capital, have the right to appoint each one member and an alternate
to our Board of Directors. If no group of common or preferred class A shareholders meets the
thresholds described above, shareholders holding preferred class A or common shares representing at
least 10% of our total share capital are entitled to combine their holdings to appoint one member
and an alternate to our Board of Directors. Holders of preferred class A shares and the golden
shares may 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 an alternate.
The Brazilian government holds three golden shares in us. The golden shares are preferred
shares that entitle its holder to the same rights (including with respect to voting and dividend
preference) as holders of preferred class A shares. In addition, the holder of the golden shares
is entitled to veto any proposed action relating to the following matters:
a change in our name;
a change in the location of our head office;
a change in our corporate purpose as regards the mining activities;
any liquidation of our company;
any disposal or winding up of activities of any one or more of the following stages of
our iron ore mining integrated systems:
mineral deposits, ore deposits, mines;
ports and maritime terminals;
any change in the bylaws relating to the rights accorded to the classes of capital
stock issued by us; and
any change in the bylaws relating to the rights accorded the golden shares.
At each annual shareholders’ meeting, the Board of Directors is required to recommend, based
on the executive officers’ proposal, how to allocate our earnings for the preceding fiscal year.
For purposes of the Brazilian Corporate 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 Corporate Law, an amount equal to
our “net profits,” as further reduced by amounts allocated to the legal reserve, to the contingency
reserve or to the unrealized income reserve established by us in compliance with applicable law
(discussed below) and increased by reversals 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 Corporate 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
Discretionary reserves. Under the Brazilian Corporate Law, a company may also provide for
discretionary allocations of “net profits” to the extent set forth in its bylaws. Our bylaws
provide for one discretionary depletion reserve, which may be taken into account in allocating net
profits for any fiscal year. We currently maintain a tax incentive depletion reserve established
in respect of certain mining operations. Appropriations to the tax incentive depletion reserve are
deductible for tax purposes. The discretionary depletion reserve has not been used since 1996,
when the related tax incentive expired. For more details, see Note 16 to our consolidated
financial statements. There are no limits on the size or amount of proceeds that may be retained
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 Corporate 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. We have never allocated an amount to the contingency
Reserve for investment projects. Under the Brazilian Corporate Law, we may allocate a portion
of our “net profits” for discretionary appropriations for plant expansion and other capital
investment projects, the amount of which is based on a capital budget previously presented by
management and approved by shareholders. Under Law No. 10,303/2001, capital budgets with a
duration longer than one year must be reviewed at each annual shareholders’ meeting. After
completion of the relevant capital projects, we may retain the appropriation until shareholders
vote to transfer all or a portion of the reserve to capital or retained earnings.
Unrealized income reserve. As of March 1, 2002, under Law No. 10,303/2001, which amended the
Brazilian Corporate Law, the amount by which the mandatory dividend exceeds the “realized” portion
of net profits for any particular year may be allocated to the unrealized income reserve. The
“realized” portion of net profits is the amount by which “net profits” exceed the sum of (i) our
net positive results, if any, from the equity method of accounting for earnings and losses of our
subsidiaries and certain affiliates, and (ii) the profits, gains or return obtained on transactions
completed after the end of the following fiscal year.
Tax incentive investment reserve. Under the Brazilian tax laws, a portion of “net profits”
may also be allocated to a general “tax incentive investment reserve” in amounts corresponding to
reductions in our income tax generated by credits for particular government-approved investments.
The Brazilian Corporate Law provides that all discretionary allocations of “net profits,”
including discretionary reserves, the contingency reserve, the unrealized income reserve and the
reserve for investment projects, are subject to approval by the shareholders voting at the annual
meeting and can be transferred to capital or used for the payment of dividends in subsequent years.
The fiscal incentive investment reserve and legal reserve are also subject to approval by the
shareholders voting at the annual meeting and may be transferred to capital but are not available
for the payment of dividends in subsequent years.
Our calculation of “net profits” and allocations to reserves for any fiscal year are
determined on the basis of financial statements prepared in accordance with the Brazilian Corporate
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.
Our bylaws 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. The fiscal council must review
any such determination and report it to the shareholders. In addition to the mandatory dividend,
our Board of Directors may recommend to the shareholders payment of dividends from other funds
legally available therefore. Any payment of interim dividends will be netted against the amount of
the mandatory dividend for that fiscal year. The shareholders must also approve the recommendation
of the Board of Directors with respect to any required distribution. The amount of the mandatory
dividend is subject to the size of the legal reserve, the contingency reserve, and the unrealized
income reserve. The amount of the mandatory dividend is not subject to the size of the
discretionary depletion reserve. See Item 10. Additional Information—Common Shares and Preferred
Shares—Calculation of Distributable Amount. To date, our Board of Directors has never determined
that payment of the mandatory dividend was inadvisable.
Since our privatization in 1997 following a recommendation from Valepar, our principal
shareholder, we have distributed a dividend equal to at least 50% of the amount of net income for
distribution with respect to each fiscal year, except in 2005 when it recommended a dividend
distribution equal to 43.68% of our net income.
In November 2002, our Board of Directors approved a new dividend policy. See Item 8.
Financial Information—Dividends and Interest on Shareholders’ Equity.
