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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2001
Commission file number: 000-26030
COMPANHIA VALE DO RIO DOCE VALE OVERSEAS LIMITED
(Exact name of Registrant as specified (Exact name of Registrant as
in its charter) specified in its charter)
Valley of the Rio Doce Company
(Translation of Registrant's name into English)
Federative Republic of Brazil Cayman Islands
(Jurisdiction of incorporation or organization)
Avenida Graca Aranha, No. 26
20005-900 Rio de Janeiro, RJ, Brazil
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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 CVRD New York Stock Exchange
--------------
* Shares are not listed for trading, but only in connection with the
registration of American depositary shares pursuant to the requirements of
the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
The number of issued shares of each class of stock of CVRD as of December
31, 2001 was:
245,267,973 common shares, no par value per share
138,575,821 preferred class A shares, no par value per share
1 golden share, no par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
Please send copies of notices and communications from the Securities and
Exchange Commission to:
Joseph A. Hall
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
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TABLE OF CONTENTS
Page
----
Mining Terms................................................................iii
Presentation of Financial Information........................................vi
Presentation of Information Concerning Reserves..............................vi
Forward Looking Information.................................................vii
PART I........................................................................1
Item 1. Identity of Directors, Senior Management and Advisers.........1
1.A. Directors and Senior Management...............................1
1.B. Advisers......................................................1
1.C. Auditors......................................................1
Item 2. Offer Statistics and Expected Timetable.......................1
Item 3. Key Information...............................................2
3.A.1-2. Selected Financial Data....................................2
3.A.3. Exchange Rates............................................4
3.B. Capitalization and Indebtedness...............................6
3.C. Reasons for the Offer and Use of Proceeds.....................6
3.D. Risk Factors..................................................7
Item 4. Information on the Company...................................14
4.A.1-3. Incorporation of the Company...............................14
4.A.4. Development of the Company.................................14
4.A.5. Capital Expenditures and Divestitures......................18
4.A.6. Current Capital Expenditures and Divestitures..............18
4.A.7. Public Takeover Offers.....................................18
4.B., 4.C. and 4.D. Business Overview, Organizational Structure
and Property, Plants and Equipment................18
Item 5. Operating and Financial Review and Prospects..................53
5.A. Operating Results.............................................53
5.A.1. Changes.....................................................54
5.A.2. Inflation...................................................58
5.A.3. Currency Fluctuations.......................................59
5.A.4. Government Policies.........................................59
5.B. Liquidity and Capital Resources...............................59
5.B.1. Liquidity...................................................59
5.B.2. Debt........................................................60
5.B.3. Budgeted Capital Expenditures...............................61
5.C. Research and Development, Patents and Licenses, Etc...........61
5.D. Trend Information.............................................61
Item 6. Directors, Senior Management and Employees....................65
6.A., 6.B. and 6.C. Directors and Senior Management, Compensation
and Board Practices...............................65
6.D. Employees.....................................................72
6.E. Share Ownership...............................................72
Item 7. Major Shareholders and Related Party Transactions.............73
7.A. Major Shareholders............................................73
7.B. Related Party Transactions....................................77
7.C. Interests of Experts and Counsel..............................78
Item 8. Financial Information.........................................78
8.A.1-6. Consolidated Statements and Other Financial Information.....78
8.A.7. Legal Proceedings...........................................78
8.A.8. Dividend Distributions......................................79
8.B. Significant Changes...........................................80
i
Item 9. The Offer and Listing.........................................80
9.A.1-3. Offering Details............................................80
9.A.4. Price History of Stock......................................80
9.A.5-7. Listing Details.............................................81
9.B. Plan of Distribution..........................................81
9.C. Markets.......................................................81
9.D., 9.E. and 9.F. Selling Shareholders, Dilution and
Expenses of the Issue.............................81
Item 10. Additional Information........................................82
10.A. Share Capital.................................................82
10.B. Memorandum and Articles of Association........................82
10.C. Material Contracts............................................90
10.D. Exchange Controls and Other Limitations Affecting
Security Holders..............................................90
10.E. Taxation......................................................91
10.F. Dividends and Paying Agents...................................97
10.G. Statement by Experts..........................................97
10.H. Documents on Display..........................................98
10.I. Subsidiary Information........................................98
Item 11. Quantitative and Qualitative Disclosures About Market Risk....98
Item 12. Description of Securities Other than Equity Securities.......102
PART II.....................................................................102
Item 13. Defaults, Dividend Arrearages and Delinquencies..............102
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds..................................102
Item 15. [Reserved]...................................................102
Item 16. [Reserved]...................................................102
Item 17. Financial Statements.........................................102
PART III....................................................................103
Item 18. Financial Statements.........................................103
Index to Consolidated Financial Statements.............................103
Index to Audit Reports From Independent Accountants Listed.............103
Item 19 Exhibits ....................................................104
Signatures.............................................................106
ii
Mining Terms
Alumina.................. Aluminum oxide. It is extracted from bauxite in a
chemical refining process and is the principal raw
material in the electro-chemical process from which
aluminum is produced.
Bauxite.................. A rock composed primarily of hydrated aluminum
oxides. It is the principal ore of alumina, the raw
material from which aluminum is made.
Beneficiation............ The process of separating, concentrating and
classifying ore by particle size or some other
characteristic (e.g., specific gravity, magnetic
susceptibility, surface chemistry, etc.) in order
to obtain the mineral or metal of interest.
CIF...................... Cost, insurance and freight. It indicates that the
seller pays for shipping, insurance, and all other
costs associated with transportation of the
commodity to its destination.
CIL...................... Carbon-in-Leach. A method of recovering gold in
solution from slurry streams by contacting
activated carbon with the pulp during the leaching
process within agitated vessels and separating
loaded carbon from the pulp by screening.
CIP...................... Carbon-in-Pulp. A method of recovering gold and
silver extracted from pregnant cyanide solutions by
absorbing the precious metals to granules of
activated carbon, which are typically ground up
coconut shells.
Concentration............ Physical, chemical or biological process to
increase the grade of the metal or mineral of
interest.
DR....................... Direct reduction. DR iron ore pellets are used by
steelmakers that employ minimill technology.
DWT...................... Deadweight ton. The measurement unit of a vessel's
capacity for cargo, fuel oil, stores and crew,
measured in metric tons of 1,000 kg. A vessel's
total deadweight is the total weight the vessel can
carry when loaded to a particular load line.
Fines.................... Refers to iron ore with particles in the range of
0.10 mm to 6.35 mm diameter.
FOB...................... Free on Board. It indicates that the purchaser pays
for shipping, insurance, and all the other costs
associated with transportation of the commodity to
its destination.
Grade.................... The proportion of metal or mineral present in ore
or any other host material.
HL....................... Heap Leaching. A low cost method of extracting
metals such as gold and copper from low-grade ores.
It consists of building a
iii
heap of ore and applying a solution (lixiviant)
which dissolves the metal to produce a pregnant
solution (leachate) from which the metal is
recovered by precipitation and smelting or carbon
absorption, stripping and electrowinning methods.
Kaolin................... A fine white aluminum silicate clay used as a
coating agent, filler, extender and absorbent in
the paper, ceramics and pharmaceutical industries.
Lump ore................. Iron ore or manganese ore with the coarsest
particle size in the range of 6.35 mm to 75 mm
diameter, but varying slightly between different
mines and ores.
Manganese................ A hard brittle metallic element found primarily in
the minerals pyrolusite, hausmannite and manganate.
Mineral deposit(s) or
mineralized material(s). Refers to a mineralized body which has been
intersected by a sufficient number of
closely-spaced drill holes and/or
underground/surface samples to support sufficient
tonnage and grade of metal(s) or mineral(s) of
interest to warrant further exploration-development
work. The deposit does not qualify as an ore body
until it can be legally and economically extracted
at the time of ore reserve determination.
Open pit mining.......... The extraction method by which surface or barren
rock is removed so that ore may be removed using
power shovels, front-end loaders, hydraulic
excavators, draglines, etc.
Oxides................... Compounds of oxygen with another element. For
example, magnetite (Fe3O4) is an oxide mineral
formed by the chemical union of iron with oxygen.
Pellet feed.............. Fine (0.10 mm to 6.35 mm) and ultra-fine (less than
0.10 mm) iron ore particles generated by the
mining, grading, handling and transporting of iron
ore, with no practical direct application in the
steel industry, unless the material is aggregated
into pellets through an agglomeration process.
Pellets.................. Balls of agglomerated fine and ultra-fine iron ore
particles of a size and quality suitable for
particular steelmaking processes. Our pellets range
in size from 8 mm to 18 mm.
Potash................... A potassium chloride compound, chiefly KCl, used in
industry and agriculture.
Probable (indicated)
reserves................. Reserves for which quantity and grade and/or
quality are computed from information similar to
that used for proven (measured) reserves, but the
sites for inspection, sampling and measurement are
farther apart or are otherwise less adequately
spaced. The degree of assurance, although lower
than that for proven (measured) reserves, is high
enough to assume continuity between points of
observation.
iv
Proven (measured)
reserves................. Reserves for which (1) quantity is computed from
dimensions revealed in outcrops, trenches, workings
or drill holes; (2) grade and/or quality are
computed from the results of detailed sampling; and
(3) the sites for inspection, sampling and
measurement are spaced so closely and the geologic
character is so well defined that size, shape,
depth and mineral content of reserves are
well-established.
Recoverable reserve.... That portion of interest in the ore that can be
physically recovered through processing.
Reserve................ Refers to that part of a mineral deposit which
could be economically and legally extracted or
produced at the time of the reserve determination.
Run-of-mine............ Ore in its natural (unprocessed) state, as mined,
without having been crushed.
Seaborne market........ The market for iron ore products that are shipped
in vessels which have a capacity in excess of
50,000 DWT.
Sinter feed............ Iron or manganese ore suitable for sintering.
Sintering.............. Refers to the agglomeration of small particles into
a coherent mass by heating without melting.
S/P.................... Stockpile. Refers to ore or materials accumulated
or piled at the surface for future use.
Sulfides............... Compounds of sulphur with more than one element and
metallic sulfides (such as galena, PbS, and
chalcopyrite, CuFeS2) which occur as minerals.
v
Presentation of Financial Information
We have prepared our financial statements appearing in this annual report
in accordance with generally accepted accounting principles in the United
States (U.S. GAAP), which differ in certain respects from accounting principles
in Brazil (Brazilian GAAP). Brazilian GAAP is determined by the requirements of
Law No. 6,404, dated December 15, 1976, as amended (the Brazilian Corporation
Law), and the rules and regulations of the Comissao de Valores Mobiliarios, or
CVM, the Brazilian Securities Commission. We publish financial statements in
Brazil, known as the Brazilian Corporation Law financial statements, and
prepare them in accordance with Brazilian GAAP. We use our Brazilian
Corporation Law financial statements for:
o reports to Brazilian shareholders,
o filings with the CVM,
o determination of dividend payments, and
o determination of tax liability.
Our financial statements and the other financial information appearing in
this annual report have been remeasured (translated) from Brazilian reais to
U.S. dollars on the basis explained in note 2(a) to our financial statements
unless we indicate otherwise.
Some of the figures included in this annual report have been rounded.
--------------
References to "real," "reais" or "R$" are to Brazilian reais (plural) and
to the Brazilian real (singular), the official currency of Brazil; and
references to "U.S. dollars," "dollars" or "US$" are to United States dollars.
Unless otherwise specified, metric units have been used, e.g. tons refer
to metric tons.
References to "CVRD Group," "us" or "we" are to CVRD, its consolidated
subsidiaries and its joint ventures and other affiliated companies. References
to "Vale Overseas" are to Vale Overseas Limited. References to "affiliated
companies" are to companies in which Companhia Vale do Rio Doce has a minority
investment, and exclude controlled affiliates that are consolidated for
financial reporting purposes.
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.
Presentation of Information Concerning Reserves
The estimates of proven and probable reserves at mines within the CVRD
Group and the estimates of mine life, as of December 31, 2001, included in this
annual report have been calculated according to the technical definitions
required by the U.S. Securities and Exchange Commission, as described in Mining
Terms. We derived estimates of mine life described in this annual report from
such reserve estimates. See Item 3.D. Risk Factors--Risks Relating to the
Mining Industry.
The National Mineral Research Department, Departamento Nacional de
Pesquisa Mineral, or DNPM, compiles domestic and foreign mining reserve
estimates using criteria which may differ from technical definitions required
by the Commission. We have adjusted ore reserve estimates for extraction losses
and metallurgical recoveries during extraction.
vi
Forward Looking Information
This annual report contains statements which constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Many of the forward looking statements contained in this annual report
can be identified by the use of forward-looking words such as "anticipate",
"believe", "could", "expect", "should", "plan", "estimate", and "potential",
among others. Those statements appear in a number of places in this annual
report and include statements regarding our intent, belief or current
expectations with respect to:
o our direction and future operation,
o the implementation of our principal operating strategies, including
our potential participation in privatization, acquisition or joint
venture transactions or other investment opportunities,
o our divestiture plans,
o the implementation of our financing strategy and capital expenditure
plans,
o the exploration of mineral reserves and development of mining
facilities,
o depletion and exhaustion of mines and mineral reserves,
o the declaration or payment of dividends,
o other factors or trends affecting our financial condition or results
of operations, and
o the factors discussed under Item 3.D. Risk Factors beginning on page
7.
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; relating to the iron ore business
and its dependence on the global steel industry, which is cyclical in nature;
and 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, and our reports filed with the CVM and the U.S. Securities and
Exchange Commission. We caution that any such forward looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those in the forward looking
statements as a result of these various factors.
vii
PART I
Item 1. Identity of Directors, Senior Management and Advisers
1.A. Directors and Senior Management
See Item 6.A., 6.B. and 6.C. Directors and Senior Management, Compensation
and Board Practices--Board of Directors and--Executive Officers.
1.B. Advisers
Davis Polk & Wardwell acts as our U.S. legal adviser. The firm's address
is:
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017 U.S.A.
1.C. Auditors
PricewaterhouseCoopers Auditores Independentes acts as our independent
public accountants. The firm's address is:
PricewaterhouseCoopers Auditores Independentes
Rua da Candelaria 65
15th Floor
Rio de Janeiro, Brazil
PricewaterhouseCoopers is a member of the Instituto Brasileiro de
Contadores, or IBRACON, the Brazilian Institute of Accountants (registration
no. CRC-SP-160-S-RJ).
We have retained AMEC Engineering and Construction Services, or AMEC
(formerly MRDI), to audit and verify some of our estimates of proven and
probable reserves and mine life as of December 31, 2001. The firm's address is:
AMEC Engineering and Construction Services
2001 W. Camelback Road, Suite 300
Phoenix, AZ 85015 U.S.A.
Unless specifically stated, our reserve estimates have not been audited by
AMEC.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
1
Item 3. Key Information
3.A.1-2. Selected Financial Data
The table below presents selected consolidated financial information as of
and for the periods indicated. You should read this information together with
our consolidated financial statements appearing in this annual report.
For the Year Ended December 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(in millions of US$)
Statement of Income Data
Net operating revenues US$3,748 US$3,553 US$3,076 US$3,935 US$3,990
Cost of products and services (2,653) (2,272) (1,806) (2,429) (2,327)
Selling, general and administrative
expenses (207) (171) (138) (225) (241)
Research and development (51) (48) (27) (48) (43)
Employee profit sharing plan (46) (29) (24) (29) (38)
Restructuring costs (87) (9) -- -- --
Other income (expenses) (79) (175) (165) (278) (412)
-------- -------- -------- -------- --------
Operating income 625 849 916 926 929
-------- -------- -------- -------- --------
Non-operating income (expenses):
Financial income (expenses) (3) 151 (33) (107) (200)
Foreign exchange and monetary gain/
Translation gain (loss) 7 (108) (213) (142) (393)
Gain on sale of investments -- -- -- 54 784
-------- -------- -------- -------- --------
4 43 (246) (195) 191
-------- -------- -------- -------- --------
Income before income taxes, equity
results, minority interests and
extraordinary items 629 892 670 731 1,120
Income taxes benefit (charge) (32) -- (33) 32 218
Equity in results of affiliates and joint
ventures 155 80 41 260 (49)
Change in provision for losses and
write-downs on equity investments (59) (273) (268) 62 (4)
Minority interests (2) (1) 2 1 2
Extraordinary items (net of taxes)(1) (372) -- -- -- --
-------- -------- -------- -------- --------
Net income US$ 319 US$ 698 US$ 412 US$1,086 US$1,287
-------- -------- -------- -------- --------
Total cash distributions US$ 302 US$ 607 US$ 452 US$ 246 US$1,066
--------------
(1) Extraordinary items in 1997 relate to transactions in connection with the
first step of our privatization.
2
For the Year Ended December 31,
----------------------------------------------------------------
(in US$ except recorded dividends and interest on shareholders'
equity per share and share numbers)
1997 1998 1999 2000 2001
--------- --------- --------- -------- --------
Per Share Data
Basic earnings per common and
preferred share(2):
Income before extraordinary items... US$ 1.06 US$ 1.80 US$ 1.07 US$ 2.82 US$ 3.34
--------- --------- --------- -------- --------
Extraordinary items................. (0.96) -- -- -- --
Net income.......................... US$ 0.10 US$ 1.80 US$ 1.07 US$ 2.82 US$ 3.34
--------- --------- --------- -------- --------
Recorded dividends and interest on
shareholders' equity per share in US$(3) US$ 1.20 US$ 1.58 US$ 1.28 US$ 1.70 US$ 1.99
Recorded dividends and interest on
shareholders' equity per share in
Brazilian reais(3).................. R$ 1.33 R$ 1.86 R$ 2.28 R$ 3.33 R$ 4.61
Weighted average number of shares
outstanding (in thousands):
Common shares(2).................... 249,983 249,983 249,983 249,983 249,864
Preferred shares(2)................. 138,563 137,965 134,917 134,917 135,042
--------- --------- --------- -------- --------
Total........................... 388,546 387,948 384,900 384,900 384,906
--------- --------- --------- -------- --------
3
At December 31,
-------------------------------------------------------------------
1997 1998 1999 2000 2001
---------- --------- --------- --------- ---------
(in millions of US$)
Balance Sheet Data
Current assets............................. US$ 2,603 US$ 2,845 US$ 2,490 US$ 2,502 US$ 2,638
Property, plant and equipment, net......... 5,557 5,261 3,943 3,955 3,813
Investments in affiliated companies and
joint ventures and other investments.... 1,666 1,557 1,203 1,795 1,218
Other assets............................... 1,791 1,385 1,052 1,543 1,853
---------- --------- --------- --------- ---------
Total assets.................... 11,617 11,048 8,688 9,795 9,522
---------- --------- --------- --------- ---------
Current liabilities........................ 2,057 2,030 2,072 2,136 1,921
Long-term liabilities...................... 1,157 1,169 601 1,061 786
Long-term debt(4).......................... 1,428 1,389 1,321 2,020 2,170
Minority interest.......................... 69 68 3 9 5
---------- --------- --------- --------- ---------
Total liabilities............... 4,711 4,656 3,997 5,226 4,882
---------- --------- --------- --------- ---------
Stockholders' equity.......................
Capital stock....................... 1,288 1,740 1,927 1,927 2,211
Additional paid-in capital.......... 498 498 498 498 498
Reserves and retained earnings...... 5,120 4,154 2,266 2,144 1,931
---------- --------- --------- --------- ---------
Total stockholders' equity...... US$ 6,906 US$ 6,392 US$ 4,691 US$ 4,569 US$ 4,640
---------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity......... US$11,617 US$11,048 US$ 8,688 US$ 9,795 US$ 9,522
========= ========= ========= ========= =========
------------------
(2) Each common American depositary share represents one common share and each
preferred American depositary share represents one preferred class A
share.
(3) Since 1997, all distributions have been in the form of interest on
shareholders' equity.
(4) Excludes current portion. At December 31, 2001, we had extended guarantees
for borrowings of joint ventures and affiliated companies in an aggregate
amount of US$702 million. These contingent liabilities do not appear on
the face of our consolidated balance sheets, but appear in note 15(a) to
our consolidated financial statements.
At December 31,
-----------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
(in millions of US$)
Additional Data
Ratio of earnings to fixed charges(1)...... 3.40x 4.28x 3.66x 3.43x 4.28x
------------------
(1) To calculate the ratio of earnings to fixed charges, we calculate earnings
by adding interest before income taxes, equity results and minority
interests, fixed charges, amortization of capitalized interest and
distributed income of equity investments less capitalized interest. Fixed
charges represent the total of capitalized interest, financial expenses
and the preferred stock guaranteed dividend.
3.A.3. Exchange Rates
There are two principal foreign exchange markets in Brazil:
o the commercial rate exchange market, and
o the floating rate exchange market.
Most trade and financial foreign-exchange transactions are carried out on
the commercial rate exchange market. These transactions include the purchase or
sale of shares or the payment of dividends or interest with respect to shares.
4
Foreign currencies may only be purchased through a Brazilian bank authorized to
operate in these markets. In both markets, rates are freely negotiated but may
be influenced by Central Bank intervention. In 1999, the Central Bank unified
the exchange positions of the Brazilian banks in the floating rate exchange
market and commercial exchange market, which led to a convergence in the
pricing and liquidity of both markets. Since February 1, 1999, the floating
market rate has been the same as the commercial market rate. However, there is
no guarantee that these rates will continue to be the same in the future.
Despite the convergence in the pricing and liquidity of both markets, each
market continues to be regulated differently.
From its introduction on July 1, 1994 through March 1995, the real
appreciated against the U.S. dollar. In 1995, the Central Bank announced that
it would intervene in the market and buy or sell U.S. dollars, establishing a
band in which the exchange rate between the real and the U.S. dollar could
fluctuate. This policy resulted in a gradual devaluation of the real relative
to the U.S. dollar. On January 13, 1999, the band was set between R$1.20 and
R$1.32 per US$1.00. Two days later, on January 15, 1999, due to market
pressures, the Central Bank abolished the band system and allowed the real/U.S.
dollar exchange rate to float freely. As a result, the exchange rate dropped to
R$2.1647 per US$1.00 on March 3, 1999. Since then, the real/U.S. dollar
exchange rate has been established by the interbank market, and has fluctuated
considerably. In the past, the Central Bank has intervened occasionally to
control unstable movements in the foreign exchange rate. It is not possible to
predict whether the Central Bank will continue to let the real float freely or
whether the real will remain at its present level. Accordingly, it is not
possible to predict what impact the Brazilian government's exchange rate
policies may have on us. The Brazilian government could impose a band system in
the future or the real could devalue or appreciate substantially. For more
information on these risks, see Item 3.D Risk Factors--Risks Relating to
Brazil.
The following table sets forth the commercial selling rate, expressed in
reais per U.S. dollar (R$/US$) for the periods indicated.
Average for
------------------------------------------------------
Period-end Period Low High
---------- -------- ----- -----
Year ended
----------
December 31, 1997................. 1.116 1.088(1) 1.040 1.116
December 31, 1998................. 1.209 1.168(1) 1.117 1.209
December 31, 1999................. 1.789 1.851(1) 1.208 2.165
December 31, 2000................. 1.955 1.835(1) 1.723 1.985
December 31, 2001................. 2.320 2.353(1) 1.936 2.801
Month ended
-----------
December 31, 2001................. 2.320 2.380(2) 2.293 2.467
January 31, 2002.................. 2.418 2.366(2) 2.293 2.438
February 28, 2002................. 2.348 2.408(2) 2.348 2.469
March 31, 2002.................... 2.324 2.345(2) 2.324 2.366
April 30, 2002.................... 2.362 2.320(2) 2.271 2.369
May 31, 2002...................... 2.522 2.453(2) 2.377 2.530
June 24, 2002..................... 2.827 2.684(2) 2.541 2.827
--------------
(1) Average of the rates on the last day of each month in the period.
(2) Average of the lower and higher rates in the month.
Source: Central Bank.
On June 24, 2002, the commercial selling rate was R$2.827 per US $1.00.
5
3.B. Capitalization and Indebtedness
The table below sets forth our current liabilities and capitalization at
December 31, 2001.
At December
31, 2001
(In millions
of US$)
-------------
Current liabilities
Current portion of long-term debt.............................................. $ 296
Short-term debt................................................................ 589
Other.......................................................................... 1,036
-------------
Total current liabilities................................................ $ 1,921
============
Long-term liabilities
Long-term debt
Secured...................................................................... $ 633
Unsecured.................................................................... 1,537
-------------
Total long-term debt..................................................... 2,170
Loans from related parties..................................................... 21
Other.......................................................................... 765
-------------
Total long-term liabilities.............................................. 2,956
-------------
Minority interest................................................................. 5
-------------
Shareholders' equity
Preferred shares--600,000,000 shares authorized and 138,575,913 issued.......... 820
Common shares--300,000,000 shares authorized and 249,983,743 issued............. 1,479
Treasury shares--91 preferred and 4,715,170 common shares....................... (88)
Additional paid-in capital........................................................ 498
Retained earnings................................................................. 5,396
Other cumulative comprehensive income............................................. (3,465)
-------------
Total shareholders' equity............................................... 4,640
-------------
Total capitalization (total shareholders' equity + long-term debt)....... $ 6,810
============
We often use joint venture and affiliated company ownership structures
with domestic and foreign partners to finance our large-scale projects. On
occasion, we enter into guarantees to support the debt of these joint ventures
and affiliated companies. As of December 31, 2001, we had extended guarantees
for borrowings of joint ventures and affiliated companies in an aggregate
amount of US$702 million, of which US$492 million was denominated in U.S.
dollars and the remaining US$210 million was denominated in Brazilian currency.
These guarantees do not appear in the table above.
At December 31, 2001 US$458 million of our total long-term debt was
guaranteed by non-CVRD Group entities pursuant to a transaction which arose out
of our privatization.
Vale Overseas
The table below sets forth Vale Overseas' capitalization at March 31,
2002.
At December
31, 2001
(In millions
of US$)
------------
Long-term debt.............................................................. U.S.$300,000
Shareholders equity......................................................... 1
------------
Total................................................................. U.S.$300,001
============
3.C. Reasons for the Offer and Use of Proceeds
Not applicable.
6
3.D. Risk Factors
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise,
significant influence over the Brazilian economy. Brazilian political and
economic conditions have a direct impact on our business and the market
price of our securities.
The Brazilian government frequently intervenes in the Brazilian economy
and occasionally makes drastic changes in policy. The Brazilian government's
actions to control inflation and effect other policies have often involved wage
and price controls, currency devaluations, capital controls and limits on
imports, among other things. Our business, financial condition and results of
operations may be adversely affected by changes in policy involving tariffs,
exchange controls and other matters, as well as other factors outside of our
control such as:
o currency fluctuations,
o inflation,
o monetary policy and interest rates,
o fiscal policy,
o energy shortages, and
o other political, social and economic developments in or affecting
Brazil.
Inflation and certain government measures to curb inflation may contribute
significantly to economic uncertainty in Brazil and to heightened volatility
in the Brazilian securities markets and, consequently, may adversely affect
the market value of our securities.
Brazil has historically experienced extremely high rates of inflation.
Since the introduction of the real in July 1994 under the Real Plan, Brazil's
inflation rate has been substantially lower than in previous periods.
Inflation, as measured by the Indice Geral de Precos--Mercado, the general
market price index in Brazil, or IGP-M, fell to 1.8% in 1998 before increasing
to 20.1% in 1999 as a result of the devaluation of the real in January 1999,
and decreased again to 9.9% in 2000, 10.4% in 2001 and 1.1% in the first four
months of 2002. There can be no assurance that recent lower levels of inflation
will continue. Future governmental actions, including actions to adjust the
value of the real, may trigger increases in inflation. If Brazil experiences
substantial inflation again in the future, our operating expenses and borrowing
costs may increase, our operating and net margins may decrease and, if investor
confidence decreases, the price of our securities may fall. For a more detailed
discussion about inflation, see Item 5.A.2. Inflation.
Inflation itself and governmental measures to combat inflation have had
significant negative effects on the Brazilian economy. Since 1999, governmental
actions to curb inflation have included interest rate increases and
intervention in the foreign exchange market through the sale of U.S. dollars
and government bonds linked to the U.S. dollar. These actions may adversely
affect the market value of our securities.
Fluctuations in the value of the real against the value of the U.S. dollar
may result in uncertainty in the Brazilian economy and the Brazilian
securities market and could lower the market value of our securities.
The Brazilian currency has historically suffered frequent devaluation and
depreciation. In the past, the Brazilian government has implemented various
economic plans and utilized a number of exchange rate policies, including
sudden devaluations, periodic mini-devaluations during which the frequency of
adjustments has ranged from daily to monthly, floating exchange rate systems,
exchange controls and dual exchange rate markets. Although over long periods
depreciation of the Brazilian currency generally has correlated with the rate
of inflation in Brazil, 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.
7
In 1999, the real depreciated 48% against the U.S. dollar, and in 2000 it
devalued 9%. During 2001, the real experienced a period of significant
depreciation, in part due to the economic uncertainties in Argentina, the
global economic slowdown and the energy crisis in Brazil. The real depreciated
18.7% against the U.S. dollar during 2001. There are no guarantees that the
exchange rate between the real and the U.S. dollar will stabilize at current
levels or that the real will appreciate against the U.S. dollar.
Depreciation of the real relative to the U.S. dollar would reduce the U.S.
dollar value of distributions and the dividends on the American depositary
shares and may also reduce the market value of our securities. Depreciation
also creates additional inflationary pressures in Brazil by generally
increasing the price of imported products and requiring recessionary government
policies to curb aggregate demand. On the other hand, appreciation of the real
against the U.S. dollar may lead to a deterioration of the current account and
the balance of payments, as well as dampen export-driven growth. For a more
detailed discussion about the floating exchange rate and Brazilian government
measures aimed at stabilizing the real, see Item 3.A.3. Exchange Rates.
Developments in other emerging market countries may affect the Brazilian
securities markets.
International investors generally consider Brazil to be an emerging
market. As a result, economic and market conditions in other emerging market
countries, especially those in Latin America, influence the market for
securities issued by Brazilian companies. Since the fourth quarter of 1997, the
international financial markets have experienced significant volatility, and a
large number of market indices, including those in Brazil, have declined
significantly. For example, the Brazilian financial markets were adversely
affected by the Asian financial crisis at the end of 1997 and the Russian
financial crisis in 1998. In 2001, after prolonged periods of recession,
followed by political instability, Argentina announced it would not service its
public debt. In order to address the worsening economic and social crisis, the
Argentine government abandoned its decade-old fixed dollar-peso exchange rate,
allowing the currency to float. The Argentine peso experienced a 260%
devaluation against the U.S. dollar from January 1 to May 31, 2002.
The continuation of the Argentine recession and the recent devaluation of
the Argentine peso could adversely affect the Brazilian economy, as Argentina
is one of Brazil's principal trading partners, accounting for 8.6% of Brazil's
exports in 2001. The Argentine crisis may also affect the perception of risk in
Brazil by foreign investors. Although the expectation of many that a similar
problem would follow in Brazil has not materialized, the volatility in market
prices for Brazilian securities increased in early 2001. Nonetheless, if events
in Argentina continue to deteriorate, they may adversely affect our ability to
borrow funds at an acceptable interest rate, to raise equity capital when and
if there should be a need, or to finance capital expenditures. Approximately
63.9% of our long-term debt at December 31, 2001 is scheduled to mature in 2003
and 2004. Accordingly, adverse developments in Argentina or in other emerging
market countries could harm our results of operations and lead to a reduction
in the demand for, and market price of, our ADSs
The Brazilian government's energy rationing program could adversely affect
us.
We are a significant consumer of Brazil's electricity production, and
accounted for 4.5% of total consumption in Brazil in 2001. Brazil faced a
shortage of energy during the second half of 2001 as a result of increased
demand due to economic growth, inadequate expansion of electric generation in
past years and unfavorable hydrological conditions. In response, the Brazilian
government imposed an energy rationing program to alleviate the energy
shortage, which aimed to decrease energy consumption by at least 20%. This
program had a negative impact upon the country's economic performance and
inflation levels. As a result of this program, we had a temporary reduction of
our aluminum and ferro-alloy production. By the end of 2001, climate conditions
improved, reducing the immediate risk of energy shortages. Therefore, the
Brazilian government eliminated the restrictions on the use of energy on
December 31, 2001 for the northern region of Brazil, and on February 28, 2002
for the rest of Brazil. However, there currently remain forecasted shortfalls
in generation capacity. We are unable to assess the impact that the
government's response to future energy shortages may have on our operations.
Our business could be affected by political instability in Brazil.
The next presidential elections in Brazil are to occur in October 2002 and
Brazilian law does not allow President Fernando Henrique Cardoso, now serving a
second term, to serve a third term. Changes in the
8
composition of the governing coalition, in the identity of ruling local
parties, in the cabinet or in the presidency may potentially undermine investor
confidence or produce policy changes that may adversely affect our operations
and/or the price of our ADSs.
Risks Relating to Our Business
Due to our dependence on the global steel industry, any fluctuations in the
demand for steel could adversely affect our business.
Sales prices and volumes in the worldwide iron ore mining industry depend
on the prevailing and expected level of demand for iron ore in the world steel
industry. The world steel industry is cyclical. A number of factors, the most
significant of these being the prevailing level of worldwide demand for steel
products, influence the world steel industry. During periods of sluggish or
declining regional or world economic growth, demand for steel products
generally decreases and leads to corresponding reductions in demand for iron
ore. Global steel output in 2001 decreased by 0.08% to 846,900 from 847,600
tons produced during 2000. This may lead to decreases in the level of demand in
the iron ore market and have an adverse effect on world contract prices and
sales volumes for iron ore. Prolonged reductions or declines in world contract
prices or sales volumes for iron ore would have a material adverse effect on
our revenues. In addition, poor conditions in the global steel industry could
result in the bankruptcy of some of our customers, which would increase our bad
debt expenses.
The mining industry is an intensely competitive industry, and we cannot
assure our ability to continue to effectively compete with other mining
companies in the future.
Intense competition characterizes the worldwide iron ore industry. We
compete with a number of large mining companies, including international mining
companies. Some of these competitors possess substantial iron ore mineral
deposits at locations closer to our principal Asian and European customers and
it is possible that competition from foreign or Brazilian iron ore producers in
the future will result in our losing market share and revenues. Our gold,
aluminum, manganese and other activities are also subject to intense
competition.
Competition in the energy generation business tends to intensify
As a result of the Brazilian government's privatization and restructuring
of the regulatory framework for the power industry, we expect an increase in
competition in the generation of electricity, which could result in declining
energy prices. Beginning on January 1, 2003, the provision of electricity
services will be subject to further deregulation and competition may increase
even further with the entry of new competitors. A sustained decrease in energy
prices would lower the returns that we are expecting from our investments in
the energy business.
We are subject to cyclicality and price volatility for iron ore, aluminum
and other minerals.
Cyclical and other uncontrollable changes in world market prices affect
our iron ore, aluminum, gold and other mining activities. In particular,
aluminum and gold are sold in an active world market and traded on exchanges,
such as the London Metals Exchange and the Commodity Exchange, Inc. Therefore,
the prices for these metals are more volatile than iron and pellet prices, as
they respond to daily changes in supply and demand. Prolonged declines in world
market prices, in nominal and real terms, for our products would have a
material adverse effect on our revenues.
Our mining activities depend on authorizations of regulatory agencies.
Changes in regulations could have an adverse effect on our business.
Our mining activities in Brazil depend on authorizations and concessions
by regulatory agencies of the Brazilian government. Our exploration, mining and
mineral processing activities are also subject to Brazilian laws and
regulations which change from time to time. If these laws and regulations
change in the future, modifications to our technologies and operations could be
required, and we may be required to make unbudgeted capital expenditures which
could lead to an increase in our borrowing costs. For a more detailed
discussion about the authorizations and concessions by regulatory agencies of
the Brazilian government upon which our mining activities depend, see Item
4.B., 4.C. and 4.D. Business Overview, Organizational Structure and Property,
Plants and Equipment--Lines of Business--Non-Ferrous Minerals--Regulatory
Matters.
9
Our energy business is subject to extensive governmental regulation
The Brazilian power generation business depends on concessions granted by
the government and is regulated and supervised by the Brazilian electricity
regulatory governmental agency, ANEEL. Given that Brazil may face future energy
shortages like the one experienced in the second half of 2001, the Brazilian
government has announced its intention to issue further regulations applicable
to the power system. Changes in the laws, regulations or governmental policies
regarding the power generation industry, the marketing of energy in the
wholesale market or concession requirements could lower the returns we are
expecting from our investments in the business. For more information on the
regulations governing our energy business, see Item 4.B., 4.C. and 4.D.
Business Overview, Organizational Structure and Property, Plants and
Equipment--Non-Ferrous Minerals--Regulatory Matters.
Our operations are also regulated by Brazilian environmental laws. Changes
to these laws in the future may adversely affect our mining and energy
business.
Our operations often involve using, handling, disposing and discharging
hazardous materials into the environment or the use of natural resources, and
are therefore subject to the environmental laws and regulations of Brazil.
Environmental regulation in Brazil has become stricter in recent years, and it
is possible that more regulation or more aggressive enforcement of existing
regulations will adversely affect us through imposing restrictions on our
activities, creating new requirements for the issuance or renewal of
environmental licenses, raising our costs, or requiring us to engage in
expensive reclamation efforts. We are currently a defendant in an action
brought by the municipality of Itabira, in the state of Minas Gerais, on the
basis of environmental laws. If we do not prevail in this lawsuit, we could
incur a substantial expense. For more information on environmental laws and the
legal challenges we face, see Item 4.B., 4.C. and 4.D. Business Overview,
Organizational Structure and Property, Plants and Equipment--Environmental
Matters and Item 8.A.7. Legal Proceedings.
Our reserve estimates may be materially different from mineral quantities
that we may actually recover and market price fluctuations and changes in
operating and capital costs may render certain ore reserves or mineral
deposits uneconomical to mine.
Our reported ore reserves and mineral deposits are estimated quantities of
ore and minerals that under present and anticipated conditions have the
potential to be economically mined and processed by the extraction of their
mineral content. There are numerous uncertainties inherent in estimating
quantities of reserves and in projecting potential future rates of mineral
production, including many factors beyond our control. In addition, reserve
engineering is a subjective process of estimating underground deposits of
minerals that cannot be measured in an exact manner and the accuracy of any
reserve estimate is a function of the quality of available data and engineering
and geological interpretation and judgment. Estimates of different engineers
may vary and results of our mining and production subsequent to the date of an
estimate may justify revision of estimates. Reserve estimates may require
revision based on actual production experience and other factors. For example,
fluctuations in the market price of metals, reduced recovery rates or increased
production costs due to inflation or other factors may render proven and
probable reserves containing relatively lower grades of mineralization
uneconomic to exploit and may ultimately result in a restatement of reserves.
We face a number of risks which could lead to economically harmful
consequences to us.
Our businesses are generally subject to a number of risks and hazards,
including:
o industrial accidents,
o labor disputes,
o unexpected geological conditions,
o slope failures,
o environmental hazards,
o electricity stoppages,
10
o equipment or vessel failures, and
o weather and other natural phenomena.
These occurrences could result in damage to, or destruction of, mineral
properties, production facilities, transportation facilities, equipment or
vessels. They could also result in personal injury or death, environmental
damage, waste of resources or intermediate products, delays or interruption in
mining, production or transportation activities, monetary losses and possible
legal liability. The insurance we maintain against risks that are typical in
our business may not provide adequate coverage. Insurance against some risks
(including liabilities for environmental pollution or certain hazards or
interruption of certain business activities) may not be available at a
reasonable cost or at all. Therefore, accidents or other negative developments
involving our mining, production or transportation facilities could have a
material adverse effect on our operations.
Our mineral exploration efforts may not lead to a replenishment of our gold
reserves, which could adversely affect our mining prospects.
We engage in mineral exploration principally related to copper and gold.
Mineral exploration is highly speculative in nature, involves many risks and
frequently is nonproductive. With respect to our gold operations, it is
possible that our exploration programs will not result in the expansion or
replacement of reserves depleted by current production. If we do not develop
new reserves, we may not be able to sustain our current level of production
beyond the remaining life of existing mines.
Even if we discover minerals, we remain subject to drilling and production
risks, which could adversely affect the mining process.
Once we discover mineralization, it may take us a number of years from the
initial phases of drilling until production is possible, during which the
economic feasibility of production may change. It takes substantial time and
expenditures to:
o establish ore reserves through drilling,
o determine appropriate metallurgical processes for optimizing the
recovery of metal contained in ore,
o obtain the ore or extract the metals from the ore, and
o construct mining and processing facilities for greenfield properties.
It is possible that a project will prove uneconomical by the time we are
able to exploit it, in which case we may incur substantial write-offs.
We face rising extraction costs as our deposits decrease.