Dividend Preference of Preferred Shares
Pursuant to our bylaws, holders of preferred class A shares and the golden shares are entitled
to a minimum annual non-cumulative preferential dividend equal to (i) at least 3% of the book value
per share, calculated in accordance with the financial statements which serve as reference for the
payment of dividends, or (ii) 6% of their pro rata share of our paid-in capital, whichever is
higher. To the extent that we declare dividends in any particular year in amounts which exceed the
preferential dividends on preferred class A shares, and after holders of common shares have
received distributions equivalent, on a per share basis, to the preferential dividends on preferred
class A shares, holders of common shares and preferred class A shares shall receive the same
additional dividend amount per share. Since the first step of our privatization in 1997, we have
had sufficient distributable amounts to be able to distribute equal amounts to both common and
Other Matters Relating to Preferred Class A Shares
Our bylaws do not provide for the conversion of preferred class A shares into common shares.
In addition, the preferred class A shares do not have any preference upon our liquidation and there
are no redemption provisions associated with the preferred class A shares.
Payments on Shareholders’ Equity
Pursuant to a change in Brazilian tax law effective January 1, 1996, Brazilian companies are
permitted to pay limited amounts to shareholders and treat such payments as an expense for
Brazilian income tax purposes. In accordance with Law No. 9,249 dated December 26, 1995, our
bylaws provide for the distribution of interest on shareholders’ equity as an alternative form of
payment to shareholders. The interest rate applied is 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 a beneficiary located in a tax haven jurisdiction
(i.e. a 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 bylaws, the amount paid to shareholders as interest
on shareholders’ equity (net of any withholding tax) may be included as part of any mandatory and
minimum dividend. Under the Brazilian Corporate 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.
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
class A shares. Holders of preferred class A shares and common shares may, in certain
circumstances, combine their respective holdings to elect members of our Board of Directors.
The golden shares entitle the holder thereof to the same voting rights as holders of preferred
class A shares. The golden shares also confer certain other significant voting rights in respect
of particular actions, as described under Item 10. Additional Information—Common Shares and
The Brazilian Corporate Law provides that non-voting or restricted-voting shares, such as the
preferred class A 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 bylaws 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
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
Pursuant to the Brazilian Corporate Law, shareholders voting at a general shareholders’
meeting have the power, among other powers, to:
amend the bylaws;
elect or dismiss members of the Board of Directors and members of the fiscal council at any time;
receive annual reports by management and accept or reject management’s financial
statements and recommendations including the allocation of net profits and the
distributable amount for payment of the mandatory dividend and allocation to the various
authorize the issuance of debentures;
suspend the rights of a shareholder in default of obligations established by law or by the bylaws;
accept or reject the valuation of assets contributed by a shareholder in consideration
for issuance of capital stock;
pass resolutions to reorganize our legal form, to merge, consolidate or split us, to
dissolve and liquidate us, to elect and dismiss our liquidators and to examine their
authorize management to file for bankruptcy or to request a concordata.
All shareholders’ meetings, including the annual shareholders’ meeting, 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 Diário 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 BOVESPA, we must publish a notice in a São Paulo based newspaper. Such notice must
contain the agenda for the meeting and, in the case of an amendment to our bylaws, an indication of
the subject matter. In addition, under our bylaws, the holder of the golden shares is entitled to
a minimum of 15 days prior formal notice to its legal representative of any general shareholders’
meeting to consider any proposed action subject to the veto rights accorded to the golden shares.
See Item 10. Additional Information—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 except for the eight-days prior notice, 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
Except as otherwise provided by law, resolutions of a shareholders’ meeting are passed by a
simple majority vote, abstentions not being taken into account. Under the Brazilian Corporate 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 bylaws;
(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) reducing the mandatory dividend;
(d) changing the corporate purposes;
(e) merging us with another company or consolidating or splitting us;
(f) dissolving or liquidating us;
(g) participating in a centralized group of companies as defined under the Brazilian Corporate
(h) canceling any ongoing liquidation of us.
Whenever the shares of any class of capital stock are entitled to vote, each share is entitled
to one vote. Annual shareholders’ meetings must be held by April 30 of each year. Shareholders’
meetings are called, convened and presided over by the Chairman or by the Vice-Chairman 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
Our common shares and preferred class A shares are not redeemable, except that a dissenting
shareholder is entitled under the Brazilian Corporate Law to obtain redemption upon a decision made
at a shareholders’ meeting by shareholders representing at least 50% of the voting shares:
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 bylaws);
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;
to reduce the mandatory distribution of dividends;
to change our corporate purposes;
to merge us with another company or consolidate us;
to transfer all of our shares to another company in order to make us a wholly owned
subsidiary of such company, a stock merger;
to approve the acquisition of control of another company at a price which exceeds
certain limits set forth in the Brazilian Corporate Law;
to approve our participation in a centralized group of companies as defined under the
Brazilian Corporate Law; or
in the event that the entity resulting from (a) a merger, (b) a stock merger 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
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 items (1) and (2)
above, the resolution is subject to confirmation by the 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 Corporate 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 bylaws currently do not provide that our capital stock will be
redeemable at its economic value and, consequently, any redemption pursuant to the Brazilian
Corporate Law would be made at no less than the 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.
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 bylaws, our Board of Directors may decide not to extend preemptive rights
to our shareholders or, under Law No. 10,303/2001, to reduce the 30-day period for the exercise of
preemptive rights, in each case with respect to any issuance of shares, debentures convertible into
shares and warrants in the context of a public offering, subject to the limit on the number of
shares that may be issued with the approval of the board without any additional shareholder
approval. In the event of a capital increase that 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 that
would reduce the proportion of capital represented by preferred class A shares, shareholders 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. In the event of a capital increase that would maintain or increase the
proportion of capital represented by common shares, shareholders will have preemptive rights to
subscribe only to newly issued common shares. In the event of a capital increase that would reduce
the proportion of capital represented by common shares, holders of common shares will have
preemptive rights to subscribe for preferred class A shares only to the extent necessary to prevent
dilution of their overall interest in us.
According to the Brazilian Corporate Law, in the event of a sale of control of the Company,
the acquirer is obliged to offer to holders of common voting shares the right to sell their shares
for a price equal to at least 80% of the price paid for the common voting shares representing
Form and Transfer
Our preferred class A 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
Corporate 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.
BOVESPA operates a central clearing system through Companhia Brasileira de Liquidação e
Custódia, 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.
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 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 Central Bank.
These restrictions on the remittance of foreign capital abroad could hinder or prevent the
custodian for the preferred class A shares or common shares represented by American Depositary
Shares, or holders who have exchanged American Depositary Shares for preferred class A shares or
common shares, from converting dividends, distributions or the proceeds from any sale of preferred
class A shares or common shares, as the case may be, into U.S. dollars and remitting such U.S.
dollars abroad. Delays in, or refusal to grant any required government approval for conversions of
Brazilian currency payments and remittances abroad of amounts owed to holders of American
Depositary Shares could adversely affect holders of American depositary receipts.
Under Resolution No. 2,689/2000, 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. 2,689/2000,
the definition of foreign investor includes individuals, legal entities, mutual funds and other
collective investment entities, domiciled or headquartered abroad.
Under Resolution No. 2,689/2000, a foreign investor must:
appoint at least one representative in Brazil, with powers to perform actions relating to its investment,
complete the appropriate foreign investor registration form,
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.
2,689/2000 must be registered or maintained in deposit accounts or under the custody of an entity
duly licensed by the Central Bank or the CVM. In addition, securities trading is restricted to
transactions carried out on stock exchanges or through organized over-the-counter markets licensed
by the CVM, except for subscription, bonification, conversion of debentures into shares, securities
indexes, purchase and sale of investment funds quotas and, if permitted by the CVM, going private
transactions, canceling or suspension of trading. Moreover, the offshore transfer or assignment of
the securities or other financial assets held by foreign investors pursuant to Resolution No.
2,689/2000 are prohibited, except for transfers resulting from a corporate reorganization, or
occurring upon the death of an investor by operation of law or will.
Resolution No. 1,927/1992 of the National Monetary Council, which is the restated and amended
Annex V to Resolution No. 1,289/1997, which we call the Annex V Regulations, provides for the
issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. It
provides that 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
American Depositary Shares who are not resident in a tax haven jurisdiction (i.e. a country or
location that does not impose taxes on income or where the maximum income tax rate is lower than
20%, or where the legislation imposes restrictions on disclosure of the shareholding composition or
the ownership of the investment) will be entitled to favorable tax treatment.
An electronic registration has been issued by the custodian in the name of JPMorgan Chase
Bank, the depositary, with respect to the American Depositary Shares. Pursuant to this electronic
registration, the custodian and the depositary are able to convert dividends and other
distributions with respect to the preferred class A shares or common 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 or common shares, the holder may
continue to rely on the custodian’s electronic registration for only five business days after the
exchange. After that, the holder must seek to obtain its own electronic registration with the
Central Bank under Law No. 4,131/1962 or Resolution No. 2,689/2000. 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 or common shares. A holder that obtains an electronic
registration generally will be subject to less favorable Brazilian tax treatment than a holder of
American Depositary Shares. See Item 10. Additional Information—Taxation—Brazilian Tax
As of March 14, 2005, there is a single foreign exchange market in Brazil. Foreign currencies
may only be purchased through a Brazilian bank authorized to operate in this market. In the past,
under Brazilian regulations, foreign exchange transactions were carried out on either the
commercial rate exchange market or the floating rate exchange market. Rates in the two markets
were generally the same. Although rates are freely negotiated in the foreign exchange market, they
may be strongly influenced by the Central Bank’s intervention. See Item 3. Key
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 or common shares from converting
distributions or the
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, common shares
or American Depositary Shares. You should know that it does not purport to be a comprehensive
description of all the tax considerations that may be relevant to a holder of preferred class A
shares, common shares or American Depositary Shares.
Holders of preferred class A shares, common 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, common shares or American Depositary Shares, including, in
particular, the effect of any state, local or other national tax laws.
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, common shares, or American Depositary
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of the
acquisition, ownership and disposition of preferred class A shares, common shares or American
Depositary Shares by a holder not deemed to be domiciled in Brazil for purposes of Brazilian
taxation (“non-Brazilian holder”). It is based on the tax laws of Brazil and regulations
thereunder in effect on the date hereof, which are subject to change (possibly with retroactive
effect). This discussion 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, common shares, or American Depositary Shares.