Ore reserves gradually decrease in the ordinary course of a given
mining operation. As reserves decrease, it becomes necessary for mining
companies to use more expensive processes to extract remaining ore. As a
result, mining companies, over time, usually experience rising unit extraction
costs with respect to a particular mine. Several of our mines have operated for
long periods, and we will likely experience rising extraction costs per unit in
the future at these operations.
Risks Relating to the CVRD Group
Some of our operations depend on joint ventures and could be adversely
affected if our joint venture partners do not observe their commitments.
We currently operate important parts of our pelletizing, copper
exploration, logistics, energy, and aluminum businesses through joint ventures
with other companies. Our forecasts and plans for these joint ventures assume
that our joint venture partners will observe their obligations to contribute
capital, purchase products and, in some cases,
11
provide managerial talent. If any of our joint venture partners do not observe
its commitments, it is possible that the affected joint venture would not be
able to operate in accordance with its business plans or that we would have to
increase the level of our investment to give effect to these plans. For more
information on our joint ventures, see Item 4.B., 4.C. and 4.D. Business
Overview, Organizational Structure and Property, Plants and Equipment--Lines of
Business--Ferrous Minerals--Pellets, --Lines of Business--Non-Ferrous
Minerals--Current Copper Prospects, --Lines of Business--Logistics, --Lines of
Business--Energy and --Lines of Business--Holdings--Aluminum Business--
Bauxite, --Alumina and --Aluminum.
Our Albras joint venture is subject to substantial electricity cost
increases.
Electricity costs are a significant component of the cost of producing
aluminum. Our aluminum plant, Albras--Aluminio Brasileiro S.A., or Albras,
obtains electric power at discounted rates from Eletronorte, a state-owned
electric power utility. The contract through which Albras purchases electricity
from this utility expires in 2004. It is not likely that Albras will continue
to benefit from below-market electricity costs following expiration of the
contract. Albras is currently trying to negotiate a new contract and is
examining other alternatives. We cannot predict the impact that this will have
on Albras's cost structure.
An electricity stoppage that affects our aluminum operations could cause
substantial damage.
A single 300-kilometer power line supplies electricity to Albras. Any
interruption in the supply of electrical power to Albras lasting longer than
six hours can cause substantial damage to cells at the Albras facility. Cells
are equipment used in the process of transforming alumina into aluminum. Cells
will cool off if they are deprived of energy for six consecutive hours, and may
experience serious damage as a result of the cooling off process. Albras
experienced an outage of four hours and several outages of less than one hour
in 1996 because of a faulty Tucurui substation, which has since been repaired.
Interruptions in the supply of electricity to Albras lasting more than six
hours may occur in the future.
We are vulnerable to adverse developments affecting other economies.
In 2001, 7.3% of our consolidated gross operating revenues were
attributable to sales to Japanese customers, 12.3% were attributable to sales
to other Asian customers and 29.7% were attributable to sales to European
customers. In 2001, 1.7% of our sales were made to Argentine customers. As
noted above, Argentina continues to experience severe economic difficulties.
A number of important Asian economies, including Japan and South Korea,
have experienced difficulties in recent periods. Continuing economic
difficulties in the Asian market could reduce local demand for iron ore and
pellets, which, in turn, could have a material adverse effect on us. Asian
economies could be harmed by a weak U.S. economy, and a slow U.S. economy could
have an adverse effect on the European economy. A weakened economy in Asia or
Europe could reduce demand for our products in our primary markets.
Our principal shareholder and the Brazilian government could have a great
deal of influence on our company.
Valepar, our principal shareholder, currently owns 42% of our outstanding
common stock and 27% of our total outstanding capital. Litel Participacoes S.A.
holds 42% of Valepar's stock and directly owns 10% of our outstanding common
shares. For a description of our share ownership, see Item 7.A. Major
Shareholders--Principal Shareholder. As a result of their stock ownership,
Valepar and Litel have significant influence in determining the outcome of any
action requiring shareholder approval, such as the election of our directors.
BNDESPAR, a wholly-owned subsidiary of BNDES, the Brazilian development bank,
has a golden share in Valepar, giving the Brazilian government special voting
rights over certain actions of Valepar. Further, the Brazilian government, in
addition to its ownership stake in us, owns a golden share in us, which gives
it veto powers over certain actions that we could propose to take. For a
detailed description of the veto powers granted to the Brazilian government by
virtue of its ownership of this golden share, see Item 10.B. Memorandum and
Articles of Association--Common Shares and Preferred Shares--General.
12
We are subject to ongoing antitrust investigations.
Conselho Administrativo de Defesa Economica, or CADE, the Brazilian
antitrust regulator, has initiated inquiries into our principal lines of
business to determine whether undue concentration exists in our industries. We
cannot predict the outcome of these inquiries. If CADE were to determine that
undue concentration exists in one or more of our industries, CADE could impose
measures to safeguard competition in that industry. These measures could
include requiring us to divest certain operations or imposing price
restrictions.
Our risk management strategy may not be effective.
We are exposed to fluctuations in interest rates, foreign currency
exchange rates, and commodity prices relating to our iron ore, aluminum and
gold production. In order to partially protect ourselves against unusual market
volatility, we periodically enter into hedging transactions to manage these
risks. We do not hedge risks relating to iron ore price fluctuations. See Item
11. Quantitative and Qualitative Disclosures about Market Risk. However, our
hedging strategy may not be successful in minimizing our exposure to these
fluctuations. In addition, to the extent we hedge our commodity price exposure,
we forego the benefits we would otherwise experience if commodity prices were
to increase.
Risks Relating to the American Depositary Shares
Restrictions on the movement of capital out of Brazil may hinder your
ability to receive dividends and distributions on American depositary
shares, and the proceeds from any sale of American depositary shares.
From time to time, the Brazilian government may impose restrictions on
capital outflow that would hinder or prevent the custodian who acts on behalf
of the depositary for the American depositary shares from converting proceeds
from the shares underlying the American depositary shares into U.S. dollars and
remitting those proceeds abroad. Brazilian law permits the government to impose
these restrictions whenever there is a serious imbalance in Brazil's balance of
payments or reasons to foresee a serious imbalance.
The Brazilian government imposed remittance restrictions for approximately
six months in 1989 and early 1990. If enacted, similar restrictions would
hinder or prevent the conversion of dividends, distributions or the proceeds
from any sale of shares from reais into U.S. dollars and the remittance of the
U.S. dollars abroad. In such a case, the custodian, acting on behalf of the
depositary, will hold the reais it cannot convert for the account of the
holders of American depositary receipts who have not been paid. The depositary
will not invest the reais and will not be liable for interest on those amounts.
Furthermore, any reais so held will be subject to devaluation risk.
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 a certificate of registration from the Central Bank of
Brazil to be entitled to remit U.S. dollars abroad for payments of dividends
and other distributions relating to the 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 certificate of registration. Thereafter, you
may not be able to obtain and remit U.S. dollars abroad upon the disposition
of, or distributions relating to, the underlying shares unless you obtain your
own certificate of registration by registering your investment in the
underlying shares under Law No. 4,131 or Resolution No. 2,689 of the National
Monetary Council, which entitles foreign investors to buy and sell securities
on the Sao Paulo stock exchange. For more information regarding these exchange
controls, see Item 10.D. Exchange Controls and Other Limitations. If you
attempt to obtain your own certificate of registration, you may incur expenses
or suffer delays in the application process, which could delay your ability to
receive dividends or distributions relating to the underlying shares or the
return of your capital in a timely manner. We cannot assure you that the
custodian's certificate of registration or any certificate of foreign capital
registration obtained by you will not be affected by future legislative
changes, or that additional restrictions applicable to you, the disposition of
the underlying shares or the repatriation of the proceeds from disposition will
not be imposed in the future.
13
Because we are not obligated to file a registration statement with respect
to preemptive rights relating to our shares, you might be unable to exercise
those preemptive rights.
Holders of American depositary receipts that are residents of the United
States may not be able to exercise preemptive rights, or exercise other types
of rights, with respect to the 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
and we cannot assure you that we will file any registration statement. If a
registration statement is not filed and an exemption from registration does not
exist, JPMorgan Chase Bank, as depositary, will attempt to sell the preemptive
rights, and you will be entitled to receive the proceeds of the sale. However,
the preemptive rights will expire if the depositary cannot sell them. For a
more complete description of preemptive rights with respect to the underlying
shares, see Item 10.A. Share Capital--Preemptive Rights.
Holders of our American depositary receipts may encounter difficulties in
the exercise of voting rights.
Holders of our common shares are entitled to vote on shareholder matters,
while holders of our preferred shares are not entitled to vote except in
extremely limited circumstances. 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, under some
circumstances, such as our failure to provide the depositary with voting
materials on a timely basis, you may not be able to vote by giving instructions
to the depositary on how to vote for you. For a detailed description of your
rights as an American depositary receipt holder, see Item 10.A. Share
Capital--Preemptive Rights.
Item 4. Information on the Company
4.A.1-3. Incorporation of the Company
Our legal and commercial name is Companhia Vale do Rio Doce. We are a
limited liability company, or sociedade anonima, duly organized on January 11,
1943, and existing under the laws of the Federative Republic of Brazil. We are
organized for an unlimited period of time. Our principal executive offices are
located at Avenida Graca Aranha, No. 26, 20005-900 Rio de Janeiro, RJ, Brazil,
and our telephone number is (011) 55-21-3814-4540.
Our wholly-owned subsidiary Vale Overseas was registered and incorporated
as a Cayman Islands exempted company with limited liability on April 3, 2001
(registration number 113637). Vale Overseas has been 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.
4.A.4. Development of the Company
Recent Developments
The following discussion describes some of the important recent
developments in our businesses.
Mining
At December 31, 2001, in our wholly-owned and majority-owned operations,
we had 4.0 billion tons of proven and probable iron ore reserves and 130
million tons per year of iron ore production capacity. In 2001, we acquired an
additional 15 million tons of iron ore production capacity and 263 million tons
of other mineral deposits. We describe significant mining acquisitions below.
Samitri. In May 2000, we acquired a controlling interest in S.A. Mineracao
da Trindade, known as Samitri. In September 2000, through a public tender, we
acquired additional shares to bring our ownership to 99.3% of the voting
capital and 99.2% of the total capital of Samitri. In February 2001, we
increased our ownership interest in Samitri to 100% by exchanging 140,023 of
our preferred class A shares for the shares in Samitri that we did not already
own. In October 2001, we merged Samitri into CVRD. The total cost of the
Samitri acquisition was US$710.5 million, which we principally financed with
operating cash flow. Samitri operates the Alegria, Agua Limpa and Corrego do
Meio iron ore mining complexes in the state of Minas Gerais, and is one of
Brazil's largest
14
producers of iron ore. Its production capacity is 17.5 million tons per year,
and it has proven and probable reserves of 691 million tons of high grade
hematite and other mineral deposits of 11.6 billion tons of itabirites. The
Samitri acquisition allowed us to acquire a 50% interest in the pelletizing
operations of Samarco Mineracao S.A., described below.
Ferteco. In April 2001, we acquired 100% of Ferteco Mineracao S.A. from
Thyssen Krupp Stahl AG, for US$523 million. Ferteco is one of the largest
producers of iron ore in Brazil, with a production capacity of 15 million tons
per year. It has other mineral deposits of 263 million tons of hematite and
itabirite ores, with a quality similar to our Southern System reserves. It
operates two open pit iron ore mines, Fabrica and Feijao, and a pellet plant in
the Iron Quadrangle region in the State of Minas Gerais which has a production
capacity of 4 million tons per year. Ferteco accounted for 2% of world iron ore
production in 2001.
Additionally, Ferteco owns 9.8% of the total capital of MRS Logistica
S.A., a Brazilian railroad company. MRS has 1,612 kilometers of track linking
the states of Rio de Janeiro, Sao Paulo and Minas Gerais, with a capacity to
transport 80 million tons per year. Ferteco also operates a marine terminal
through its wholly owned subsidiary, Companhia Portuaria Baia de Sepetiba S.A.,
in the port of Sepetiba, Rio de Janeiro.
Baovale. In August 2001, we agreed to supply Shanghai Baosteel Group
Corporation, a steel company located in the People's Republic of China, with
approximately 6 million tons of iron ore annually for a 20-year term. In
addition, we and Baosteel agreed to form a joint venture, Baovale Mineracao
S.A. In October 2001, we ceded our mining rights in the Agua Limpa mining
complex located in the Southern System to Baovale, which resulted in a decrease
of 68.8 million of tons in our proven and probable reserves. In return,
Baosteel paid us US$18.9 million for its 50% stake in Baovale's total capital.
In exchange for a monthly fee, Baovale leases us its rights in the mining
deposit which we continue to operate. We expect that this transaction will
increase our presence in the Asian market.
Belem. In September 2001 we acquired a 99.99% stake in Belem
Administracoes e Participacoes Ltda., from Bethlehem Steel Corporation and
Bethlehem Steel International Corporation for approximately US$25 million.
Belem is a holding company which owns 9.9% of Empreendimentos Brasileiros de
Mineracao S.A., a privately held company controlled by Caemi Mineracao e
Metalurgia S.A., a Brazilian producer of iron ore and pellets, as well as
kaolin and refractory bauxite.
Sossego. In October 2001, we acquired all of Phelps Dodge Exploration
Corporation's stake in Mineracao Serra de Sossego S/A for $42.5 million. As a
result of the transaction, we now own 100% of Sossego. Sossego is a copper
project in the Carajas region, state of Para, with an estimated 313 million
tons in copper ore reserves.
Codelco. In November 2001, we agreed to form a 50/50 joint venture to
explore new opportunities to produce and process copper with Corporacion
Nacional del Cobre de Chile, or Codelco, the world's largest copper producer.
Caemi. In December 2001, we acquired 50% of Caemi's voting shares for
US$278.7 million. We completed the acquisition after receiving the approval of
the European Commission, which required as a condition that Caemi sell its 50%
interest in Quebec Cartier Mining Company, known as QCM, a Canadian iron ore
and pellets producer. Caemi has been following all the procedures required by
the European Commission and is in the process of disposing of its stake in QCM
but has not entered into a definitive agreement to do so. We currently own 50%
of the voting capital and 17% of the total capital of Caemi. Mitsui & Co., Ltd.
holds the remaining 50% of Caemi's voting capital. Caemi accounted for 3% of
world iron ore production in 2000. We are obligated to indemnify the seller
from whom we purchased our interest in Caemi against certain liabilities in
connection with the transaction. In a pending arbitration, other former
shareholders of Caemi who also sold their shares in the transaction have
alleged that the seller should have closed the transaction earlier, and that
certain actions by the seller resulted in a lower sale price for their shares.
This arbitration proceeding is in its early stages and we are unable to predict
its outcome, although we do not expect that any liability under the indemnity
would be material.
Nucor. In April 2002, we signed a non-binding memorandum of cooperation to
identify potential iron and steel business opportunities for joint development
with Nucor Corporation, a North American steelmaker. We will be exploring
opportunities with Nucor, including projects that offer strategic position in
North and South America and mutually advantageous opportunities that may arise
as a result of the restructuring of the North American steel industry.
15
Salobo. In June 2002, we acquired Anglo American's 50% interest in Salobo
Metals S.A. through our subsidiary Caulim do Brasil Investimentos S/A for
US$50.9 million. Salobo is the largest of five copper projects that we are
currently developing, with estimated mineral reserves of 784 million tons. We
now own, directly and indirectly, 100% of Salobo's equity capital.
Antofagasta. In June 2002, we signed a memorandum of understanding with
Antofagasta Plc, one of Chile's largest copper producers, to develop a 50/50
joint venture for mining, research and exploration near Cuzco in southern Peru.
We intend to invest US$6.7 million over the next three years on this joint
venture.
Pellets
In 2001, we acquired an additional 4 million tons of annual production
capacity of pellets through our acquisition of Ferteco. Our pelletizing joint
ventures have a combined annual production capacity of 35.8 million tons. Of
this total, 17.9 million tons corresponded to our equity ownership in the
pelletizing joint ventures as of December 31, 2001, and thus represented our
attributable share. In addition, as of December 31, 2001, our wholly-owned
pelletizing operations had a combined annual production capacity of 9.2 million
tons.
Samarco. Samarco is one of the world's largest exporters of pellets. We
acquired a controlling interest in Samarco through our Samitri acquisition,
described above. When we acquired Samitri, Samitri owned 51% of Samarco, and
the remaining 49% of Samarco was held by Broken Hill Proprietary Company
Limited, or BHP, the Australian mining concern. Samitri subsequently sold a 1%
share of Samarco to BHP for US$8 million in order to equalize the parties'
ownership interests.
Sao Luis. In March 2002, we completed the construction of our new Sao Luis
pelletizing plant. We expect the plant to produce 2 million tons of pellets in
2002, and by 2003, reach full nominal capacity of 6 million tons per year. This
investment will bring our consolidated pellet production capacity to 33.1
million tons per year. Our total capital expenditure for the plant was US$188
million.
Energy
In 2001 and 2000, we consumed 12.5 TWh and 13.8 TWh of electricity,
respectively. Energy management and supply has become a priority for us, driven
both by the Brazilian government's privatization program of the industry, and
by the risk of rising electricity prices and electricity rationing due to
energy shortages, such as the one Brazil experienced in the second half of
2001. We currently perceive favorable investment opportunities in the Brazilian
electricity sector and are taking advantage of them to invest in hydroelectric
power generation projects. We currently hold stakes in nine hydroelectric power
generation projects (Igarapava, Porto Estrela, Funil, Candonga, Aimores, Capim
Branco I, Capim Branco II, Foz do Chapeco and Santa Isabel), which have a total
projected capacity of 3,364 MW. The Igarapava and Porto Estrela power plants
started operations in January 1999 and September 2001, respectively. Our
remaining power generation projects are scheduled to start operations within
the next five years. These projects may sell their production to third parties
in the power market, and, as a result, our energy department will be engaged in
wholesale marketing activities. Our energy business is comprised of the sale
but not the delivery of electricity. We may use some of the electricity from
these projects for our internal needs. As we are a large consumer of
electricity, we expect that investing in the energy business will help protect
us against electricity price volatility.
Divestitures
In line with our focus on mining, logistics and energy, we have moved to
pare down our holdings of non-strategic assets. We have disposed of almost all
of our pulp and paper assets and are also pursuing the sale of assets in the
steel and transportation sectors that are not strategically connected to our
core businesses.
In the pulp and paper industry, in March 2001, we concluded the sale of
our interest in Bahia Sul Celulose S.A., known as Bahia Sul, for approximately
US$318 million. In September 2001, we concluded the sale of our stake in
Celulose Nipo Brasileira, S.A., known as Cenibra, to our former partner for
US$670.5 million. In June 2002, we agreed to sell approximately 70,000 acres of
eucalyptus forest in the San Mateus region of the state of Espirito Santo
16
to Aracruz Celulose S.A. and Bahia Sul. Once this transaction closes, we will
have sold all of our pulp and paper assets.
In the steel industry, we disposed of our 2.3% stake in Acominas in
December 2000 for US$10 million worth of preferred shares of Gerdau S.A., a
publicly listed steel company, which we intend to sell in the future. In
addition, in March 2001, we disposed of our 10.3% stake in Companhia
Siderurgica Nacional or CSN. We transferred our interest in CSN, valued at
US$249 million to Fundacao Vale do Rio Doce de Seguridade Social, known as
VALIA, our employee pension fund, in order to satisfy a funding obligation that
we owed VALIA. For more information on this contribution to VALIA see Item 6.D.
Employees. Finally, we have begun the process of divesting our dry-bulk cargo
shipping assets. In February 2002, Docenave sold six of its carrier vessels,
with a total capacity of 592,240 DWT, to Empresa Naviera Elcano, S.A., a
Spanish company, for US$53 million. Docenave subsequently sold another three
vessels for US$7.5 million. We intend to sell Docenave's remaining dry-bulk
assets in the future, but have reached no agreement regarding this sale to
date.
In the logistics industry, in August 2001, we sold our 50% interest in the
Rio Doce Pasha marine terminal, located in the port of Los Angeles in Los
Angeles, California, to our partner in the joint venture, the Pasha Group, for
approximately US$10 million. This marine terminal principally handles imports
of steel slabs for California Steel Industries, Inc., or CSI, our steelmaking
joint venture.
Unwinding of Our Cross-Holding Relationships With CSN
We acquired a stake in Companhia Siderurgica Nacional, or CSN, during its
privatization process in 1993. CSN, in turn, acquired a 6.8% stake in us during
the first step of our privatization process in 1997, through its indirect
participation in Valepar, our principal shareholder. In line with our strategy
to consolidate and focus on mining, logistics and energy, in the first quarter
of 2001, we implemented a program to unwind our cross-holding relationships
with CSN.
In March 2001, CSN concluded the sale of its shares in Valepar to Litel
Participacoes S.A., Bradesplan Participacoes S.A. and Bradespar S.A. Bradesplan
and Bradespar subsequently transferred their shares in Valepar to Babie
Participacoes, S.A. Babie is a holding company owned by Bradesplan and
Bradespar.
In March 2001, we transferred our 10.3% stake in CSN, valued at US$249
million, to VALIA, our employee pension fund. For more information on this
contribution to VALIA, see Item 6.D. Employees.
As part of the unwinding transaction, CSN granted us the following rights
of first refusal relating to CSN's Casa de Pedra mine, each of which lasts for
a period of 30 years:
o the right to purchase any iron ore produced by the mine beyond CSN's
internal requirements,
o the right to purchase or to rent the mine should CSN decide to sell
or lease it, and
o the right to become a joint venture partner should CSN decide to form
a pelletizing joint venture with a third party with iron ore produced
by the mine.
In return, we have granted CSN a right of first refusal to participate
with us in the construction of any new steel producing facilities that we
undertake in the next five years.
This transaction, as a whole, is subject to review by the Brazilian
antitrust authorities.
We do not expect the unwinding of our cross-holding relationships with CSN
to have any significant impact on our operations and financial results.
17
4.A.5. Capital Expenditures and Divestitures
The table below sets forth our capital expenditures by business area for
the periods indicated. Our capital expenditures have historically been more
intensive in the second half of the year.
For the Year Ended December 31,
----------------------------------
Business Area 1999 2000 2001
--------------------------------------------- ---------- --------- ---------
(in millions of USS)
Ferrous...................................... US$ 183 US$ 354 US$ 454
Non-ferrous.................................. 56 50 40
Logistics.................................... 4 14 25
Energy....................................... 18 19 52
Corporate center............................. 4 10 24
---------- --------- ---------
Total................................. US$ 265 US$ 447 US$ 595
---------- --------- ---------
Capital expenditures relating to ferrous products increased 42.9% from
US$354 million in 2000 to US$506 million in 2001, primarily due to the
construction of the Sao Luis pelletizing plant (US$84 million), the
construction of infrastructure needed for its installation (US$55 million) and
the acquisition of locomotives for transportation of iron ore (US$21 million).
For a description of our divestitures, see Item 4.A.4. Development of the
Company--Divestitures.
4.A.6. Current Capital Expenditures and Divestitures
See Item 5.B.3. Budgeted Capital Expenditures, for a description of
budgeted capital expenditures.
See Item 4.A.4. Development of the Company, for a description of current
divestitures.
4.A.7. Public Takeover Offers
Not applicable.
4.B., 4.C. and 4.D. Business Overview, Organizational Structure and Property,
Plants and Equipment
Business Overview
We are one of the world's largest producers and exporters of iron ore. We
are the largest diversified mining company in the Americas by market
capitalization and one of the largest companies in Brazil. We hold exploration
claims that cover 7.0 million hectares (17.3 million acres). We operate two
large railway systems that are integrated with our mining operations. Through
joint ventures, we have major investments in the production of aluminum.
For the year ended December 31, 2001, we had consolidated gross operating
revenues of US$4,132 million, 62.9% of which were attributable to sales of iron
ore and pellets, 14.7% of which were attributable to third-party
transportation, 6.9% of which were attributable to sales of aluminum sector
products and 3.4% of which were attributable to sales of gold. For the year
ended December 31, 2001, we recorded consolidated operating income of US$929
million and consolidated net income of US$1,287 million. Our equity in results
of affiliates and joint ventures and provisions for losses and write-downs on
equity investments in aggregate totaled US$53 million over that period.
Our main lines of business are mining, logistics and energy and are
generally grouped according to the business segments below:
o ferrous minerals: comprised of iron ore, pellets as well as manganese
and ferro alloys businesses,
o non-ferrous minerals: comprised of gold, kaolin, potash and copper
businesses,
o logistics: comprised of railroads, ports and terminals and shipping
businesses,
18
o energy: comprised of power generation businesses, and
o holdings: comprised of aluminum, steel, fertilizers and e-commerce
businesses.
Mining. Our primary mining activities involve iron ore. We operate two
world-class integrated systems in Brazil for producing and distributing iron
ore, each consisting of mines, railroads and port and terminal facilities. The
Southern System, based in the states of Minas Gerais and Espirito Santo,
contains aggregate estimated proven and probable iron ore reserves of
approximately 2.3 billion tons. The Northern System, based in the states of
Para and Maranhao, contains aggregate estimated proven and probable iron ore
reserves of approximately 1.2 billion tons. We also operate ten pellet
producing facilities, six of which are joint ventures with international
partners. We have a 50% stake in Samarco Mineracao S.A., in Ponta do Ubu, which
owns and operates two pelletizing plants.
Exploration Assets. As part of our mineral prospecting and development
activities in Brazil, we have acquired extensive experience in exploration
techniques and processes specifically designed for use in tropical areas of the
world. Our current mineral exploration efforts are mainly in Brazil and focus
on copper, gold, nickel, manganese, and kaolin. Expenditures for a mineral
exploration program were US$43 million in 2001 We currently hold claims to
explore approximately 7.0 million hectares (17.3 million acres).
Logistics. In our logistics business, we provide our clients with various
forms of transportation and related support services, such as warehouse, port
and terminal services. We are a leading competitor in the Brazilian
transportation industry. Each of our iron ore complexes incorporates an
integrated railroad network linked to automated port and terminal facilities,
and is designed to provide iron ore, freight and passenger rail transportation,
bulk terminal storage and ship loading services to us and third parties. For
2001, our railroads transported approximately 55.4% of the total freight
tonnage transported by Brazilian railroads, or approximately 167.1 million tons
of cargo, of which 79.6 million tons were our iron ore and pellets. Of the
total amount transported, 51% was for third parties and 49% was for ourselves.
Our two wholly-owned railroads, the Vitoria-Minas railroad and the Carajas
railroad, serve primarily to transport our iron ore products from interior
mines to coastal port and terminal facilities. In addition, the Vitoria-Minas
railroad carries significant amounts of third party cargo as well as
passengers.
Energy. In 2001, we began to consider energy as a core business, although
at present energy production does not represent a significant portion of our
activities. We currently hold stakes in nine hydroelectric power generation
projects (Igarapava, Porto Estrela, Funil, Candonga, Aimores, Capim Branco I,
Capim Branco II, Foz do Chapeco and Santa Isabel) which have a total projected
capacity of 3,364 MW. The Igarapava and the Porto Estrela power plants started
operations in January 1999 and September 2001, respectively. Our remaining
power generation projects are scheduled to start operations within the next
five years. Depending on market conditions, the power generated by these plants
will be sold in the market and/or used for our own operations. See Item 4.B.,
4.C. and 4.D. Business Overview, Organizational Structure and Property, Plants
and Equipment--Lines of Business--Energy.
Aluminum Operations. Through joint ventures, our wholly owned subsidiary,
Aluvale, conducts major operations in the production of aluminum. They include
bauxite mining, alumina refining and aluminum metal smelting and marketing.
Aluvale conducts its bauxite mining activities through its 40.0% interest in
MRN, which holds substantial bauxite reserves with a low strip ratio and high
recovery rate. MRN, one of the largest bauxite producers in the world, produced
10.7 million tons of bauxite in 2001. Aluvale currently holds a 50.3% voting
interest in our alumina refining joint venture, Alunorte, which has a nominal
production capacity of 1.5 million tons of alumina per year. Aluvale
participates in two aluminum smelting joint ventures, Albras, in which it has a
51.0% interest, and Valesul, in which it has a 54.5% interest. These joint
ventures have a combined production capacity of 500,000 tons of aluminum per
year. Our integrated aluminum operations rank among the largest in Latin
America in terms of production volume.
Vale Overseas. Vale Overseas, our wholly-owned subsidiary, is a finance
company for the CVRD Group. Its business is to borrow money outside Brazil by
issuing securities to finance CVRD's activities outside Brazil or to on-lend it
to other CVRD Group companies. On March 8, 2002, Vale Overseas issued 8.625%
notes maturing on March 8, 2007, extendable to September 8, 2008, to raise
US$300 million. The issuance of the notes was its first borrowing.
19
Business Strategy
Through organic, disciplined growth and selective acquisitions, we will
continually seek to develop our mining, logistics and energy capabilities and
increase scale while working to reduce costs. We aim to achieve earnings growth
and increase cash generation, while maximizing our return on capital employed
and the total return to our shareholders. We are focusing on our core
businesses of mining, logistics and energy to achieve these goals, by:
o maintaining our leadership position in the world iron ore market,
o expanding our pelletizing facilities to accommodate current market
demands,
o growing our logistics business,
o developing our copper resources,
o increasing our aluminum activities, and
o developing power generation projects.
Maintaining Our Leadership Position in the World Iron Ore Market
In 2001, we produced 14% of the world's iron ore, more than any other
producer. In 2001, we acquired Ferteco, which accounted for 2% of world iron
ore production in 2001, and we acquired one half of the control of Caemi, which
accounted for 3% of world iron ore production in 2001. We are committed to
maintaining our position in the world iron ore market by keeping close contact
with our customers, focusing our product line to capture industry trends and
controlling costs. We believe that our strong relationships with major
customers, tailored product line and logistical advantages will enable us to
achieve this goal.
Expanding Our Pelletizing Facilities to Accommodate Current Market Demands
We believe that, in the long term, the growth rate of global demand for
pellets will continue to be higher than the growth rate of the overall iron ore
market, and therefore we plan to continue investing in the development of this
dynamic segment of the iron ore market. We constructed a new pelletizing plant
at Sao Luis, which started commercial operation in June 2002 and by 2003 will
have a production capacity of 6 million tons of pellets per year, and we are
expanding production capacity at our Samarco pellet operations. When these
investments are completed, we and our joint ventures will have an additional
5.2 million tons of annual production capacity, and a total of 56.2 million
tons of annual production capacity.
Growing Our Logistics Business
The privatization and deregulation of transportation facilities has
revitalized the Brazilian logistics market. We believe there is potential for
growth in the near term from the conversion of existing truck haulage to rail,
and in the longer term from increased bulk cargo resulting from economic growth
in Brazil. We believe that the quality of our railway assets and our many years
of experience as a railroad and port operator position us to take advantage of
this market and establish ourselves as a leading Brazilian logistics company
serving both domestic and export markets. We plan to focus on the physical and
commercial integration of our transportation assets, and also to take advantage
of new e-business technology.
Developing Our Copper Resources
Global demand for copper grew rapidly in the 1990s. From 1993 to 2001,
global consumption of copper increased from 10,967,000 tons to 15,281,000 tons
per year. Although growth was adversely affected by the global economic
slowdown in 2001, we expect strengthening of the growth trend over the next
decade, driven by the spending in the automotive, computer, telecommunications
and electrical appliance sectors of the world economy. We believe that our
copper projects, which are all situated in the Carajas region, can be among the
most competitive in the world in terms of investment cost per ton of ore. When
our copper mines enter production, they will benefit from our transportation
facilities serving the Northern System. Additionally, in March 1997, we and
BNDES,
20
entered into a Mineral Risk Contract providing for the joint development of
certain unexplored mineral resources in approximately two million identified
hectares of land in the Carajas region, as well as proportional participation
in any financial benefits earned from the development of those resources. For
more detailed information on the Mineral Risk Contract, see Item 4.B., 4.C. and
4.D. Business Overview, Organizational Structure and Property, Plants and
Equipment--Lines of Business--Non-Ferrous Minerals--Current Copper
Prospects--Mineral Risk Contract.
Increasing Our Aluminum Activities
We believe that global demand for aluminum will continue to grow during
the next decade, driven mainly by the transportation and packaging industries.
We therefore plan to develop and increase production capacity in our integrated
aluminum operations. Our bauxite joint venture, MRN, is increasing annual
production capacity from 11.0 to 16.3 million tons by 2003. Our alumina joint
venture, Alunorte, is increasing annual production capacity from 1.5 to 2.3
million tons per year by 2002. Our aluminum joint venture, Albras, increased
its production capacity by 40,000 tons in 2001. In addition, we own large
unexplored deposits of high quality bauxite in the states of Para and Maranhao
that will allow us to pursue further growth opportunities in the aluminum
sector.
Developing Power Generation Projects
In 2001 and 2000, we consumed 12.5 TWh and 13.8 TWh of electricity,
respectively. Energy management and supply has become a priority for us, driven
both by the Brazilian government's privatization program of the industry, and
by the risk of rising electricity prices and electricity rationing due to
energy shortages, such as the one Brazil experienced in the second half of
2001. We currently perceive favorable investment opportunities in the Brazilian
electricity sector and are taking advantage of them to invest in hydroelectric
power generation projects. These projects may sell their production to third
parties in the power market, and, as a result, our energy department will be
engaged in wholesale marketing activities. Our energy business is comprised of
the sale but not the delivery of electricity. We may use some of the
electricity from these projects for our internal needs. As we are a large
consumer of electricity, we expect that investing in the energy business will
help protect us against electricity price volatility.
In 2001, we spent US$52 million on investments in power projects. We
currently hold stakes in two hydroelectric power plants (Igarapava and Porto
Estrela), which have already started operations. Both are located in the state
of Minas Gerais. We are also investing in the construction of five
hydroelectric power plants and developing the economical and environmental
feasibility studies for two other hydroelectric projects for which we and our
joint venture partners have obtained the concessions. When completed, these
projects will provide us with the equivalent of approximately half of our 2001
electricity consumption (approximately 12.5 TWh). We are also analyzing other
hydroelectric power projects that will require additional investments.
LINES OF BUSINESS
Our principal lines of business consist of mining, logistics and energy.
For internal management purposes, we group our aluminum operations together
with our other significant equity participations in steel and pulp and paper.
See Item 4.B., 4.C., and 4.D. Business Overview, Organizational Structure and
Property, Plants and Equipment--Lines of Business--Holdings.
Ferrous Minerals
Our ferrous minerals business segment comprises iron ore mining and pellet
production, as well as transportation facilities in the Northern and Southern
Systems (including railroads, ports and terminals) as they relate to mining
operations. Manganese mining and ferro-alloys are also part of our ferrous
minerals business.
21
The table below sets forth our ferrous minerals revenues by geographic
market and by category for the periods indicated as reflected in our
consolidated financial statements.
For the Year Ended December 31,
-------------------------------
1999 2000 2001
--------- --------- ---------
(in millions of US$)
Revenues classified by geographic destination Export sales:
Latin America............................................. US$ 149 US$ 224 US$ 238
United States............................................. 147 252 247
Europe.................................................... 621 969 1,469
Middle East............................................... 146 209 216
Japan..................................................... 351 544 525
Asia, other than Japan.................................... 575 651 864
Other..................................................... -- -- --
--------- --------- ---------
1,989 2,849 3,559
--------- --------- ---------
Domestic sales............................................ 639 1,000 1,082
--------- --------- ---------
Total................................................. US$ 2,628 US$ 3,849 US$ 4,641
--------- --------- ---------
Revenues classified by category
Iron ore......................................................... US$ 1,859 US$ 2,710 US$ 3,438
Pellets.......................................................... 632 769 860
Manganese and ferro-alloys....................................... 137 370 343
--------- --------- ---------
Total................................................. US$ 2,628 US$ 3,849 US$ 4,641
--------- --------- ---------
Iron Ore
We conduct our iron ore business primarily at the parent company level.
System Structure
The table below sets forth information regarding our proven and probable
iron ore reserves as of December 31, 2001. The estimates of mineral reserves
have been audited and verified by AMEC Engineering and Construction Services,
or AMEC, experts in geology, mining and ore reserve determination.
Proven and Probable Reserves
----------------------------
Ore
Tonnage Grade(1)
------------- ----------
In millions
of tons) (% Fe)
Southern System
Itabira District
Caue....................................... 15.5 46.9
Conceicao.................................. 319.5 56.7
Dois Corregos(2)........................... 403.7 59.5
-------
Total Itabira District................. 738.7 58.0
-------
Timbopeba(6).................................... 115.8 55.1
Gongo Soco Complex(8)........................... 486.7 54.7
Capanema/Ouro Fino(3)........................... 26.7 59.2
Fazendao........................................ 237.2 50.6
Samitri
Alegria Complex(9)......................... 619.4 54.2
Morro Agudo Complex(10).................... 64.1 45.4
Corrego do Meio Complex(11)................ 7.2 58.6
-------
Total Samitri.................................. 690.6 53.2
-------
22
Proven and Probable Reserves
----------------------------
Ore
Tonnage Grade(1)
------------- ----------
In millions
of tons) (% Fe)
Samarco (7).................................... 595.4 46.2
Total Southern System 2,891.1 53.2
-------
Northern System
Carajas(4)...................................... 1,100.7 65.3
-------
Total CVRD Group........................... 3,991.9 56.5
-------
--------------
(1) CVRD equity interest in mines is 100% unless otherwise noted.
(2) Consists of several mines.
(3) CVRD ownership interest is 51%.
(4) Includes four active mines.
(5) The subtotal and total figures include weight-averaged ore grades.
(6) Reserves are based on 2001 model.
(7) CVRD owns 50 percent of Samarco.
(8) Gongo Soco Complex consists of Gongo Soco, Brucutu, Bau and Gralhos
deposits.
(9) Alegria, Fabrica Nova and Morro da Mina deposits.
(10) Agua Limpa and Cururu deposits.
(11) Corrego do Meio and Segredo deposits.
23
The table below sets forth information regarding our mines. The projected
exhaustion dates are based on 2001 production levels.
Projected Our
Commencement Exhaustion Ownership Production For the Year Ended
Mine of Operations Date Interest December 31,
---------------------------------------- ------------- ---------- --------- ---------------------------------
1999 2000 2001
------ ------ ------
(percent) (in millions of tons)
Southern System
Itabira District
Caue............................. 1942 2014 100% 17.8 20.1 19.7
Conceicao........................ 1957 2014 100 18.8 19.8 19.2
Dois Corregos.................... -- -- -- -- -- --
Total Itabira District........... -- -- -- 36.6 39.9 38.9
----- ----- -----
Timbopeba............................... 1984 2006 100 7.4 7.6 5.5
Gongo Soco Complex(1)................... 2000 2010 100 0.7 6.6 6.7
Capanema/Ouro Fino...................... 1982 2003 51 3.7 5.3 3.9
Fazendao................................ 1997 -- 100 0.9 1.2 1.0
Samitri.................................
Alegria Complex(2)............... 2000 2040 100 -- 9.4 9.7
Agua Limpa Complex(3)............ 2000 2009 100 -- 3.7 2.5
Corrego do Meio Complex(4)....... 2000 2006 100 -- 1.5 1.2
----- ----- -----
Total Samitri........................... -- -- -- -- 14.6 13.4
----- ----- -----
Urucum(5)............................... 1993 -- 100 0.6 0.7 0.6
----- ----- -----
Total Southern System............ -- -- -- 49.9 75.9 70.0
----- ----- -----
Northern System
----- ----- -----
Carajas(6).............................. 1986 2021 100 44.0 47.6 52.4
----- ----- -----
Total CVRD Group........................ 93.9 123.5 122.4
--------------
(1) The Gongo Soco Complex consists of the Gongo Soco, Brucutu, Bau and
Gralhos deposits.
(2) The Alegria Complex consists of the Alegria, Fabrica Nova and Morro da
Mina deposits.
(3) The Agua Limpa Complex consists of the Agua Limpa and Cururu deposits.
(4) The Corrego do Meio Complex consists of the Corrego do Meio and Segredo
deposits.
(5) There are no proven and probable reserves at Urucum.
(6) Includes four active mines.
24
Integrated Systems
[GRAPHIC OMITTED]
Our iron ore mining and related operations are concentrated in two regions
in Brazil, the Southern System and the Northern System. The Southern System is
located in the States of Minas Gerais and Espirito Santo, and the Northern
System is located in the States of Para and Maranhao. Each system includes iron
ore reserves and other mineral deposits, mines, ore processing facilities and
integrated railroad and terminal transportation facilities. Our railroads
connect each system and bring products from the mines to our marine terminals,
located at Tubarao and Praia Mole in the Southern System, and Ponta da Madeira
in the Northern System. The operation of two separate systems, each with
transportation capability under our control, enhances reliability and
consistency of service to our customers.