Taxation of dividends. Dividends, including dividends paid in kind, paid by us from profits
of periods beginning on or after January 1, 1996 (1) to the depositary in respect of the preferred
class A shares or common shares underlying the American Depositary Shares or (2) to a non-Brazilian
holder in respect of preferred class A shares or common shares will generally not be subject to
Brazilian withholding income tax. Dividends paid from profits generated before January 1, 1996 may
be subject to Brazilian withholding income tax at varying rates depending on the year the profits
were generated, except in the 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.
Distributions of interest on shareholders’ equity. Since January 1, 1996, Brazilian
corporations may attribute interest on shareholders’ equity as an alternative form of making
dividend distributions, 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 Central Bank of Brazil from time to time. Also, the amount paid may not
be higher, for tax purposes, 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, as far as the limits described above are observed.
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 exempt from tax in Brazil, which payments are free of Brazilian tax, and except if
the beneficiary is located in a tax haven jurisdiction (as defined below), in which case the
applicable rate is 25%.
Taxation of capital gains. For purposes of Brazilian taxation, two types of non-Brazilian
holders should be considered: (1) non-Brazilian holders that are not resident or domiciled in tax
haven jurisdictions (as defined below), which are registered before the Central Bank of Brazil
and the CVM to invest in Brazil in
accordance with Resolution No. 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
(i.e., a jurisdiction that does not impose income tax or where the maximum income tax rate is lower
than 20% and/or where internal legislation imposes restrictions on the disclosure of share or
investment ownership),. The investors identified in item (1) are subject to a favorable tax
treatment, as described below.
According to the Law No. 10,833, dated December 29, 2003, capital gains earned abroad derived
from the disposition of assets located in Brazil by non-residents to other non-residents may become
subject to taxation in Brazil. In this sense, upon the disposition of the preferred class A shares
or of the common shares, defined as assets located in Brazil, the non-Brazilian holder may be
subject to income tax on the gains assessed, following the rules described below, no matter if the
transaction is conducted in Brazil or abroad, or with a Brazilian resident or not. Regarding
American Depositary Shares, although we believe that the American Depositary Shares do not fall
within the definition of assets located in Brazil for the purposes of this rule, considering the
general and unclear scope of the rule and the lack of judicial court rulings in respect thereto, we
are unable to predict whether such understanding will ultimately prevail in the courts of Brazil.
The deposit of preferred class A shares or common shares in exchange for American Depositary
Shares is not subject to Brazilian income tax if the acquisition cost of the preferred class A
shares or common shares is lower than (i) the average price per preferred class A share or common
share on the Brazilian stock exchange in which the greatest number of such shares were sold on the
day of deposit; or (ii) if no preferred class A shares or common shares were sold on that day, the
average price on the Brazilian stock exchange in which the greatest number of preferred class A
shares or common shares were sold in the 15 trading sessions immediately preceding such deposit. In
such case, the difference between the acquisition cost and the average price of the preferred class
A shares or common shares calculated as described above will be considered to be a capital gain
subject to taxation. There are grounds to sustain that such taxation is not applicable in case of
investors registered under Resolution No. 2,689, which are not domiciled in a tax haven
jurisdiction. The withdrawal of American Depositary Shares in exchange for preferred class A
shares or common shares is not subject to Brazilian income tax as long as the applicable
regulations in respect to the registration of the investment before the Brazilian Central Bank are
properly complied with.
The gain realized as a result of a transaction on a Brazilian stock, future and commodities
exchange is the difference between the amount in Brazilian currency realized on the sale or
disposition and the acquisition cost, without any adjustment for inflation, of the shares sold.
Gains assessed on the disposition of the preferred class A shares or common shares carried out
on a Brazilian stock exchange (which includes the transactions carried out on the organized
are exempt from income tax when assessed by a non-Brazilian holder that (i) has
registered its investment in Brazil before the Brazilian Central Bank under the rules of
Resolution No. 2,689/2001 and (ii) is not a tax haven resident; or
are subject to income tax at a rate of 15% in any other case, including the gains
assessed by a non-Brazilian holder that (i) has not registered its investment in Brazil
before the Brazilian Central Bank under the rules of Resolution No. 2,689/2001; or (ii) has
registered its investment in Brazil before the Brazilian Central Bank under the rules of
Resolution No. 2,689/2001 but is a tax haven resident. In these cases, a withholding
income tax at a rate of 0.005% shall be levied on the transaction and can be offset with
the eventual income tax due on the capital gain.
Any other gains assessed on the disposition of the preferred class A shares or of the common
shares that are not carried out on a Brazilian stock exchange are subject to income tax at a rate
of 15%, except for tax haven residents which, in this case, are subject to income tax at a rate of
25%. In case these gains are related to transactions conducted on the Brazilian non-organized
over-the-counter market, with brokerage, a withholding income tax at a rate 0.005% shall also be
levied on the transaction and can be offset with the eventual income tax due on the capital gain.
With reference to proceeds of redemption or of a liquidating distribution with respect to
the preferred class A shares or common shares, the difference between the amount received and the
acquisition cost of the corresponding shares will be treated as a sale or disposition carried out
outside of the Brazilian stock exchange.
Any exercise of preemptive rights relating to the preferred class A shares or common shares
will not be subject to Brazilian taxation. 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 or common shares.
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 common shares
or American Depositary Shares by a non-Brazilian holder, except for gift and inheritance taxes
which are levied by some states of Brazil on gifts made or inheritances bestowed by individuals or
entities not resident or domiciled in Brazil or in the relevant State to individuals or entities
resident or domiciled within such state in Brazil. There are no Brazilian stamp, issue,
registration, or similar taxes or duties payable by holders of preferred class A shares or common
shares or American Depositary Shares.