25
Southern System
[GRAPHIC OMITTED]
The Southern System is an integrated system consisting of iron ore mines,
the Vitoria-Minas railroad, and the Ports of Tubarao and Praia Mole (located in
Vitoria, in the State of Espirito Santo). The iron ore mines of the Southern
System are located in a region called the Iron Quadrangle in the State of Minas
Gerais, in the southeast of Brazil. Nine mining complexes compose this system:
Caue and Conceicao in the Itabira District, Timbopeba, Gongo Soco Complex,
Alegria Complex, Agua Limpa Complex, Corrego do Meio Complex, Capanema and
Fazendao. The Southern System is accessible by road or by spur tracks of the
Vitoria-Minas railroad, which transports iron ore concentrate, lump, and
natural pellet ore to the Tubarao marine terminal (located approximately 600
kilometers away) and domestic steelmakers, as well as third party general
cargo.
Iron ore in the Southern System is mined by open pit methods. These ore
reserves have high ratios of itabirite ore relative to hematite ore. Itabirite
is a quartz-hematite rock with an average iron content ranging from 35% to 65%,
requiring concentration to achieve shipping grade, which is above a 64% average
iron content. Mines in the Southern System generally process their run-of-mine
by means of standard crushing, classification and concentration steps,
producing sinter feed, lump ore and pellet feed.
Our Vitoria-Minas railroad transports Southern System iron ore to the
Tubarao marine terminal located at Vitoria in the State of Espirito Santo. The
Southern System has train-loading facilities with a daily carrying capacity of
300,000 tons of iron ore. A train composed of two diesel-electrical locomotives
and up to 240 gondola ore-cars, makes a round-trip to the marine terminal every
43 hours. The Tubarao/Praia Mole marine terminal complex has a storage capacity
of 4.5 million tons of iron ore and pellets. The storage capacity in connection
with the complex's two piers, which are 25 meters deep and 600 meters wide,
ensures access for ships of up to 365,000 DWT. Our loading system consists of a
bucket-wheel reclaimer, conveyor belts and a ship-loader for each pier, which
represents a total loading capacity of 32,000 tons per hour to the terminal.
26
Northern System
[GRAPHIC OMITTED]
The Northern System is an integrated mine, railroad and port system,
including open pit mines and an ore processing complex. The Northern System is
located in the Carajas region, in the States of Para and Maranhao in the north
of Brazil (in the Amazon River basin), on public lands for which we hold mining
concessions. The Northern System's reserves are among the largest iron ore
deposits in the world, with a life of more than 21 years at 2001 output levels.
These reserves are divided into two main ranges (north and south), situated
approximately 35 kilometers apart. Iron ore mining activities in the Northern
System are currently being conducted in the north range, which is divided into
four main mining bodies (N4E, N4WC, N4WN and N5).
The N4E deposit is the largest operational pit in the Northern Region.
Industrial scale mining operations began at this mine in 1985. We selected the
N4E mine as the first iron body to be developed in the Northern System because
development of the N4E would facilitate access to the N4W and N5 deposits,
which could share the N4E beneficiation complex and train loading terminal. We
began mining operations at N4W in 1994, opening two pits (N4WC and N4WN). We
completed the construction of two in-pit crushing systems located at N4E and
N4WN mines in late December 1998. The N4E and N4W mines use conventional open
pit benching, with drilling and blasting to open a free face followed by shovel
loading. During 1998, we also started operations in the N5 mines (N5W and N5E).
Because of the high iron content (65.4% on average) in the Northern
System, we do not have to operate a concentration plant at Carajas. The
beneficiation process for creating marketable sinter feed, pellet feed, special
fines for direct reduction processes and lump ore consists simply of sizing
operations, including screening, hydrocycloning, crushing and filtration. We
can therefore produce marketable iron ore in the Northern System at a lower
cost than in the Southern System. Output from the beneficiation process
consists of sinter feed, pellet feed, special fines for direct reduction
processes and lump ore, which is sampled regularly before storage at the
Carajas stockyard by automatic sampling systems that conform to ISO 9002
standards. After the beneficiation process, our Carajas railroad transports
Northern System iron ore to the Ponta da Madeira marine terminal located at Sao
Luis in the State of Maranhao, on the Atlantic Ocean. The Northern System has
train-loading facilities with an aggregate nominal loading capacity of 14,000
tons per hour. A train composed of three diesel-electrical locomotives and 206
gondola ore-cars, each car having a net capacity of 105 tons, makes each
54.5-hour round-trip to the marine terminal. At the Ponta da Madeira marine
terminal, a 100 kilometer long natural channel (at least 23 meters deep and 500
meters wide) ensures access for ships of up to 420,000 DWT. With a storage
capacity of 3.5 million tons, a loading system consisting of bucket-wheel
reclaimers, conveyor belts and single boom ship-loaders at two piers, the
marine terminal can handle vessels from 20,000 to 420,000 DWT with no
repositioning.
Our complex in Carajas is accessible by road, air and rail. It obtains
electrical power at market rates from regional utilities. To support our
Carajas operations and to reduce turnover of mining personnel, we have housing
and other facilities for the people in a nearby township.
27
Pellets
We conduct our pellet business primarily through participations in joint
ventures and also at the parent company level, as shown below:
CVRD
|
|
---------------------------------------------------------------------------------------------------------------
50.9% | 51.0% 50.9% | 51.0% 51.0% | 51.1% 50.0% | 49.0% 50.0% | 50.0% 50.0% | 50.0%
(total | (voting (total | (voting (total | (voting (total | (voting (total | (voting (total | (voting
capital) | capital) capital) | capital) capital) | capital) capital) | capital) capital) | capital) capital) | capital)
| | | | | |
Companhia Companhia Companhia
Italo- Hispano - Nipo - Samarco Gulf Industrial Companhia
Brasileira de Brasileira de Brasileira de Mineracao Investment Coreano -
Pelotizacao Pelotizacao Pelotizacao S.A. Company Brasileira de
(Itabrasco) (Hispanobras) (Nibrasco) (Samarco) (GIIC) Pelotizacao
(Kobrasco)
Partners:
Ilva Mining W.V. Aceralia Nippo Steel BHP Gulf Investment POSCO
Nissho Iwai Corporation
NKK Corporation
Sumitomo Metal
Industries
Kawasaki Steel
Corporation
Nisshin Steel
The table below sets forth information regarding attributable pellet
production by us and our joint ventures for the periods indicated.
For the Year Ended
December 31,
----------------------
Pellet producer 1999 2000 2001
-------------------------------------------------- ------ ------ ------
(In millions of tons)
CVRD.............................................. 4.8 5.0 5.1
Itabrasco......................................... 3.4 3.3 3.3
Hispanobras....................................... 3.6 3.8 3.7
Nibrasco.......................................... 6.1 8.5 7.1
Kobrasco.......................................... 3.8 4.4 4.2
Samarco........................................... -- 12.7 9.9
GIIC.............................................. -- 3.6 2.7
----- ----- -----
Total............................................. 21.7 41.3 36.0
----- ----- -----
Percentage DR pellets............................. 25.9% 23.5% 26.2%
Except for GIIC, which is in Bahrain, and Samarco, which is in Ponta do
Ubu, all of our pelletizing operations are in the Southern System at our
Tubarao complex. We acquired Samarco in May 2000, and GIIC in October 2000.
In April 2001, we acquired an additional 4 million tons of annual
production capacity of pellets through our acquisition of Ferteco Mineracao
S.A., known as Ferteco.
In March 2002, we completed the construction of our new Sao Luis
pelletizing plant. Our total capital expenditure for the plant was US$188
million. The plant is located in our Northern System.
Our pellet activities increase our market for fine and ultrafine iron ore
products. We sell pellet feed to our pellet joint ventures at market-based
prices. Historically, we have supplied all of the iron ore requirements of our
joint ventures located in the Southern System.
The table below sets forth information regarding iron ore shipments to our
pellet joint ventures for the periods indicated.
28
For the Year Ended
December 31,
--------------------------
Joint Venture 1999(1) 2000(1) 2001(1)
--------------------------------------------- -------- -------- --------
(In millions of tons)
Kobrasco..................................... 4.1 4.7 4.5
Itabrasco.................................... 3.6 3.6 3.6
Hispanobras.................................. 4.0 4.1 3.9
Nibrasco..................................... 6.6 9.3 7.8
Samarco...................................... -- 1.9 1.9
GIIC......................................... -- 2.0 1.7
Total................................. 18.3 25.6 23.4
--------------
(1) Shipments in 2001, 2000 and 1999 represent iron ore sold and iron ore
delivered to the joint ventures on a tolling basis.
Customers, Sales and Marketing (Iron Ore and Pellets)
We use all of our iron ore and pellets (including our share of
joint-venture pellet production) to supply the steelmaking industry. Prevailing
and expected levels of demand for steel products affect demand for our iron ore
and pellets. Demand for steel products is influenced by many factors, such as
expected rates of economic growth.
Historically, we have exported more than two-thirds of our iron ore
shipments. We export iron ore products primarily to Asia and Europe, with
customers in Japan, China, South Korea and Germany accounting for approximately
53.5% of our total export shipments in 2001. Our 10 largest customers
collectively purchased 37.6 million tons of iron ore and pellets from us,
representing 41.7% of our 2001 iron ore and pellet shipments and approximately
40% of our total revenues. No individual customer accounted for more than 7.0%
of our sales of iron ore products for any of the three years ended December 31,
2001.
We strongly emphasize customer service in order to improve our
competitiveness. We work with our customers to understand their principal
objectives and then tailor our iron ore to meet specific customer needs. To
provide a tailored product, we take advantage of our large number of iron ore
mines in order to produce multiple iron ore products possessing different
grades of iron, silica and alumina, and varying physical properties, including
grain size. We believe that we offer our customers more variety than our
competitors in Australia and Canada. This variety helps us offset any
disadvantages in relation to competitors who may be more conveniently located
geographically. In addition to offering technical assistance to our customers,
we operate sales support offices in Tokyo, Brussels, New York and Shanghai.
These offices allow us to stay in close contact with our customers, monitor
their requirements and our contract performance, and ensure that our customers
receive deliveries on schedule. Our central sales office in Rio de Janeiro
coordinates the activities of these offices.
Distribution (Iron Ore and Pellets)
Our ownership and operation of transportation systems designed for the
efficient transportation of iron ore products complements our iron ore mining
business. We operate an integrated railroad and terminal network in each of our
Northern and Southern Systems. This network transports our iron ore products
from interior mining locations to the marine terminal and domestic customers.
The Vitoria-Minas railroad provides the rail link for the Southern System and
has a daily carrying capacity of 300,000 tons of iron ore. The Carajas railroad
provides the rail link for the Northern System and has a daily carrying
capacity of 130,000 tons of iron ore.
Our port and terminal facilities in the Southern and Northern Systems
receive iron ore and pellets from our railroads for dispatch onto ocean-going
vessels. We shipped a total of 118.0 million tons of iron ore and pellets in
2001. The Tubarao/Praia Mole marine terminal complex, located near the Port of
Vitoria in the State of Espirito Santo, serves the Southern System. The
Vitoria-Minas railroad transports ore from iron ore mines in the Southern
System directly to the Tubarao terminal and its ship-loading facilities. The
Ponta da Madeira marine terminal complex, located near the Port of Sao Luis in
the State of Maranhao, serves the Northern System. The Carajas railroad
transports iron ore from the Northern System mines directly to the Ponta da
Madeira terminal and its ship-loading facilities.
29
We are currently seeking to divest our dry-bulk shipping business due to
its overall lack of profitability and to the significant investment we would
have to undertake to replace our existing dry-bulk shipping fleet in the
future. See Item 4.B., 4.C., and 4.D. Business Overview, Organizational
Structure and Property, Plants and Equipment--Logistics--Ports and
Terminals--Shipping.
Competition (Iron Ore and Pellets)
The international iron ore market is highly competitive. Several large
producers dominate this market. The principal factors affecting competition are
price, quality, range of products offered, reliability and transportation
costs. In 2001, the Asian market (primarily Japan, South Korea and China) and
the European market were the primary markets for our iron ore.
Our biggest competitors in the Asian market are located in Australia and
include affiliates of Broken Hill Proprietary Company Limited, or BHP, and The
Rio Tinto Corporation Plc. Although the transportation costs of delivering iron
ore from Australia to Asian customers are generally lower than ours as a result
of Australia's geographical proximity, we believe we are able to remain
competitive in the Asian market for two principal reasons. First, steel
producers generally seek to obtain the types (or blends) of iron ore which can
produce the intended final product in the most economic and efficient manner.
Our iron ore has low impurity levels which generally lead to lower processing
costs. For example, the alumina content of our iron ore is very low compared to
Australian ore. Second, steel mills often develop sales relationships based on
a reliable supply of a specific mix of iron ore. We have an aggressive
marketing policy of meeting our clients' needs to the extent possible,
including placing specialized personnel in direct contact with our clients to
determine the blend that best suits each particular client. We sell our
products FOB from our ports, which means that the invoice price includes
delivery at our expense to our ports and no further. In general, our ownership
of the process of producing and transporting iron ore to our ports helps ensure
that our products get to our ports on schedule and at competitive costs.
Consequently, we believe that the sale of our shipping dry-bulk assets will not
affect our competitiveness as we have not subsidized shipping costs for those
customers who have used our fleet. We believe that third party carriers are
available to serve our customers.
We are competitive in the European market for the reasons we described
above, as well as the quality of our Carajas iron ore and the proximity of the
Ponta da Madeira port facilities to European customers. Our principal
competitors in Europe are:
o Anglo American (U.K.) and Affiliates,
o Iron Ore Co.,
o Quebec Cartier Mining Co. (Canada),
o Luossavaara Kiirunavaara AB (Sweden),
o Societe Nationale Industrielle et MiniPre (Mauritania),
o Kumba Resources (South Africa), and
o BHP (Australia), Rio Tinto (UK) and Affiliates.
The Brazilian iron ore market is highly competitive with a wide range of
smaller producers. Although pricing is a relevant factor, quality and
reliability are important competitive factors as well. We believe that our
integrated transportation systems, high-quality ore and technical services make
us a strong competitor in domestic sales. Prevailing export market prices, with
adjustments negotiated to compensate for lower transport costs to domestic
customers, influence iron ore sales in the domestic market.
30
Manganese and Ferro-Alloys
We conduct our manganese and ferro-alloy business primarily through
affiliates and joint ventures, as shown below:
CVRD
|
|
--------------------------------------------|-------------------------------------------
| | | | |
99.9% | 99.9% 99.2% | 99.9% | 49.0% | 49.0% 100% | 100%
(total | (voting (total | (voting | (total | (voting (total | (voting
capital) | capital) capital) | capital) | capital) | capital) capital) | capital)
| | | | |
Rio Doce Sibra | Nova Era Silicon Urucum
Manganese Eletrosiderurgica | (NES) Mineracao S.A.
Europe Brasileira S.A. | (Urucum)
(RDME) (SIBRA) | Partner:
(France) | | Mitsubishi Kawasaki
| | Mizushima
93.6% | 99.88% |
(total | (voting |
capital) | capital |
| |
| 0.23% | 0.11%
Companhia (total | (voting
Paulista de Ferro capital) | capital)
Ligas -------------
(CPFL)
In 2001, we were the largest Brazilian manganese ore producer, with total
shipments of approximately 1.7 million tons. We had US$315 million in gross
revenues in 2001 from manganese ore and ferro-alloy sales.
We produce manganese ore products from the Azul mine in the Carajas region
in the state of Para and from the Urucum mine in the Pantanal region in the
state of Mato Grosso do Sul. We operate on-site beneficiation plants at both
the Azul and Urucum mines. Both mines are accessible by road and obtain
electrical power at market rates from regional electric utilities.
Our manganese mines produce three types of manganese products:
o metallurgical ore used primarily for the production of
ferro-alloys,
o natural manganese dioxide suitable for the manufacture of
electrolytic batteries, and
o chemical ore used in several industries for the production of
fertilizer, pesticides and animal food and used as a pigment in
the ceramics industry.
The production of ferro-alloys consumes significant amounts of
electricity. The Brazilian government, as part of its energy rationing program,
required us as of June 1, 2001 to decrease energy consumption by 25% for
ferro-alloy related activities. In June 2001, in response to these governmental
measures, we began a plan to reduce our ferro-alloy output in the six-month
period ending November 30, 2001, by 46,000 tons, from the previously planned
220,000 tons to 174,000 tons. This reduction represents a revenue loss of US$26
million. We believe that the remaining production will be sufficient to supply
our clients in Brazil and the rest of Latin America, our main ferro-alloys
markets. Despite this mandatory temporary reduction, we continue to pursue our
long-term plan to expand our ferro-alloy operations. For information on the
risks associated with the Brazilian government's energy rationing program, see
Item 3.D. Risk Factors--Risks Relating to Brazil--The Brazilian government's
energy rationing program could adversely affect us.
The table below sets forth information regarding our manganese reserves as
of December 31, 2001. The estimates of mineral reserves have been audited and
verified by AMEC.
31
Proven and Probable Reserves
------------------------------------
Ore
Mine(1) Type Tonnage(2) Grade(3)
----------------------------------------- ----------- --------- -------
(In millions of tons)
Azul..................................... Open pit (1) 15.0 44.5
Stockpile 0.6 49.3
----- -----
15.6 48.7
----- -----
Urucum................................... Underground(2) 7.5 47.5
----- -----
Total............................. 23.1 45.6
===== =====
--------------
(1) Reported as product wet tons (14.5% moisture content).
(2) Reported as product dry tons.
(3) Reported as recoverable product grade.
The table below sets forth information regarding our manganese mines and
recent manganese ore production for the periods indicated. The projected
exhaustion dates are based on 2001 production levels.
Projected Our
Commencement Exhaustion Ownership Production For the Year Ended
of Operations Date Interest December 31,
------------- ---------- --------- ---------------------------------
Mine 1999 2000 2001
------------------------------------- ------ ------ ------
(percent) (in millions of tons)
Azul................................. 1986 2014 100% 0.9 1.4 1.4
Urucum............................... 1976 2035 100% 0.2 0.3 0.3
---- ---- ----
Total......................... 1.1 1.7 1.7
The table below sets forth information regarding our ferro-alloy
production.
Production Production in
Plant Capacity 2001
------------------------------------- ----------------- --------------
(In thousands (In thousands
of tons per year) of tons)
RDME................................. 140.0 120.0
CPFL/SIBRA........................... 311.6 220.0
NES.................................. 45.0 32.0
Prior to December 1999, we owned 50% of Vale Usiminas Participacoes, S.A.
or VUPSA. In December 1999, we agreed to acquire, for a nominal sum, the 50%
stake in VUPSA that we did not already own from our former partner, Usinas
Siderurgicas de Minas Gerais S.A., known as Usiminas. In exchange for our
agreement to acquire the Usiminas interest in VUPSA, Usiminas was released from
some of its obligations with respect to the debt of Companhia Paulista de Ferro
Ligas, or CPFL, and Sibra Eletrosiderurgica Brasileira S.A., or SIBRA, two
leading Brazilian producers of ferro-alloys, which were owned by Ferro Ligas do
Norte S.A., a subsidiary of VUPSA. This acquisition enables us to integrate our
manganese mining operations with ferro-alloy producing plants. On December 31,
2000, after a corporate reorganization, we became the direct owner of SIBRA,
which in turn owns CPFL.
Non-Ferrous Minerals
Our non-ferrous minerals business segment includes the production of gold
and other non-ferrous minerals, such as kaolin and potash. We also include our
copper exploration efforts in the non-ferrous category.
The table below sets forth information regarding our non-ferrous revenues
and sales by geographic market for the periods indicated.
32
For the Year Ended
December 31,
---------------------------
1999 2000 2001
------ ------ ------
(In millions of US$)
Revenues classified by geographic destination
Export sales:
Latin America................................................... $ -- $ -- $ --
United States................................................... 139 156 139
Europe.......................................................... -- 35 33
Japan........................................................... -- 4 --
Asia, other than Japan.......................................... 4 3 1
------ ------- ------
143 198 173
Domestic sales......................................................... 96 90 79
------ ------- ------
Total $ 239 $ 288 $ 252
====== ======= ======
Revenues classified by category
Gold................................................................... $ 155 $ 156 $ 139
Potash................................................................. 84 85 71
Other minerals......................................................... -- 47 42
------ ------- ------
Total........................................................... $ 239 $ 288 $ 252
====== ======= ======
Gold
We conduct our gold business primarily at the parent company level and
each of our gold mines is wholly owned.
We started gold operations in 1984 and, at December 31, 2001, we operated
three gold mines. We are one of the largest gold producers in Latin America,
with a total gold production of 513,300 troy ounces of refined gold for 2001.
We were responsible for approximately 32% of all gold produced on an industrial
scale in Brazil during 2001. Gold sales generated US$139 million of gross
operating revenues in 2001.
The table below sets forth information regarding estimated gold proven and
probable reserves as of December 31, 2001. The estimates of mineral reserves
have been audited and verified by AMEC.
Proven and Probable Reserves
-----------------------------------------------------------------------------------
Ore Au
Tonnage Grade Contained Metal Recoverable Gold
Mine(1) Ore Type(2) (Mt) (g/t) Gold (t) Recovery(%) (t) M ozt (3)
-------------------------------- ---------------- -------- --------- --------- ---------- ------------------
(Millions
(Millions of troy
of tons) (gram/ton (tons) (percent) (tons) ounces(4)
Igarape Bahia(4)................ Sulfide CIP 0.78 3.80 2.96 90 2.67 0.086
Sulfide
Stockpile 0.06 3.51 0.21 90 0.19 0.006
Oxide HL 0.79 1.28 1.01 70 0.71 0.023
Oxide Stockpile 0.43 1.05 0.45 70 0.32 0.010
------ ------ ------ ------ ------
Total-Igarape................... 2.06 2.25 4.64 84 3.88 0.125
------ ------ ------ ------ ------
Fazenda Brasileiro.............. Sulfide CIP 2.33 5.18 12.08 94.6 11.43 0.367
------ ------ ------ ------ ------
Itabira......................... CIL in situ 0.34 2.05 0.70 96 0.67 0.022
------ ------ ------ ------ ------
S/P HL 0.10 0.55 0.06 60 0.03 0.001
------ ------ ------ ------ ------
Total-Itabira................... 0.45 1.70 0.76 0.71 0.003
------ ------ ------ ------ ------
Total........................... 4.84 3.61 17.48 92 16.02 0.495
====== ====== ======= ====== ======
33
--------------
(1) Each mine listed is 100% owned by the Company. All mines are open-pit
except Fazenda Brasileiro, which is an underground operation.
(2) CIP refers to Carbon-in-Pulp, HL refers to Heap Leaching, S/P refers to
Stockpile, and CIL refers to Carbon-in-Leach.
(3) ozt refers to troy ounces. One troy ounce equals 31.103 grams.
(4) The Igarape Bahia mine is exhausted at the date of this annual report
although we are currently studying drilling in deeper zones. The stated
reserve equals the production from January 1, 2002 through completion of
mining.
The table below sets forth information regarding our gold mines and
recent gold production for the periods indicated. The projected exhaustion
dates are based on 2001 production levels.
Production
Commencement Projected --------------------------------------
of Exhaustion
Mine Operations Date For the Year Ended December 31,
-------------------------- ------------ ----------- --------------------------------------
1999 2000 2001
-------- ---------- --------
(Thousands of troy ounces)(1)
Igarape Bahia............. 1991 2002 357.5 333.9 328.3
Fazenda Brasileiro........ 1984 2009 141.2 154.6 165.2
Almas..................... 1985 2001 16.0 13.2 0.6
Caete..................... 1996 2001 17.4 11.0 0.4
Itabira................... 1984 2003 20.0 22.4 18.8
-------- --------- --------
Total..................... 552.1 535.1 513.3
-------- --------- --------
Average total cash cost of
production (US$ per
troy ounce)(1)......... US$ 143 US$ 165 US$ 146
-------- --------- --------
--------------
(1) One troy ounce equals 31.103 grams.
Our gold mines are located in the states of Minas Gerais, Bahia and Para.
All gold mines are open-pit, except for Fazenda Brasileiro, which is
underground. Each mine includes an on-site processing facility to produce dora
bars from raw ore. We ship dora bars to a third party refinery for remelting
and chemical treatment, which yields gold bars with 99.99% purity. Our gold is
insured from the time we place it in its mine vaults until it reaches the
customer.
As of December 31, 2001, our proven and probable gold reserves represented
three years of production at 2001 output levels. In 2001, we had expenditures
of US$5.7 million for gold exploration and resource development, including
US$0.4 million related to prospecting for new deposits and US$4.7 million
directed to the extension of existing reserves. Of these expenses, US$0.6
million were reimbursed under the Mineral Risk Contract. See--Current Copper
Prospects--Mineral Risk Contract.
Drilling has indicated that Igarape Bahia has gold mineralization at
distinct levels. Mineralization at the uppermost level, which consists
primarily of oxidized gold ore, was depleted at the date of this annual report.
We are currently studying the commencement of mining in the second and third
ore zones to produce copper concentrate with gold credit. The second zone is a
transition zone which changes from oxide-based ore to sulfide, and the third
zone consists entirely of copper sulfide ore.
Kaolin
We conduct our kaolin business through our stake in Para Pigmentos S.A.,
which began operations in August 1996. Our total and voting interests in Para
Pigmentos are 75.5% and 80.0%, respectively. Our partners in Para Pigmentos are
Mitsubishi Corporation and International Finance Corporation.
34
Kaolin is a fine white aluminum silicate clay used in the paper, ceramic
and pharmaceutical industries as a coating agent and filler. In 2001, Para
Pigmentos reported revenues of US$39 million and a net loss of US$1.7 million.
Currently, Para Pigmentos has approximately US$61 million of long-term debt
outstanding, of which we guarantee US$50 million. Para Pigmentos is conducting
a four phased investment program to increase production capacity in response to
an expected increase in the demand for kaolin.
The table below sets forth the schedule for the investment program which
Para Pigmentos expects to carry out through 2007:
Expected
Investment Phase Production Total Investment Date of Completion
------------------------ ----------- -------------------- ------------------
kt/year (In millions of US$)
I....................... 320 $ 140.0 complete
II...................... 600 29.0 complete
III..................... 800 24.4 2003
IV...................... 1,000 26.3 2007
Potash
Potash is an important raw material used in the production of fertilizers.
We lease a potash mine in the state of Sergipe from Petroleo Brasileiro S.A.,
the Brazilian oil company. It is the only mine of this type in Brazil and has a
current capacity of 600,000 tons per year. We had gross revenues of US$70.9
million from potash sales in 2001.
Current Copper Prospects
At December 31, 2001, our copper mining exploration and development
projects were conducted through the following joint ventures:
CVRD
|
|
----------------------------------------|------------------------------------------
| 100% | 50.0% | 50.0% | 67.0% | 50.0%
| (total and | (total and | (total and | (total and | (total and
| voting capital) | voting capital) | voting capital) | voting capital) | voting capital)
| | | | |
| | | | |
Sossego Salobo 118 Alemao Cristalino
Partners: Anglo-American BNDES BNDES BNDES
The table below sets forth information, at December 31, 2001, regarding
the status and potential productivity of our copper (Cu) prospects, all but one
of which features a gold (Au) by-product:
Total Expected Anticipated
Other Mineral Capital Start-up
Project Status Deposits Expenditures Date
------------------------------------ ----------------- ---------------- -------------- -----------
(Millions of tons) (In millions of US$)
Full feasibility 313 at 1.02% Cu
Sossego............................. May 2001 and 0.3 g/t Au $ 383 2004
Pre-feasibility 784 at 0.96% Cu
Salobo.............................. in progress and 0.6 g/t Au 1,005 2007
Pre-feasibility
Project 118......................... in progress 100 at 0.80% Cu 140 2004
35
Total Expected Anticipated
Other Mineral Capital Start-up
Project Status Deposits Expenditures Date
------------------------------------ ----------------- ---------------- -------------- -----------
(Millions of tons) (In millions of US$)
Advanced 170 at 1.60% Cu
Alemno.............................. Exploration and 0.90 g/t Au 550 2006
Advanced 300 at 0.49% Cu
Cristalino.......................... Exploration and 0.2 g/t Au 500 2006
In addition, we and BNDES are prospecting the Carajas region for new
copper exploration projects. See --Exploration--Mineral Risk Contract.
Exploration
As part of our mineral prospecting and development activities in Brazil,
we have acquired extensive experience in exploration techniques and processes
specifically designed for use in tropical areas of the world. Our current
mineral exploration efforts are in Brazil and focus primarily on copper.
Expenditures for our mineral exploration program in 2001 were US$43 million and
the budget for 2002 is US$40 million.
Since 1998, we have focused our exploration efforts on areas where
geological knowledge was more advanced, focusing primarily on gold and copper,
and let lapse those claims we did not consider economically attractive. As a
result, our undeveloped acreage claims decreased from approximately 31.2
million hectares as of December 31, 1997, to 7.0 million hectares as of
December 31, 2001.
Mineral Risk Contract
We and BNDES entered into a Mineral Risk Contract in March 1997, relating
to prospecting authorizations for mining regions where drilling and exploration
are still in their early stages. The Mineral Risk Contract provides for the
joint development of certain unexplored mineral deposits in approximately two
million identified hectares of land in the Carajas region, which is part of the
Northern System, as well as proportional participation in any financial
benefits earned from the development of such resources. Iron ore and manganese
deposits already identified and subject to development were specifically
excluded from the Mineral Risk Contract.
Pursuant to the Mineral Risk Contract, we and BNDES each agreed to provide
US$205 million, which represents half of the US$410 million in expenditures
estimated as necessary to complete geological exploration and mineral resource
development projects in the region over a period of five years. Under certain
circumstances, this period may be extended for an additional two years. We will
oversee these projects and BNDES will advance us half of our costs on a
quarterly basis. Under the Mineral Risk Contract, as of December 31, 2001, we
and BNDES each had remaining commitments to contribute an additional US$89
million toward exploration and development activities. We both expect to fund a
portion of these contributions each year through 2001. In the event that either
of us wishes to conduct further exploration and development after having spent
such US$205 million, the contract provides that each party may either choose to
match the other party's contributions, or may choose to have its financial
interest proportionally diluted. If a party's participation in the project is
diluted to an amount lower than 40% of the amount invested in connection with
exploration and development projects, then the Mineral Risk Contract provides
that the diluted party will lose (1) all the rights and benefits provided for
in the Mineral Risk Contract and (2) any amount previously contributed to the
project.
Under the Mineral Risk Contract, BNDES has agreed to compensate us for our
contribution of existing development and ownership rights in the Carajas region
through a finder's fee production royalty on mineral resources that are
discovered and placed into production. This finder's fee is equal to 3.5% of
the revenues derived from the sale of gold, silver and platinum group metals
and 1.5% of the revenues derived from the sale of other minerals, including
copper, except for gold and other minerals discovered at Serra Leste, for which
the finder's fee is equal to 6.5% of revenues.
36
Logistics
At December 31, 2001, our logistics business, which comprises the
transportation of third party products and passengers, operated through the
following subsidiaries and joint ventures:
CVRD
|
|
|
-------------------------------------------------------------------------------------------------------------
99.9% |99.9% 30.0% |30.0% 50.0% |50% 18.7% |0.0% 100% |100% 100% |100% 100% |100%
(total |(voting (total |(voting (total |(voting (total |(voting (total |(voting (total |(voting (total |(voting
capital)|capital) capital)|capital) capital)|capital) capital)|capital) capital)|capital) capital)|capital) capital)|capital)
| | | | | | |
Terminal de Companhia Sepetiba Ferroban | Ferteco Navegacao
Villa Velha Ferroviaria do Tecon S.A. Bandeirantes Mineracao Mineracao Vale do Rio
S.A. Nordeste (Sepetiba S.A. Tacuma Ltda. S.A. (Ferteco) Doce S.A.
(TVV) (CFN) Tecon) (Ferroban) | (Docenave)
|
Partners: Employees Taquari CSN Ferropasa 45.6 |20.0% 9.6% |17.2%
CSN Capmelissa (total |(voting (total |(voting
Employees LAIF capital)|capital) capital)|capital)
Funcef | |
Previ | |
Ferrovia |
Centro- |
Atlantica S.A. MRS
(Centro-
Atlantica)
VALIA
KRJ
CARMO
CPP
CSN
Employees
The table below sets forth information regarding our third party logistics
revenues and sales by geographic market for the periods indicated.
1999 2000 2001
------ ------ ------
(in millions
of US$)
Export market
Latin America............... 13 30 65
United States............... 34 64 21
Europe...................... 31 75 44
Middle East................. 3 6 4
Japan....................... 9 15 10
Asia, other than Japan...... 9 5 3
Others.......................... 1 -- --
---- ---- ----
100 195 147
Domestic sales.................. 318 403 344
---- ---- ----
418 598 491
==== ==== ====
Railroads
Vitoria-Minas Railroad. The Vitoria-Minas railroad, in the Southern
System, originates near the city of Belo Horizonte and our Itabira mines in the
State of Minas Gerais. We operate this railroad under a 30-year renewable
concession granted by the Brazilian government in July 1997. This railroad
extends 905 kilometers to our Tubarao marine terminal located near the Port of
Vitoria in the state of Espirito Santo. The Vitoria-Minas railroad consists of
two lines of track extending for a distance of 601 kilometers to permit
continuous railroad travel in opposite directions, and single-track branches of
304 kilometers. Industrial manufacturers are located near this area and major
agricultural regions are adjacent and accessible to the Vitoria-Minas railroad.
The Vitoria-Minas rolling stock fleet consists of approximately 197
locomotives, 7,603 ore-cars, 5,639 cars for general cargo and 61 passenger
cars. In 2001, the Vitoria-Minas railroad carried a total of 109.9 million tons
of iron ore and other cargo, of which 78.6 million tons consisted of cargo
transported for third parties. The Vitoria-Minas railroad also carried
approximately one million passengers in 2001.
37
The principal cargo of the Vitoria-Minas railroad consists of:
o iron ore, carried for us,
o steel, coal and pig iron carried for steel manufacturers located
along the railroad, and
o limestone carried for steel mills located in the states of Minas
Gerais and Espirito Santo.
We charge market rates for third party freight, including pellets,
aluminum and pulp and paper originating from joint ventures and other
enterprises in which we do not own 100% of the equity interest. Market rates
vary based upon the distance traveled, the kind of product and the weight of
the freight in question.
The table below sets forth information regarding the cargo that the
Vitoria-Minas railroad transported for the periods indicated.
For the Year Ended December 31,
-------------------------------
Cargo 1999 2000 2001
----------------------------------------------- -------- ------ ------
(Thousands of tons)
Third Party
Iron ore and pellets.................... 53,292 56,986 53,295
Steel................................... 4,745 5,542 5,621
Coal.................................... 4,223 4,905 4,892
Pig iron................................ 2,042 2,585 2,688
Limestone and dolomite.................. 2,149 2,609 1,551
Grain................................... 1,655 2,410 2,377
Cooking coal............................ 525 854 1,048
Oil..................................... 285 334 372
Other................................... 4,143 4,284 6,801
------- ------- -------
Third party subtotal................ 73,059 80,509 78,645
------- ------- -------
CVRD Group
Iron ore................................ 26,322 29,338 30,162
Wood pulp............................... 726 756 --
Other................................... 722 1,281 1,072
------- ------- -------
CVRD Group subtotal................. 27,770 31,375 31,234
------- ------- -------
Total............................... 100,829 111,884 109,879
======= ======= =======
Carajas Railroad. We operate the Carajas railroad under a 30-year
renewable concession granted by the Brazilian government in June 1997. This
railroad, located in the Northern System, starts at our Carajas iron ore mine
in the state of Para, and extends 892 kilometers to our Ponta da Madeira marine
terminal facilities located near the Port of Sao Luis in the state of Maranhao.
The Carajas railroad consists of one line of track, with spur tracks and
turn-outs to permit the passage of trains in opposite directions. The Carajas
fleet consists of approximately 88 locomotives, 4,006 ore-cars, 745 cars for
general cargo and 37 passenger cars. In 2001, the Carajas railroad carried a
total of 57.2 million tons of iron ore and other cargo (of which 6.3 million
tons, or 11%, consisted of cargo transported for third parties). The Carajas
railroad also carried approximately 431,000 passengers in 2001.
The table below sets forth information regarding the cargo the Carajas
railroad transported for the periods indicated.
For the Year Ended December 31,
-------------------------------
Cargo 1999 2000 2001
----------------------------------------------- -------- ------ ------
(Thousands of tons)
Iron ore
CVRD Group.............................. 41,683 45,353 49,475
Third party............................. 2,246 2,544 3,229
38
For the Year Ended December 31,
-------------------------------
Cargo 1999 2000 2001
----------------------------------------------- -------- ------ ------
(Thousands of tons)
Manganese ore
CVRD Group.............................. 807 1,339 1,411
Pig iron....................................... 1,321 1,526 1,879
Vehicles....................................... 120 142 86
Fuels.......................................... 383 394 472
Soy beans...................................... 426 491 515
Other.......................................... 114 127 158
------ ------ ------
Total................................... 47,100 51,916 57,225
====== ====== ======
Other Investments. We hold a 20% interest in the voting capital of
Centro-Atlantica, which operates the central east regional railway network of
the Brazilian national railway system under a 30-year renewable concession
granted in 1996. The central east network contains approximately 7,000
kilometers of track extending into the states of Sergipe, Bahia, Espirito
Santo, Minas Gerais, Goias, Rio de Janeiro and Distrito Federal. It connects
with our Vitoria-Minas railroad near the cities of Belo Horizonte and Vitoria.
Centro-Atlantica currently operates on the same track gauge as our
Vitoria-Minas railroad. In 2001, Centro-Atlantica reported net revenues of
US$101.4 million, and a net loss of US$47 million.
We also hold a 30% stake in the Malha Nordeste railroad through Companhia
Ferroviaria do Nordeste, known as CFN. The Malha Nordeste railroad operates
under a 30-year concession granted by the Brazilian government in December
1997. Malha Nordeste is an existing rail line with 4,342 kilometers of track
extending into the states of Maranhao, Piaui, Ceara, Rio Grande do Norte,
Paraiba, Pernambuco, Alagoas and Sergipe. The Malha Nordeste line comes close
to our Carajas line in the Northern System but is built on a narrower gauge.
The Malha Nordeste line requires significant modernization, and the owners are
currently discussing the amount of investment required to effect the
modernization. In 2001, CFN reported net revenues of US$7.8 million and a net
loss of US$26.3 million.
We are part of a consortium which won the auction for a 30-year concession
for the Malha Paulista railroad in November 1998. We currently hold 18.7% of
the total capital in this consortium, which was incorporated as Ferrovias
Bandeirantes S.A., or Ferroban. We entered into this concession, which is
renewable for an additional 30-year period, for a price of US$205.7 million.
Ferroban is a 4,236 kilometer railroad linking the states of Sao Paulo, Minas
Gerais and Parana. In 2001, Ferroban reported net revenues of US$63 million and
a net loss of US$44.5 million.
In 2001, we acquired 100% of Ferteco Mineracao S.A. Ferteco owns 9.6% of
the total capital and 17.2% of the voting capital in MRS Logistica S.A. MRS is
a 1,612 kilometer railroad which links the states of Rio de Janeiro, Sao Paulo
and Minas Gerais with a capacity to transport 80 million tons per year. MRS
operates under a 30-year renewable concession granted by the Brazilian
government in November 1996.
The Brazilian government has the option to extend our railroad concessions
when they expire. The table below sets forth the expiration date for each of
our concessions:
Concession
Railroad Expiration Date
-------------------------------------------------- ---------------
Centro-Atlantica.................................. August 2026
MRS............................................... December 2026
Vitoria-Minas..................................... June 2027
Carajas........................................... June 2027
Malha Nordeste.................................... December 2027
Malha Paulista.................................... December 2028
39
Ports and Terminals
We operate ports and terminals principally as a means to complete the
distribution of our iron ore and pellets to ocean-going vessels serving the
export market. See --Ferrous Minerals--Pellets--Distribution--Iron Ore and
Pellets. We also use our ports and terminals to handle third party cargo. In
2001, 30% of the cargo handled by our ports and terminals represented cargo
handled for third parties.
Tubarao/Praia Mole Marine Terminal. The Tubarao/Praia Mole marine terminal
complex, which covers an area of approximately 18 square kilometers, is located
near the Port of Vitoria in the State of Espirito Santo and has two piers. Pier
I can accommodate two vessels at a time, one of up to 80,000 DWT on the
southern side and one of up to 120,000 DWT on the northern side. Pier II can
accommodate one vessel of up to 300,000 DWT at a time. In Pier I there are two
shiploaders which can load up to a combined total of 14,000 tons per hour. In
Pier II there are two shiploaders that work alternately and can each load up to
16,000 tons per hour. We operate a grain terminal, accessible by highway in the
Tubarao area, with an annual capacity of 1.5 million tons and a maximum loading
speed of 1,500 tons per hour. We also operate a bulk liquid terminal with a
capacity of 2.0 million cubic meters. There are two berths in the Tubarao
terminal. One is for transportation of grains, with a capacity of 3 million
tons a year, and the other is for the transportation of general cargo and
fertilizers.