Brazilian law imposes a Tax on Foreign Exchange Transactions, or IOF/Exchange Tax on the
conversion of reais into foreign currency and on the conversion of the foreign currency to reais.
Although the IOF/Exchange Tax rate is currently 0% with some few specific exceptions, but the
Minister of Finance has the legal power to increase the rate to a maximum of 25%. Any such
increase will be applicable only prospectively.
Brazilian law imposes a Tax on Transactions Involving Bonds or Securities (the “IOF/Bonds
Tax”), due on transactions involving bonds and securities, including those carried out on the
Brazilian stock, futures or commodities exchange. The rate of the IOF/Bonds Tax with respect to
preferred class A shares or common shares or American Depositary Shares is currently 0%. The
Minister of Finance, however, has the legal power to increase the rate to a maximum of 1.5% per
day. Any such increase will be applicable only prospectively.
In addition, as a general rule, transactions carried out in Brazil that result in the transfer
of reais from an account maintained with a Brazilian financial institution are subject to the
Temporary Contribution on Financial Transactions (“CPMF Tax”), at the rate of 0,38%. Currently,
the funds transferred for the acquisition of shares on Brazilian stock exchanges and the remittance
abroad of the proceeds earned from the disposition of shares in Brazil by means of a currency
exchange transaction are exempt of the CPMF Tax. In addition to that, according to Provisory
Measure No. 281, of February 15, 2006, the CPMF rate is reduced to zero on withdrawals from bank
accounts used to buy common shares in a public offering, provided the public offering is registered
with the CVM and that the issuer is listed in a Brazilian stock exchange. Such Provisory Measure
is currently in force but it must be approved by the Congress within 120 days from the date of its
publication and signed by the President to be converted into law.
U.S. Federal Income Tax Considerations
This summary does not purport to be a comprehensive description of all the tax consequences of
the acquisition, holding or disposition of the preferred class A shares or common shares or
American Depositary Shares. This summary applies to U.S. holders, as defined below, who hold their
preferred class A shares or common shares or American Depositary Shares as capital assets and does
not apply to special classes of holders, such as:
certain financial institutions,
dealers or traders in securities or foreign currencies,
persons holding preferred class A shares, common shares or American Depositary Shares as
part of hedge, straddle, conversion or other integrated financial transaction for tax
holders whose functional currency for tax purposes is not the U.S. dollar,
partnerships or other pass-through entities 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.
As used herein, the term “United States holder” means a beneficial owner of preferred class A
shares, common shares, or American Depositary Shares that is for U.S. federal income tax purposes:
a citizen or resident alien individual of the United States,
a corporation created or organized in or under the laws of the United States or of any
political subdivision thereof, or
otherwise subject to U.S. federal income taxation on a net income basis with respect to
the preferred class A shares, common shares, or American Depositary Shares.
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 or common shares represented by those American Depositary Shares. Deposits and
withdrawals of preferred class A shares or common shares by holders in exchange for American
Depositary Shares will not result in the realization of gain or loss for U.S. federal income tax
Taxation of dividends. Distributions paid on American Depositary Shares, preferred class A
shares or common shares, including distributions paid in the form of payments of interest on
capital for Brazilian tax purposes, out of our current or accumulated earnings and profits, as
determined for U.S. federal tax purposes, before reduction for any Brazilian income tax withheld by
us, will be taxable to you as foreign source dividend income and will not be eligible for the
dividends-received deduction allowed to corporations.
You will be required to include dividends paid in reais in income in an amount equal to their
U.S. dollar value calculated by reference to an exchange rate in effect on the date such items are
received. If you hold American Depositary Shares, you will be considered to receive a dividend
when the dividend is received by the depositary.
Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of
dividends received by an individual prior to January 1, 2011 with respect to the American
Depositary Shares will be subject to taxation at a maximum rate of 15% if the dividends are
“qualified dividends.” Dividends paid on the American Depositary Shares will be treated as
qualified dividends if (i) the American Depositary Shares are readily tradable on an established
securities market in the United States and (ii) the Company was not, in the year prior to the year
in which the dividend was paid, and is not, in the year in which the dividend is paid, a passive
foreign investment company (“PFIC”). The American Depositary Shares are listed on the New York
Stock Exchange and will qualify as readily tradable on an established securities market in the
United States so long as they are so listed. Based on CVRD’s audited financial statements and
relevant market and shareholder data, CVRD believes that it was not treated as a PFIC for U.S.
federal income tax purposes with respect to its 2004 or 2005 taxable year. In addition, based on
CVRD’s audited financial statements and its current expectations regarding the value and nature of
its assets, the sources and nature of its income, and relevant market and shareholder data, we do
not anticipate becoming a PFIC for its 2006 taxable year.
Based on existing guidance, it is not entirely clear whether dividends received with respect
to the preferred class A shares and common shares will be treated as qualified dividends, because
the preferred class A shares and common shares are not themselves
listed on a
U.S. exchange. In addition, the U.S. Treasury
has announced its intention to promulgate rules pursuant to which holders of American Depositary
Shares, preferred class A shares or common stock and intermediaries through whom such securities
are held will be permitted to rely on certifications from issuers to establish that dividends are
treated as qualified dividends. Because such procedures have not yet been issued, it is not clear
whether we will be able to comply with them. Holders of American Depositary Shares, preferred
class A shares and common shares should consult their own tax advisers regarding the availability
of the reduced dividend tax rate in the light of their own particular circumstances.