The table below sets forth information on cargo shipped through our
Tubarao/Praia Mole marine terminal by tonnage for the periods indicated.
For the Year Ended December 31,
-------------------------------
Cargo 1999 2000 2001
----------------------------------------------- -------- ------ ------
(Thousands of tons)
Iron ore and pellets
CVRD Group.............................. 42,017 39,397 46,262
Third party............................. 23,433 31,629 20,925
Coal........................................... 7,497 8,252 8,250
Grain.......................................... 1,302 1,889 2,073
Coking coal.................................... 603 999 1,016
Pig iron....................................... 1,867 2,081 1,862
Fertilizers.................................... 405 334 513
Other.......................................... 3,023 4,770 5,039
------ ------ ------
Total 80,147 89,351 85,940
====== ====== ======
Ponta da Madeira Marine Terminal. The Ponta da Madeira marine terminal
complex is located near the Port of Sao Luis in the state of Maranhao. The
Ponta da Madeira port facilities can accommodate two vessels. Pier I can
accommodate vessels displacing up to 420,000 DWT. Pier II can accommodate
vessels of up to 155,000 DWT. The two berths have a maximum loading rate of
16,000 tons per hour at Pier I and 8,000 tons per hour at Pier II.
The table below sets forth information on cargo shipped through our
Ponta da Madeira marine terminal by tonnage for the periods indicated.
For the Year Ended December 31,
-------------------------------
Cargo 1999 2000 2001
----------------------------------------------- -------- ------ ------
(Thousands of tons)
CVRD Group
Iron ore................................ 41,531 46,178 49,351
Manganese ore........................... 787 1,293 1,513
Third Party
Pig iron................................ 1,223 1,533 1,879
Soy beans............................... 451 561 622
------ ------ ------
Total............................... 43,992 49,565 53,364
====== ====== ======
40
Other Investments. In September 1994, we licensed the Inacio Barbosa
Maritime Terminal, a marine terminal located in the state of Sergipe, near our
potash mine. Under the terms of the ten-year agreement, we entered into with
Sergiportos, a state-owned port company, we receive 40% of the net operating
profit of the terminal and must manage the terminal.
In May 1998, we entered into a 25-year lease for the Capuaba marine
terminal in Vitoria, in the state of Espirito Santo. We shipped 1,818,000 tons
cargo during 2001, and 1,833,000 tons of cargo during 2000.
In September 1998, we acquired a 50% indirect interest in the lease of the
Sepetiba container terminal, operated by Sepetiba Tecon S.A. Companhia
Siderdrgica Nacional, or CSN, holds the remaining 50% of Sepetiba Tecon. The
lease has a term of 25 years and we can renew it for an additional period of 25
years. The price for the concession was approximately US$79 million, of which
we have already paid US$33 million. The remainder is due in 276 monthly
installments starting after the completion of certain investments by Companhia
Docas do Rio de Janeiro required under the concession contract. We expect
payments to start in January 2003.
Shipping
We are currently seeking to divest our interests in our dry-bulk shipping
business. In February 2002, Navegacao Vale do Rio Doce S.A., known as Docenave,
sold six of its carrier vessels, with a total capacity of 592,240 DWT, to
Empresa Naviera Elcano, S.A., a Spanish company, for US$53 million. Docenave
subsequently sold another three vessels for US$7.5 million. We intend to sell
Docenave's remaining dry-bulk assets in the future, but have reached no
agreement regarding this sale to date.
The table below sets forth information on the cargo our shipping
operations transported for the periods indicated.
For the Year Ended December 31,
-------------------------------
Cargo 1999 2000 2001
----------------------------------------------- -------- ------ ------
(Thousands of tons)
Iron ore.......................................
CVRD Group.............................. 1,328 3,058 7,179
Third party............................. 12,514 15,608 7,748
Coal........................................... 6,541 7,452 3,824
Other.......................................... 8,142 9,031 7,036
------ ------ ------
Total................................... 28,525 35,149 25,787
====== ====== ======
Major customers of Docenave in 2001 included steelmakers (iron ore
exports), Alunorte (domestic bauxite purchases) and Brazilian steelmakers (coal
imports).
Competition in the logistics industry. The lower costs of rail transport
compared to road transport costs in the routes served by the Carajas railroad
restrict the competition. Competition with the Vitoria-Minas railroad is
limited with respect to its principal minerals and bulk products cargo due to
the comparative cost advantage of rail transport over road transport for the
same routes. The local trucking industry provides competition for the
Vitoria-Minas railroad with respect to non-bulk cargo. The Centro-Atlantica
railroad competes primarily with an established trucking industry to carry
freight in the region it serves.
The Ponta da Madeira marine terminal does not face any significant
competition due to its geographic distance from other comparable marine
terminals and to its direct link with the Carajas railroad. The Tubarao/Praia
Mole marine terminal faces limited competition for most types of cargo due to
its direct link with the Vitoria-Minas railroad. However, with respect to some
types of cargo and origins, it encounters competition from the Port of Rio de
Janeiro and the Port of Santos.
Our shipping services compete with a wide variety of international bulk
shipping companies. Competition for tonnage can be quite intense. It depends
principally on price, as well as the size, age, condition and acceptability of
a vessel and its operator to the customer. Varying economic factors can cause
wide swings in freight rates and sudden
41
shifts in traffic patterns. Vessel redeployment and new vessel construction can
also lead to an overcapacity of vessels offering the same service or operating
in the same market.
Energy
In 2001 and 2000, we consumed 12.5 TWh and 13.8 TWh of electricity,
respectively. Energy management and supply has become a priority for us, driven
both by the Brazilian government's privatization program of the industry, and
by the risk of rising electricity prices and electricity rationing due to
energy shortages, such as the one Brazil experienced in the second half of
2001. We currently perceive favorable investment opportunities in the Brazilian
electricity sector and are taking advantage of them to invest in the
hydroelectric power generation projects discussed below. These projects may
sell their production to third parties in the power market, and, as a result,
our energy department will be engaged in wholesale marketing activities. Our
energy business is comprised of the sale but not the delivery of electricity.
We may use some of the electricity from these projects for our internal needs.
As we are a large consumer of electricity, we expect that investing in the
energy business will help protect us against electricity price volatility.
We are entering the energy business through the following investments:
CVRD
|
|
|
-----------------------------------------------------------------------------------------------------------
51% |51% 50% |50% 48.42%|48.42% 33.33%|33.33% 43.85%|43.85% 51% |51% 40% |40% 38.15%|38.15%
(total|(voting (total|(voting (total|(voting (total|(voting (total|(voting (total|(voting (total|(voting (total|(voting
capi- |capi- capi- |capi- capi- |capi- capi- |capi- capi- |capi- capi- |capi- capi- |capi- capi- |capi-
tal) |tal) tal) |tal) tal) |tal) tal) |tal) tal) |tal) tal) |tal) tal) |tal) tal) |tal)
| | | | | | | |
| | | | | | | |
| | | | | | | |
Capim Porto Santa Foz do Chapeco
Aimores Candonga Banco I & II Estrela Isabel Funil Energia S.A. Igarapava
Partners:
Cemig Cemig Biliton Metais Cemig CPFL Geracao CMM
Cemig Alcan Capim Branco Coteminas Alcoa CEEE CSN
Paineiras Camargo Correa MMV
CMM Votorantim Cimentos
Among our partners in these investments, Companhia Energetica de Minas
Gerais, known as Cemig and Companhia Estadual de Energia Eletrica, known as
CEEE, are state-government controlled companies. Cemig Capim Branco Energia
S.A. is an affiliate of Cemig. Alcan Aluminio do Brasil Ltda., known as Alcan,
is an affiliate of Alcan Inc. Comercial e Agricola Paineiras Ltda., known as
Paineiras, is an affiliate of Suzano Participacoes S.A.. Billiton Metais S.A.
is a wholly-owned subsidiary of BHP Billiton. CPFL Geracao is an affiliate of
CPFL-Companhia Paulista de Forca e Luz. Companhia Mineira de Metais, known as
CMM, and Votorantim Cimentos S.A. are affiliates of Votorantim Participacoes
S.A. Alcoa Aluminio S.A., known as Alcoa, is an affiliate of Alcoa Inc.
Mineracao Morro Velho Ltda., known as MMV, is an affiliate of Anglo American
Brasil Ltda., which in turn is affiliated with Anglo American Plc. Companhia de
Tecidos do Norte de Minas, known as Coteminas, is affiliated with Coteminas
International Ltd.
The table sets forth the information regarding our power generation
projects.
Our Total
Our Total Projected
Investment Investment
Our as of as of
Commencement Ownership Projected December 31, December 31,
Project of Operation Interest Capacity 2001 2002
---------------------------------- ---------------- --------- ---------- ------------ ------------
(percent) (in MW) (in millions of US$)
Igarapava(1)...................... January 1999 38.1% 210 US$ 88.1 US$ 88.1
42
Our Total
Our Total Projected
Investment Investment
Our as of as of
Commencement Ownership Projected December 31, December 31,
Project of Operation Interest Capacity 2001 2002
---------------------------------- ---------------- --------- ---------- ------------ ------------
(percent) (in MW) (in millions of US$)
Porto Estrela(2).................. September 2001 33.3 112 19.2 19.7
Aimores(3)........................ December 2003(7) 51.0 330 27.4 99.2
Candonga(3)....................... November 2003(7) 50.0 140 7.7 42.1
Funil(1).......................... December 2002(7) 51.0 180 22.3 51.2
Capim Branco I(4)................. February 2005(7) 48.4 240 0.5 63.4
Capim Branco II(4)................ July 2005(7) 48.4 210 0.2 75.8
Foz do Chapeco(5)................. November 2006(7) 40.0 855 0.4 202.3
Santa Isabel(6)................... August 2006(7) 43.9 1,087 -- --
--------------
(1) Located in Rio Grande, on the border between Sao Paulo and Minas Gerais.
(2) Located in Santo Antonio river, in the state of Minas Gerais.
(3) Located in Rio Doce basin, in the state of Minas Gerais.
(4) Located in Araguari river, in the state of Minas Gerais.
(5) Located in Uruguai river, on the border of the states of Santa Catarina
and Rio Grande do Sul.
(6) Located in Araguaia river, on the border of the states of Tocantins and
Para.
(7) Projected date of commencement of operations of the first unit of the
project.
Our total investment in the hydroelectric projects at Igarapava, Porto
Estrela, Funil, Candonga, Aimores, Capim Branco I, Capim Branco II and Foz do
Chapeco is estimated at US$642 million. We cannot assure you that the aggregate
cost will not escalate or that the projects will be completed on schedule.
Due to the energy shortage in 2001, and in response to the Brazilian
government's energy rationing program, we temporarily reduced our aluminum and
ferro-alloy production. For a description of these measures, see Item 3.D. Risk
Factors--Risks Relating to Brazil--The Brazilian government's energy rationing
program could adversely affect us, Item 4.B., 4.C., and 4.D. Business Overview,
Organizational Structure and Property, Plants and Equipment--Lines of Business
--Ferrous Minerals--Manganese and Ferro-Alloys, --Holdings--Aluminum
Business--Aluminum--Albras and --Holdings--Aluminum
Business--Aluminum--Valesul.
Holdings
Our holdings are comprised primarily of our aluminum operations and our
interests in the steel industry. We are currently pursuing the sale of some of
our interests in the steel industry.
The table below sets forth information regarding our holdings revenues and
sales by geographic market for the periods indicated.
For the Year Ended December 31,
---------------------------------------------------------
1999 2000 2001
------------------ ------------------ -----------------
Pulp & Pulp & Pulp &
Paper Aluminum Paper Aluminum Paper Aluminum
-------- -------- -------- -------- ------- --------
(In millions of US$)
Export market
Latin America.................. $ -- $ 5 $ -- $ 23 $ -- $ 9
Europe......................... 39 146 48 237 -- 173
Middle East.................... -- -- -- 16 -- --
Japan.......................... -- 94 -- 34 -- 12
United States.................. 62 23 73 39 47 73
43
For the Year Ended December 31,
---------------------------------------------------------
1999 2000 2001
------------------ ------------------ -----------------
Pulp & Pulp & Pulp &
Paper Aluminum Paper Aluminum Paper Aluminum
-------- -------- -------- -------- ------- --------
(In millions of US$)
Asia, other than Japan......... -- 50 -- 2 -- 15
Others................................ -- -- -- -- -- --
-------- -------- -------- -------- ------- --------
101 318 121 351 47 282
Domestic sales........................ 10 62 21 12 8 1
-------- -------- -------- -------- ------- --------
$ 111 $ 380 $ 142 $ 363 $ 55 $ 283
======== ======== ======== ======== ======= ========
Aluminum Business
At December 31, 2001, our aluminum business operated through the following
subsidiaries and joint ventures:
CVRD
|
100% | 100%
(total interest) | (voting interest)
|
|
Aluvale
|
|
--------------------------------------------------------------------------
40% |40% 45.6% |50.3% 51.0% |51.0% 54.5% |54.5%
(total |(voting (total |(voting (total |(voting (total |(voting
capital)|capital) capital)|capital) capital)|capital) capital)|capital)
| | | |
| | | |
Mineracao Rio Alumina do Aluminio Valesul
do Norte S.A. Norte do Brasil S.A. Brasileiro S.A. Aluminio S.A.
(MRN) (Alunorte) (Albras) (Valesul)
Partners: Billiton Norsk Hydro Nippon Amazon Billiton
Alcoa MRN
Alcan Nippon Amazon
Companhia Brasileira de Companhia Brasileira
Aluminio de Aluminio
Norsk Hydro JAIC
Reynolds
Abalco
Our wholly-owned subsidiary, Aluvale, manages our aluminum operations
through participation in joint ventures that engage in:
o mining bauxite,
o refining bauxite into alumina, and
o using alumina to produce primary aluminum and aluminum alloys.
Aluvale's principal operating activity consists of marketing the aluminum
produced by Albras--Aluminio Brasileiro S.A., or Albras, and Valesul Aluminio
S.A., or Valesul. In 2001, gross revenues from aluminum products totaled US$284
million.
44
Bauxite
MRN, the largest bauxite producer in Latin America and one of the largest
in the world, produces bauxite for sale to its joint venture partners. Excess
production may be sold to third parties. MRN operates two open-pit bauxite
mines which produce high quality bauxite. In addition, MRN controls substantial
additional high quality bauxite resources which it believes can be produced
economically in the future. MRN had net revenues of US$211 million and net
income of US$81 million in 2001.
MRN's mines are located in the northern region of the state of Para.
The table below sets forth information regarding MRN's bauxite reserves as
of December 31, 2001. The estimates of mineral reserves have been audited and
verified by AMEC.
Proven and Probable Reserves(1)
-------------------------------------
Mine Type Ore Tonnage Grade
---------------------------------------- -------- ----------- -----
Millions of tons) % A1203)
Mineracao Rio do Norte(2)............... Open pit 146.6 50.6
--------------
(1) Reported as recoverable product.
(2) Includes two active mines.
Operations at MRN's mines commenced in 1979 and the proven and probable
reserves are projected to exhaust in 2015 at 2001 production levels. For 1999,
2000 and 2001, production equaled 11.0, 11.2 and 10.7 million tons,
respectively.
MRN operates ore beneficiation facilities at its mines, which are
connected by rail to a loading terminal and port facilities on the Trombetas
River. The Trombetas River is a tributary of the Amazon River and MRN's port
facilities can handle vessels of up to 50,000 DWT. MRN owns and operates the
rail and the port facilities serving its mines. The MRN bauxite mines are
accessible by road from the port area and obtain electricity from their own
thermoelectric power station.
MRN is undertaking an expansion of its capacity from 11.0 million tons to
16.3 million tons in 2003. The cost of this expansion is estimated at US$206
million.
Alumina
Alunorte began operations in July 1995 and produces alumina by refining
bauxite which MRN supplies. The Alunorte plant has a production capacity of 1.5
million tons of alumina per year. In 2001, it produced 1.6 million tons.
Alunorte sells the major portion of its production to Albras, Valesul and
Aluvale for the production of aluminum. The Alunorte plant is located near
Belem in the state of Para next to Albras's aluminum production facilities.
This allows Alunorte and its principal customer to share infrastructure and
other resources. Alunorte had net revenues of US$294 million and net loss of
US$13 million in 2001.
With the exception of MRN, each Alunorte joint venture partner must
purchase on a take-or-pay basis all alumina produced by Alunorte in proportion
to its respective interest. MRN also has the right, but not the obligation, to
purchase its share of Alunorte's production. The joint venturers each pay the
same price, which is determined by a formula based on prevailing world market
prices of alumina and aluminum. In the aggregate, we are committed to
take-or-pay 437,214 metric tons per year of alumina produced by Alunorte, which
at a market price of US$176.08 per metric ton at December 31, 2001, represents
an annual commitment of US$77 million.
In 2000, Alunorte's partners agreed to contribute an additional US$126
million in equity capital to expand Alunorte's capacity from 1.5 million tons
of alumina per year to 2.3 million tons by 2002, a project which is expected to
cost approximately US$286 million. Our share of this contribution is US$42
million to be paid over six installments. Due to this contribution, our equity
interest in Alunorte will be diluted to 44.4% of the total capital by 2002,
although our voting interest will remain unchanged at 50.3%.
45
Aluminum
Albras and Valesul each produce aluminum using alumina which Alunorte
supplies. Alunorte has supplied all of Albras's alumina requirements since
October 1995. Albras produces aluminum ingots and Valesul produces aluminum
ingots, slabs, bars, billets and alloys. Aluminum is produced from alumina by
means of a continuous electro-chemical process which requires substantial
amounts of electricity.
Albras
The Albras plant is one of the largest aluminum plants in Latin America,
with a capacity of approximately 406,000 tons per year. Albras started its
operations in 1985 at a plant located near Belem in the state of Para. Albras
had net revenues of US$472 million and net income of US$8 million in 2001.
The Albras joint venture partners must purchase on a take-or-pay basis all
aluminum produced by Albras in proportion to their ownership interests which
represents an annual commitment from us of US$256 million. See note 15(d) to
our consolidated financial statements. We generally market our share of
Albras's output in international export markets.
The table below sets forth information regarding Albras's recent aluminum
production and our recent purchases from Albras.
For the Year Ended
December 31,
----------------------------
Aluminum 1999 2000 2001
------------------------------------------ ------ ------ ------
(Thousands of tons)
Albras production......................... 358.0 366.0 333.0
Our purchases from Albras................. 183.0 187.0 167.0
As of December 31, 2001, Albras had US$532 million of long term
outstanding debt, of which US$162 million was denominated in Japanese yen
(approximately 50% of which was hedged into U.S. dollars). To reduce the impact
of price fluctuations and to assure adequate cash flow, Albras engages in
hedging activities from time to time, usually through one-year forward sales.
See Item 11. Quantitative and Qualitative Disclosures About Market
Risk--Commodity Price Risk.
In 2001, Albras obtained a financing package with BNDES aimed at financing
the expansion of the Albras plant from a capacity of approximately 366,000 tons
per year to a capacity of approximately 406,000 tons per year. The total cost
of this project which was completed in the fourth quarter of 2001 was US$57
million. Consequently, Albras' production capacity increased by 40,000 tons.
Electricity. The production of aluminum requires a continuous flow of
substantial amounts of electricity. Albras purchases electrical power from
Eletronorte, a state-owned electric power utility. Eletronorte generates
electricity at the Tucurui Hydroelectric Power Plant located on the Tocantins
River. This plant is the sole source of electrical power in the region in the
quantities required for Albras's operations. Albras consumes approximately
one-quarter of the constant (year round) output of the Eletronorte plant.
We currently benefit from a contract between Albras and Eletronorte
pursuant to which Albras is able to purchase electricity at very favorable
rates. This contract is scheduled to expire in 2004. We cannot assure you that
we will be able to renew this contract on the same or similarly favorable
terms. We, together with other aluminum producers in the region, are currently
investigating alternative electricity sources. See--Energy.
Due to the energy shortage and the Brazilian government's energy rationing
program which required an energy consumption decrease of 25% for aluminum
related activities, we reduced 2001 aluminum production at Albras by 46,000
tons, from the previously planned 379,000 tons. In January 2002, Albras began
operations at full production capacity, which has reached 406,000 tons,
following the completion of the Albras plant expansion project. For information
on the risks associated with the Brazilian government's energy rationing
program, see Item 3.D. Risk Factors--Risks Relating to Brazil--The Brazilian
government's energy rationing program could adversely affect us.
46
Valesul
Valesul started its operations in 1982 and operates a plant located in the
state of Rio de Janeiro. Valesul produces primary aluminum and aluminum alloys
in the form of ingots, slabs, bars and billets. Valesul's aluminum is sold
primarily in the domestic Brazilian market on a spot basis. Valesul had net
revenues of US$129 million and net income of US$21 million in 2001.
The table below sets forth information regarding Valesul's recent primary
aluminum production, third party scrap recycled by Valesul and our recent
tolling acquisitions from Valesul.
For the Year Ended
December 31,
----------------------------
Aluminum 1999 2000 2001
------------------------------------------ ------ ------ ------
(Thousands of tons)
Valesul production........................ 91.7 93.8 80.1
Third party scrap recycled................ 20.1 19.5 20.1
Our acquisitions from Valesul............. 50.7 -- --
At the end of 1999, Aluvale and Billiton, Valesul's shareholders, decided
to terminate the tolling agreement in force since 1987. Consequently, as of
January 1, 2000, Valesul independently purchases its raw material requirements
and operates as a company in its own right.
Electricity. Valesul currently obtains approximately 20% of its electrical
energy requirements from four internal hydroelectric power plants located in
the state of Minas Gerais and the remainder from a third party power company at
market rates. The Brazilian federal power system uses a two-tiered (peak and
off-peak) rate structure, with electricity during peak hours costing
considerably more than off-peak electricity. Valesul has invested substantial
amounts to reduce its electricity cost during peak hours. If its initiatives
are successful, Valesul could realize substantial cost savings in producing
aluminum. To address Valesul's need for reliable electrical power sources, we
have built a ten megawatt hydroelectric power plant at Rio Preto in the state
of Minas Gerais, which began operations in October 1997. Valesul is also a
participant in another power plant, known as Machadinho, that will be
operational in 2002 and will ensure the self-sufficient power supply in peak
hours.
Due to the energy shortage and the Brazilian government's energy rationing
program which required an energy consumption decrease of 25% for aluminum
related activities in the second half of 2001, we reduced 2001 aluminum
production at Valesul by 13,000 tons to 80,000 from the previously planned
93,000. Valesul decreased the production of ingots, a commodity traded on the
London Metal Exchange. Valesul did not alter the production of higher value
added products, such as alloys and billets, that are sold under contracts with
customers. Despite this mandatory temporary reduction, we continue to pursue
our long-term plan to expand our aluminum operations. For information on the
risks associated with the Brazilian government's energy rationing program, see
Item 3.D. Risk Factors--Risks Relating to Brazil--The Brazilian government's
energy rationing program could adversely affect us.
Competition in Bauxite, Alumina and Aluminum
Competition in the bauxite export market is based primarily on two key
factors: quality of bauxite and reliability of purchasers. We believe that MRN
remains competitive in this market because of:
o the high quality of Brazilian bauxite, and
o our aluminum production system which ensures internal use of our
bauxite production.
Quality, price and reliability of supply drive competition in the alumina
market. We believe that Alunorte is competitive in the alumina market because
of:
o its proximity to MRN's bauxite mines,
47
o its newly developed refinery facilities,
o its efficient port facilities, and
o the on-going support of its owners in committing to purchase a
substantial portion of its annual production.
Aluminum is a commodity and competition is based primarily on the
economics of transportation and the costs of production. We believe that Albras
is competitive in the aluminum market because of:
o its relatively efficient and accessible port facilities, and
o its generally prevailing lower costs of production.
Steel Investments
At December 31, 2001, our steel business operated through the following
joint ventures:
CVRD
|
|
|
--------------------------------------------------------------------------
11.5% |23.0% 22.9% |20.5% 50.0% |50.0% 4.8% |5.3%
(total |(voting (total |(voting (total |(voting (total |(voting
capital)|capital) capital)|capital) capital)|capital) capital)|capital)
| | | |
| | | |
Usinas Companhia California
Siderugicas Siderugica de Steel Siderar
de Minas Turbarao Industries,
Gerais S.A. (CST) Inc. (CSI)
(Usiminas)
Partners: Nippon Acesita Kawaski Techint Group
Previ Usinor Employees
CIU Kawasaki Usiminas
Others Others Others
In line with our strategy to consolidate and focus on mining, logistics
and energy, on December 31, 2000 we reached an agreement to unwind our cross
holdings with CSN, which we completed in March 2001. Additionally, in December
2000 we exchanged our 2.28% interest in Aco Minas Gerais S.A., or Acominas, a
privately held steel company for US$10 million worth of preferred shares of
Gerdau S.A., a publicly listed steel holding company, which shares we intend to
sell in the future. CSI, a North American steelmaker, is the principal
purchaser of slabs from CST, with whom we have an exclusive supply contract for
iron ore and pellets. In addition, our participation in CSI gives us access to
and experience dealing with the U.S. market, where we currently have a very
small market share. For these reasons, we intend to hold our investment in CSI.
The following table sets forth information on our continuing interests in
makers of steel products.
Investment Location 2001 Production 2001 Net Revenues Principal Products
------------------------- ---------------- --------------- ----------------- ------------------------------------
(Millions of tons)(1) (In millions of US$)(2)
CSI....................... United States 1.8 640 Hot-rolled steel; cold-rolled steel;
galvanized steel; steel tubes
CST(3).................... Brazil 4.9 866 Steel slabs
Usiminas.................. Brazil 4.6 1,259 Hot-rolled steel; cold-rolled steel;
heavy steel plates; electro galvanized
steel
48
Investment Location 2001 Production 2001 Net Revenues Principal Products
------------------------- ---------------- --------------- ----------------- ------------------------------------
(Millions of tons)(1) (In millions of US$)(2)
Siderar................... Argentina 1.9 778 Hot-rolled steel; cold-rolled steel;
galvanized steel; tin plates
--------------
(1) Production in million of tons of crude steel for all steelmakers except
CSI, and in millions of tons of finished products for CSI.
(2) Represents amounts translated from local financial statements and
converted into U.S. dollars (where applicable) at prevailing year-end
exchange rates.
(3) We are party to a shareholders' agreement which permits us to participate
in a control group.
The market value of our investments in CST, Usiminas, and Siderar, all of
which have publicly traded equity, was US$224 million at December 31, 2001. The
aggregate net book value of these investments was US$65 million at December 31,
2001. The aggregate net book value of our total investments in steel producing
companies (including CSI, a privately held company) was US$163 million at
December 31, 2001. We earned US$14 million in dividends from these investments
in 2001.
Fertilizers
We conduct our fertilizer business primarily through our stake in
Fertilizantes Fosfatados S.A., or Fosfertil, a company that produces and sells
nitrate and phosphate based fertilizers. Our total and voting interest in
Fosfertil is 11.0%. Our main partner in Fosfertil is Fertifos-Administracao e
Participacoes S.A.
Regulatory Matters
Mining
Under the Brazilian Constitution, all mineral resources in Brazil belong
to the Brazilian government. The Brazilian Constitution requires that mining
companies incorporate in accordance with Brazilian law.
The Brazilian Constitution and Mining Code impose on mining companies
various regulatory restrictions relating to, among other things:
o the manner in which mineral deposits are exploited,
o the health and safety of workers,
o the protection and restoration of the environment,
o the prevention of pollution, and
o the promotion of local communities where mines are located.
Mining companies in Brazil can only prospect and mine for mineral
resources pursuant to prospecting authorizations or mining concessions granted
by the National Mineral Production Department, Departamento Nacional de
Producao Mineral, or DNPM, an agency of the Ministry of Mines and Energy of the
Brazilian government. DNPM grants prospecting authorizations to a requesting
party for an initial period of three years. These authorizations are renewable
at DNPM's discretion for another period of one to three years, provided that
the requesting party is able to show that the renewal is necessary for proper
conclusion of prospecting activities. On-site prospecting activities must start
within 60 days of official publication of the issuance of a prospecting
authorization. Upon completion of prospecting activities and geological
exploration at the site, the grantee must submit a final report to DNPM. If the
geological exploration reveals the existence of a mineral deposit that is
economically exploitable, the grantee will have one year (which DNPM may
extend) from approval of the report by DNPM to
49
apply for a mining concession or to transfer its right to apply for a mining
concession to a third party. When a mining concession is granted, the holder of
the concession must begin on-site mining activities within six months. DNPM
grants mining concessions for an indeterminate period of time lasting until the
exhaustion of the mineral deposit. Extracted minerals that are specified in the
concession belong to the holder of the concession. With the prior approval of
DNPM, the holder of a mining concession can transfer it to a third party that
is qualified to own concessions. In some cases, mining concessions are
challenged by third parties.
The Brazilian government taxes mining companies on the basis of minerals
extracted. It also imposes other financial obligations. For example, mining
companies must compensate both private property owners for damage and loss of
income caused by use and occupation of land and state or municipal governments
where the mine is located. In the case of mining on private lands, mining
companies must share production with landowners. A substantial majority of our
mines and mining concessions are on lands owned by us or on public lands for
which we hold mining concessions.
Energy
Under the present regulatory structure, the power industry in Brazil is
comprehensively regulated by the Brazilian government, acting through the
Ministry of Mines and Energy and ANEEL, the Brazilian electricity regulatory
governmental agency. The role of the Ministry of Mines and Energy is to develop
policies and regulations aimed at organizing and regulating the electricity
sector. ANEEL's main function is to ensure the efficient and economical supply
of energy to consumers by monitoring prices and promoting market competition.
Under Law No. 8,987, concessions grant exclusive rights to generate and
transmit or to distribute electricity in a particular area for a period of time
that, in the opinion of ANEEL, is sufficient for the concessionaire to recover
its investment, up to a limit of 35 years in the case of concessions for power
generation. Concessions may be renewed at ANEEL's discretion for an additional
period of equal duration. Concessionaires are required to supply electricity
for public services at the established prices, on a continuing basis, in
sufficient quantity and within approved standards of quality.
To mitigate the potential volatility of revenues for hydroelectric
generators, ANEEL has implemented regulations that create the Energy
Reallocation Mechanism, known as MRE, a mechanism for sharing hydrological risk
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 promised payment for the amount of its Assured Energy, as long as MRE
members as a whole are able to meet MRE Assured Energy levels. To the extent a
generator has signed contracts for the sale of its Assured Energy, it receives
payments based on these contractual terms, regardless of its level of actual
generation. Each generator is allowed to enter into contracts to sell up to
100% of its Assured Energy. If all MRE members meet their contracted energy and
there is still produced energy remaining, then there will be an allocation of
the net regional surplus generation among generators in different regions.
Energy will be traded in the wholesale energy market, or MAE, at the price
prevailing in the region in which the energy has been generated. MAE is the
legal entity responsible for the operation of the wholesale energy market and
seeks to ensure that purchases of energy in the short-term market are settled
and cleared in an efficient manner. Originally created as a self-regulatory
body, on February 22, 2002, MAE became a legal entity under supervision and
regulation by ANEEL, due to MAE's failure in implementing a self-regulated
energy market. MAE is expected to compute the spot price for energy according
to guidelines that are currently in use and available to the public. The spot
price is determined by a model called Newave that considers the optimum
operation condition for the integrated system. This model will change to a bid
model which is intended to reflect market conditions more accurately. The new
model is currently under study by the government.
The concepts of Assured Energy and the MRE, together with bilateral
contracts between generators and distributors, determine the annual revenues
for each generator. Initial contracts between generators and distributors are
power purchase agreements in which the parties agree to purchase and sell
energy at tariffs set forth by ANEEL.
50
Initial contracts will be valid and binding during a transition period until
price deregulation is completed, when they will be fully replaced by bilateral
contracts. Bilateral contracts between generators and distributors may be
freely negotiated at any price level and with any form of pricing adjustment,
subject to compliance with certain Brazilian legal requirements governing
generally permissible indexation mechanisms in contracts.
Environmental Matters
Federal, state and municipal legislation contain provisions for the
control and protection of the environment in Brazil. These laws oversee the use
of natural resources, the reclamation and restoration of mined areas, the
control of atmospheric emissions, the treatment of industrial effluents, as
well as the use, handling and final disposal of hazardous materials. It is
possible that current environmental regulations will become more strict in the
future. The strengthening of these laws may lead to greater costs for
environmental compliance.
In order to conduct our mining, energy generation and industrial
activities, we must prepare environmental impact assessments and submit them to
authorities who oversee the granting of environmental permits. We are committed
to complying with all legal requirements and achieving the best relationship
with interested parties, especially the communities located near our
operational activities. The implementation of the environmental management
system in all of our installations and operations provides a systematic
approach for the improvement of the legal compliance and the environmental
performance of our activities.
Under Brazilian Federal Law No. 9,605, non-compliance with environmental
laws and regulations can result in criminal penalties, such as imprisonment and
other restrictions on personal rights for individuals (including directors,
officers and managers of companies), and fines and the mandatory rendering of
public services by companies. Administrative penalties range from warnings and
fines to the suspension of corporate activities, and may also include the loss
or reduction of the incentives, or the cancellation or interruption of credit
facilities granted by governmental institutions.
Issuance of Environmental Licenses. We must obtain environmental licenses
in order to build, install, expand and operate facilities that use natural
resources or may pollute the environment. Our environmental policies aim to
obtain the legally required licenses for each of our facilities and activities.
We have entered into agreements with the appropriate environmental authorities
with respect to facilities where environmental non-compliance has been detected
in order to make these facilities compliant.
Prevention and Environmental Control Measures. Our environmental policies
also aim to prevent, control and reduce the environmental impact caused by our
business operations. To that end, we have made significant
environmentally-related investments in our facilities and in employee training
programs (approximately US$30.4 million in 2001). We are also investing in the
development of environmental projects directed at the communities located near
our operational facilities.
We continually seek to improve the management of our environmental
policies. We are currently developing new programs to rationalize water use,
integrate information collection, and improve land management.
We also support various long-term initiatives aimed at providing
assistance to indigenous populations in twenty territories affected by our
operations. For example, in Carajas, we support programs covering education,
health, and the development of infrastructure.
In 1996, we developed an environmental management program which will be
implemented in all of our installations and operations. This program provides a
systematic approach to the improvement of the legal compliance and the
environmental performance of our activities, and further acknowledges our
commitment to high environmental standards. The following operational
facilities have obtained the International Standards Organization ("ISO")
certification No. 14001:
o Mineral Development Center, located in the state of Minas
Gerais;
o iron and manganese mines located in Carajas, in the state of
Para;
o mining complex of Timbopeba, located in Mariana, in the state of
Minas Gerais; and
51
o Ponta de Madeira marine terminal, in the state of Sao Luis.
o iron mines located in Alegria, Corrego do Meio and Agudo, all in
the State of Minas Gerais
o Rio Doce Manganese Europe alloy plant, in Dunkerque, France
o Tubarao Industrial Complex, in the state of Espirito Santo
Principal Environmental Projects. From 1994 to 2000, we developed an
environmental program involving more than 70 projects, with a total investment
of approximately US$109 million, of which US$50 million were financed by the
World Bank.
One of these projects, intended to reduce the atmospheric emissions from
the Tubarao Marine terminal complex, has resulted in an enhancement of the air
quality of the region (in the state of Espirito Santo), by reducing the total
emission of particles by 75%.
With respect to improvements in water quality, we are currently developing
several projects, including:
o improvement of water recirculation, principally in the cleaning
of iron ore and coal tips;
o collection and treatment of the industrial effluents created by
the washing of roads in Tubarao and Itabira; and
o collection and treatment of industrial effluents disposed in
bodies of water.
Our environmental program also includes reforestation projects which are
intended to protect the soil against erosion processes, such as the Green Aisle
Program (Programa Corredor Verde) at our Vitoria Minas railroad.
We are also pursuing other legally-required projects in connection with
the restoration of lands degraded in the course of our mining operations.
Environmental laws require us to spend at least 0.5% of the total cost of each
venture with a material environmental impact to create and maintain protected
sites.
We also participate in maintaining and preserving Brazil's rainforests,
including the Carajas National Forest and the Vale do Rio Doce Natural Reserve.
Patents and Trademarks
We hold a significant number of patents, registered with the U.S. Patent
and Trademark Office, and with the Brazilian Instituto Nacional de Propriedade
Industrial, or INPI, governmental agencies responsible for the granting and
registration of patent and trademarks rights in the United States and in
Brazil, respectively. The majority of our patents relate to proprietary ore
dressing processes. One of our most successful patents relates to a
concentration process for lower grade iron ore, generally known as itabirite,
which is widely used by other iron ore mining companies around the world. We
are currently conducting technological research to permit commercial
exploitation of our deposits of hard itabirites.
We have registered the "CVRD" trademark and our proprietary logo with the
INPI related to the following categories:
o minerals in general,
o geology, prospecting, topography, photogrammetry, oceanography
and land survey services,
o processing, treatment and dressing services in general,
o cargo transport services,
o ancillary services to transportation and warehousing, and
52
o research and analysis services of material for industrial
purposes.
We renew our trademark registrations with the INPI every ten years.
Insurance
We carry insurance covering various types of risks, such as general
liability, liability of officers and directors, automotive vehicles, fire,
operational risks, operational risks of marine terminals and transportation of
precious minerals, as well as group life insurance policy, insuring our
employees. The policies are currently in full force and the related premiums
were duly paid. We believe that our insurance coverage is adequate for the
scope of our operations.
Item 5. Operating and Financial Review and Prospects
5.A. Operating Results
Critical Accounting Policies
The notes to our consolidated financial statements contain a summary of
our significant accounting policies and a discussion of recently issued
accounting pronouncements.
We have prepared our financial statements in accordance with U.S. GAAP and
the rules relating thereto, which requires management to make estimates and
assumptions in their application because they are related to matters that are
inherently uncertain. We believe that the following are the more critical
judgment areas or involve a higher degree of complexity in the application of
the accounting policies that currently affect our financial condition and
results of operations:
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, including interest
cost incurred during the construction of major new facilities. We compute
depreciation on the straight-line basis rates which take into consideration the
useful lives of the items, principally an average of 80 years for the
railroads, 20 years for ships, 25 years for buildings and improvements and
between 10 and 20 years for mining and other equipment. Expenditures for
maintenance and repairs are charged to operating costs and expenses as
incurred.
We capitalize the costs of developing major new ore bodies or expanding
the capacity of operating mines and amortize these to operations on the
unit-of-production method based on the total probable and proven quantity of
ore to be recovered. Exploration costs are expensed until viability of mining
activities is established; subsequently such costs are capitalized together
with further exploration costs. We capitalize mine development costs as from
the time we actually begin such development.
Revenues and Expenses
Revenues are recognized when title has transferred to the customer for
services rendered. Expenses and costs are recognized on the accrual basis.
Revenue from exported products is recognized when such products are loaded on
board the ship. Revenue from products sold in the domestic market is recognized
when delivery is made to the customer. Revenue from transportation services,
other than shipping operations, is recognized when the service order has been
fulfilled. Shipping operations are recorded on the completed voyage basis and
net revenue, costs and expenses of voyages not completed at period-end are
deferred. Anticipated losses on voyages are provided when probable and can be
reasonably estimated.
Income Taxes
In accordance with Statement of Financial and Accounting Standards 109
"Accounting for Income Taxes", the deferred tax effects of temporary
differences have been recognized in the consolidated financial statements. A
valuation allowance is made when we believe that it is more likely than not
that tax assets will not be fully recoverable in the future.
53
5.A.1. Changes
2001 Compared to 2000
Net operating revenues increased to US$3,990 million in 2001 from US$3,935
million in 2000, reflecting an increase in our iron ore and pellets revenues
which was partially offset by decreases in revenues from other lines of
business.
Revenues from iron ore and pellets increased 19.4% to US$2,600 million in
2001 from US$2,177 million in 2000, reflecting a 19.5% increase in volume sold
to 148.8 million tons in 2001 from 124.5 million tons in 2000 and a 3.3%
increase in sales of higher-margin products, which were partially offset by a
3.2% decrease in average selling prices. In 2001, there was an increase in
demand from the growing market in China and therefore our exports to this
country increased to 14.9 million tons in 2001 compared to 9.2 million tons in
2000. Our acquisition of Ferteco in April 2001 increased our 2001 sales volume
for iron ore and pellets by 11.7 million tons.
Revenues from gold sales decreased 10.9% to US$139 million in 2001 from
US$156 million in 2000, representing a 9.0% decrease in volume sold and a 1.9%
decrease in average selling prices. The reduction in volume sold was
principally due to the closure of our Almas and Caete mines at the end of 2000
and to a reduction in gold extracted during the first quarter of 2001, due to
operational problems at two other mines, which problems were subsequently
resolved.
Revenues from other mining products increased 3.4% to US$426 million in
2001 from US$412 million in 2000. This increase is mainly due to price
increases, partially offset by a US$35 million reduction in sales of our
ferro-alloys subsidiary, Sibra, due to a decrease in average prices. Potash and
kaolin sales also decreased as a result of a reduction in demand.
Revenues from transportation services decreased 20.0% to US$608 million in
2001 from US$760 million in 2000, principally due to the loss of revenues from
services provided to Ferteco and Samitri following our acquisition of these
companies in May 2000 and in April 2001, respectively, which are now eliminated
in our consolidated financial statements. Revenues from services provided to
Ferteco and Samitri prior to their acquisition totaled US$86 million in 2000
and US$20 million in 2001. Other factors leading to the reduction in revenues
from transportation services include a 13.0% decline in prices for domestic
transport as a result of the depreciation of the real in 2001, as well as a
decrease in our international transportation revenues due to our divestments in
the dry-bulk shipping business.
Revenues from aluminum products (bauxite, alumina and aluminum) decreased
21.5% to US$284 million in 2001 from US$362 million in 2000. This decrease of
US$78 million was due to a US$60 million or 20.7% reduction in aluminum sales
as a result of lower production due to the energy rationing program, and to a
US$18 million reduction in our resales of alumina provided by our alumina
affiliate Alunorte as a result of increased alumina sales by Alunorte to its
other shareholders.
Revenues from other products and services decreased 62.9% to US$75 million
in 2001 from US$202 million in 2000, primarily representing decreases in pulp
and paper product revenues following our divestment of Cenibra.
Operating costs and expenses
Overall costs and expenses decreased 4.2% to US$2,327 million in 2001 from
US$2,429 million in 2000. Our costs and expenses, as expressed in U.S. dollars,
were favorably affected by the significant depreciation of the real against the
U.S. dollar during the year (from R$1.9554 to US$1.00 at December 31, 2000 to
R$2.3204 to US$1.00 at December 31, 2001, or a depreciation of 15.7%), because
the majority of these costs and expenses are denominated in reais. The average
exchange rate was R$2.2854 to US$1.00 during 2001 and R$l.7975 to US$1.00
during 2000, or a depreciation of 21.3%. This decrease was partially offset by
an increase of US$109 million, or 4.8%, in 2001 relating to our acquisition of
Ferteco and a smaller increase due to the inclusion of Samitri costs in 2001.
Cost of ores and metal sold increased 12.8% to US$1,605 million in 2001
from US$1,423 million in 2000. The increase of US$182 million was principally
due to an increase of US$124 million in costs due to the Ferteco
54
acquisition. This increase in costs was partially offset by the favorable
impact of exchange rate movements which is estimated at US$90 million.
Cost of transportation services decreased 21.4% to US$378 million in 2001
from US$481 million in 2000, due to improved cost management related to our
ships in addition to the loss of costs from providing services to Ferteco and
Samitri.
Cost of aluminum products decreased 19.5% to US$269 million in 2001 from
US$334 million in 2000 as a result of lower levels of activity. The favorable
effect of exchange rate movements on the cost of aluminum products is
insignificant, since the related costs are primarily determined by
international market prices.
Cost of other products and services decreased 60.7% to US$75 million in
2001 from US$191 million in 2000, reflecting principally the decreases in
volumes of pulp and paper purchases as a result of our divestitures in this
line of business.
Selling, general and administrative expenses increased 7.1% to US$241
million in 2001 from US$225 million in 2000, due principally to the acquisition
of Ferteco which increased these expenses by US$25 million or 11.1% in 2001,
partially offset by the effects of exchange rate movements.
Research and development, employee profit sharing and other costs and
expenses increased 38.9% to US$493 million in 2001 from US$355 million in 2000.
This increase is mainly attributable to asset impairment provisions made in
2001, including expected losses on the sale of ships (US$34 million).
Non-Operating Income (Expenses)
Net non-operating income was US$191 million in 2001 compared to net
non-operating expenses of US$195 million in 2000. The aggregate favorable
change of US$386 million was principally due to gains on sales of investments
(US$784 million) upon divestment of our interests in Bahia Sul, CSN and Cenibra
in 2001. This was partially offset by additional net financial expenses of
US$93 million in 2001 due principally to a reduction in financial income as a
result of lower average balances of cash and cash equivalents and the negative
effect of exchange rate movements on our U.S. dollar denominated liabilities,
mainly short and long-term debt totaling US$251 million.
Income Taxes
In 2001 we recorded a tax benefit of US$218 million. However, our Federal
income tax and social contribution expense at statutory rates for 2001 was
US$381 million. The difference was principally due to the tax benefit we
derived from making distributions to our shareholders in the form of interest
on shareholders' equity in the amount of US$260 million and to tax exempt
foreign income.
Affiliates and Joint Ventures
Our equity in the results of affiliates and joint ventures and provisions
for losses on equity investments in aggregate totaled a loss of US$49 million
in 2001 compared to a gain of US$260 million in 2000.
In 2001, our affiliates in the aluminum sector recorded losses due to the
effects of the depreciation of the real on their foreign currency denominated
debt. Albras reported a gain in 2001, of which we recognized our portion of
US$4 million through a reduction in our provision for losses on equity
investments. Alunorte reported a loss, of which we recognized our portion of
US$6 million through equity accounting. In the same period of 2000, our portion
of gains reported by Albras and Alunorte were US$66 million and US$11 million,
respectively.
In addition to exchange rate effects, the operating results of our major
aluminum sector affiliates and joint ventures in 2001 compared to 2000, were
influenced by the following factors:
Albras - Aluminum sales volume decreased 9.3% to 332,000 tons in
2001 from 366,000 tons in 2000 and average sales prices
decreased 5.3% to US$l,428.99 per ton in 2001 from
US$1,508.42 per ton in 2000.
55
Alunorte - Alumina sales volume decreased 3.5% to 1,540,000 tons in
2001 from 1,596,000 tons in 2000 and the average sales prices
decreased by 5.7% to US$185.51 per ton in 2001 as compared to
US$196.63 per ton in 2000.
MRN - Bauxite sales volume decreased 2.6% to 10,952,000 tons in 2001
from 11,242,000 tons in 2000 and average sales prices
increased 1.1% to US$20.95 per ton in 2001 from US$21.18 per
ton in 2000.
During 2001, we sold our respective interests in Bahia Sul and Cenibra,
which had jointly contributed US$108 million to our 2000 consolidated net
income. Through the date of their respective sales in 2001, these two companies
jointly contributed US$11 million to our 2001 consolidated net income. However,
the sale of Bahia Sul and Cenibra resulted in one-time gains of US$170 million
and US$507 million, respectively, which are included in non-operating income
(expenses).
Our steel sector affiliates were affected in addition to a devaluation of
the real against the U.S. dollar, by a weaker market for steel products which
resulted in decreased average sales prices in 2001. Our U.S. affiliate, CSI,
was also affected by higher costs resulting from the energy crisis in
California. In 2001 we recorded a loss of US$3 million in respect of our steel
sector affiliates compared to a gain of US$17 million in 2000.
Our railroad affiliate, Centro-Atlantica, continued to perform very poorly
in 2001 and we recorded an equity loss of US$95 million (which included a
write-off of goodwill in the amount of US$74 million) against a loss of US$30
million in 2000. We and the other shareholders of Centro-Atlantica are
currently reviewing alternatives to restructure this business.
In 2001, the results of our other equity investments were generally lower
than in 2000 due to the effects of the devaluation of the real and to lower
results of operations of these affiliates as a result of difficult trading
conditions in the markets for their respective products.
2000 Compared to 1999
Revenues
Net operating revenues increased 27.9% to US$3,935 million in 2000 from
US$3,076 million in 1999, reflecting improvements in most areas of our
business, as discussed below.
Revenues from iron ore and pellets increased 28.5% to US$2,177 million in
2000 from US$1,694 million in 1999, representing an increase in volume sold of
29.3% to 124.5 million tons in 2000 from 96.3 million tons in 1999, partially
offset by changes in product mix. Our acquisitions of Samitri and Mineracao
Socoimex S.A., known as Socoimex, in May 2000 added major markets notably
Europe, Asia and Brazil. A portion of increased revenues is due to the
termination of tolling arrangements with our pelletizing joint ventures.
Currently, we sell ore to these joint ventures and buy pellets back from them.
As a result, both revenues and costs of ores and metals sold have increased.
Revenues from gold sales increased 0.6% to US$156 million in 2000 from
US$155 million in 1999, reflecting a 1.2% increase in volume sold, offset by a
0.6% decrease in average gold prices.
Revenues from other mining products, such as kaolin, manganese and potash,
increased 135.4% to US$412 million in 2000 from US$175 million in 1999. This
increase includes US$207 million due to the consolidation in 2000 of our
ferro-alloy and kaolin subsidiaries upon acquiring control from our former
partners in these enterprises, but volumes and average prices also improved in
our manganese business.
Revenues from transportation services increased 18.4% to US$760 million in
2000 from US$642 million in 1999, mainly due to a 67.3% increase in the
revenues of our shipping subsidiary to US$271 million in 2000 from US$162
million in 1999, reflecting a 37.2% increase in average prices and a 23.2%
increase in tonnage carried.
Revenues from aluminum products (bauxite, alumina and aluminum) remained
virtually unchanged at US$362 million in 2000 and US$363 million in 1999.
Aluminum sales volumes decreased 21% in 2000 as compared to
56
1999, primarily due to the termination of our tolling arrangement with Valesul,
which is an unconsolidated subsidiary, whereby that company now sells its
production directly into the market rather than through our wholly-owned
subsidiary Aluvale, offset by increases in average prices and increased alumina
sales.
Revenues from other products and services increased 57.8% to US$202
million in 2000 from US$128 million in 1999, primarily resulting from increases
in the international prices for pulp and paper products. We are currently in
the process of divesting our pulp and paper business.
Operating Costs and Expenses
Overall costs and expenses increased 36.9% to US$2,951 million in 2000
from US$2,156 million in 1999. This increase includes US$234 million or 10.9%
in 2000, relating to newly acquired subsidiaries which in total generated
US$308 million of additional consolidated revenues (US$101 million relating to
the acquisition of Samitri and Socoimex and US$207 million relating to the
consolidation of ferro-alloy and kaolin subsidiaries).
Cost of ores and metal sold increased 42.9% to US$1,423 million in 2000
from US$996 million in 1999, or 7.3% more than the increase in revenues. This
mainly reflects increased costs of acquiring pellets due to the termination of
tolling arrangements with affiliates and increased fuel costs.
Cost of transportation services sales increased 30.7% to US$481 million in
2000 from US$368 million in 1999 or 12.3% more than the increase in revenues.
The most important factors in this increase were the continuing upward trend in
fuel costs (primarily determined by the international market) and the increase
in volumes, partially offset in terms of revenues by lower prices in
transportation services other than shipping.
Cost of aluminum products sold increased 3.4% to US$334 million in 2000
from US$323 million in 1999, reflecting increases in the purchase price of
these products, substantially offset by decreases in volumes purchased.
Cost of other products sold increased 60.5% to US$191 million in 2000 from
US$119 million in 1999, primarily due to increases in the prices for pulp and
paper products.
Selling, general and administrative expenses increased 63.0% to US$225
million in 2000 from US$138 million in 1999. Newly acquired subsidiaries added
US$36 million to these costs, or 26.1%, in 2000. General and administrative
costs further increased by US$28 million in 2000 compared to 1999 as a result
of transferring various accounting, control, legal and information technology
functions from the operating divisions to the corporate center and outsourcing
data processing activities. The remaining increase of US$23 million is
attributable to the effect of increased business activity on selling and
general expenses.
Research and development, employee profit sharing and other costs and
expenses increased 40.1% to US$297 million in 2000 from US$212 million in 1999
mainly due to increased geological research activity targeting copper deposits,
and to provisions for labor-related and tax contingencies, which were US$24
million higher in 2000 than in 1999.
Non-Operating Income (Expenses)
Net non-operating expenses increased to US$253 million in 2000 from US$250
million in 1999. Although the rate of devaluation of the real against the U.S.
dollar in 2000 was lower than in 1999, thereby reducing our net foreign
exchange and monetary loss (mainly on our foreign currency debt) by US$71
million, this positive impact was offset by an increase in financial expenses
of US$82 million, most of which was related to increased borrowing (US$53
million) and to taxes on financial transactions (US$25 million).
Income Taxes
In 2000, we obtained approval for certain tax incentives relative to our
iron ore and manganese operations in Carajas, which resulted in a tax saving of
US$31 million. As a result, our income tax benefit was US$32 million in 2000
compared to an expense of US$33 million in 1999. We also continue to pay
tax-deductible dividends in the form of interest on shareholders' equity, which
reduced our taxes payable by US$222 million in 2000 compared to US$181 million
in 1999.
57
Affiliates and Joint Ventures
Our equity in the results of affiliates and joint ventures and provisions
for losses and write-downs on equity investments in aggregate totaled a gain of
US$322 million in 2000 as compared to a loss of US$227 million in 1999.
In 1999, most of our affiliates and joint ventures in Brazil recorded
losses due to the effects of the devaluation of the real on their foreign
currency debt. Our affiliates in the aluminum sector were especially affected.
Albras reported a loss of US$203 million, of which we recognized US$104 million
through equity accounting. Alunorte reported a loss of US$137 million, of which
we recognized US$89 million through equity accounting. In 2000, with a more
stable exchange rate and price improvements, all our affiliates and joint
ventures recorded positive results except for Centro-Atlantica and CFN, our
railroad investments.
The operating results of our major affiliates and joint ventures in 2000
as compared with 1999 were influenced by the following major factors:
o Albras-Albras contributed US$66 million to our net income in 2000.
Aluminum sales volume increased 2.8% to 366,000 tons in 2000 from
356,000 tons in 1999 and average prices increased 16.0% to
US$1,508.42 per ton in 2000 from US$1,300.35 per ton in 1999.
o Alunorte-Alunorte contributed US$11 million to our net income in
2000. Alumina sales volume rose 14.8% to 1,628,000 tons in 2000 from
1,418,000 tons in 1999 and average prices increased 16.9% to
US$196.63 per ton in 2000 from US$168.17 per ton in 1999.
o MRN-MRN contributed US$36 million to our net income in 2000. Bauxite
sales volume increased 3.3% to 11,242,000 tons in 2000 from
10,884,000 tons in 1999 and average prices increased 3.2% to US$21.18
per ton in 2000 from US$20.53 per ton in 1999.
o Bahia Sul-Bahia Sul contributed US$42 million to our net income in
2000, compared to US$13 million in 1999. Pulp sales volume decreased
8.7% to 367,000 tons in 2000 from 402,000 tons in 1999 and average
pulp prices increased 31.5% to US$618 per ton in 2000 from US$470 per
ton in 1999. Paper sales volume decreased 2.3% to 211,000 tons in
2000 from 216,000 tons in 1999 and average paper prices increased
28.8% to US$824 per ton in 2000 from US$640 per ton in 1999. In the
first half of 2001, we sold our interest in Bahia Sul for
approximately US$318 million, US$2.4 million of which corresponded to
unpaid dividends relating to 2000.
o Cenibra-Cenibra contributed US$66 million to our net income in 2000.
Pulp sales volume decreased 2.5% to 789,000 tons in 2000 from 809,000
tons in 1999 and average prices increased 38.0% to US$587.54 per ton
in 2000 from US$425.79 per ton in 1999. On July 6, 2001, our former
partner in Cenibra agreed to buy our stake in Cenibra for US$670.5
million. The closing of this transaction took place in September
2001.
o Steel sector affiliates-Increases in volumes and prices, plus
productivity gains, produced a contribution of US$59 million to our
net income in 2000. Of this total, US$13 million relates to
investments that we disposed of in 2000 or 2001. We are pursuing the
sale of most of our remaining steel interests. In 1999, the
devaluation of the real substantially affected the results of these
affiliates, producing a contribution of only US$7 million to our
consolidated earnings in that year.
5.A.2. Inflation
As measured by the IGP-M Index, published by the Fundacao Getulio Vargas,
the Brazilian inflation rate was approximately, 7.7% in 1997, 1.8% in 1998,
20.1% in 1999, 9.9% in 2000 and 10.4% in 2001.
Before July 1, 1997, Brazil was considered to have a highly inflationary
economy. For periods before July 1, 1997, we remeasured (translated) our
financial statements into U.S. dollars from financial statements presented in
reais, in accordance with the provisions of Statement of Financial Accounting
Standards 52-Foreign Currency Translation, or SFAS 52. Under the financial
statement remeasurement procedures we adopted, we translated
58
non-monetary items (inventories, property, plant and equipment and accumulated
depreciation and depletion, as well as shareholders' equity accounts) at
historical exchange rates. We translated monetary assets and liabilities
denominated in Brazilian currency at period-end exchange rates. We included the
translation gain or loss resulting from this restatement process in the
then-current statements of operations.
As of July 1, 1997, we concluded that the Brazilian economy had ceased to
be highly inflationary for purposes of SFAS 52 and changed our functional
currency from the reporting currency, U.S. dollars, to the local currency,
Brazilian reais. Therefore, on July 1, 1997, we translated the U.S. dollar
amounts of non-monetary assets and liabilities into reais at the then-current
exchange rate. These translated amounts became the new accounting bases for
such assets and liabilities. At each period ended after July 1, 1997, we have
remeasured all assets and liabilities into U.S. dollars at the then-current
exchange rate and all accounts in the statements of operations and cash flows
at the average rates prevailing during the applicable period. We included the
translation gain or loss resulting from this translation process in the
cumulative translation adjustments component of shareholders' equity.
5.A.3. Currency Fluctuations
Most of our sales will continue to be dollar-denominated while most of our
costs (other than debt expenses) will continue to be denominated in Brazilian
currency. As a result, when the real is relatively strong against the dollar,
this tends to have a negative effect on our reported financial results from
operations, and vice versa. On the other hand, because most of our debt (and
debt at the joint venture and affiliate level) is dollar-denominated, a
relatively weak real causes us to record monetary and foreign-exchange losses.
5.A.4. Government Policies
Brazilian economic, fiscal, monetary and political policies and factors
have affected us in the past and will affect us in the future. In addition, we
are affected by these policies and factors in the markets where we sell our
products, principally Europe and Asia. See Item 3.D. Risk Factors for a
description of some of these policies and factors that can affect our results
of operations.
Brazilian government policies can also affect your rights as a holder of
our American depositary shares. See Item 10.D. Exchange Controls and Other
Limitations Affecting Security Holders.
5.B. Liquidity and Capital Resources
5.B.1. Liquidity
Our principal sources of liquidity have consisted of cash generated from
operations and short-term and long-term secured and unsecured borrowings. We
believe these sources will continue to be adequate to meet our currently
anticipated uses of funds, which include working capital, investment capital,
capital expenditures, debt repayment and dividend payments.
From time to time, we review acquisition and investment opportunities and
will, if a suitable opportunity arises, make an investment. We can make any
future investments either directly or through subsidiaries, joint ventures or
affiliated companies, and we may fund these investments through internally
generated funds, the issuance of debt or equity or a combination of these
methods.
As a result of our acquisitions in 2001, we generated a net decrease in
cash and cash equivalents of US$94 million compared to a net decrease of US$242
million in 2000 and net increase of US$264 million in 1999. As of December 31,
2001, we had cash and cash equivalents of US$1,117 million.
Sources of Funds
Operating activities provided net cash flows of US$1,518 million in 2001
compared to US$1,424 million in 2000 and US$1,336 million 1999.
Financing activities (before distributions to shareholders), which include
short-term and long-term secured and unsecured borrowings and debt repayments,
provided net cash flows of US$79 million in 2001 compared to using net
59
cash flow of US$176 million in 2000 and providing net cash flows of US$41
million in 1999. In 2001, our principal source of borrowed funds was a US$300
million asset securitization.
As of December 31, 2001, our aggregate outstanding debt was US$2,948
million, consisting of short-term debt of US$757 million, including US$168
million in loans from joint ventures and affiliated companies in connection
with the CVRD Group's cash management system, and long-term debt (excluding
current portion) of US$2,191 million, including US$21 million in loans from
related parties. Our short-term debt consists primarily of U.S.
dollar-denominated trade financing, documented mainly in the form of export
prepayments and export sales advances with Brazilian and foreign financial
institutions.
Uses of Funds
Investing activities, primarily including acquisitions, other capital
expenditures and investments in and loans to joint ventures and affiliated
companies, consumed net cash flows of US$531 million in 2001 compared to
US$1,489 million in 2000 and US$469 million in 1999.
Other significant uses of cash included:
o repayment of debt, which consumed US$350 million in 2001, US$444
million in 2000 and US$347 million in 1999, and
o payment of dividends and interest on shareholders' equity, which
consumed US$1,066 million in 2001, US$246 million in 2000 and
US$452 million in 1999.
5.B.2. Debt
Our long-term debt consists principally of U.S. dollar-denominated notes
and borrowings. At December 31, 2001, approximately US$633 million of our debt
was secured by liens on some of our assets.
Except for the perpetual notes, which have no scheduled maturity date, all
of our currently outstanding long-term debt is likely to mature by 2011 in
accordance with the schedule below.
Year ended December 31, (In millions of US$)(1)
----------------------- -----------------------
2003................................................. $ 662
2004................................................. 725
2005................................................. 255
2006................................................. 151
2007................................................. 225
2008 and thereafter.................................. 97
No due date (perpetual notes)........................ 55
-------
Total......................................... $ 2,170
=======
--------------
(1) Excludes US$21 million in loans from related parties.
In March 2002, we issued US$300 million in debt which matures in 2007.
We use derivative instruments to manage our exposure to interest rate
fluctuations. See Item 11. Quantitative and Qualitative Disclosures About
Market Risk. Giving effect to these instruments, at December 31, 2001, our
weighted-average effective interest rate on long-term debt was 5.4097%.
Some of our long-term debt instruments contain restrictive financial
covenants. We were in compliance with such covenants as of December 31, 2001,
and we believe that we will be able to operate within the terms of such
financial covenants for the foreseeable future. None of these covenants
directly restrains our ability to pay dividends on equity securities at the
parent company level.
60
5.B.3. Budgeted Capital Expenditures
The table below sets forth our capital expenditures budget for 2002.
2002 Budgeted Expenditures
--------------------------
(In millions of US$)
Ferrous..................................... $ 406 57.8%
Nonferrous.................................. 61 8.7
Logistics................................... 51 7.3
Energy...................................... 139 19.8
Corporate center............................ 45 6.4
---------- ------
Total................................ $ 702 100.0%
Structural changes in the production of iron ore and steel have been
generating a growing global demand for pellets, and smoothing the volatility of
the pellet market. See Item 4.B., 4.C. and 4.D. Business Overview,
Organizational Structure and Property, Plants and Equipment -- Business
Strengths -- Well-Positioned to Meet Demand in a Changing Steel Industry. In
the belief that this trend will continue over the next few years, we have been
investing heavily in our pellet operations. In 2002, we have set aside US$50
million for the Sao Luis pellet plant construction project which was completed
in the first quarter of 2002.
To increase productivity and meet the demand increase that we anticipate
from the construction of the Sao Luis pelletizing plant, we have set aside
investments in projects of US$206.3 million for iron ore mining and US$37.8
million for logistics. In the Southern System, we intend to spend US$7.5
million on increasing capacity of the Gongo Soco mine from 7 to 8.4 million
tons, US$6.7 million on extending the useful life of the Timbopeba mine and of
the Capanema beneficiation plant. In the Northern System, we intend to spend
US$17.7 million in the construction of a new pier at the Ponta da Madeira Port
Terminal, increasing the port's capacity to 56 million tons, and US$10 million
on expanding capacity of iron ore stocking facilities. In addition, we intend
to spend about US$40.8 million on projects to improve the infrastructure for
the operation of the Sao Luis pellet plant.
The future deregulation of the electricity market, and the demand
pressures created by a growing economy, indicate a trend of rising electricity
prices in Brazil. Investment in energy, for which we have a budget of US$139
million in 2002, is therefore expected to become a powerful tool in controlling
and reducing costs and generating revenues. This budget includes US$125 million
which will be absorbed by the ongoing hydroelectric projects at Aimores, Porto
Estrela, Candonga, Funil, Capim Branco I and Capim Branco II and Foz do
Chapeco.
Most of the capital expenditures budget relating to replacement and
improvement is expected to be allocated toward the Southern System, to be spent
mainly on modernization and increasing the capacity of the mines and the
Vitoria Minas railroad. We will modernize control and maintenance systems for
the railroad and will replace a number of processing systems in the mines.
5.C. Research and Development, Patents and Licenses, Etc.
Our mineral exploration activities are currently focused on identifying
copper and gold deposits for future exploitation. We incurred US$27 million,
US$48 million and US$43 million on geological exploration in 1999, 2000 and
2001, respectively.
5.D. Trend Information
Several factors will affect our future results of operations, liquidity
and capital resources, including:
o contract prices for iron ore and pellets and world market prices
for aluminum and gold,
o the level of demand in the seaborne market for our iron ore and
pellets,
o the level of demand for our third party transportation services,
o the relationship between the real and the U.S. dollar, in which
most of our sales are denominated,
61
o the results of operations of joint ventures and affiliated
companies (in particular our aluminum operations and pellet
joint ventures) recorded under the equity method in our
financial statements,
o Brazil's electricity shortage, and
o Brazilian tax legislation.
Prices
The prices for our core mineral products fluctuate, although iron ore and
pellet prices are less volatile than those of aluminum and gold. We expect
these fluctuations to continue.
The table below sets forth our quarterly sinter feed reference prices in
U.S. dollars for iron ore and pellet export sales and world quarterly market
prices for gold and aluminum for the periods indicated.
Iron Ore
------------------------
Asian European
Market(1) Market(1)(2) Pellets(3) Gold Aluminum
----------- ------------ ------------ ------------ ------------
(per troy
(per ton) ounce)(4) (per pound)(5)
1Q98...................... US$ 15.82 US$ 19.21 US$ 34.66 US$ 301 US$ 0.66
2Q98...................... 15.78 19.21 34.66 296 0.60
3Q98...................... 15.78 19.21 34.66 294 0.61
4Q98...................... 15.78 19.21 34.66 288 0.57
1Q99...................... 15.78 17.10 30.07 279 0.62
2Q99...................... 14.48 17.10 30.07 261 0.60
3Q99...................... 14.48 17.10 30.07 299 0.68
4Q99...................... 14.48 17.10 30.07 290 0.71
1Q00...................... 14.48 17.82 31.87 277 0.75
2Q00...................... 15.35 17.82 31.87 288 0.68
3Q00...................... 15.35 17.82 31.87 274 0.72
4Q00...................... 15.35 17.82 31.87 274 0.67
1Q01...................... 15.35 18.68 32.46 258 0.69
2Q01...................... 16.01 18.68 32.46 269 0.67
3Q01...................... 16.01 18.68 32.46 293 0.62
4Q01...................... 16.01 18.68 32.46 278 0.61
--------------
(1) Represents our quarterly standard sinter feed reference prices for export
sales for periods indicated (FOB Tubarao--Asian market and FOB Sao
Luis--European market) and not actual prices realized on sales.
(2) Brazilian iron ore prices are generally based on the European market
reference price.
(3) Represents our quarterly standard pellet reference prices for export sales
for period indicated (FOB Tubarao) and not actual prices realized on
sales.
(4) Represents London Gold Market prices.
(5) Represents London Metals Exchange prices (cash/three-month average
quotations).
Iron Ore. Our iron ore export sales are generally made pursuant to
long-term supply contracts which provide for annual price adjustments. Cyclical
changes in the world demand for steel products affect sales prices and volumes
in the world iron ore market. Different factors, such as the iron content of
specific ore deposits, the various beneficiation and purifying processes
required to produce the desired final product, particle size, moisture content,
and the type and concentration of contaminants (such as phosphorus, alumina and
manganese) in the ore, influence contract prices for iron ore. Contract prices
also depend on transportation costs. Fines, lump ore and pellets typically
command different prices. We generally conduct annual price negotiations from
November to February of each year, with separate prices established for the
Asian and European iron ore markets. In the Asian market, the renegotiated
prices are effective from April of the current year until March of the
following year. In the European market, the renegotiated prices are effective
62
for the calendar year. Because of the wide variety of iron ore and pellet
quality and physical characteristics, iron ore and pellets are less
commodity-like than other minerals. This factor combined with the structure of
the market has prevented the development of an iron ore futures market. We do
not hedge our exposure to iron ore price volatility.
Gold. We sell gold in an active world market in which prices respond to
daily changes in supply and demand. We generally seek to manage the risks
associated with changes in gold prices through hedging. For more information
about our gold hedging activities, see Item 11. Quantitative and Qualitative
Disclosures about Market Risk.
Aluminum. We sell our aluminum in an active world market where prices are
determined by reference to prices prevailing on terminal markets, such as the
London Metals Exchange and the Commodity Exchange, Inc., or COMEX, at the time
of delivery. We sell aluminum purchased from the Albras aluminum joint venture
pursuant to a take-or-pay commitment for 51% (representing our proportional
ownership interest) of the joint venture's annual aluminum production. Although
our annual purchase commitment can be substantial, approximately US$256 million
in 2001, prevailing world market prices for aluminum (subject to discount in
accordance with the terms of our joint venture agreements) determine our
aluminum purchase prices. Albras seeks to manage the risks associated with
changes in aluminum prices by hedging. For more information about aluminum
hedging, see Item 11. Quantitative and Qualitative Disclosures about Market
Risk.
Demand
Demand for our iron ore products is a function of worldwide demand for
steel, which is, in turn, heavily influenced by worldwide economic activity.
Worldwide demand for steel had a downward trend in 2001 from 2000. A slowdown
in economic activity in Europe or Asia will directly affect demand for our iron
ore products, although there will typically be a lag effect. Demand for our
other mineral products is also influenced to varying degrees by worldwide
economic activity.
Demand for our third party transportation services is influenced by
Brazilian economic growth as well as by Brazilian exports and imports of goods.
Effects of Certain Equity Method Affiliates and Investments Carried at
Cost
The financial condition and results of operations of our joint ventures,
affiliated companies and investments have had a significant effect on our
results of operations and financial condition in the past. Our steel and pulp
and paper divestitures should limit this effect in future periods, although the
activities of our aluminum and pellet joint ventures will remain important. See
note 10 to our consolidated financial statements for information on these
effects.
Rising Unit Extraction Costs
Several of our mines, such as Caue, Conceicao and Capanema, have operated
for long periods and may experience rising extraction costs per unit as more
expensive processes become necessary to extract remaining ore in these mines.
Increases in extraction costs at each of theses mines have not materially
affected our results of operations as such increases were offset by
productivity gains and by the favorable foreign exchange effects on these
costs.
Electricity Costs
Electricity costs are a significant component of the cost of producing
aluminum. Our aluminum plant, Albras, entered into a 20-year contract with
Eletronorte, a state-owned power utility, pursuant to which Albras purchases
electricity at rates which are lower than the prevailing market rates in the
region. For the years ended December 31, 2001, 2000 and 1999, the prevailing
market rate was US$22.87, US$24.48 and US$23.36 per MWh, respectively. The
average price paid by Albras for the same periods was US$11.27, US$11.93 and
US$10.56 per MWh, respectively. The Eletronorte contract is scheduled to expire
in May 2004.
Effects of the Energy Shortage in Brazil
On June 1, 2001, the Brazilian government, as part of its energy rationing
program, required energy consumption to decrease by at least 20% relative to
average consumption for May, June and July 2000. Aluminum and ferro-alloy
activities were categorized as electricity-intensive activities and energy
consumption relating to these activities was
63
required to decrease by 25% relative to average consumption for May, June and
July 2000. Our total expected energy consumption for 2001 was 14.5 TWh.
However, due to this rationing program, our actual energy consumption for 2001
was 12.5 TWh. In 2000, our total energy consumption was 13.8 TWh. As a result,
we reduced our ferro-alloy production in the six-month period ending November
30, 2001 by 46,000 tons, from the previously planned 220,000 tons to 174,000
tons. We also reduced 2001 aluminum production at Albras by 46,000 tons to
333,000 tons from the previously planned 379,000 tons, and at Valesul by 13,000
tons to 80,000 tons from the previously planned 93,000 tons. By the end of
2001, climate conditions in Brazil improved, reducing the immediate risk of
energy shortages. Therefore, on December 31, 2001, the Brazilian government
eliminated the rationing in the rest of the country. For a discussion about the
possible consequences and risks associated with energy shortages, see Item 3.D.
Risk Factors--Risks Relating to Brazil, and Item 4.B., 4.C. and 4.D. Business
Overview, Organizational Structure and Property, Plants and Equipment--Lines of
Business--Holdings.
Divestitures
Past divestitures include Bahia Sul (pulp and paper), Cenibra (pulp and
paper), Acominas (steel), and CSN (steel). Divestitures currently in progress
include our dry-bulk cargo business and our forestry activities.
The following table shows the effects of both past divestitures and those
currently in progress on our gross revenues, net income and total assets:
For the Year Ended December 31
------------------------------
2001 2000 1999
---- ---- ----
Decrease in gross revenues..................... 4.4% 6.3% 4.9%
Decrease (increase) in net income............. (1.1) 7.4 (6.8)
Decrease in total assets....................... 1.5 7.4 7.8
Brazilian Taxes
We are subject to a number of Brazilian taxes in addition to corporate
income tax. Brazilian tax legislation changes, which are frequent, can have an
impact on our results of operations. Some Brazilian taxes are described below.
Value-Added Tax. Our revenues consist of total revenues from sales, net of
discounts, returns and allowances, together with amounts we collect in respect
of value-added tax. Net operating revenues represent revenues less value-added
tax, which we collect on behalf of, and must remit to, state taxing
authorities. Export sales are currently exempt from value-added tax.
Social Contribution on Profits. Social contribution on profits is a
federal income tax. The rate has fluctuated in the past three years from 8% to
12% and is currently at 9%. Before 1997, this tax was deductible for income tax
purposes; beginning in 1997, the tax is no longer deductible. After December
2002, the applicable rate is scheduled to be 8%.
Social Integration Program and Social Contribution on Gross Sales. The
Social Integration Program, or PIS, aims to finance special social programs
through the collection of a 0.65% revenues tax. Social contribution on gross
sales, or COFINS, finances special social programs through the collection of a
3% revenues tax. Export sales are currently exempt from both of these taxes.
Provisional Tax on Bank Accounts. The provisional tax, known as CPMF, is
imposed on every transaction involving the debit of money from a bank account.
The CPMF rate has fluctuated from 0.2% to 0.38% since its creation in 1997. For
the period between March 18, 2001 and June 17, 2002, the rate is 0.38%.
Financial Compensation for the Exploration of Mineral Resources. We owe a
government royalty on net revenues derived from the production and sale of
mineral resources. The annual rates on our products are:
o iron ore, 2%,
64
o bauxite, manganese and potash, 3%, and
o gold, 1%.
Federal Tax on Industrialized Products. Manufacturers pay this federal tax
on behalf of their customers at the time of sale, either to another
manufacturer to further the manufacturing process or to the retailer of the
ultimate customer. Export operations are currently excluded. The tax on our
aluminum production is at the rate of 4%.
Item 6. Directors, Senior Management and Employees
6.A., 6.B. and 6.C. Directors and Senior Management, Compensation and
Board Practices
Board of Directors
The conselho de administracao, the board of directors, is our
decision-making body responsible for determining general guidelines and
policies for our business, our wholly-owned subsidiaries and controlled
companies, and for formulating and expressing our policies. The board of
directors is responsible for supervising the executive officers. It also
monitors the executive officers' implementation of the general guidelines and
policies. The board of directors holds regularly scheduled meetings on a
monthly basis and holds additional meetings when called by its chairman,
vice-chairman or any two directors. Decisions of the board of directors require
a quorum of a majority of the directors and are taken by majority vote.
Under the Brazilian Corporation Law, the board of directors must have at
least three members. Each director and his or her respective alternate are
elected at a general shareholders' meeting and are subject to removal at any
time. Our by-laws state that the board of directors must consist of nine
members. Our current employees have the right to appoint one member of the
board of directors and its respective alternate. According to our by-laws,
members of the board of directors must be Brazilian residents who are both
shareholders of CVRD and have managerial experience. Members of the board of
directors are elected for three-year terms and can be re-elected. Each
alternate director serves on behalf of a specific board member. In the absence
of the director for whom an alternate director is acting, that alternate
director may attend and vote at meetings of the board of directors.
Six of our current directors and five of our current alternate directors
were appointed to their positions directly by Valepar, our principal
shareholder, pursuant to Valepar's shareholders' agreement and the provisions
of the Brazilian Corporation Law. These appointments were approved at our
annual shareholders' meeting held in April 2001. For a description of Valepar's
shareholders' agreement, see Item 7.A. Major Shareholders--Principal
Shareholder.
65
The table below lists the current members of the board of directors.
Year
First
Name Elected Position Age
---- ------- --------------------- ---
Luiz Tarquinio Sardinha Ferro(1) 1999 Chairman of the Board 41
Joao Moises de Oliveira(1) 2001 Board Member 57
Erik Persson(1) 2001 Board Member 47
Jose Marques de Lima(1) 2000 Board Member 44
Octavio Lopes Castello Branco Neto 2001 Board Member 43
Romeu do Nascimento Teixeira(1) 2001 Board Member 69
Renato da Cruz Gomes(1) 2001 Board Member 49
Renato Augusto Zagallo Villela dos Santos 2001 Board Member 46
Francisco Valadares Povoa(2) 1997 Board Member 57
--------------
(1) Appointed by Valepar.
(2) Appointed by our employees.
The table below lists the alternate members of the board of directors. One
additional alternate director is to be appointed by Valepar.
Year
First
Name Elected Position Age
---- ------- --------------------- ---
Jose Ricardo do Carmo(1) 2000 Board Member 49
Ricardo Carvalho Giambroni(1) 2001 Board Member 45
Octavio Mauro Muniz Freire Alves(1) 2001 Board Member 41
Eleazar de Carvalho Filho 2001 Board Member 44
Antonio Joao Martins Torres(1) 2001 Board Member 61
Romulo de Mello Dias(1) 2001 Board Member 40
Otto de Souza Marques Junior(2) 1997 Board Member 56
--------------
(1) Appointed by Valepar.
(2) Appointed by our employees.
We have summarized below the business experience, areas of expertise, and
principal outside business interests of our current directors:
Luiz Tarquinio Sardinha Ferro. Mr. Ferro was appointed chairman of
our board of directors in July 2001. From May 1999 to July 2001, he served
as vice-chairman of our board of directors. From 1996 to 1998, he was
President of PREVI -- Caixa de Previdencia dos Funciunarios do Banco do
Brasil and executive superintendent of the financial department of Banco
do Brasil S.A. In 1995, he was appointed general coordinator of the public
accounts management unit, at the Secretariat of the National Treasury.
From 1994 to 1995, he participated in an international management program
of Banco do Brasil. From 1992 to 1994, Mr. Ferro worked at the Secretariat
of the National Treasury.
Joao Moises de Oliveira. Mr. Oliveira has served as a member of our
board of directors since 2001. From 1962 to 2000, he worked at Banco
Bradesco S.A. and at several companies in which Banco Bradesco S.A. has a
direct or indirect ownership interest. Since 2000, Mr. Oliveira has been
an executive officer at Bradespar S.A. He has served as a member of the
board of directors of many companies in which Banco Bradesco or Bradespar
have or had a direct or indirect ownership interest, including Companhia
Siderugica Belgo Mineira, Companhia Siderugica Nacional and Sao Paulo
Alpargatas S.A.
66
Erik Persson. Mr. Persson has served as a member of our board of
directors since April 25, 2001. Since June 2000, he has been working as a
planning director of PREVI--Caixa de Previdencia dos Funcionarios do Banco
do Brasil. He has been at PREVI since 1977.
Jose Marques de Lima. Mr. Lima has served as a member of our board of
directors since April 2000. Currently, he also serves as general manager
of the risk management unit at Banco do Brasil. In June 1999, he was
appointed as an executive officer of PREVI. From 1984 to 1998, he worked
for Banco do Brasil S.A. holding a variety of positions, including team
work coordinator and executive manager of the investor relations
department, manager of the market and shareholders division and manager of
the financial analysis department.
Octavio Lopes Castello Branco Neto. Mr. Castello Branco was appointed
as a member of our board of directors on April 2001. He is also a managing
director of BNDES. In 1995, he joined J.P. Morgan as head of the
investment banking group in Brazil. From 1990 to 1995, Mr. Castello Branco
worked at Caemi as the chief financial officer and member of the executive
committee. Mr. Castello Branco started his career at JP Morgan's Sao Paulo
Office in 1983 and has developed an extensive experience in mergers and
acquisitions, having managed projects across a number of sectors since the
inception of J.P. Morgan's mergers and acquisitions group in Brazil.