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” (or, for some holders, “financial services income”).
Taxation of capital gains. Upon a sale or exchange of preferred class A shares, common shares
or American Depositary Shares, you will recognize a capital gain or loss for U.S. federal income
tax purposes equal to the difference, if any, between the amount realized on the sale or exchange
and your adjusted tax basis in the preferred class A shares, common shares or American Depositary
Shares. This gain or loss will be long-term capital gain or loss if your holding period in the
preferred class A shares, common shares or American Depositary Shares exceeds one year. The net
amount of long-term capital gain recognized by individual U.S. holders prior to January 1, 2011
generally is subject to taxation at a maximum rate of 15%. Your ability to use capital losses to
offset income is subject to limitations.
Any gain or loss will be U.S. source gain or loss for U.S. foreign tax credit purposes.
Consequently, if a Brazilian withholding tax is imposed on the sale or disposition of American
Depositary Shares, preferred class A shares or common shares, and you do not receive significant
foreign source income from other sources you may not be able to derive effective U.S. foreign tax
credit benefits in respect of such Brazilian withholding tax. You should consult your own tax
advisor regarding the application of the foreign tax credit rules to your investment in, and
disposition of, American Depositary Shares, preferred class A shares or common shares.
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 Item 10. Additional Information—Taxation—Brazilian Tax
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, common shares or American Depositary Shares and the
proceeds from their sale or other disposition. You may be subject to United States backup
withholding tax on these payments if you fail to provide your taxpayer identification number or
comply with certain certification procedures or otherwise establish an exemption from backup
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 timely furnished to the Internal Revenue Service.
We are subject to the information requirements of the Securities Exchange Act of 1934, as
amended, and accordingly file reports and other information with the SEC. Reports and other
information filed by us with the SEC may be inspected and copied at the public reference facilities
maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can obtain further
information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
You may also inspect CVRD’s reports and other information at the offices of the New York Stock
Exchange, 11 Wall Street, New York, New York10005, on which CVRD’s American Depositary Shares are
listed. Our SEC filings are also available to the public from the SEC’s website at
http://www.sec.gov. For further information on obtaining copies of CVRD’s public filings at the
New York Stock Exchange, you should call (212) 656-5060.
We also file financial statements and other periodic reports with the CVM.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Risk Management Policy
We consider the effective management of risk a key objective to support our growth strategy
and financial flexibility. In furtherance of this objective, the Board of Directors has
established an enterprise risk management policy and a risk management committee. Under the
policy, we measure, monitor, and manage risk at the portfolio level, using a single framework, and
consider the natural diversification of our portfolio. We hedge our market risk only when
considered necessary to support our corporate strategy or to maintain our target level of financial
flexibility. The risk management committee is composed of members of senior management and assists
our Executive Directors in overseeing and reviewing information regarding our enterprise risk
management and framework, including the significant policies, procedures and practices employed to
manage risk. Our enterprise risk management policy is designed to promote an effective risk
management system and to ensure that enterprise-level risks are reported at least quarterly to the
risk management committee.
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 risk
management activities follow the risk management policy, which generally prohibits speculative
trading and short selling and requires diversification of transactions and counter-parties. We
monitor and evaluate our overall position regularly in order to evaluate financial results and
impact on our cash flow. We also periodically review the credit limits and creditworthiness of our
Under SFAS 133 – “Accounting for Derivative Financial Instruments and Hedging Activities,” as
amended by SFAS 137 and SFAS 138, we recognize all derivatives on our balance sheet at fair value,
and the gain or loss in fair value is included in current earnings. The asset (liability) balances
at December 31, 2005 and 2004 and the movement in fair value of derivative financial instruments
are as follows:
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 unrelated parties, except for accrued charges, as reflected in our
consolidated financial statements.
The table below provides information about our total debt obligations as of December 31,2005, 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
at December 31, 2005. The debt obligations’ actual cash flows are denominated mainly in U.S.
dollars or reais or other currencies, as indicated.
Weighted average interest rates do not take into account the effect of the derivatives.
Weighted average variable interest rates are based on the applicable reference rate at December31, 2005.
Interest Rate Risk
We are exposed to interest rate risk on our outstanding borrowing and in future debt
issuances. Our floating rate debt consists principally of U.S. dollar borrowings related to trade
finance and loans from commercial banks and multilateral organizations. In general, our foreign
currency floating rate debt is principally subject to changes in the London Interbank Offered Rate
(USD LIBOR). Consequently, fluctuations in the USD LIBOR may adversely impact our cash flows. To
mitigate the effects of interest rate volatility we sometimes make use of natural hedges allowed by
the positive correlation between U.S. dollar floating interest rates and metals prices. When
natural hedges are not present, we sometimes try to realize the same effect with the aid of
financial instruments. Our floating rate debt denominated in reais is mainly subject to changes in
the TJLP, as fixed by the BNDES.