Romeu do Nascimento Teixeira. Mr. Teixeira has served as a member of
our board of directors since April 2001. Mr. Teixeira was also appointed
as an executive officer of IESA, Internacional de Engenharia S.A., from
1986 to 1993. Since 1960, he has held many different positions within the
CVRD Group. From 1958 to 1960 he worked as an engineer at DNER,
Departamento Nacional de Estradas de Rodagem.
Renato da Cruz Gomes. Mr. Gomes joined our board of directors in
April 2001. He has also been an executive officer of Bradespar. In 2000,
he was appointed as an executive officer of Bradespar S.A. From 1976
through 2000, Mr. Gomes held a variety of positions within BNDES and
participated on the boards of directors of many companies, namely Elebra
Eletronica, Globo Cabo, Aracruz, Iochpe, Bahia Sul and Latasa. He is also
a member of the consulting board of Factor Sinergia, a securities
investment fund, and the investments committee of Bradesco Templeton Value
and Liquidity Fund.
Renato Augusto Zagallo Villela dos Santos. Mr. Villela was appointed
member of our board of directors in 2001. He has served as Deputy
Secretary of Brazilian National Treasury since August 1999. Mr. Villela
has held several positions within the City of Rio de Janeiro, including
Secretary of Strategic Affairs, Deputy Secretary of Finance, and Economic
Advisor of the Secretary of Finance. He has also served as Professor of
Monetary and Fiscal Policies of Candido Mendes University Masters Program
in Business Economics since 1993. In 1989, he served as Professor of
Public Sector Economics at Rio de Janeiro State University. From 1978 to
1979, Mr. Villela was as an associate economist and partner at Annibal
Villela consultoria Economica S/C Ltda. (AVCEL). From 1987 to 1995, he
worked as a Senior Economist at IPEA (Applied Economic Research Institute
of Brazil's Ministry of Planning)."
Francisco Valadares Povoa. Mr. Povoa has served as a member of our
board of directors since May 1997. He also sits on the board of Valepar,
Valepontocom, Rio Doce Manganese Europe, or RDME, Salobo Metais, CSI and
Nova Era Silicon, or NES. Until March, 2001, he was also a member of the
board of directors of CSN and was previously an alternate member of the
board of CSN. Mr. Povoa joined us as a mining engineer in 1972 and has
held a variety of positions within the CVRD Group.
67
Vale Overseas' Directors are as follows:
Name Principal Occupation Age
------------------------------ ---------------------------------- ---
General Counsel, Head of the Legal
Francisco Rohan de Lima....... Department, CVRD 47
Gabriel Stoliar............... Executive Officer, CVRD 47
Tito Botelho Martins.......... Finance Director, CVRD 40
Mr. Stoliar also serves as Vale Overseas' principal executive officer and
Mr. Martins also serves as Vale Overseas' principal financial and accounting
officer.
The business address of the Directors is Avenida Graca Aranha, 26, 17th
floor, 20005-900 Rio de Janeiro, RJ, Brazil.
Executive Officers
The executive officers are our legal representatives and are responsible
for our internal organization and day-to-day operations and the implementation
of the general policies and guidelines set forth by the board of directors. Our
by-laws provide for a minimum of three and a maximum of eight executive
officers. The board of directors appoints executive officers for three-year
terms and may remove them at any time. According to the Brazilian Corporation
Law and to our by-laws, executive officers must be Brazilian residents. The
executive officers hold regularly scheduled meetings on a weekly basis and hold
additional meetings when called by any executive officer.
We are in the process of revising our corporate governance model in order
to, among other things, improve the efficiency of our decision-making process.
We are also defining metrics of value reaction, which will improve the
transparency in our communications with our investors.
On May 20, 2002, the general meeting approved an amendment to our by-laws
to increase the number of the executive board members. As a result, we now have
one chief executive officer and up to seven executive officers, each
responsible for business areas that the board of directors assigns to them. On
October 24, 2001, the board of directors approved a new management structure
with the following areas:
o Ferrous Minerals,
o Non-Ferrous,
o Holdings and Business Development (including energy),
o Logistics,
o Finance,
o Investor Relations and Planning and Control, and
o Human Resources and Corporate Services.
The table below lists our current executive officers.
Year of
Name Appointment Position Age
-------------------------------- ----------- ------------------------------------ ---
Roger Agnelli 2002 Chief Executive Officer 43
Armando de Oliveira Santos Neto 2002 Executive Officer (Ferrous Minerals) 52
Executive Officer (Holdings and
Business Development and
Antonio Miguel Marques 2002 Non-Ferrous) 45
Guilherme Rodolfo Laager 2002 Executive Officer (Logistics) 45
Fabio de Oliveira Barbosa 2002 Executive Officer (Finance) 41
Executive Officer (Investor Relations,
Gabriel Stoliar 2002 and Planning and Control) 48
Executive Officer (Human Resources
Carla Grasso 2002 and Corporate Services) 40
68
We have summarized below the experience, areas of expertise, and principal
outside business interests of our current executive officers.
Roger Agnelli. Since July 2001, Mr. Agnelli has been our chief
executive officer. He served as chairman of our board of directors from
May 2000 to July 2001. He also served as a member of the board of
directors of VBC Energia S.A., Companhia Paulista de Forca e Luz;
Companhia Siderurgica Nacional (CSN), Brasmotor S.A., Globo Cabo S.A. and
Latas de Aluminio S.A. He also served as the chief executive officer of
Bradespar S.A. from March 2000 to July 2001. Mr. Agnelli worked for 22
years with Banco Bradesco S.A., where he started his career as an
investment analyst and served as executive director from 1992 to 2000. Mr.
Agnelli has a degree in Economics from Fundacao Alvares Penteado.
Armando de Oliveira Santos Neto. Mr. Santos was appointed as an
executive officer of our ferrous minerals area in October 2001. Since
1970, Mr. Santos has held many different positions within the CVRD Group,
including trainee at the railway division, assistant to the chief
executive officer and marketing manager and executive officer at Rio Doce
America, Inc., or RDA, sales manager of the Far East area, coordinator for
planning and sales promotion, general manager and director of Rio Doce
International S.A., or RDI, general sales manager and executive officer of
the iron ore division, commercial officer and executive officer of RDA and
member of the board of directors of CSI. Mr. Santos has a degree in civil
engineering from the Universidade Federal do Espirito Santo (UFES).
Antonio Miguel Marques. Mr. Marques was appointed as an executive
officer of our holdings business development and non-ferrous minerals area
in October 2001. Currently, Mr. Marques is Chief Executive Officer of
Aluvale and a member of the board of directors of Celmar, Albras,
Alunorte, MRN, and Valesul. Prior to that, Mr. Marques has held various
positions at Caraiba Metais S.A. Industria e Comercio, DuPont do Brasil
S.A., Billiton Metais S.A., Paranapanema Group and Votarantim Group. Mr.
Marques has a degree in engineering from the Universidade Federal de Ouro
Preto. He received his post-graduate degree in Mineral Treatment at the
Universidade Federal de Minas Gerais (UFMG) and obtained an MBA from
COPPEAD, at Universidade Federal do Rio de Janeiro (UFRJ).
Guilherme Laager. Mr. Laager was appointed as an executive officer of
our logistics area in September 2001. Mr. Laager served as logistics,
supplying and technological information director for AMBEV, Companhia de
Bebidas das Americas from 1989 until August 2000. Mr. Laager has a degree
in civil engineering from the Universidade Federal do Rio de Janeiro
(UFRJ) and obtained an MBA in business administration from COPPEAD, also
at UFRJ.
Fabio de Oliveira Barbosa. Mr. Barbosa was appointed as our chief
financial officer in May 2002. Prior to that, Mr. Barbosa served as member
of our board of directors from April 2000 to March 2002. Previously, he
also served as board member of the following companies: BANESPA--Banco do
Estado de Sao Paulo S/A, Banco do Brasil S/A, Caixa Economica Federal,
Cia., Siderurgica Turbarao and TELESP--Telecomunicacoes de Sao Paulo.
Prior to joining us, Mr. Barbosa served as secretary of the National
Treasury Secretariat 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 DC. 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 Parana State
Development Institute, the Ministry of Labor and the Institute for Applied
Economic Research.
69
Gabriel Stoliar. Mr. Stoliar was appointed as our executive officer
of the investor relations and planning and control area in September 1997.
In 1994, he was appointed director of BNDESPAR. In 1991, Mr. Stoliar
assumed the position of superintendent of the operational division
responsible for the areas of mining, metallurgy, chemicals,
petrochemicals, pulp and paper. He was hired by BNDESPAR in 1988 as
manager of operations in the area of capital, electronic and consumer
goods. In 1982, he was promoted to manager of BNDES for the project area
of FINSOCIAL. In 1978, he was hired by BNDES as an analyst in the area of
pulp, paper and petrochemicals. Mr. Stoliar began his career as a business
organization consultant at the Institute of Economic and Management
Development of the Federation of Industries of Rio de Janeiro. Mr. Stoliar
obtained an engineering degree from Universidade Federal do Rio de
Janeiro, a post-graduate degree in production engineering and an MBA from
PDG/EXEC-SDE in Rio de Janeiro.
Carla Grasso. Mrs. Grasso was appointed as an executive officer of
the human resources and corporate services area in October 2001. Prior to
joining us, Mrs. Grasso served as our economic assistant to the President
of Brazil. She has also been deputy coordinator of fiscal policy at the
Ministry of the Economy and has held a variety of positions at the
Ministry of Social Security. In 1997, she was appointed as an executive
officer of Fundacao Vale de Rio Doce de Habitacao e Desenvolvimento Social
(FVRD). Mrs. Grasso has both a degree in Economics and a master in
Economics from Universidade de Brasilia (UNB).
Fiscal Council
Under the Brazilian Corporation Law, we may appoint the conselho fiscal, a
fiscal council, as a corporate body independent of our management and external
auditors. The primary responsibility of the fiscal council is to review
management's activities and the financial statements, and report its findings
to the shareholders. We amended our by-laws on June 18, 1997 in order to
provide for the establishment of a five member permanent fiscal council. On
April 29, 2002, the shareholders appointed the current members and their
respective alternates. Holders of preferred class A shares and the golden share
together may elect one member of the fiscal council and the respective
alternate. Non-controlling holders of common shares comprising at least 10% of
the common shares outstanding may also elect one member of the fiscal council
and the respective alternate. The terms of the members of the fiscal council
expire at the next ordinary annual shareholders' meeting following their
election.
The table below lists the current members of the fiscal council.
First Year of
Name Appointment
---- -------------
Claudio Bernardo Guimaraes de Moraes............... 2002
Ricardo Wiering de Barros.......................... 2002
Marcos Fabio Coutinho.............................. 1999
Eliseu Martins..................................... 1997
Pedro Carlos de Mello.............................. 2002
The table below lists the alternate members of the fiscal council.
First Year of
Name Appointment
---- -------------
Helio Cabral Moreira............................... 2002
Luiz Octavio Nunes West............................ 1998
Vicente Barcelos................................... 2001
Almir de Souza Carvalho............................ 2002
Jose Carlos Gouveia Danelli........................ 2002
70
Compensation
According to our by-laws, our shareholders are responsible for
establishing the aggregate compensation we pay to the members of our board of
directors and our executive officers. Our shareholders determine this aggregate
compensation at the general shareholders' meeting each year. In order to
establish aggregate director and officer compensation, we believe that our
shareholders usually take into account various factors which range from age,
experience and skills of our directors and officers to the recent performance
of our operations. Once aggregate compensation is established, the members of
our board of directors are then responsible for distributing such aggregate
compensation individually in compliance with our by-laws. Our board of
directors does not have a compensation committee.
For the year ended December 31, 2001, we paid approximately R$5.0 million
in aggregate (including benefits in kind granted) to the members of our board
of directors and to the executive officers for services in all capacities.
During 2001, the monthly amount we paid to the members of the fiscal
council was the higher of (1) R$4,200 or (2) the equivalent of 10% of the
amount paid to a director, excluding benefits. In addition, the members of the
fiscal council receive refunds for expenses they incur in connection with
transportation and accommodation, whenever such expenses are necessary for the
performance of their functions. For the year ended December 31, 2001, none of
our board members and executive officers had any financial or other interests
in transactions involving us which was not in the ordinary course of business.
71
6.D. Employees
The table below sets forth the number of our employees by category as of
the dates indicated.
At December 31,
---------------------------------
1999 2000 2001
------ ------ ------
Mining (other than gold).................. 4,478 4,948 6,584
Transportation............................ 4,514 4,525 4,725
Gold...................................... 588 555 531
Other operational(1)...................... 504 511 628
Administrative............................ 659 903 1,152
------ ------ ------
Total..................................... 10,743 11,442 13,620
====== ====== ======
--------------
(1) Does not include pelletizing, aluminum, or pulp and paper joint venture
employees.
We establish our annual wage and benefits programs in July of each year
following negotiations with our unions. In July 2001, our final proposals to
our unions included a 6% salary increase, additions to the list of available
medications, provisions for college materials for employees and annual bonus
amounts. The provisions of our collective bargaining agreements with our unions
also apply to our non-union employees. We have not suffered any material
economic loss as a result of labor strikes or stoppages.
Since 1973 we have sponsored a defined benefit pension plan, known as the
old plan, covering substantially all employees, with benefits based on years of
service, salary and social security benefits. This plan is administered by
VALIA, and is funded by monthly contributions we and our employees make,
calculated based on periodic actuarial appraisals.
In May 2000, we implemented a new pension plan, which is primarily a
defined contribution plan with a benefit feature relative to service prior to
May 2000, known as the new plan, and offered our active employees opportunity
to transfer to the new plan. Over 98% of our active employees opted to transfer
to the new plan. The old plan will continue in existence, covering almost
exclusively retired participants and their beneficiaries. In 2001, we
contributed approximately US$37 million to VALIA to fund the new plan and the
old plan. In addition, on March 9, 2001, we transferred our 10.3% interest in
shares of CSN, to the new plan, as a special contribution valued at US$249
million, equivalent to the value of such shares (determined based on their
weighted average price in the last thirty trading sessions on the Sao Paulo
Stock Exchange during the period ended on March 9, 2001). We also provide
scholarships and apprenticeships at our corporate vocational centers. We
believe our relations with our union employees and other employees are good.
Our employees have an equity stake in our business. On May 20, 1997, in
connection with our ongoing privatization, the Brazilian government completed
the sale of 11,120,919 common shares and 8,744,308 preferred shares to
Investvale, an association of our current and retired employees and certain
affiliates, at per share prices representing substantial discounts to
prevailing market prices.
6.E. Share Ownership
During the privatization process, the Brazilian government sold 11,120,919
common shares, representing approximately 4.5% of the outstanding common
shares, and 8,744,308 preferred class A shares, representing approximately 6.3%
of the outstanding preferred class A shares, in an offering restricted to our
current and retired employees. Substantially all of the shares sold were
purchased through Investvale, an association of our current and retired
employees. Employees were also granted the option, exercisable through
Investvale, to obtain an interest in the controlling block held by Valepar by
exchanging their common shares for equity in Valepar. See Item 7.A. Major
Shareholders--The Privatization. In addition, Investvale, as any investor, may
from time to time acquire and sell our shares in the market. At December 31,
2001, Investvale owned 10,362,069 common shares, representing approximately 4%
of our total common shares, and 269,000 preferred class A shares.
72
As of December 31, 2001, the representative of our employees in the board
of directors (as well as his alternate) also held 80,231 quotas in Investvale.
None of our other directors or executive officers holds an ownership interest
in Investvale.
The total number of common shares owned by members of our board of
directors as of May 31, 2002, was 17. The total number of preferred shares
owned by members of our board of directors as of May 31, 2002, was 209. Our
executive officers do not own any of our shares.
Our by-laws authorize us to establish stock option plans, but to date we
have not done so.
Item 7. Major Shareholders and Related Party Transactions
7.A. Major Shareholders
The table below sets forth certain information regarding share ownership
of the common and preferred shares as of May 31, 2002, by each person who we
know to be the owner of more than 5% of any class of our outstanding capital
stock, and by all directors and executive officers as a group.
Percent
Shares Owned of Class
------------ --------
Common Shares
Valepar S.A......................................... 105,443,070 43.0%
BNDESPAR(1)......................................... 11,672,271 4.8
Litel Participacoes S.A.(2).........................
Shares owned directly 25,272,641 10.3
Shares owned by Valepar S.A. 105,443,070 43.0
----------- ----
Total beneficial ownership by Valepar S.A. 130,715,711 53.3
Directors and executive officers as a group(3)...... 17 --
Preferred Shares(4)
Directors and executive officers as a group......... 209 --
Golden Share
Brazilian Government................................ 1 100.0%
--------------
(1) Excludes common shares owned directly by Valepar, in which this
shareholder has an ownership interest. See the table below for information
on Valepar's shareholders.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In general, a person who has or shares
voting power or investment power with respect to securities is treated as
a beneficial owner of those securities. It does not necessarily imply that
the named person has the economic or other benefits of ownership. Litel
owns 42% of Valepar. See the table below for more information on Valepar's
shareholders.
(3) Share ownership of all directors and officers, as a group, decreased from
14,399 common shares at December 31, 2000, to 17 common shares at May 31,
2002, due to the fact that former members of our board of directors, who
individually owned some of our shares, ceased owning them as a result of
our unwinding transactions with CSN.
(4) The Brazilian government (National Treasury) owns 5,075,341 preferred
shares representing 3.7% of the outstanding preferred shares and BNDESPAR
owns 1,251,980 preferred shares representing 0.9% of the outstanding
preferred shares.
73
The table below sets forth information as of May 31, 2002 regarding
Valepar S.A. share ownership and Litel Participacoes S.A. share ownership.
Percent of
Total Shares
Shares Owned Owned
------------ ------------
Valepar S.A.
Litel Participacoes S.A...................... 43,985,949 42%
Babie(1)..................................... 15,019,621 14
Eletron(2)................................... 21,875,000 21
Sweet River Investments Ltd.(3).............. 12,187,500 11
BNDESPAR..................................... 11,250,000 11
Investvale(4)................................ 1,125,000 1
----------- ------
Total..................................... 105,443,070 100%
=========== ======
Litel Participacoes S.A.
BB Carteira Ativa 0(5)......................... 129,528,472 52.41%
BB Carteira Ativa I(5)......................... 64,211,703 25.98
BB Carteira Ativa II(5)........................ 53,388,022 21.60
Others......................................... 875 0.01
Directors and Executive Officers as a group.... 3 --%
----------- ------
Total.......................................... 247,129,075 100.00%
=========== ======
--------------
(1) Babie is a holding company owned by Bradesplan and Bradespar, which are
affiliated with Banco Bradesco S.A., a Brazilian financial services
company.
(2) Eletron is a company 86% of which is owned by Bradespar and approximately
14% of which is owned by Opportunity Amafi Participacoes S.A.
(3) Sweet River Investments Ltd. is affiliated with Bank of America.
(4) Investvale is an investment club owned by our employees.
(5) Each of BB Carteira Ativa 0, BB Carteira Ativa I and BB Carteira Ativa II
is a Brazilian investment fund. BB Carteira Ativa 0 and BB Carteira Ativa
I are 100% owned by Previ. BB Carteira Ativa II is 59.36% owned by Funcef
and 38.8% owned by Petros. Each of Previ, Petros and Funcef is a Brazilian
pension fund.
The Privatization
In June 1995, the Brazilian government announced its intention to sell its
common and preferred share ownership interests in us as part of the ongoing
Brazilian privatization program. After a period of considerable governmental,
judicial and public attention and debate, the Brazilian government started our
privatization in May 1997.
In the first step of the privatization process, on May 6, 1997, the
Brazilian government and BNDES sold 99,999,203 common shares, representing
approximately 40.0% of the outstanding common shares, for approximately US$3
billion to Valepar, a special-purpose company formed to hold a controlling
interest in our outstanding common shares. The initial principal investors in
Valepar were a subsidiary of CSN, a Brazilian steelmaker, various Brazilian
pension funds, an affiliate of Bank of America, a U.S. bank, and certain
foreign investment funds.
In the second step of the privatization process, on May 20, 1997, the
Brazilian government and BNDES sold 11,120,919 common shares, representing
approximately 4.5% of the outstanding common shares, and 8,744,308 preferred
shares, representing approximately 6.3% of the outstanding preferred shares, in
an offering restricted to our current and retired employees. Substantially all
of the shares sold in this step of the privatization were purchased through
Investvale, an association of our current and retired employees. Employees were
also granted the option, exercisable through Investvale, to obtain an interest
in the controlling block held by Valepar by exchanging their
74
common shares for equity in Valepar. The shares offered to employees were sold
at substantial discounts to prevailing market prices. Common shares exchanged
for equity in Valepar were sold at R$11.09 per share, representing a 58.4%
discount from the then-current market price. Common shares not exchanged for
equity in Valepar were sold at R$8.88 per share (representing a 66.7% discount
from the then-current market price). Preferred shares were sold at R$8.88 per
share (representing a 63.2% discount from the then-current market price).
Investvale subsequently contributed 1,125,000 common shares to Valepar, in
exchange for a 0.9% equity interest in Valepar. These discounts gave rise to a
US$318 million extraordinary charge in 1997.
In the third step of the privatization process, on March 20, 2002, the
Brazilian government and BNDES each sold 34,255,582 shares (and an additional
5,138,337 shares including the underwriters' overallotment option), in the form
of common shares or American depositary shares, which together represent 32.1%
of our outstanding common stock. Following this offering, BNDESPAR, a
wholly-owned subsidiary of BNDES, owned 11,672,271 common shares, representing
approximately 4.8% of our outstanding common shares. In addition, the Brazilian
government owned outstanding preferred shares, and a golden share in us, which
gives it veto powers over certain actions that we could propose to take, and
BNDES owned 1,003 of our common shares. For a detailed description of the veto
powers granted to the Brazilian government by virtue of its ownership of the
golden share, see Item 10.A. Share Capital.
Shareholder Debentures
At the time of the first step of our privatization in 1997, we issued
debentures to our then-existing shareholders, including the Brazilian
government. The terms and conditions applicable to the required payments under
the debentures, which are described below, were set to ensure that our
pre-privatization shareholders, including the Brazilian government, would
participate alongside us in potential future financial benefits that we derive
from exploiting our mineral resources not included in the settlement of the
minimum purchase price of our shares. These financial benefits were not taken
into account in the price of our shares at the time of the privatization.
At the time of the privatization, the debentures were distributed, on a
one-for-one basis, as a payment for the redemption of the preferred class "B"
shares, which had been issued as a bonus to the holders of our common shares
and preferred Class A shares, through a capital increase. The debentures are
not redeemable or convertible and cannot be traded. In order to permit trading
of the debentures, we have requested their registry with the CVM. After the CVM
authorizes the registration, holders will be able to trade the debentures.
Under Central Bank regulations, pre-privatization shareholders that held
their shares through our American depositary receipt program were not permitted
to receive the debentures or any financial benefits relating to the debentures.
We sought approval from the Central Bank to (i) allow the depositary to hold
the debentures on behalf of the holders of American depositary receipts, and
transfer any financial benefits relating to the debentures as soon as they
begin to trade; and (ii) contribute these debentures to a Brazilian investment
fund to be created by the depositary, which stocks would be distributed to the
holders of American depositary receipts. The Central Bank rejected our request.
We intend to renew our request to the Central Bank after the debentures begin
to trade, but we cannot assure you that we will succeed. Therefore, unless the
Central Bank approves our request, the debentures will not have any value for
holders of American depositary receipts.
Under the terms of the debentures, holders will have the right to receive
semi-annual 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 April 1997, to the extent that we exceed defined thresholds of sales
volume relating to mineral resources, and from the sale of mineral rights that
we owned at April 1997. Our obligation to make payments to the holders will
cease when the relevant mineral resources are exhausted. Based on current
production and sales levels, and on the estimates of production and sales of
our new projects, we estimate that we would begin making payments related to
gold in approximately 2003, payments related to copper in approximately 2004,
and payments related to iron ore and other mineral resources in later years.
75
The table below summarizes the amounts we will be required to pay under
the debentures, based on the net revenues we earn from the sale of identified
mineral resources and mineral rights.
Area Mineral Required Payments by CVRD
----------------------------------------------- ------------------- -----------------------------------------
Southern System (including Urucum)............. Iron ore 1.8% of net revenue, after total sales
volume from May 1997 exceeds 1.7 billion
tons
Northern System................................ Iron ore 1.8% of net revenue, after total sales
volume from May 1997 exceeds 1.2 billion
tons
Pojuca, Andorinhas, Liberdade and Sossego...... Gold and Copper and 2.5% of net revenue from the beginning
by-products of commercial sales, as adjusted in
proportion to our interest in these
projects
Igarape Bahia and Alemao....................... Gold 2.5% of net revenue, (i) from the
beginning of commercial sales with
regard to copper and by-products, and
(ii) after total sales volume from May
1997 exceeds 70 tons of gold with regard
to gold, as adjusted in proportion to
our interest in these projects
Fazenda Brasileiro............................. Gold 2.5% of net revenue, after total sales
volume from May 1997 exceeds 26 tons of
gold
Other areas, excluding Carajas/Serra Leste and Gold and Copper and 2.5% of net revenue from the beginning
Salobo......................................... by-products of commercial production
Other areas owned at May 1997.................. Other minerals 1% of net revenue, 4 years after the
beginning of commercial sales
All areas...................................... Sale of mineral 1% of the sales price
rights owned at May
1997
Principal Shareholder
Through the Brazilian government's privatization program, the by-laws of
Valepar restrict concentration of ownership of Valepar shares by particular
types of investors for a period of five years through May 9, 2002. The by-laws
of Valepar state that no single investor or group of affiliated investors may
hold more than 45% of Valepar's outstanding capital stock. In addition, joint
shareholdings in Valepar by any group of iron ore producers or any group of
steel producers, and iron ore trading companies combined, may not exceed 45% of
Valepar's outstanding capital stock. Finally, shareholdings in Valepar by
individual large iron ore producers, steel producers or iron ore trading
companies may not exceed 10% of Valepar's outstanding capital stock.
The shareholders of Valepar have entered into a shareholders' agreement,
ending in 2017. This agreement:
o gives rights of first refusal on any transfer of Valepar shares
and preemptive rights on any new issue of Valepar shares,
o prohibits encumbrances on Valepar shares (other than in
connection with financing our acquisition),
o requires each party generally to retain control of its special
purpose company holding its interest in shares of Valepar,
o allocates Valepar's and our board seats, and
o establishes super-majority voting requirements for certain
matters relating to Valepar or to us.
BNDESPAR has a golden share in Valepar giving it a veto right over:
o any change in Valepar's corporate purpose,
o the liquidation of Valepar,
76
o a change in ownership of Valepar's shares if such change were to
increase concentration of the ownership of Valepar over
specified limits by participants in the iron ore, steel or iron
ore trading businesses, and
o any transfer of Valepar's shares to anyone until May 2002 if the
transfer were to result in such person owning more than 45% of
Valepar's shares.
Another agreement among Valepar's shareholders, ending in 2002, contains
similar restrictions on transfers.
Continuing Relationship with the Brazilian Government and BNDES
From time to time, in the ordinary course of our business, we enter into
transactions with other entities which the Brazilian government owns or
controls. See Item 7.B. Related Party Transactions. The most significant of
these transactions is with Eletronorte, a state-owned company. Pursuant to a
contract between Albras and Eletronorte, Albras is able to purchase electricity
at favorable rates. We are currently seeking to renegotiate this contract,
which expires in May 2004. For more information on our Eletronorte contract,
see Item 4.B., 4.C. and 4.D. Business Overview, Organizational Structure,
Property, Plants and Equipment--Holdings--Aluminum Business--Aluminum. No other
entity controlled by the Brazilian government, by itself or in the aggregate,
accounted for a significant percentage of our consolidated revenues or
purchases in 2000.
We have also entered into a Mineral Risk Contract with BNDES relating to
prospecting authorizations for mining regions where drilling and exploration
are still in their early stages. This contract provides for the joint
development of certain unexplored mineral deposits in the Carajas region, which
is part of the Northern System. BNDES is also our partner in Project 118,
Alemao and Cristalino, which are joint ventures through which we conduct our
copper mining exploration and development. For more information on these joint
ventures, see Item 4.B., 4.C. and 4.D. Business Overview, Organizational
Structure, Property, Plants and Equipment--Non-Ferrous Minerals.
As a result of the transfer of our voting control to Valepar, we are no
longer subject to various regulatory requirements and operating restrictions
applicable to Brazilian governmental entities. However, in connection with our
privatization, the Brazilian government retained special rights with respect to
our and Valepar's future decisions and caused us to enter into certain
agreements which may restrict our activities and results of operations in the
future. We discuss these restrictions below.
Golden Share
The Brazilian government holds one golden share, which confers upon its
holder veto rights over certain changes, including:
o our name,
o the headquarters of our head office,
o our corporate purpose as regards the working of mineral
deposits, and
o our continued operation of integrated iron ore mining systems.
For a more detailed description of the golden share, see Item 10.B.
Memorandum and Articles of Association--Common Shares and Preferred Shares.
Since the privatization, the Brazilian government has not exercised its
veto rights and, consequently, has refrained from interfering in our
decision-making process.
7.B. Related Party Transactions
At December 31, 2001, we had extended guarantees for borrowings obtained
by affiliates and joint ventures in the amount of US$702 million of which
US$492.5 million is denominated in U.S. dollars and the remaining US$210
million in Brazilian currency. See note 15(a) to our consolidated financial
statements.
77
For information regarding investments in affiliated companies and joint
ventures and for information regarding transactions with major related parties,
see notes 10 and 17 to our consolidated financial statements.
The Brazilian government owns or controls entities with which we enter
into transactions in the ordinary course of business. See Item 7.A. Major and
Selling Shareholders - Major Shareholders.
BNDES, in its role as an economic development bank, is involved with us as
a lender, partner and/or co-investor in a number of projects, and will probably
continue to do so in the future.
Current activities of BNDES related to us include:
o investments in a number of our joint ventures
o entering into mineral risk contracts with us, and
o providing financing for our expansion
Our consolidated balance sheet at December 31, 2001 includes loans
repayable to BNDES in the aggregate amount of US$163 million.
Further, one of our directors is also a managing director of BNDES, one of
our alternate directors is the chief executive officer of BNDES, one of our
executive officers was a director of an affiliate of BNDES and one of our
directors is the Deputy Secretary of the National Treasury. BNDESPAR, an
affiliate of BNDES, also owns eleven percent of our largest shareholder,
Valepar.
7.C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
8.A.1-6. Consolidated Statements and Other Financial Information
For our consolidated financial statements see Item 18. Financial
Statements.
8.A.7. Legal Proceedings
We and our subsidiaries are defendants in numerous legal actions in the
normal course of business, including civil, administrative, tax, social
security and labor proceedings. We have set aside or deposited in court amounts
to cover estimated contingency losses due to adverse legal judgments. Based on
the advice of our legal counsel, we believe that the provision made against
contingent losses is sufficient to cover probable losses in connection with
such actions.
Conselho Administrativo de Defesa Economica, known as CADE, the Brazilian
antitrust regulator, has been conducting inquiries into our principal lines of
business to determine whether undue concentration exists in our respective
industries. One of such inquiries that CADE made was in the context of our
privatization and involved our railroad system. In November 2001, CADE issued a
favorable opinion regarding this matter, on condition that we periodically
provide certain financial information to CADE and to the Ministry of
Transportation.
Numerous lawsuits challenging the legality of our privatization are
pending, including a number of class- action lawsuits. We do not believe that,
individually or in the aggregate, these actions will adversely affect the
course of the privatization process or otherwise have a material adverse effect
on us.
We are currently a defendant in two separate actions brought by the
municipality of Itabira, in the state of Minas Gerais. It alleges that our
Itabira iron ore mining operations have caused environmental and social
damages. In one of the actions, filed in August 1996, the municipality of
Itabira alleges that our Itabira iron ore mining operations have caused
environmental and social damages and claims damages with respect to the
degradation of the site of one of our mines, as well as the immediate
restoration of the affected ecological complex and the performance of
compensatory environmental programs in the region. The damages sought, as
adjusted from the date of the claim, amount to
78
approximately US$535 million. We believe that this amount is significantly
higher than the amount we would actually be responsible for in the event that
we were found liable. We have requested the annulment of this action as it
represents no actual controversy. In fact, on June 5, 2000, the local
environmental authorities granted an operating license to our Itabira iron ore
mining operations. This license sets forth conditions regarding the
environmental restoration of the degraded site and the performance of
compensatory environmental programs. We intend to continue complying with these
conditions. In the other action, the municipality of Itabira is claiming the
right to be reimbursed for expenses it has incurred in connection with public
services rendered as a consequence of our mining activities. We believe that
this action is without merit. We are vigorously defending both pending actions.
8.A.8. Dividend Distributions
Under the Brazilian Corporation Law, shareholders are generally entitled
to receive an annual mandatory dividend set forth in the company's by-laws,
which may not be lower than 25% of adjusted net income for the relevant year,
calculated in accordance with the Brazilian Corporation Law. Accordingly, our
by-laws prescribe that we must distribute to our shareholders an amount equal
to not less than 25% of the amount of profits available for distribution with
respect to each fiscal year, unless the board of directors advises our
shareholders at the general shareholders' meeting that payment of the required
distributions for the preceding fiscal year is inadvisable in light of our
financial condition. The fiscal council must review any such determination and
report to the shareholders and to the CVM. The shareholders must also approve
the recommendation of the board of directors with respect to any required
distributions. To date, our board of directors has never determined that a
payment of the required distribution amount was inadvisable.
In addition to any required distributions, the board of directors may
recommend to the shareholders the payment of distributions from other funds
that are legally available.
Since our privatization in 1997, and following a recommendation from
Valepar, our principal shareholder, we have distributed a dividend equal to at
least 50% of the amount of profits available for distribution with respect to
each fiscal year.
Holders of preferred class A shares and the golden share are entitled to
receive an amount equal to 6% of their pro rata share of our paid-in capital
prior to any distribution to holders of preferred class B shares, if any are
issued, or to holders of common shares. Holders of preferred class B shares, if
any are issued, are entitled to receive an amount equal to 6% of their pro rata
share of our paid-in capital prior to any distribution to holders of common
shares and to any additional distribution to holders of preferred class A
shares and the golden share. After holders of common shares receive
distributions per share in an amount equal to the preferential dividend of
holders of preferred shares, all holders of shares receive the same additional
distribution amount per share.
Since our privatization, we have had sufficient distributable amounts to
be able to distribute equal amounts to both common and preferred shareholders.
For a discussion on our preferred class A and preferred class B shares, see
Item 10.B. Memorandum and Articles of Association -- Common Shares and
Preferred Shares.
According to Law No. 10,303, the recently enacted law that amended the
Brazilian Corporation Law, we will be required to amend our by-laws in order to
modify the rights granted to holders of preferred shares. For a detailed
description of this requirement, see Item 10.B. Memorandum and Articles of
Association--New Provisions in the Brazilian Corporation Law.
We may make distributions either in the form of dividends or in the form
of interest on shareholders' equity. Dividends with respect to the American
depositary shares, and to non-resident holders of common shares, will not be
subject to Brazilian withholding tax, except for dividends declared based on
profits generated prior to December 31, 1995. These dividends will be subject
to a 15% Brazilian withholding tax. Distributions of interest on shareholders'
equity to shareholders, including holders of American depositary receipts, are
currently subject to Brazilian withholding tax of 15%. We pay distributions in
Brazilian currency.
We are required to hold an annual shareholders' meeting by April 30 of
each year at which an annual dividend may be declared. Additionally, our board
of directors may declare interim dividends. Under the Brazilian Corporation
Law, dividends are generally required to be paid to the holder of record on a
dividend declaration date within 60 days
79
following the date the dividend was declared, unless a shareholders' resolution
sets forth another date of payment, which, in either case, must occur prior to
the end of the fiscal year in which the dividend was declared. A shareholder
has a three-year period from the dividend payment date to claim dividends (or
payments of interest on shareholders' equity) in respect of its shares, after
which we will have no liability for such payments. Since 1997, all cash
distributions we have made have been in the form of interest on shareholders'
equity.
We will make cash distributions on 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 will then convert such
proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to
the depositary for distribution to holders of American depositary receipts. For
more information on Brazilian tax policies regarding dividend distributions,
see Item 10.E. Taxation--Brazilian Tax Considerations.
The table below sets forth the dollar equivalent of cash distributions we
paid to holders of common shares and preferred shares for the periods
indicated. For your convenience, we have calculated U.S. dollar conversions
using both the commercial market rate in effect on the date of payment and the
exchange rate at June 24, 2002 of R$2,827 per US$1.00. We stated amounts gross
of any applicable withholding tax.
U.S.
Dollars
U.S. Dollars per Share
per Share at at June
Year Payment Date Payment Date 24, 2002
---- ------------------------------------ ------------ ---------
1997 May 30.............................. 0.48 0.17
September 2......................... 0.30 0.11
1998 May 8............................... 0.88 0.36
August 31........................... 0.64 0.27
1999 January 15.......................... 0.44 0.23
March 31............................ 0.29 0.18
August 20........................... 0.57 0.39
2000 March 1............................. 0.66 0.41
2001 February 20......................... 1.66 1.18
2001 December 10......................... 0.98 0.82
2002 April 30............................ 0.98 0.82
8.B. Significant Changes
Not applicable.
Item 9. The Offer and Listing
9.A.1-3. Offering Details
Not applicable.
9.A.4. Price History of Stock
The table below sets forth trading information for our preferred and
common American depositary shares, as reported by the New York Stock Exchange
(and for periods prior to June 2000, reported by the National Quotations
Bureau, Inc.), and our preferred shares and our common shares, as reported by
the BOVESPA, for the periods indicated.
U.S. Dollars per U.S. Dollars per
Reais per Common Reais per Preferred Preferred American Common American
Share Class A Share Depositary Share Depositary Share
------------------ ------------------- ------------------- ------------------
High Low High Low High Low High Low
------- ------- ------- ------- -------- -------- ------ ------
1997................... R$33.00 R$17.00 R$31.50 R$18.40 US$28.51 US$16.87 -- --
1998................... 27.00 10.00 29.10 13.00 25.13 11.38 -- --
1999................... 42.00 9.80 50.00 13.80 26.50 10.87 -- --
80
U.S. Dollars per U.S. Dollars per
Reais per Common Reais per Preferred Preferred American Common American
Share Class A Share Depositary Share Depositary Share
------------------ ------------------- ------------------- ------------------
High Low High Low High Low High Low
------- ------- ------- ------- -------- -------- ------ ------
2000................... 52.40 33.00 59.00 38.82 33.13 19.75 -- --
2001................... 55.00 42.70 58.70 44.00 26.98 18.65 -- --
1Q00.................. 52.40 33.00 59.00 42.00 33.13 22.75 -- --
2Q00.................. 46.00 35.00 53.50 40.01 29.00 22.62 -- --
3Q00.................. 49.00 41.21 54.00 44.97 29.75 24.44 -- --
4Q00.................. 46.50 37.00 47.80 38.82 25.56 19.75 -- --
1Q01.................. 51.00 42.70 53.60 44.00 26.98 23.05 -- --
2Q01.................. 54.00 46.50 58.60 49.05 25.70 22.05 -- --
3Q01.................. 55.00 46.40 55.00 45.50 23.15 18.65 -- --
4Q01.................. 54.00 47.00 58.70 49.60 23.61 19.00 -- --
December 2001...... 53.40 48.00 55.00 51.48 23.61 21.35 -- --
January 2002....... 55.40 50.00 56.50 50.70 23.45 21.52 -- --
February 2002...... 62.32 53.80 60.50 54.65 25.45 22.40 -- --
March 2002......... 65.70 59.40 64.20 58.50 27.49 24.80 27.39 26.15
April 2002......... 66.50 61.50 66.30 59.80 28.35 25.75 28.46 26.60
May 2002........... 75.99 64.60 74.50 63.52 29.51 26.90 30.00 27.00
June 2002(1)...... 78.01 71.00 75.90 65.80 29.30 23.70 30.00 25.68
(1) through June 25, 2002
9.A.5-7. Listing Details
Not applicable.
9.B. Plan of Distribution
Not applicable.
9.C. Markets
Our publicly traded share capital consists of common shares and preferred
shares, each without par value. Our common shares and our preferred shares are
publicly traded in Brazil on the Sao Paulo stock exchange, known as BOVESPA,
under the ticker symbols VALE3, and VALE5, respectively. Our common shares and
preferred 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.
Our common American depositary shares, each representing one common share,
have traded on the New York Stock Exchange since March 2002, under the ticker
symbol RIO. Our preferred American depositary shares, each representing one
preferred share, have traded on the New York Stock Exchange since June 2000,
under the ticker symbol RIOPR. Prior to June 20, 2000, the preferred American
depositary shares traded in the over-the-counter market. JPMorgan Chase Bank
serves as the depositary for the preferred American depositary shares. At
December 31, 2001, there were 57,754,261 American depositary shares
outstanding, representing 41.7% of our preferred shares or 14.9% of our total
share capital.
9.D., 9.E. and 9.F. Selling Shareholders, Dilution and Expenses of the Issue
Not applicable.
81
Item 10. Additional Information
10.A. Share Capital
For a description of our common and our preferred shares, including voting
rights and preemptive rights, see Item 10.B. Memorandum and Articles of
Association--Common Shares and Preferred Shares.
The table below provides a recent history of changes in our share capital.
Preferred Class
Common Shares A Shares
------------- ---------------
Shares authorized............................. 300,000,000 600,000,000
Shares issued prior to December 31, 1999...... 249,983,143 138,575,912
Shares repurchased prior to December 31, 1999. - (3,659,311)
Shares outstanding on December 31, 1999....... 249,983,143 134,916,601
Shares repurchased during 2000................ (7,300) -
Shares outstanding on December 31, 2000....... 249,975,843 134,916,601
Shares repurchased during 2001................ (4,707,870) 3,659,220
Shares outstanding on December 31, 2001....... 245,267,973 138,575,821
Shares repurchased during 2002................ - (4,660)
Shares outstanding on May 31, 2002............ 245,267,973 138,571,161
Vale Overseas' issued share capital is US$1,000.00 divided into 1,000
ordinary shares. All of the issued shares are fully paid and are held by us.
10.B. Memorandum and Articles of Association
Company Objects and Purposes
Clause 2 of the by-laws defines our corporate purpose to include (1)
working mineral deposits in Brazil and abroad by mining, concentrating,
processing, transporting, shipping and trading minerals, (2) building,
operating and exploiting railway traffic, (3) operating maritime terminals,
including support for in port navigation, (4) exploiting, processing and
trading forestry materials, (5) engaging, in Brazil and abroad, in other
activities in support of our corporate purpose, including research, industrial
processing, trading, importing and exporting goods and rendering services, and
(6) incorporating or investing in corporations acting within the scope of our
corporate purpose.
Directors' Powers
Under the Brazilian Corporation Law, if a director or an executive officer
has a conflict of interest with the company in connection with any proposed
transaction, the director or executive officer may not vote in any decision of
the board of directors or of the board of executive officers regarding such
transaction and must disclose the nature and extent of the conflicting interest
for transcription in the minutes of the meeting. In any case, a director or an
executive officer may not transact any business with the company, including any
borrowings, except on reasonable or fair terms and conditions that are
identical to the terms and conditions prevailing in the market or offered by
third parties. Under our by-laws, shareholders set the aggregate compensation
payable to directors and executive officers. The board of directors allocates
the compensation among its members and the executive officers. See Item 6.A.,
6.B. and 6.C. Directors and Senior Management, Compensation and Board
Practices--Compensation. Our by-laws do not establish any mandatory retirement
age limits.
Common Shares and Preferred Shares
Set forth below is certain information concerning our authorized and
issued capital stock and a brief summary of certain significant provisions of
our by-laws and the Brazilian Corporation Law. This description does not
purport to be complete and is qualified by reference to our by-laws (an English
translation of which has been filed with the Commission) and to the Brazilian
Corporation Law.
82
General
Our by-laws authorize the issuance of (1) up to 300 million common shares
and (2) up to 600 million preferred class A shares or preferred class B shares,
in each case based solely on the approval of the board of directors without any
additional shareholder approval. There are currently no preferred class B
shares outstanding.
Each common share entitles the holder thereof to one vote at meetings of
our shareholders. Holders of common shares are not entitled to any preference
relating to our dividends or other distributions or any preference upon our
liquidation.
Holders of preferred class A shares are generally entitled to the same
voting rights as holders of common shares, except with respect to the election
of members of the board of directors, and are entitled to a minimum annual
non-cumulative preferential dividend of 6% of their pro rata share of our
paid-in capital prior to any distribution to holders of common shares or to
holders of preferred class B shares, if any. Holders of preferred class A
shares and the golden share may also elect one member of the permanent fiscal
council and the respective alternate. Non-controlling holders of common shares
comprising at least 10% of the common shares outstanding may also elect one
member of the fiscal council and an alternate. As of March 1, 2002, holders of
preferred shares and common shares may in certain circumstances combine their
respective holdings to elect members of our board of directors. See -New
Provisions in Brazilian Corporation Law. The preferred class A shares are not
entitled to any preference in the case of our liquidation.
The golden share is a preferred share. It is required to be held by the
Brazilian government. The holder of the golden share is entitled to the same
rights (including with respect to voting, dividend preference and liquidation
preference) as holders of preferred class A shares. In addition, the holder of
the golden share is entitled to veto any of our proposed action relating to the
following matters:
(1) a change in our name;
(2) a change in the location of our head office;
(3) a change in our corporate purpose as regards the working of mineral
deposits;
(4) any liquidation of our company;
(5) any disposal or winding up of activities of any one or more of the
following stages of the integrated systems of our iron ore mining:
(a) mineral deposits, ore deposits, mines;
(b) railways;
(c) ports and marine terminals;
(6) any change in the by-laws relating to the rights accorded to the
classes of capital stock issued by us; and
(7) any change in the by-laws relating to the rights accorded the golden
share.
Calculation of Distributable Amount
At each annual shareholders' meeting, the board of directors is required
to recommend how to allocate our earnings for the preceding fiscal year. For
purposes of the Brazilian Corporation Law, a company's net income after income
taxes and social contribution taxes for such fiscal year, net of any
accumulated losses from prior fiscal years and amounts allocated to employees'
and management's participation in earnings represents its "net profits" for
such fiscal year. In accordance with the Brazilian Corporation Law, an amount
equal to our "net profits," as further reduced by amounts allocated to the
legal reserve, to the contingency reserve or the unrealized income reserve
established by us in compliance with applicable law (as hereinafter discussed)
and increased by reversions of reserves constituted in prior years, will be
available for distribution to shareholders in any particular year. Such amount,
the adjusted net profits, is herein referred to as the distributable amount. We
may also establish discretionary reserves, reserves for investment projects and
fiscal investment reserves, as discussed below.
83
Legal Reserve. Under the Brazilian Corporation Law, we are required to
maintain a legal reserve to which we must allocate 5% of our "net profits" for
each fiscal year until the amount of the reserve equals 20% of our paid-in
capital. Net losses, if any, may be charged against the legal reserve.
Discretionary Reserves. Under the Brazilian Corporation Law, a company may
also provide for discretionary allocations of "net profits" to the extent set
forth in its by-laws. Our by-laws provide for one discretionary depletion
reserve which may be taken into account in allocating net profits for any
fiscal year. We currently maintain a fiscal incentive depletion reserve
established in respect of certain mining operations. Appropriations to the
fiscal incentive depletion reserve are deductible for tax purposes. The
discretionary depletion reserve has not been used since 1996, when the related
fiscal incentive expired. For more details, see note 13 to the consolidated
financial statements. There are no limits on the size or amount of proceeds
that may be retained by our board in the discretionary depletion reserve.
However, the sum of the legal reserve, the depletion reserve and the reserve
for investment projects may not exceed the amount of our paid-in capital.
Contingency Reserve. Under the Brazilian Corporation Law, a portion of our
"net profits" may also be discretionally allocated to a "contingency reserve"
for an anticipated loss that is deemed probable in future years. Any amount so
allocated in a prior year must be either reversed in the fiscal year in which
the loss was anticipated if such loss does not in fact occur or charged off in
the event that the anticipated loss occurs.
Reserve for Investment Projects. Under the Brazilian Corporation Law, we
may allocate a portion of our "net profits" for discretionary appropriations
for plant expansion and other capital investment projects, the amount of which
is based on a capital budget previously presented by management and approved by
shareholders. Under Law 10,313, capital budgets with duration longer than one
year must be revised at each annual shareholder's meeting. After completion of
the relevant capital projects, we may retain the appropriation until
shareholders vote to transfer all or a portion of the reserve to capital or
retained earnings.
Unrealized Income Reserve. Under the Brazilian Corporation Law prior to
the enactment of Law 10,313, if the amount of "unrealized income" for any
particular year exceeds the sum allocated to the legal reserve, the
discretionary reserves, the contingency reserve and the reserve for investment
projects in such year, such excess may be allocated to an "unrealized income
reserve." "Unrealized income" in any particular year represents the sum of
price-level restatement of certain balance sheet accounts in such year in which
the system of price-level restatement was applicable (up to December 31, 1995),
the share of equity earnings of subsidiary and associated companies in such
year and profits from installment sales to be received after the end of the
next succeeding fiscal year. As of March 1, 2002, under Law 10,313, which
amends the Brazilian Corporation Law, the amount by which the mandatory
dividend exceeds the "realized" portion of net profits for any particular year
may be allocated to the unrealized income reserve. The "realized portion of net
profits is the amount by which "net profits" exceed the sum of (i) our net
positive results, if any, from the equity method of accounting for earnings and
losses of our subsidiaries and certain affiliates, and (ii) the profits, gains,
or return obtained on transactions maturing after the end of the following
fiscal year.
Fiscal Incentive Investment Reserve. Under the Brazilian tax laws, a
portion of "net profits" may also be allocated to a general "fiscal incentive
investment reserve" in amounts corresponding to reductions in our income tax
generated by credits for particular government-approved investments.
The Brazilian Corporation Law provides that all discretionary allocations
of "net profits," including discretionary reserves, the contingency reserve,
the unrealized income reserve and the reserve for investment projects, are
subject to approval by the shareholders voting at the annual meeting and can be
transferred to capital or used for the payment of dividends in subsequent
years. The fiscal incentive investment reserve and legal reserve are also
subject to approval by the shareholders voting at the annual meeting and may be
transferred to capital but are not available for the payment of dividends in
subsequent years.
Our calculation of "net profits" and allocations to reserves for any
fiscal year are determined on the basis of financial statements prepared in
accordance with the Brazilian Corporation Law. Our consolidated financial
statements have been prepared in accordance with U.S. GAAP and, although our
allocations to reserves and dividends will be reflected in these financial
statements, investors will not be able to calculate such allocations or
required dividend amounts from our consolidated financial statements.
84
Mandatory Dividend
Our by-laws prescribe that we must distribute to our shareholders in the
form of dividends or interest on shareholders' equity an annual amount equal to
not less than 25% of the distributable amount, referred to as the mandatory
dividend, unless the board of directors advises our shareholders at our general
shareholders' meeting that payment of the mandatory dividend for the preceding
year is inadvisable in light of our financial condition. Dividends paid to
holders of our preferred shares will be computed in determining whether we have
paid the mandatory dividend. The fiscal council must review any such
determination and report it to the shareholders and the CVM. In addition to the
mandatory dividend, our board of directors may recommend to the shareholders
payment of dividends from other funds legally available 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 --Calculation of Distributable Amount. To
date, our board of directors has never determined that payment of the mandatory
dividend was inadvisable.
Since our privatization in 1997, and following a recommendation from
Valepar, our principal shareholder, we have distributed a dividend equal to at
least 50% of the amount of profits available for distribution with respect to
each fiscal year.
Dividend Preference of Preferred Shares
Pursuant to our by-laws, holders of preferred class A shares and the
golden share are entitled to a minimum annual non-cumulative preferential
dividend equal to 6% of their pro rata share of our paid-in capital ahead of
dividends to holders of preferred class B shares and common shares. In
addition, any future holders of our authorized but unissued preferred class B
shares will be entitled to a minimum annual non-cumulative preferential
dividend equal to 6% of their pro rata share of our paid-in capital ahead of
dividends to holders of common shares. To the extent that dividends are
declared by us in any particular year in amounts which exceed the preferential
dividends on preferred shares, and after holders of common shares have received
distributions equivalent, on a per share basis, to the preferential dividends
on preferred shares, holders of common shares and preferred shares shall
receive the same additional dividend amount per share. Since the first step of
our privatization in 1997, we have had sufficient distributable amounts to be
able to distribute equal amounts to both common and preferred shareholders.
Other Matters Relating to Preferred Shares
Our by-laws do not provide for the conversion of preferred shares into
common shares. In addition, the preferred shares do not have any preference
upon our liquidation and there are no redemption provisions associated with the
preferred shares.
Payments on Shareholders' Equity
Pursuant to a change in Brazilian tax law effective January 1, 1996,
Brazilian companies are permitted to pay limited additional amounts to holders
of equity securities and treat such payments as an expense for Brazilian income
tax purposes. The purpose of the tax law change is to encourage the use of
equity investments as opposed to indebtedness to finance corporate activities.
In accordance with Law No. 9,249 dated December 26, 1995, our by-laws provide
for the distribution of interest on shareholders' equity as an alternative form
of payment to shareholders. The interest rate applied is generally limited to
the Brazilian long-term interest rate, or TJLP, for the applicable period. The
deduction of the amount of interest paid cannot exceed the greater of (1) 50%
of net income (after the deduction of the provision of social contribution on
net profits and before the deduction of the provision of the corporate income
tax) before taking into account any such distribution for the period in respect
of which the payment is made or (2) 50% of the sum of retained earnings and
profit reserves. Any payment of interest on shareholders' equity to
shareholders is subject to Brazilian withholding income tax at the rate of 15%,
except for beneficiary located in a tax haven jurisdiction (i.e. country that
does not impose income tax or that imposes it at a maximum rate lower than
20%), in which case the rate is 25%. Under our by-laws, the amount paid to
shareholders as interest on shareholders' equity (net of any withholding tax)
may be included as part of any mandatory dividend. Under the Brazilian
Corporation Law, we are obligated to distribute to shareholders an amount
sufficient to ensure that the net amount received, after payment by us
85
of applicable Brazilian withholding taxes in respect of the distribution of
interest on shareholders' equity, is at least equal to the mandatory dividend.
Voting Rights
Each common share entitles the holder thereof to one vote at meetings of
our shareholders. Holders of preferred shares are entitled to the same voting
rights as holders of common shares except that they may not vote on the
election of members of the board of directors, except in the event of dividend
arrearages, as described below. One of the members of the permanent fiscal
council and his or her alternate are elected by majority vote of the holders of
preferred shares. As of March 1, 2002, holders of preferred shares and common
shares may, in certain circumstances, combine their respective holdings to
elect members of our board of directors. See --New Provisions in the Brazilian
Corporation Law.
The golden share entitles the holder thereof to the same voting rights as
holders of preferred shares. The golden share also confers certain other
significant voting rights in respect of particular actions, as described under
--General.
The Brazilian Corporation Law provides that non-voting or
restricted-voting shares, such as the preferred shares, acquire unrestricted
voting rights beginning when a company has failed for three consecutive fiscal
years (or for any shorter period set forth in a company's constituent
documents) to pay any fixed or minimum dividend to which such shares are
entitled and continuing until payment thereof is made. Our by-laws do not set
forth any such shorter period.
Any change in the preferences or advantages of our preferred class A
shares, or the creation of a class of shares having priority over the preferred
class A shares, would require the approval of holders of a majority of the
outstanding preferred class A shares, voting as a class at a special meeting.
Shareholders Meetings
A general shareholders' meeting convenes each year to decide all matters
relating to our corporate purposes and to pass such resolutions as they deem
necessary for our protection and well-being.
Pursuant to the Brazilian Corporation Law, shareholders voting at a
general shareholders' meeting have the power, among other powers, to:
o amend the by-laws;
o elect or dismiss members of the board of directors and members
of the fiscal council at any time;
o receive the annual reports by management and accept or reject
management's financial statements, including the allocation of
net profits and the distributable amount for payment of the
mandatory dividend and allocation to the various reserve
accounts;
o authorize the issuance of debentures;
o suspend the rights of a shareholder in default of obligations
established by law or by the by-laws;
o accept or reject the valuation of assets contributed by a
shareholder in consideration for issuance of capital stock;
o pass resolutions to reorganize our legal form, to merge,
consolidate or split us, to dissolve and liquidate us, to elect
and dismiss our liquidators and to examine their accounts; and
o authorize management to file for bankruptcy or to request a
concordata, a procedure involving protection from creditors
similar in nature to reorganization under the U.S. Bankruptcy
Code.
All shareholders meetings, including the annual shareholders' meeting, are
convened by publishing, no fewer than fifteen days prior to the scheduled
meeting date and no fewer than three times, a notice in the Diario Oficial do
Estado do Rio de Janeiro and in a newspaper with general circulation in the
city where we have our registered office, which is Rio de Janeiro. Our
shareholders have previously designated Jornal do Commercio for this purpose.
Also,
86
as our shares are traded on the Sao Paulo Stock Exchange, we must publish a
notice in the Sao Paulo based Diario do Comercio e da Industria. Such notice
must contain the agenda for the meeting and, in the case of an amendment to our
by-laws, an indication of the subject matter. In addition, under our by-laws,
the holder of the golden share is entitled to a minimum of 15 days prior notice
of any general shareholders' meeting to consider any proposed action subject to
the veto rights accorded to the golden share. See --Common Shares and Preferred
Shares--General.
A shareholders' meeting may be held if shareholders representing at least
one-quarter of the voting capital are present. If no such quorum is present,
notice must again be given in the same manner as described above, and a meeting
may then be convened without any specific quorum requirement, subject to the
minimum quorum and voting requirements for certain matters, as discussed below.
A shareholder without a right to vote may attend a general shareholders'
meeting and take part in the discussion of matters submitted for consideration.
Except as otherwise provided by law, resolutions of a shareholders'
meeting are passed by a simple majority vote, abstentions not being taken into
account. Under the Brazilian Corporation Law, the approval of shareholders
representing at least one-half of the issued and outstanding voting shares is
required for the types of action described below, as well as, in the case of
clause (a) and clause (b), a majority of issued and outstanding shares of the
affected class: (a) creating a new class of preferred shares or
disproportionately increasing an existing class of preferred shares relative to
the other classes of shares, other than to the extent permitted by the by-laws,
which permit us to increase the number of preferred class B shares
disproportionately in relation to the number of common and preferred shares;
(b) changing a priority, preference, right, privilege or condition of
redemption or amortization of any class of preferred shares or creating any
class of non-voting preferred shares that has a priority, preference, right,
condition or redemption or amortization superior to an existing class of
shares, such as the preferred shares; (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 Corporation Law; and (h) canceling any ongoing liquidation of us.
Whenever the shares of any class of capital stock are entitled to vote,
each share is entitled to one vote.
Annual shareholders' meetings must be held by April 30 of each year.
Shareholders' meetings are called, convened and presided over by the President
or by the Vice-President of our board of directors. A shareholder may be
represented at a general shareholders' meeting by an attorney-in-fact appointed
not more than one year before the meeting, who must be a shareholder, a company
officer or a lawyer. For a public company, such as us, the attorney-in-fact may
also be a financial institution.
Redemption Rights
Our common shares and preferred shares are not redeemable, except that a
dissenting, or, in certain cases, shareholder is entitled under the Brazilian
Corporation Law to obtain redemption upon a decision made at a shareholders'
meeting by shareholders representing at least 50% of the voting shares:
(1) to create a new class of preferred shares or to disproportionately
increase an existing class of preferred shares relative to the other
classes of shares (unless such actions are provided for or
authorized by the by-laws);
(2) to modify a preference, privilege or condition of redemption or
amortization conferred on one or more classes of preferred shares,
or to create a new class with greater privileges than the existing
classes of preferred shares;
(3) to reduce the mandatory distribution of dividends;
(4) to change our corporate purposes;
(5) to merge us with another company or consolidate us;
(6) to transfer all of our shares to another company in order to make us
a wholly-owned subsidiary of such company, an incorporacao de acoes;
87
(7) to approve the acquisition of control of another company at a price
which exceeds certain limits set forth in the Brazilian Corporation
Law;
(8) to approve our participation in a centralized group of companies as
defined under the Brazilian Corporation Law; or
(9) in the event that the entity resulting from (a) a merger, (b) an
"incorporacao de acoes" as described in clause (6) above, or (c) a
spin-off that we conduct fails to become a listed company within 120
days of the general shareholders' meeting at which such decision was
taken.
(10) in the event that the entity resulting from (a) a merger, (b) an
incorporacao de acoes as described in clause (6) above, or (c) a
spin-off that we conduct fails to become a listed company within 120
days of the shareholders' meeting at which such decision was taken.
Only holders of shares adversely affected by the changes mentioned in
items (1) and (2) above may require us to redeem their shares. The right of
redemption mentioned in items (5), (6) and (8) above may only be exercised if
our shares do not satisfy certain tests of liquidity at the time of the
shareholder resolution. The right of redemption lapses 30 days after
publication of the minutes of the relevant general shareholders' meeting,
unless, in the case of items (1) and (2) above, the resolution is subject to
confirmation by preferred shareholders (which must be made at a special meeting
to be held within one year), in which case the 30 day term is counted from the
publication of the minutes of the special meeting.
We would be entitled to reconsider any action giving rise to redemption
rights within 10 days following the expiration of such rights if the redemption
of shares of dissenting shareholders would jeopardize our financial stability.
Law No. 9,457 dated May 5, 1997, which amended the Brazilian Corporation Law,
contains provisions which, among other provisions, restrict redemption rights
in certain cases and allow companies to redeem their shares at their economic
value, subject to certain requirements. Our by-laws currently do not provide
that our capital stock will be redeemable at its economic value and,
consequently, any redemption pursuant to the Brazilian Corporation Law would be
made at book value per share, determined on the basis of the last balance sheet
approved by the shareholders; provided that if the general shareholders'
meeting giving rise to redemption rights occurred more than 60 days after the
date of the last approved balance sheet, a shareholder would be entitled to
demand that his or her shares be valued on the basis of a new balance sheet
dated within 60 days of such general shareholders' meeting.
Preemptive Rights
Each of our shareholders has a general preemptive right to subscribe for
shares in any capital increase, in proportion to his or her shareholding. A
minimum period of 30 days following the publication of notice of a capital
increase is allowed for the exercise of the right and the right is negotiable.
Under our by-laws, our board of directors may decide not to extend preemptive
rights to our shareholders or, under Law 10,303, to reduce the 30 days period
for the exercise of preemptive rights, in each case with respect to any
issuance of shares, debentures convertible into shares and warrants in the
context of a public offering, subject to the limit on the number of shares that
may be issued with the approval of the board without any additional shareholder
approval. In the event of a capital increase which would maintain or increase
the proportion of capital represented by preferred shares, holders of preferred
American depositary receipts will have preemptive rights to subscribe only to
newly issued preferred shares. In the event of a capital increase which would
reduce the proportion of capital represented by preferred shares, holders of
preferred American depositary receipts will have preemptive rights to subscribe
for preferred shares, in proportion to their shareholdings, and for common
shares only to the extent necessary to prevent dilution of their overall
interest in us. In the event of a capital increase which would maintain or
increase the proportion of capital represented by common shares, holders of
common American depositary receipts will have preemptive rights to subscribe
only to newly issued common shares. In the event of a capital increase which
would reduce the proportion of capital represented by common shares, holders of
common American depositary receipts will have preemptive rights to subscribe
for preferred shares only to the extent necessary to prevent dilution of their
overall interest in us.
88
New Provisions in the Brazilian Corporation Law
On October 31, 2001, Law 10,303, a legislative act modifying the Brazilian
Corporation Law, was enacted. The main goal of Law 10,303 is to broaden the
rights of minority shareholders.
Law 10,303 could have a material impact on the shares represented by
American depositary shares because it will, as of March 1, 2002:
o obligate our controlling shareholder to make a tender offer for
our shares if it increases its interest in our share capital to
a level that materially and negatively affects the liquidity of
our shares, as defined by the CVM.
o require any acquiror of control to make a tender offer for our
common shares at a price equal to 80% of the per share price
paid for the controlling block of shares;
o authorize us to redeem minority shareholders' shares if, after a
tender offer, our controlling shareholder increases its
participation in our total share capital to more than 95%.
o entitle dissenting or, in certain cases, non-voting
shareholders, to obtain redemption upon a decision to conduct a
spin-off that results in (a) change of our corporate purpose,
(b) a reduction in the mandatory dividend or (c) any
participation in a group of companies (as defined by the
Brazilian Corporation Law).
o require that preferred shares have one of the following
advantages in order to be listed and to trade on a stock
exchange: (i) priority in receipt of dividends, corresponding to
at least 3% of the book value per share (after this priority
condition is met, equal conditions apply to common shares); or
(ii) dividends 10% higher than those paid for common shares; or
(iii) tag-along right at 80% of the price paid to the
controlling shareholder in case of a transfer of control. We may
be required to amend our by-laws to contemplate one or ore of
these advantages which may affect the holders of our preferred
shares currently outstanding. No withdrawal rights will arise
from such amendment if it is made before December 31, 2002.
o entitle shareholders that are not a controlling shareholder but
that together hold
(i) preferred shares representing at least 10% of our total
share capital or
(ii) common shares representing at least 15% of our voting
capital;
o the right to appoint one member and an alternate to our board of
directors. If no group of common or preferred shareholders meets
the thresholds described above, shareholders holding preferred
or common shares representing at least 10% of our total share
capital are entitled to combined their holdings to appoint one
member and an alternate to our board of directors. Until 2005,
the board members that may be elected pursuant to (i) above or
by the combined holdings of holders of preferred and common
shares are to be chosen from a list of three names drawn up by
the controlling shareholder. Any such members elected by the
minority shareholders will have veto powers on the selection of
our independent auditors.
o require controlling shareholders, shareholders that appoint
members of our board of directors or fiscal council and members
of our board of directors, board of executive officers or fiscal
council to file immediately with the CVM and the stock exchanges
(or the over-the-counter markets on which our securities are
traded) a statement of any change in their shareholders.
o require us to send copies of the documentation we submit to our
shareholders in connection with shareholders meetings to the
stock exchanges on which our shares are most actively traded.
We are required to adapt our by-laws to these provisions by March 1, 2003.
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Form and Transfer
Our preferred shares and common shares are in book-entry form registered
in the name of each shareholder or its nominee. The transfer of such shares is
made under the Brazilian Corporation Law which provides that a transfer of
shares is effected by our transfer agent, Banco Bradesco S.A., upon
presentation of valid share transfer instructions to us by a transferor or its
representative. When preferred shares or common shares are acquired or sold on
a Brazilian stock exchange, the transfer is effected on the records of our
transfer agent by a representative of a brokerage firm or the stock exchange's
clearing system. Transfers of shares by a foreign investor are made in the same
way and are executed by the investor's local agent, who is also responsible for
updating the information relating to the foreign investment furnished to the
Central Bank.
The Sao Paulo stock exchange, known as BOVESPA, operates a central
clearing system through Companhia Brasileira de Liquidacao e Custodia, or CBLC.
A holder of our shares may participate in this system and all shares elected to
be put into the system will be deposited in custody with CBLC (through a
Brazilian institution that is duly authorized to operate by the Central Bank
and maintains a clearing account with CBLC). The fact that such shares are
subject to custody with the relevant stock exchange will be reflected in our
registry of shareholders. Each participating shareholder will, in turn, be
registered in the register of our beneficial shareholders that is maintained by
CBLC and will be treated in the same way as registered shareholders.
10.C. Material Contracts
None.
10.D. Exchange Controls and Other Limitations Affecting Security Holders
There are no restrictions on ownership of our capital stock by individuals
or legal entities domiciled outside Brazil. However, the right to convert
dividend payments and proceeds from the sale of preferred class A shares or
common shares into currency and to remit such amounts outside Brazil is subject
to restrictions under foreign investment legislation which generally requires,
among other things, that the relevant investment be registered with the Central
Bank. Foreign investors may register their investment under Law No. 4,131 of
September 3, 1962 or Resolution No. 2,689 of January 26, 2000 of the National
Monetary Council. Registration under Law No. 4,131 or Resolution No. 2,689
affords favorable tax treatment to foreign investors who are not resident in a
tax haven jurisdiction and defined by Brazilian tax laws (i.e. country that
does not impose income tax or where the maximum income tax rate is lower than
20%).
Under Resolution No. 2,689, foreign investors may invest in almost all
financial assets and engage in almost all transactions available in the
Brazilian financial and capital markets, provided that certain requirements are
fulfilled. In accordance with Resolution No. 2,689, the definition of foreign
investor includes individuals, legal entities, mutual funds and other
collective investment entities, domiciled or headquartered abroad.
Under Resolution No. 2,689, a foreign investor must:
o appoint at least one representative in Brazil, with powers to
perform actions relating to its investment,
o appoint an authorized custodian in Brazil for its investment,
o register as a foreign investor with the CVM, and
o register its foreign investment with the Central Bank.
Securities and other financial assets held by foreign investors pursuant
to Resolution No. 2,689 must be registered or maintained in deposit accounts or
under the custody of an entity duly licensed by the Central Bank or the CVM. In
addition securities trading is restricted to transactions carried out on the
Sao Paulo stock exchange or through organized over-the-counter markets licensed
by the CVM, except for transfers resulting from a corporate reorganization, or
occurring upon the death of an investor by operation of law or will.
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Resolution No. 1,927 of the National Monetary Council, which is the
restated and amended Annex V to Resolution No. 1,289, the Annex V Regulations,
provides for the issuance of depositary receipts in foreign markets in respect
of shares of Brazilian issuers. Accordingly, the proceeds from the sale of
American depositary shares by holders of American depositary receipts outside
Brazil are free of Brazilian foreign investment controls and holders of the
American depositary shares who are not resident in a tax haven jurisdiction
will be entitled to favorable tax treatment.
The right to convert dividend payments and proceeds from the sale of our
capital stock into foreign currency and to remit such amounts outside Brazil is
subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investment be registered with
the Central Bank. 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.
The custodian will obtain a certificate of registration in the name of
JPMorgan Chase Bank, the depositary. Pursuant to this certificate, the
custodian and the depositary are able to convert dividends and other
distributions with respect to the preferred class A shares 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 certificate of registration for only five business days
after the exchange. After that, the holder must seek to register its investment
directly with the Central Bank under Law No. 4,131 or Resolution No. 2,689.
Thereafter, unless the holder has registered its investment with the Central
Bank, 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. The holder generally will be
subject to less favorable Brazilian tax treatment than a holder of American
depositary shares. See Item 10.E. Taxation--Brazilian Tax Considerations.
There are two principal foreign exchange markets in Brazil:
o the commercial rate exchange market, and
o the floating rate exchange market.
Most trade and financial foreign-exchange transactions, including
transactions relating to the purchase or sale of shares or the payment of
dividends or interest with respect to shares, are carried out on the commercial
market. Only a Brazilian bank authorized to buy and sell currency in the
commercial market may effect purchases of foreign currencies in that market. In
both markets, rates are freely negotiated, but may be strongly influenced by
Central Bank intervention. See Item 3.A.3. Exchange Rates.
Under Brazilian law, whenever there is a serious imbalance in Brazil's
balance of payments or reasons to foresee a serious imbalance, the Brazilian
government may impose temporary restrictions on the remittance to foreign
investors of the proceeds of their investments in Brazil, and on the conversion
of Brazilian currency into foreign currencies. Such restrictions may hinder or
prevent the custodian or holders who have exchanged American depositary shares
for underlying preferred class A shares or common shares from converting
distributions or the proceeds from any sale of such shares, as the case may be,
into U.S. dollars and remitting such U.S. dollars abroad.
10.E. Taxation
The following summary contains a description of the principal Brazilian
and U.S. federal income tax consequences of the ownership and disposition of
preferred class A shares or American depositary shares. You should know that it
does not purport to be a comprehensive description of all the tax
considerations that may be relevant to a holder of preferred class A shares or
American depositary shares.
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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
shares.
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 to a holder who is not
domiciled in Brazil for purposes of Brazilian taxation and, to a holder of
preferred class A shares or common shares, who has registered his/her
investment in preferred class A shares or common shares with the Central Bank
as a U.S. dollar investment (in each case, a non-resident in Brazil holder). It
is based on the tax laws of Brazil and regulations thereunder in effect on the
date hereof, which are subject to change (possibly with retroactive effect).
Any change in such law may change the consequences we describe below. The
following discussion summarizes the principal tax consequences applicable under
current Brazilian law to non-Brazilian resident holders of preferred class A
shares, common shares, or American depositary shares; it does not specifically
address all of the Brazilian tax considerations applicable to any particular
non-Brazilian holder. Therefore, each non-Brazilian resident 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 (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 resident holder in respect of preferred class A shares or common
shares will not be subject to Brazilian withholding income tax for distribution
of profits earned as of January 1, 1996. Dividends paid from profits generated
before January 1, 1996 may be subject to taxation at varying rates, except in
case of stock dividends, which are not subject to withholding income tax in
Brazil unless we redeem the stock within five years from such distribution or
the non-Brazilian holder sells the stock in Brazil within this five-year
period.
Since January 1, 1996, Brazilian corporations may attribute interest on
shareholders' equity, which they may pay in cash. They base the calculation on
shareholders' equity as stated in the statutory accounting records. The
interest rate applied may not exceed the TJLP as determined by the Brazilian
Central Bank from time to time (in 2001 the annual rate was approximately
9.5%). Also, the amount paid may not be higher than the greater of (1) 50% of
net income (after the deduction of the provision of social contribution on net
profits but before taking into account such payment of interest and the
provision of corporate income tax) for the relevant period or (2) 50% of the
sum of retained earnings and profit reserves as of the beginning of the year in
respect of which the payment is made.
The amount of interest attributed to shareholders is deductible for
corporate income tax and social contribution on net profit purposes. Therefore,
the benefit to us, as opposed to making a dividend payment, is a reduction in
our corporate taxes charge equivalent to 34% of such amount. Subject to certain
limitations, income tax is withheld from the shareholders on interest payments
at the rate of 15%, except if the beneficiary is located in a tax haven
jurisdiction, in which case the applicable rate is 25%. As defined by Brazilian
law, a tax haven jurisdiction is a country that does not impose taxes on income
or where the maximum income tax is lower than 20%
Taxation of Gains. Regarding this issue, for purposes of Brazilian
taxation, two types of non-Brazilian residents should be considered: (1)
non-Brazilian holders that are not resident or domiciled in tax haven
jurisdictions, which are registered before the Central Bank and the CVM to
invest in Brazil in accordance with Resolution 2,689 or are holders of American
depositary shares; and (2) other non-Brazilian holders, which include any and
all non-residents in Brazil who invest in the country through any other means
and all type of investors that are located in a tax haven jurisdiction. The
investors identified in item (1) are subject to a favorable tax treatment, as
described below.
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Gains realized outside Brazil by a non-Brazilian resident holder on the
disposition of American depositary shares to another non-Brazilian resident
holder are not subject to Brazilian tax.
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
preferred class A shares or common shares are registered under Resolution 2,689
and the respective holder is not located in a tax haven jurisdiction. If the
preferred class A shares or common shares are not registered or if they are
registered but the respective holder is located in a tax haven jurisdiction,
the deposit of preferred class A shares or common shares in exchange for
American depositary shares may be subject to Brazilian capital gains tax at the
rate of 15%. The withdrawal of preferred class A shares or common shares in
exchange for American depositary shares is not subject to Brazilian income tax.
On receipt of the underlying preferred class A shares or common shares, a
non-Brazilian resident holder, registered under Resolution 2,689 may register
the U.S. dollar value of such shares with the Central Bank as described below
under --Registered Capital.
Non-Brazilian holders are not subject to tax in Brazil on gains realized
on sales of preferred class A shares or common shares that occur abroad to a
non-Brazilian resident. Non-Brazilian resident holders are subject to income
tax imposed at a rate of 15% on gains realized on sales or exchanges of
preferred class A shares or common shares that occur in Brazil or with a
resident of Brazil, other than Brazilian stock, future and commodities
exchange. With reference to proceeds of a redemption or of a liquidating
distribution with respect to the preferred class A shares or common shares, the
difference between the amount received and the amount of foreign currency
registered with the Central Bank, translated into reais at the commercial
market rate on the date of the redemption or liquidation distribution, will be
also subject to income tax at a rate of 15%, once such transactions are treated
as a sale or exchange carried out outside of the Brazilian stock, future
commodities exchange.
Gains realized arising from transactions on a Brazilian stock, future or
commodities exchange, by an investor under Resolution 2,689 and not located in
a tax haven jurisdiction are exempt from income tax. As of January 1, 2000, the
preferential treatment under Resolution 2,689 is no longer applicable if the
non-Brazilian holder of the American depositary shares or preferred class A
shares or common shares is resident in a tax haven jurisdiction in accordance
with Law 9,959 of January 27, 2000. As a consequence, gains realized on
transactions performed by such holder on Brazilian stock, futures or
commodities exchange are subject to income tax at a rate of 20%,.
Therefore, non-Brazilian resident holders are subject to income tax
imposed at a rate of 20%, on gains realized on sales or exchanges in the spot
market in Brazil of preferred class A shares or common shares that occur on a
Brazilian stock exchange unless such sale is made by a non-Brazilian holder who
is not resident in a tax haven jurisdiction and (1) such sale is made within
five business days of the withdrawal of such common shares in exchange for
American depositary shares and the proceeds thereof are remitted abroad within
such five-day period, or (2) such sale is made under Resolution 2,689 by
registered non-Brazilian holders who obtain registration with the Brazilian
securities commission.
The gain realized as a result of a transaction on a Brazilian stock
exchange is the difference between the amount in Brazilian currency realized on
the sale or exchange and the acquisition cost, without any correction for
inflation, of the shares sold. The gain realized as a result of a transaction
that does not occur on a Brazilian stock exchange will be calculated based on
the foreign currency amount registered with the Central Bank. It is possible
that the current preferential treatment for holders of American depositary
receipts and non-Brazilian holders of common shares under Resolution 2,689 will
not continue in the future.
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
sale or assignment of preemptive rights relating to the preferred class A
shares or common shares by the depositary that occurs abroad among
non-residents will not be subject to Brazilian taxation. In case such sale or
assignment is made to a Brazilian party, any gain on the transaction will be
subject to Brazilian income taxation according to the same rules applicable to
the sale or disposition of preferred class A shares or common shares, unless
such sale or assignment is performed within Brazilian stock exchanges and by an
investor under Resolution 2,689 who is not a resident in a tax haven
jurisdiction, in which the gains are exempt from income tax.
Taxation of Foreign Exchange Transactions (IOF/Cambio). Pursuant to Decree
2,219 of May 2, 1997, the conversion into Brazilian currency of proceeds
received by a Brazilian entity from a foreign investment in the Brazilian
securities market (including those in connection with an investment in
preferred shares or the American depositary
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shares and those under Resolution 2,689) and the conversion into foreign
currency of proceeds received by a non-Brazilian resident holder are subject to
a tax on exchange transactions known as IOF/Cambio, which is currently zero for
the transaction under analysis. However, according to Law 8,894/94, the
IOF/Cambio rate may be increased at any time to a maximum of 25% by a decision
of the Minister of Finance, but only in relation to future exchange
transactions.
Tax on Bonds and Securities Transactions (IOF/Titulos). Law 8,894/94,
created the Tax on Bonds and Securities Transactions, the IOF/Titulos, which
may be imposed on any transactions involving bonds and securities, even if
these transactions are performed on Brazilian stock, futures or commodities
exchanges. As a general rule, the rate of this tax is currently zero, although
the executive branch may increase such rate up to 1.5% per day, but only with
respect to future transactions.
Tax on Bank Accounts (CPMF). As a general rule, CPMF is imposed on any
debit to bank accounts, at a current rate of 0.38%. Although CPMF is set to
expire on June, 2002, the Brazilian government is discussing the possibility of
extending this period or converting this tax into a permanent tax.
Other Brazilian Taxes. There are no Brazilian inheritance, gift or
succession taxes applicable to the ownership, transfer or disposition of
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 within such state to individuals
or entities resident or domiciled within such state in Brazil. There are no
Brazilian stamp, issue, registration, or similar taxes or duties payable by
holders of preferred class A or common shares of American depositary shares.
Registered Capital. The amount of an investment in preferred class A
shares or common shares held by a non-Brazilian resident holder who obtains
registration under Resolution 2,689, or by the Depositary representing such
holder, is eligible for registration with the Central Bank; such registration
(the amount so registered is referred to as Registered Capital) allows the
remittance outside Brazil of foreign currency, converted at the commercial
market rate, acquired with the proceeds of distributions on, and amounts
realized with respect to disposition of, such preferred class A shares or
common shares.
The registered capital for each preferred class A share or common share
purchased in the form of an American depositary shares, or purchased in Brazil,
and deposited with the depositary in exchange for an American depositary share,
will be equal to its purchase price (in U.S. dollars) to the purchaser.
The registered capital for a preferred class A share or common shares that
is withdrawn upon surrender of an American depositary share will be the U.S.
dollar equivalent of:
(1) the average price of a preferred class A share or common shares on
the Brazilian stock exchange on which the greatest number of such
shares was sold on the day of withdrawal, or
(2) if no preferred class A shares were sold on that day, the average
price on the Brazilian stock exchange on which the greatest number of
preferred class A shares or common shares were sold in the fifteen
trading sessions immediately preceding such withdrawal.
The U.S. dollar value of the preferred class A shares or common shares is
determined on the basis of the average commercial market rates quoted by the
Central Bank on such date (or, if the average price of preferred class A shares
or common shares is determined under clause (2) of the preceding sentence, the
average of such average quoted rates on the same fifteen dates used to
determine the average price of the preferred class A shares or common shares).