We have entered into interest rate derivative transactions primarily to hedge the exposure we
hold on our USD floating rate debt. Our interest rate derivatives portfolio consists of options
and interest rate swaps to convert floating rate exposures to fixed
or 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. In our current portfolio, there is a swap subject to knock-out provisions, which, if
triggered, eliminate the protection it provides. The table below sets forth certain information
with respect to our interest rate derivatives portfolio at December 31, 2004 and 2005:
We are exposed to exchange rate risk associated with our foreign currency denominated debt.
On the other hand, a substantial proportion of our revenues are denominated in, or automatically
indexed to, the U.S. dollar. This provides a natural hedge against any devaluation of the
Brazilian real against the U.S. dollar. When devaluation occurs, the immediate negative impact on
foreign currency denominated debt is offset over time by the positive effect of devaluation on
future cash flows. In light of this framework, we generally do not use derivative instruments to
manage the currency exposure on our long-term dollar-denominated debt. However, we may
occasionally use derivatives to minimize the effects of the volatility of the exchange rates
between reais and U.S. dollars in the cash flow.
We are also exposed to the volatility of the exchange rate between reais and U.S. dollars in
our cash flows, considering that most of our revenues are denominated in U.S. dollars and a
significant amount of our operating and capital expenditures are denominated in reais.
Consequently, an appreciation of the real against the U.S. dollar would generally result in higher
operating and investment costs, negatively affecting our cash flow.
We have other exposures associated with our outstanding debt portfolio. We have a Euro
exposure associated with a credit line extended by KFW (Kreditanstalt für Wiederaufbau). To
mitigate the foreign currency risk, we have entered into some forward transactions that are
specified in the next table. The table below sets forth certain information with respect to our
exchange rate derivatives portfolio at December 31, 2004 and 2005.
We are also exposed to various market risks relating to the volatility of world market prices for:
iron ore and pellets, which represented 70.7% of our 2005 gross consolidated revenues;
manganese ore and ferroalloys, which represented 4.3% of our 2005 gross consolidated revenues;
aluminum-related products, which represented 10.5% of our 2005 gross consolidated revenues;
kaolin, which represented less than 1.3% of our 2005 gross consolidated revenues; and
copper, which we began producing in 2004 as copper concentrate and represented 2.9% of
our 2005 gross consolidated revenues.
We do not enter into derivatives transactions to hedge our iron ore, pellets, copper, kaolin,
manganese ore or ferroalloys exposure. Our strategy of not hedging our exposure to product price
volatility is in accordance with the guidelines determined by our risk management policy, which
relies primarily on the natural diversification of our portfolio. However, strategic product price
risk hedging may be implemented from time to time to support our growth strategy and financial
flexibility. See Item 5. Operating and Financial Review and Prospects.
The risk mitigation strategies set for our aluminum products were developed and implemented in
the past, when our subsidiaries Albrás and Alunorte were highly leveraged and hedging was needed to
guarantee the cash flow stream to comply with their debt obligations. To manage the risk
associated with fluctuations in aluminum prices, they engaged in hedging transactions involving put
and call options, as well as forward contracts. These derivative instruments allowed 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.
Our policy has been to settle all commodity derivatives contracts in cash without physical delivery
of product. In 2005, we did not execute any new transactions.
The table below sets forth certain information with respect to our aluminum derivatives
portfolio at December 31, 2004 and 2005.
We currently hold a small position in gold derivative instruments, structured to manage
the risks related to gold price fluctuations, inherent from the content of gold associated with
copper concentrate production. The table below sets forth certain information with respect to our
gold derivatives portfolio at December 31, 2004 and 2005.
We have a strict policy regarding financial credit risk arising from derivative and other
financial transactions executed with financial institutions. The credit policy was approved by our
Board of Directors, who delegated to the Executive Board the approval of individual limits and the
total credit exposure of the portfolio, to be proposed by our finance department. On a semiannual
basis, our financial institutions credit exposure is submitted to the finance committee and the
The credit quality of each institution is evaluated based on its financial strength, foreign
currency ratings published by international rating agencies, shareholder’s equity size and range of
financial products provided.
The credit policy only allows CVRD to perform financial transactions with institutions that
hold at least an A- foreign currency credit rating. In the case the rating of the institution is
capped by the sovereign ceiling, the rating of the country in which the institution is incorporated
has to be at least equal to Brazil rating, and the local currency rating of the institution has to
be at least A-. In addition, we can only invest our cash holdings and enter into derivative
transactions with institutions whose limits are consistent with our credit policy.
Commercial Credit Exposure
CVRD’s commercial credit policy establishes a set of rules under which the Executive Board
approves an Annual Commercial Exposure Limit, representing the maximum commercial credit exposure
CVRD is willing to take. This exposure limit is applied to each business segment of CVRD. For
those companies in which CVRD is the controlling shareholder, the limits are established according
to such policy. For the other companies, CVRD’s Executive Board recommends a credit limit in line
with CVRD’s policy. The policy outlines a procedure for measuring, granting and controlling
commercial credit within the group, which requires that each customer seeking commercial credit
must be evaluated considering its credit quality measured by the strength of its financial
statements, company size, past payment performance and country risk. In 2005, CVRD extended its
commercial credit policy to all of its consolidated companies.
CVRD’s disclosure committee, with the participation of CVRD’s chief executive officer, chief
financial officer, investors relations officer, general counsel, chief accounting officer and
internal controls officer, has evaluated the effectiveness of CVRD’s disclosure controls and
procedures as of the end of the period covered by this annual report. Vale Overseas carried out a
similar evaluation that relied primarily on CVRD’s evaluation of its controls. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon our evaluation, the Chief Executive
Officer and Chief Financial Officer of CVRD and the Director and Principal Executive Officer and
Director and Principal Financial Officer of Vale Overseas concluded that the disclosure controls
and procedures adopted by CVRD and Vale Overseas were effective to provide reasonable assurance
that information required to be disclosed by CVRD and Vale Overseas in the reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the applicable rules and forms, and that it is accumulated and communicated to
CVRD’s and Vale Overseas’ management, including the Chief Executive Officer and Chief Financial
Officer of CVRD and the Director and Principal Executive Officer and Director and Principal
Financial Officer of Vale Overseas, as appropriate to allow timely decisions regarding required
Our management identified no change in CVRD’s or Vale Overseas’ internal control over
financial reporting during CVRD’s and Vale Overseas fiscal year ended December 31, 2005 that has
materially affected or is reasonably likely to materially affect CVRD’s or Vale Overseas’ internal
control over financial reporting.
As described in Item 16D of this Form 20-F, in lieu of establishing an independent audit
committee, we have given our Fiscal Council the necessary powers to qualify for the exemption from
the audit committee requirements set forth in Exchange Act Rule 10A-3(c)(3). Our Board of
Directors has determined that one of the members of our Fiscal Council, Mr. Aníbal Moreira dos
Santos, is the audit committee financial expert. Mr. Moreira dos Santos meets the applicable
independence requirements for Fiscal Council membership under Brazilian law. He also meets the New
York Stock Exchange independence requirements that would apply to audit committee members in the
absence of our reliance on the exemption set forth in Exchange Act Rule 10A-3(c)(3).
CVRD has adopted a code of ethics that applies to all Board members, executive officers and
employees, including the Chief Executive Officer and the Chief Financial Officer and Principal
Accounting Officer of CVRD. CVRD’s code of ethics is also applicable to Vale Overseas and applies
to its directors. We have posted copies of these codes of ethics on our website:
http://www.cvrd.com.br/cvrd_us/media/CVRD_%20Codigodeetica_i.pdf. Copies of our codes of ethics
may be obtained without charge by writing to us at the address set forth on the front cover of this
Form 20-F. Neither CVRD nor Vale Overseas has granted any implicit or explicit waivers from any
provision of its code of ethics to the officers described above since adoption of the code.
“Audit Fees” are the aggregate fees billed by PricewaterhouseCoopers for the audit of our
consolidated and annual financial statements, reviews of interim financial statements and
attestation services that are provided in connection with statutory and regulatory filings or
engagements. “Audit-Related Fees” are fees charged by PricewaterhouseCoopers for assurance and
related services that are reasonably related to the performance of the audit or review of our
financial statements and are not reported under “Audit
Fees.” In 2004 and 2005, Audit-Related Fees consisted primarily
of fees for services related to CVRD’s preparation for the assessment required under Section 404 of
the Sarbanes-Oxley Act. “Tax Fees” relate primarily to the
review of the annual federal tax return and review of accuracy of the
tax computation procedures with respect to income tax and sales taxes.
Audit Committee Pre-Approval Policies and Procedures
Our Fiscal Council currently serves as our audit committee for purposes of the Sarbanes-Oxley
Act of 2002. Our Fiscal Council requires management to obtain the Fiscal Council’s approval before
engaging our independent auditors to provide any audit or permitted non-audit services to us or our
consolidated subsidiaries. Pursuant to this policy, our Fiscal Council is required to pre-approve
all audit and non-audit services provided to CVRD and its consolidated subsidiaries by their
respective independent auditors.
Our Fiscal Council has adopted a pre-approval policy for audit and non-audit services provided
to CVRD and its consolidated subsidiaries. Under the policy, the Fiscal Council has pre-approved a
detailed list of services based on detailed proposals from our auditors up to specified monetary
limits set forth in the policy. Services that are not listed or that exceed the specified limits
must be separately pre-approved by the Fiscal Council. The Fiscal Council is provided with reports
on the services provided under the policy on a periodic basis, and the list of pre-approved
services is updated periodically. The policy also sets forth a list of prohibited services.
Internal control related services must be specifically pre-approved by the Fiscal Council.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Under the listed company audit committee rules of the NYSE and the SEC, effective July 31,2005, we are required to comply with Exchange Act Rule 10A-3, which requires that we either
establish an audit committee composed of members of the Board of Directors that meets specified
requirements or designate and empower our fiscal council to perform the role of the audit committee
in reliance on the exemption set forth in Exchange Act Rule 10A-3(c)(3). We designated and
empowered our Fiscal Council to perform this role on July 19, 2005, pursuant to an amendment to our
by-laws approved by the shareholders’ meeting held at such date. In our assessment, our fiscal
council will be able to act independently and to satisfy the other requirements of Exchange Act
Report of Independent Registered Public Accounting Firm
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, 2005 and 2004, and the results
of their operations and their cash flows for each of the three years in the period ended December31, 2005, 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 2003 financial statements of certain affiliates, the investments in which generated
equity in earnings of US$157 million. Also, we did not audit the 2003 financial statements of
certain majority-owned subsidiaries which presented total revenues of US$839 million. 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 the standards of the
Public Company Accounting Oversight Board (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, assessing the accounting p