A non-Brazilian resident holder of preferred class A shares or common
shares may experience delays in completing such registration which may delay
remittances abroad. Such a delay may adversely affect the amount, in U.S.
dollars, received by the non-Brazilian holder.
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U.S. Federal Income Tax Considerations
This discussion only applies to U.S. holders, as defined below, who hold
their preferred class A shares or common shares or American depositary shares
as capital assets. This discussion does not describe all of the tax
consequences that may be relevant in light of a holder's particular
circumstances or to holders subject to special rules, such as:
o certain financial institutions,
o insurance companies,
o dealers or traders in securities or foreign currencies,
o persons holding preferred class A shares, common shares or
American depositary shares as part of a hedge, straddle,
conversion or other integrated transaction,
o holders whose functional currency is not the U.S. dollar,
o partnerships or other entities classified as partnerships for
U.S. federal income tax purposes,
o persons subject to the alternative minimum tax, or
o 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:
o a citizen or resident alien individual of the United States,
o a corporation created or organized in or under the laws of the
United States or of any political subdivision thereof, or
o an estate or trust the income of which is subject to United
States federal income taxation regardless of its source.
The term United States holder also includes certain former citizens of the
United States.
In general, for U.S. federal income tax purposes, holders of American
depositary receipts evidencing American depositary shares will be treated as
the beneficial owners of the preferred class A shares 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 purposes.
Taxation of Dividends. Subject to the discussion under --Passive Foreign
Investment Company Rules below, 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.
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You will be required to include dividends paid in reais in income in an
amount equal to their U.S. dollar value calculated by reference to an exchange
rate in effect on the date such items are received. If you hold American
depositary shares, you will be considered to receive a dividend when the
dividend is received by the depositary.
Subject to generally applicable limitations and restrictions, you will be
entitled to a credit against your United States federal income tax liability,
or a deduction in computing your U.S. federal taxable income, for Brazilian
income taxes withheld by us. You must satisfy minimum holding period
requirements to be eligible to claim a foreign tax credit for Brazilian taxes
withheld on dividends. The limitation on foreign taxes eligible for credit is
calculated separately for specific classes of income. For this purpose
dividends paid by us on our shares will generally constitute "passive income."
The U.S. Treasury has expressed concerns that parties to whom depositary
receipts such as the American depositary receipts are released may be taking
actions that are inconsistent with the claiming of foreign tax credits by
United States holders of such depositary receipts. Accordingly, the
creditability of Brazilian taxes described above could be affected by actions
that may be taken by the U.S. Treasury.
Taxation of Capital Gains. Subject to the discussion under --Passive
Foreign Investment Company Rules below, 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 American depositary shares or ordinary
shares exceeds one year. 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 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, preferred 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
--Brazilian Tax Considerations--Taxation of Gains.
Passive Foreign Investment Company Rules
We believe that we will not be considered a passive foreign investment
company for U.S. federal income tax purposes. Passive foreign investment
company status depends on a foreign company not earning more than a permitted
amount of gross income that is considered "passive income" and not holding more
than a permitted percentage of assets, determined by value, that produce or are
held to produce passive income. For these purposes, a company is treated as
earning and holding its pro rata share of the income and assets of any
corporation in which it owns, directly or indirectly, 25% of the stock, by
value. Since this test depends on the composition of a company's income and
assets, and market value of those assets, from time to time, and it is unclear
whether certain of our income and assets would be associated with "commodities
transactions" that would not be considered "qualified active sales," there can
be no assurance that we will not be considered a passive foreign investment
company for any taxable year. If we were treated as a passive foreign
investment company for any taxable year during which a U.S. Holder held an
American depositary share, preferred Class A share or common share, certain
adverse consequences could apply to the U.S. holder.
If we are treated as a passive foreign investment company for any taxable
year and a U.S. holder does not make the mark to market election described
below, gain recognized by such U.S. holder on a sale or other disposition of
the American depositary shares of preferred Class A shares or common shares
would be allocated ratably over the U.S. holder's holding period for the
American depositary shares, preferred Class A shares or common shares. The
amounts allocated to the taxable year of the sale or other exchange and to any
year before we became a passive foreign investment company would be taxed as
ordinary income. The amount allocated to each other taxable year would be
subject to tax at the highest rate in effect for individuals or corporations,
as appropriate, and an interest charge would be imposed on the amount allocated
to such taxable year. Further, any distribution in respect of American
depositary shares, preferred Class A shares or common shares in excess of 125
percent of the average of the annual distributions on American depositary
shared or common shares received by the U.S. holder during the
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preceding three years or the U.S. holder's holding period, whichever is
shorter, would be subject to taxation and an interest charge in the manner
described above.
If we are treated as a passive foreign investment company and the
preferred Class A shares or common shares or American depositary shares are
regularly traded on a "qualified exchange," a U.S. holder may make a
mark-to-market election. A "qualified exchange' includes a foreign exchange
that is regulated by a governmental authority in which the exchange is located
and with respect to which certain other requirements are met. The IRS has not
yet identified specific foreign exchanges that are "qualified" for this
purpose. The New York Stock Exchange, on which the American depositary shares
are expected to be traded, is a qualified exchange for U.S. federal income tax
purposes.
A U.S. holder that makes the election generally will include each year as
ordinary income the excess, if any, of the fair market value of the American
depositary shares, preferred Class A shares or common shares at the end of the
taxable year over their adjusted basis, and will be permitted an ordinary loss
in respect of the excess, if any, of the adjusted basis of the American
depositary shares, preferred Class A shares or common shares over their fair
market value at the end of the taxable year (but only to the extent of the net
amount of previously included income as a result of the mark-to-market
election). The basis of a U.S. holder that makes the election in the American
depositary shares, preferred Class A shares or common shares will be adjusted
to reflect any such income or loss amounts. Any gain recognized on the sale or
other disposition of American depositary shares, preferred Class A shares or
common shares will be treated as ordinary income.
If a U.S. holder owns shares or American depositary shares, preferred
Class A shares or common shares during a year in which we are considered a
passive foreign investment company, the U.S. holder must file Internal Revenue
Service Form 8621.
Prospective U.S. holders are urged to consult their tax advisers
concerning the consequences to them if we were considered to be a passive
foreign investment company.
Information Reporting and Backup Withholding
Information returns may be filed with the Internal Revenue Service in
connection with distributions on the preferred class A shares or American
depositary shares and the proceeds from their sale or other disposition. You
may be subject to United States backup withholding tax on these payments if you
fail to provide your taxpayer identification number or comply with certain
certification procedures or otherwise establish an exemption from backup
withholding. The amount of any backup withholding from a payment to you will be
allowed as a credit against your U.S. federal income tax liability and may
entitle you to a refund, provided that the required information is furnished to
the Internal Revenue Service.
10.F. Dividends and Paying Agents
For detailed information regarding dividend entitlement and distribution,
see Item 8.A.8. Dividend Distributions and Item 10.B. Memorandum and Articles
of Association--Mandatory Dividend,--Dividend Preference of Preferred Shares
and--Payments on Shareholders' Equity.
The depositary is JPMorgan Chase Bank, which has its principal office
located in New York, New York. JPMorgan Chase Bank is a commercial bank
offering a wide range of banking and trust services to its customers in the New
York metropolitan area, throughout the United States and around the world.
10.G. Statement by Experts
Our consolidated financial statements as of December 31, 2001 and 2000 and
for each of the three years in the period ended December 31, 2001 have been
included in this annual report in reliance upon the report of
PricewaterhouseCoopers Auditores Independentes, independent accountants, given
on the authority of said firm as experts in auditing and accounting. The
financial statements of Vale Overseas as of December 31, 2001 have been
included in this annual report in reliance upon the report of
PricewaterhousCoopers Auditores Independentes, independent accountants, given
on the authority of said firm as experts in auditing and accounting. The
financial statements of certain of our subsidiaries and affiliates, not
separately included in this annual report, have been audited
97
by various independent accountants other than PricewaterhouseCoopers Auditores
Independentes. The companies and periods covered by these audits are indicated
in the individual accountants' reports appearing in this annual report. These
financial statements, to the extent they have been included in our consolidated
financial statements, have been included in reliance on the reports of the
various independent accountants given on the authority of said firms as experts
in auditing and accounting.
We have engaged AMEC Engineering and Construction Services, or AMEC
(formerly MRDI), experts in geology, mining and ore reserve determination, to
perform an audit of our estimates of proven and probable reserves and mine life
at December 31, 2001. The estimates of proven and probable reserves and mine
life as presented herein have been audited and verified by AMEC, which has
indicated that our proven and probable reserves have been estimated in
accordance with good engineering practices, using current reasonable cost
estimates. Reserves classified as "other mineral deposits" have not been
audited by AMEC.
10.H. Documents on Display
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended, and in accordance therewith file reports and other
information with the Commission. Reports and other information filed by us with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 233 Broadway, New York,
New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may obtain copies of these materials by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. You may inspect these
reports and other information at the offices of the New York Stock Exchange, 11
Wall Street, New York, New York 10005, on which our American depositary shares
are listed.
We file financial statements and other periodic reports with the CVM.
As a foreign private issuer, we are not subject to the proxy rules of
Section 14 of the Securities Exchange Act of 1934 or the insider short-swing
profit reporting requirements of Section 16 of that Act.
10.I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks we face are interest rate risk, exchange rate
risk and commodity price risk. We manage some of these risks through the use of
derivative instruments. Our policy has been to settle all contracts in cash
without physical delivery of product.
Our risk management activities follow policies and guidelines that our
board of directors reviewed and approved. These policies and guidelines
generally prohibit speculative trading and short selling and require
diversification of transactions and counter-parties. We monitor and evaluate
our overall position daily in order to evaluate financial results and impact on
our cash flow. We also periodically review the credit limits and
creditworthiness of our hedging counter-parties. We report the results of our
hedging activities to senior management on a monthly basis.
Interest Rate and Exchange Rate Risk
The table below sets forth our floating and fixed rate long-term debt,
categorized by local and foreign currency, and as a percentage of our total
long-term debt portfolio at the dates indicated, including loans from both
related and unrelated parties, as reflected in our consolidated financial
statements.
98
At December 31,
-------------------------------------
2000 2001
---------------- -----------------
(in millions of US$, except percentages)
Floating rate debt
Real-denominated..................... US$ 167 8.3% US$ 116 5.5%
Foreign currency denominated......... 1,070 52.9 1.234 58.7
Fixed rate debt
Real-denominated.................... -- -- 4 0.2
Foreign currency denominated........ 783 38.8 748 35.6
-------- ---- -------- ----
Total.................................. US$2,020 100% US$2.102 100%
======== ==== ======== ====
The table below provides information about our debt obligations as of
December 31, 2001, which are sensitive to changes in interest rates and
exchange rates. The table presents the principal cash flows and related
weighted-average interest rates of these obligations by expected maturity date.
Weighted-average variable interest rates are based on the applicable reference
rate (LIBOR or TJLP) at December 31, 2001. The debt obligations' actual cash
flows are denominated in U.S. dollars or Brazilian reais, as indicated.
Fair
Value Fair
Cash Value
Flow at Accounting
to December December
Rate 2003 2004 2005 2006 2012 Total 31, 2001 31, 2001
-------- ------ ------ ------ ------ ------ ------- -------- ----------
U.S. dollar-denominated:
Fixed rate
Bonds.......................... 9.375% $209 $ 0 $ 0 $ 0 $ 0 $ 209 $ 209 $ 175
Bonds.......................... 10.00% 0 317 0 0 0 317 317 256
Loan........................... up to 7% 13 21 23 25 106 188 188 211
Loan........................... over 7% 16 16 36 12 36 116 116 106
---- ---- ---- ---- ---- ------ ------ ------
238 354 59 37 142 830 830 748
Floating rate
Loan........................... up to 7% 325 312 141 90 124 992 992 1,135
Loan........................... over 7% 73 6 5 5 0 89 89 99
---- ---- ---- ---- ---- ------ ------ ------
398 318 146 95 124 1,081 1,081 1,234
---- ---- ---- ---- ---- ------ ------ ------
Subtotal........................ $636 $672 $205 $132 $266 $1,911 $1,911 $1,982
---- ---- ---- ---- ---- ------ ------ ------
Real-denominated:
Fixed rate
Loan up to 7%................ 0 0 0 0 3 3 3 3
Loan over 7%................. 0 1 0 0 0 1 1 1
---- ---- ---- ---- ---- ------ ------ ------
0 1 0 0 3 4 4 4
Floating rate
Loan........................... up to 7% 12 12 4 0 0 28 28 39
Loan........................... over 7% 32 4 4 2 3 45 45 77
---- ---- ---- ---- ---- ------ ------ ------
$ 44 $ 16 $ 8 $ 2 $ 3 $ 73 $ 73 $ 116
Subtotal........................ $ 44 $ 17 $ 8 $ 2 $ 6 $ 77 $ 77 $ 120
---- ---- ---- ---- ---- ------ ------ ------
Total........................... $680 $689 $213 $134 $272 $1,988 $1,988 $2,102
---- ---- ---- ---- ---- ------ ------ ------
Interest Rate Risk
We are exposed to interest rate risk in our floating-rate debt. Our
long-term floating-rate debt consists principally of U.S. dollar denominated
notes and borrowings which we have incurred primarily in connection with
capital expenditures, and investments in and loans to joint ventures and
affiliated companies. Our short-term floating-rate debt consists principally of
U.S. dollar denominated trade financing. In general, our foreign currency
floating rate debt is
99
principally subject to changes in the London Interbank Offered Rate, or LIBOR.
Our floating rate debt denominated in reais is principally subject to changes
in the TJLP, as fixed by the Central Bank.
Our interest rate derivatives portfolio generally consists of option
trades which aim to cap our exposure to interest rate fluctuations. A cap is
the maximum rate we will be required to pay on the notional amount of the debt.
Conversely, a floor is the minimum rate we will be required to pay on the
notional amount of the debt. Certain caps are subject to knock-out provisions
which, if triggered, eliminate the protection provided by the cap.
The table below sets forth certain information with respect to our
interest rate derivatives portfolio at December 31, 2000 and 2001:
At December 31, 2000 At December 31, 2001
------------------------------- ----------------------------------------
Notional Unrealized Notional Unrealized Final
Type Value Rate Range gain (loss) Value Rate Range gain (loss) maturity
------------------------------- -------- ---------- ----------- -------- ---------- ----------- --------
(In millions of US$, except rate ranges)
Cap............................ $1,200 5-8% $ 3 $1,375 5.8% $ 2 12/2004
Floor.......................... 850 5-6.5 (7) 1,000 5-6.5 (28) 12/2004
Swap........................... 125 5.5-7.5 (4) 125 5.5-7.5 (10) 10/2007
---- ----
$(8) $(36)
=== ====
The unrealized loss in the amount of US$36 million represents the amount
payable if all transactions had been settled on December 31, 2001.
Exchange Rate Risk
Our long-term debt is primarily denominated in foreign currencies,
principally the U.S. dollar. Because our revenues are primarily
dollar-denominated, we do not believe that the high incidence of
dollar-denominated debt in our long-term debt portfolio exposes us to an undue
amount of exchange rate risk.
However, a portion of our indebtedness is also denominated in euros and in
Japanese yen, and we use derivatives instruments to protect ourselves against
specific risks associated with exchange rate movements in these foreign
currencies.
The table below sets forth certain information with respect to our
exchange rate derivatives portfolio at December 31, 2000 and 2001. These
derivatives are structured forwards that we have purchased, which will require
us to purchase foreign currencies as specified below:
At December 31, 2000 At December 31, 2001
---------------------------------- ----------------------------------------
Notional Unrealized Notional Unrealized Final
Value Rate Range gain (loss) Value Rate Range gain (loss) maturity
-------- ------------- ----------- -------- ------------ ----------- --------
(In millions of US$, except rate ranges)
Yen purchased......... $ 15 yen70-110 $ (2) $ 5 yen70-110 $ (2) 4/2005
per US$ per US$
Euro purchased......... 12 US$1.10-1.30 (2) 8 US$ 1.10-1.30 (2) 4/2005
per US$ ------ per US$ -----
$ (4) $ (4)
====== =====
The unrealized losses in the amounts of US$4 million and US$4 million
represent the amounts payable if all transactions had been settled on December
31, 2000 and December 31, 2001, respectively.
Commodity Price Risk
We are also exposed to various market risks relating to the volatility of
world market prices for:
o iron ore, which represented 62.9% of our 2001 consolidated
revenues,
100
o aluminum, which represented 6.9% of our 2001 consolidated
revenues, and
o gold, which represented 3.4% of our 2001 consolidated revenues.
We do not enter into derivatives transactions to hedge our iron ore
exposure. See Item 5.D. Trend Information--Prices.
To manage the risk associated with fluctuations in aluminum prices, our
affiliates Albras and Alunorte engage in hedging transactions involving put and
call options, as well as forward contracts. These derivative instruments allow
Albras and Alunorte to establish minimum average profits for their future
aluminum production in excess of their expected production costs and therefore
ensure stable cash generation. However, they also have the effect of reducing
potential gains from price increases in the spot market for aluminum.
The table below sets forth certain information with respect to Albras's
derivatives portfolio at December 31, 2001 and 2000. We have a 51% voting
capital interest and a 51% total capital interest in Albras.
At December 31, 2000 At December 31, 2001
------------------------------------- ------------------------------------------
Unrealized Unrealized
Notional gain Notional Price gain Final
Type Value Price Range (loss) Value Range (loss) maturity
------------------------------- --------- ------------- ---------- --------- ---------- ---------- --------
(In (In
(Tons of millions (Tons of (US$ per millions
aluminum) (US$ per ton) of US$) aluminum) ton) of US$)
Puts purchased 42,000 1,400-1,000 $ 2.0 80,000 1,400-1600 $ 9.5 12/2001
Forwards sold 67,189 1,500-1,700 (1.4) 57,000 1,400-1600 7.7 12/2006
Calls sold 123,000 1,500-1,700 (5.5) 56,000 1,600-1800 (0.9) 03/2002
Other instruments -- -- -- 132,000 -- (2.7)
-------- ------
$ (4.9) $ 13.6
======== ======
The table below sets forth certain information with respect to
Alunorte's derivatives portfolio of December 31, 2001 and 2000. We have a 50.3%
voting capital interest and a 49.3% total capital interest in Alunorte.
At December 31, 2000 At December 31, 2001
------------------------------------- ------------------------------------------
Unrealized Unrealized
Notional gain Notional Price gain Final
Type Value Price Range (loss) Value Range (loss) maturity
------------------------------- --------- ------------- ---------- --------- ---------- ---------- --------
(In (In
(Tons of millions (Tons of (US$ per millions
aluminum) (US$ per ton) of US$) aluminum) ton) of US$)
Puts purchased 96,000 1,400-1,600 $ 3.8 15,000 1,400-1,600 $ 2.4 12/2002
Forwards sold 51,000 1,600-1,800 (0.3) 26,000 1,400-1,600 4.4 12/2002
Calls sold 157,500 1,500-1,700 (5.1) 23,000 1,600-1,800 -- 12/2002
Other instruments 36,000 0.2 74,000 (1.6) 10/2003
-------- --------
$ (1.4) $ 5.2
======== ========
To manage the risk associated with fluctuations in gold prices, we enter
into derivative instruments which allow us to establish a minimum profit level
for future gold production. However, they may also have the effect of
eliminating potential gains on certain price increases in the spot market for
gold.
The table below sets forth certain information with respect to our gold
derivatives portfolio at December 31, 2000.
At December 31, 2000
--------------------------
Unrealized
Quantity Price Range gain (loss) Final maturity
-------- ----------- ----------- --------------
(in millions
(oz.) (US$ per oz.) of US$)
Puts purchased................ 479,500 300-375 US$ 13 12/2005
Calls sold.................... 999,800 308-375 (5) 12/2005
Other instruments............. 30,000 1 11/2005
---------
US$ 9
=========
101
The unrealized gain in the amount of US$8 million represents the amount
receivable if all transactions had been settled on December 31, 2001.
The table below sets forth certain information with respect to our gold
derivatives portfolio at December 31, 2001.
At December 31, 2001
--------------------------
Unrealized
Type Quantity Price Range gain (loss) Final maturity
--------------------- -------- ----------- ----------- -------------
(US$ per (in millions
(oz.) oz.) of US$)
Puts purchased........ 422,000 270-340 US$ 11 12/2005
Calls sold............ 718,000 308-366 (3) 12/2005
Other Instruments..... 25,000 -- 11/2005
--------
US$ 8
========
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds
None.
Item 15. [Reserved]
Item 16. [Reserved]
Item 17. Financial Statements
The Registrant has responded to Item 18 in lieu of responding to this
Item.
102
PART III
Item 18. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements of CVRD....................... F-1
Report of PricewaterhouseCoopers Auditores Independentes
dated March 28, 2002 regarding CVRD for the three years ended
December 31, 2001, 2000 and 1999..................................... F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000............. F-3
Consolidated Statements of Income for the three years ended
December 31, 2001, 2000 and 1999..................................... F-5
Consolidated Statements of Cash Flows for the three years ended
December 31, 2001, 2000 and 1999..................................... F-6
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 2001, 2000 and 1999............... F-7
Notes to Consolidated Financial Statements............................... F-8
Index to Financial Statements of Vale Overseas........................... F-41
Report of PricewaterhouseCoopers Auditores Independentes
dated March 26, 2002 regarding Vale Overseas for the year
ended December 31, 2001.............................................. F-42
Balance Sheet as of December 31, 2001.................................... F-43
Notes to Balance Sheet................................................... F-44
INDEX TO AUDIT REPORTS FROM INDEPENDENT ACCOUNTANTS LISTED
IN NOTE 20 TO OUR CONSOLIDATED FINANCIAL STATEMENTS
Index to Audit Reports................................................... B-1
Report of Deloitte Touche Tohmatsu dated January 24, 2002 with
respect to the financial statements of Albras for the three years
ended December 31, 2001, 2000 and 1999............................... B-3
Report of Deloitte Touche Tohmatsu dated January 24, 2002 with
respect to the financial statements of Alunorte for the three
years ended December 31, 2001, 2000 and 1999......................... B-4
Report of Deloitte Touche Tohmatsu dated January 25, 2002 with
respect to the financial statements of Aluvale for the three
years ended December 31, 2001, 2000 and 1999......................... B-5
Report of KPMG LLP dated February 6, 2001 with respect to the financial
statements of Bahia Sul Celulose S.A. for the two years ended
December 31, 2000 and 1999........................................... B-6
Report of KPMG LLP dated January 21, 2002 with respect to the financial
statements of CSI for the three years ended December 31, 2001, 2000
and 1999............................................................. B-7
Reports of Deloitte Touche Tomahtsu dated January 25, 2002 and January 21,
2000 with respect to the financial statements of Cenibra for the
three years ended December 31, 2001, 2000 and 1999................... B-8
Report of Deloitte Touche Tohmatsu dated January 25, 2002 with respect to
the financial statements of Docenave for the three years ended
December 31, 2001, 2000 and 1999..................................... B-11
Reports of Deloitte Touche Tohmatsu dated January 25, 2002 and February
18, 2000 with respect to the financial statements of Docepar for the
two years ended December 31, 2001, 2000 and 1999..................... B-12
103
Report of Arthur Andersen S/C dated January 24, 2002 with respect to the
financial statements of Hispanobras for the three years ended
December 31, 2001, 2000 and 1999..................................... B-14
Report of Arthur Andersen S/C dated January 24, 2002 with respect to the
financial statements of Itabrasco for the three years ended December
31, 2001, 2000 and 1999 ............................................. B-15
Report of Deloitte Touche Tohmatsu dated January 18, 2002 with respect to
the financial statements of Kobrasco for the two years ended December
31, 2001 and 2000 ................................................... B-16
Report of Arthur Andersen S/C dated January 25, 2002 with respect to
the financial statements of MRN for the three years ended December
31, 2001, 2000 and 1999 ............................................. B-17
Report of Deloitte Touche Tohmatsu dated January 18, 2002 with respect to
the financial statements of Nibrasco for the three years ended
December 31, 2001, 2000 and 1999 .................................... B-18
Report of KPMG Auditores Independentes dated January 17, 2002 with
respect to the financial statements of Valesul for the three years
ended December 31, 2001, 2000 and 1999 .............................. B-19
Reports of Deloitte Touche Tohmatsu dated January 30, 2002 and
February 2, 2001 with respect to financial statements of Terminal
Vila Velha S.A for the three years ended December 31, 2001, 2000,
and 1999 (English Version) .......................................... B-20
Report of Deloitte Touche Tohmatsu dated January 25, 2002 with respect
to financial statements of Nova Era Silicon S.A. for the two years
ended December 31, 2001 and 2000 (English Version) .................. B-22
Report of Trevisan dated January 18, 2000 with respect to financial
statements of Nova Era Silicon S.A. for the two years ended
December 31, 1999 and 1998 (English Version) ........................ B-24
Report of Deloitte Touche Tohmatsu dated January 25, 2002 with respect
to financial statements of Celmar S.A.-Industria de Celulose e
Papel for the two years ended December 31, 2001 and 2000 (English
Version) ............................................................ B-26
Report of Deloitte Touche Tohmatsu dated February 15, 2002 with
respect to financial statements of SIBRA Eletrosiderurgica
Brasileira S.A. for the two years ended December 31, 2001 and 2000 .. B-27
Item 19. Exhibits
We file the following documents as part of this annual report:
Exhibit Number
--------------
1 Instrument corresponding to Articles of Incorporation and
By-laws, as revised on May 20, 2002 (English translation).
8 List of Subsidiaries.
10.1 Consent of PricewaterhouseCoopers Auditores Independentes for
the three years ended December 31, 2001, 2000 and 1999
(CVRD).
10.2 Consent of PricewaterhouseCoopers Auditores Independentes for
the year ended December 31, 2001 (Vale Overseas)
10.3 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Albras).
104
10.4 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Alunorte).
10.5 Consent of Deloitte Touche Tohmatsu for the three years
ended December 31, 2001, 2000 and 1999 (Aluvale).
10.6 Consent of KPMG Auditores Independentes for the two years
ended December 31, 2000 and 1999 (Bahia Sul).
10.7 Consent of KPMG LLP for the three years ended December 31,
2001, 2000 and 1999 (CSI).
10.8 Consents of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Cenibra).
10.9 Consent of Deloitte Touche Tohmatsu for the three years
ended December 31, 2001, 2000 and 1999 (Docenave).
10.10 Consents of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Docepar).
10.11 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2001 and 2000 (Kobrasco).
10.12 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Nibrasco).
10.13 Consent of KPMG Auditores Independentes for the three years
ended December 31, 2001, 2000, and 1999 (Valesul).
10.14 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (CSN).
10.15 Consents of Deloitte Touche Tohmatsu for the three years
ended December 31, 2001, 2000 and 1999. (Terminal Vila Velha
S.A.).
10.16 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2001 and 2000. (Nova Era Silicon S.A.).
10.17 Consent of Trevisan for the year ended December 31, 1999.
(Nova Era Silicon S.A.).
10.18 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2001 and 2000. (Celmar S.A.-Industria de
Celulose e Papel).
10.19 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2001 and 2000. (SIBRA Eletrosiderurgica
Brasileira S.A.).
10.20 Consent of AMEC Engineering and Construction Services.
10.21 Letter from CVRD regarding auditing by Arthur Andersen
105
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all the requirements for filing
this Annual Report on Form 20-F and has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COMPANHIA VALE DO RIO DOCE
By: /s/ Gabriel Stoliar
---------------------------------
Name: Gabriel Stoliar
Title: Director
By: /s/ Antonio Miguel Marques
---------------------------------
Name: Antonio Miguel Marques
Title: Director
VALE OVERSEAS LIMITED
By: /s/ Gabriel Stoliar
---------------------------------
Name: Gabriel Stoliar
Title: Director
By: /s/ Francisco Rohan de Lima
---------------------------------
Name: Francisco Rohan de Lima
Title: Director
Date: June 28, 2002
106
COMPANHIA VALE DO RIO DOCE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of PricewaterhouseCoopers Auditores Independentes.................. F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.............. F-3
Consolidated Statements of Income for the three years
ended December 31, 2001, 2000 and 1999.................................. F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 2001, 2000 and 1999.................................. F-6
Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 2001, 2000 and 1999.................. F-7
Notes to the Consolidated Financial Information........................... F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Companhia Vale do Rio Doce
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of income, of cash flows and of changes in stockholders' equity,
present fairly, in all material respects, the financial position of Companhia
Vale do Rio Doce and its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the financial statements of certain affiliates, the investments in
which total US$441 million and US$1,188 million at December 31, 2001 and 2000,
respectively, and equity in earnings of US$53 million, US$213 million and US$42
million for 2001, 2000 and 1999, respectively. Also, we did not audit the
financial statements of the majority-owned shipping and ferrous alloys
subsidiaries as at and for the years ended December 31, 2001, 2000 and 1999,
which statements reflect total assets of US$500 million and US$584 million at
December 31, 2001 and 2000, respectively, and total revenues of US$407 million,
US$480 million and US$177 million for 2001, 2000 and 1999, respectively. The
financial statements of these affiliates and subsidiaries were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts for these affiliates and
subsidiaries, is based solely on the reports of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
Auditores Independentes
Rio de Janeiro, Brazil
March 28, 2002
F-2
Consolidated Balance Sheets
Expressed in millions of United States dollars
As of December 31
-------------------------
2001 2000
---------- ----------
Assets
Current assets
Cash and cash equivalents ................................ 1,117 1,211
Accounts receivable
Related parties ....................................... 106 125
Unrelated parties ..................................... 443 365
Loans and advances to related parties .................... 160 121
Inventories .............................................. 323 306
Deferred income tax ...................................... 265 89
Others ................................................... 224 285
---------- ----------
2,638 2,502
---------- ----------
Property, plant and equipment, net ............................ 3,813 3,955
Investments in affiliated companies and
joint ventures and other investments ..................... 1,227 1,816
Provision for losses on equity investments .................... (9) (21)
Other assets
Goodwill on acquisition of consolidated subsidiaries ..... 540 175
Loans and advances
Related parties ....................................... 555 704
Unrelated parties ..................................... 100 52
Unrecognized pension obligation .......................... 14 125
Prepaid pension cost ..................................... 99 -
Deferred income tax ...................................... 227 255
Judicial deposits ........................................ 235 173
Unrealized gain on derivative instruments ................ 7 -
Others ................................................... 76 59
---------- ----------
1,853 1,543
---------- ----------
TOTAL ......................................................... 9,522 9,795
========== ==========
F-3
Consolidated Balance Sheets
Expressed in millions of United States dollars (Continued)
As of December 31
-------------------------
2001 2000
---------- ----------
Liabilities and stockholders' equity
Current liabilities
Suppliers .......................................................................... 296 321
Payroll and related charges ........................................................ 85 51
Interest attributed to stockholders ................................................ 340 657
Current portion of long-term debt
Related parties ................................................................. 22 30
Unrelated parties ............................................................... 274 250
Short-term debt .................................................................... 589 465
Loans from related parties ......................................................... 168 152
Others ............................................................................. 147 210
---------- ----------
1,921 2,136
---------- ----------
Long-term liabilities
Employees postretirement benefits .................................................. 187 591
Long-term debt
Related parties ................................................................. 156 128
Unrelated parties ............................................................... 2,014 1,892
Loans from related parties ......................................................... 21 21
Provisions for contingencies (Note 15) ............................................. 452 338
Unrealized loss on derivative instruments .......................................... 40 -
Others ............................................................................. 86 111
---------- ----------
2,956 3,081
---------- ----------
Minority interests .................................................................... 5 9
---------- ----------
Stockholders' equity
Preferred class A stock - 600,000,000
no-par-value shares authorized and 138,575,913 issued ........................... 820 709
Common stock - 300,000,000 no-par-value
shares authorized and 249,983,143 issued ........................................ 1,479 1,279
Treasury stock - 91 (2000 - 3,659,311) preferred and 4,715,170 common shares ....... (88) (61)
Additional paid-in capital ......................................................... 498 498
Other cumulative comprehensive income .............................................. (3,465) (3,040)
Appropriated retained earnings ..................................................... 3,212 3,537
Unappropriated retained earnings ................................................... 2,184 1,647
---------- ----------
4,640 4,569
---------- ----------
TOTAL ................................................................................. 9,522 9,795
========== ==========
See notes to consolidated financial information.
F-4
Consolidated Statements of Income
Expressed in millions of United States dollars
(except number of shares and per-share amounts)
Year ended December 31
----------------------------------------
2001 2000 1999
---------- ---------- ----------
Operating revenues, net of discounts, returns and allowances
Sales of ores and metals
Iron ore and pellets .......................................... 2,600 2,177 1,694
Gold .......................................................... 139 156 155
Others ........................................................ 426 412 175
---------- ---------- ----------
3,165 2,745 2,024
Revenues from transportation services ............................ 608 760 642
Aluminum products ................................................ 284 362 363
Other products and services ...................................... 75 202 128
---------- ---------- ----------
4,132 4,069 3,157
Value-added tax .................................................. (142) (134) (81)
---------- ---------- ----------
Net operating revenues ........................................... 3,990 3,935 3,076
---------- ---------- ----------
Operating costs and expenses
Cost of ores and metals sold ..................................... (1,605) (1,423) (996)
Cost of transportation services .................................. (378) (481) (368)
Cost of aluminum products ........................................ (269) (334) (323)
Others ........................................................... (75) (191) (119)
---------- ---------- ----------
(2,327) (2,429) (1,806)
Selling, general and administrative expenses ..................... (241) (225) (138)
Research and development ......................................... (43) (48) (27)
Employee profit sharing plan ..................................... (38) (29) (24)
Others ........................................................... (412) (278) (165)
---------- ---------- ----------
(3,061) (3,009) (2,160)
---------- ---------- ----------
Operating income .................................................... 929 926 916
---------- ---------- ----------
Non-operating income (expenses)
Financial income ................................................. 135 208 200
Financial expenses ............................................... (335) (315) (233)
Foreign exchange and monetary losses, net ........................ (393) (142) (213)
Gain on sale of investments ...................................... 784 54 -
---------- ---------- ----------
191 (195) (246)
---------- ---------- ----------
Income before income taxes, equity results and minority interests ... 1,120 731 670
---------- ---------- ----------
Income taxes
Current .......................................................... 46 (10) -
Deferred ......................................................... 172 42 (33)
---------- ---------- ----------
218 32 (33)
---------- ---------- ----------
Equity in results of affiliates and joint ventures .................. (49) 260 41
Change in provision for losses on equity investments ................ (4) 62 (268)
Minority interests .................................................. 2 1 2
---------- ---------- ----------
Net income .......................................................... 1,287 1,086 412
========== ========== ==========
Basic earnings per Common and Preferred Class A Share ............... 3.34 2.82 1.07
---------- ---------- ----------
Weighted average number of shares outstanding (thousands of shares)
Common shares .................................................... 249,864 249,983 249,983
Preferred Class A shares ......................................... 135,042 134,917 134,917
See notes to consolidated financial information.
F-5
Consolidated Statements of Cash Flows
Expressed in millions of United States dollars
(Unaudited)
Year ended December 31
----------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income ........................................................................ 1,287 1,086 412
Adjustments to reconcile net income with cash provided by operating activities:
Depreciation, depletion and amortization ........................................ 212 195 163
Equity in results of affiliates and joint ventures, net of dividends received ... 181 (127) 23
Change in provision for losses on equity investments ............................ 4 (62) 268
Deferred income taxes ........................................................... (172) (42) 33
Provisions for contingencies .................................................... 79 101 57
Loss on disposals of property, plant and equipment .............................. 79 47 23
Gain on sale of investments ..................................................... (784) (54) -
Pension plan .................................................................... 32 105 55
Foreign exchange and monetary losses ............................................ 460 208 399
Net unrealized derivative losses ................................................ 38 - -
Others .......................................................................... 129 54 61
Decrease (increase) in assets:
Accounts receivable ............................................................. (49) (63) (135)
Inventories ..................................................................... (40) (50) (6)
Others .......................................................................... 17 (103) (25)
Increase (decrease) in liabilities:
Suppliers ....................................................................... 21 84 49
Payroll and related charges ..................................................... 42 (1) 2
Others .......................................................................... (18) 46 (43)
-------- -------- --------
Net cash provided by operating activities ......................................... 1,518 1,424 1,336
-------- -------- --------
Cash flows from investing activities:
Loans and advances receivable
Related parties
Additions ..................................................................... (75) (168) (202)
Repayments .................................................................... 79 32 42
Others .......................................................................... 7 8 5
Guarantees and deposits ........................................................... (85) (98) (4)
Additions to investments .......................................................... (338) (538) (49)
Additions to property, plant and equipment ........................................ (595) (447) (265)
Proceeds from disposals of property, plant and equipment .......................... 3 1 1
Proceeds from disposal of investments ............................................. 989 44 -
Net cash used to acquire subsidiaries ............................................. (516) (323) -
Others ............................................................................ - - 3
-------- -------- --------
Net cash used in investing activities ............................................. (531) (1,489) (469)
-------- -------- --------
Cash flows from financing activities:
Short-term debt, net issuances .................................................... (28) (278) (110)
Loans
Related parties
Additions ..................................................................... 145 8 223
Repayments .................................................................... (44) (42) (42)
Perpetual notes ................................................................... - 120 -
Long-term debt
Related parties ................................................................. 66 62 60
Others .......................................................................... 317 750 175
Repayments of long-term debt
Related parties ................................................................. (40) (25) (48)
Others .......................................................................... (310) (419) (299)
Interest attributed to stockholders ............................................... (1,066) (246) (452)
Treasury stock .................................................................... (27) - -
-------- -------- --------
Net cash used in financing activities ............................................. (987) (70) (493)
-------- -------- --------
Increase (decrease) in cash and cash equivalents .................................. - (135) 374
Effect of exchange rate changes on cash and cash equivalents ...................... (94) (107) (110)
Cash and cash equivalents, beginning of period .................................... 1,211 1,453 1,189
-------- -------- --------
Cash and cash equivalents, end of period .......................................... 1,117 1,211 1,453
======== ======== ========
Cash paid during the period for:
Interest on short-term debt ..................................................... (45) (48) (55)
Interest on long-term debt, net of interest capitalized of
$11 in 2001, $12 in 2000 and $12 in 1999 ...................................... (153) (128) (107)
Income tax ...................................................................... (46) (6) -
Non-cash transactions
Special pension plan contribution in shares of CSN .............................. 249 - -
Exchange of loans receivable for investments .................................... 35 7 241
Transfer of credits from related parties ar fair value .......................... - - 126
See notes to consolidated financial information.
F-6
Consolidated Statements of Changes in Stockholders' Equity
Expressed in millions of United States dollars
(except number of shares and per-share amounts)
Year ended December 31
--------------------------------------------------
Shares 2001 2000 1999
------------ --------- --------- ---------
Preferred class A stock (including one special share)
Balance January 1, 2001, 2000 and 1999 ..................................... 138,575,913 709 709 642
Transfer from appropriated retained earnings ............................... - 111 - 67
------------ --------- --------- ---------
Balance December 31, 2001, 2000 and 1999 ................................... 138,575,913 820 709 709
------------ --------- --------- ---------
Common stock
Balance January 1, 2001, 2000 and 1999 ..................................... 249,983,143 1,279 1,279 1,159
Transfer from appropriated retained earnings ............................... - 200 - 120
------------ --------- --------- ---------
Balance December 31, 2001, 2000 and 1999 ................................... 249,983,143 1,479 1,279 1,279
------------ --------- --------- ---------
Treasury stock
Balance January 1 .......................................................... (3,666,611) (61) (61) (61)
Acquisitions in 2001 ....................................................... (1,048,650) (27) - -
------------ --------- --------- ---------
Balance December 31 ........................................................ (4,715,261) (88) (61) (61)
------------ --------- --------- ---------
Additional paid-in capital
Balance January 1 and December 31 .......................................... 498 498 498
--------- --------- ---------
Other cumulative comprehensive income
Amounts not recognized as net periodic pension cost
Balance January 1 ......................................................... (100) - (153)
Excess of additional minimum liability .................................. 151 (151) 229
Tax effect on above ..................................................... (51) 51 (76)
--------- --------- ---------
Balance December 31 ....................................................... - (100) -
--------- --------- ---------
Cumulative translation adjustments
Balance January 1 ......................................................... (2,972) (2,535) (735)
Change in the year ...................................................... (503) (437) (1,800)
--------- --------- ---------
Balance December 31 ....................................................... (3,475) (2,972) (2,535)
--------- --------- ---------
Unrealized gain on available-for-sale security
Balance January 1 ......................................................... 24 54 30
Change in the year ...................................................... (24) (30) 24
--------- --------- ---------
Balance December 31 ....................................................... - 24 54
--------- --------- ---------
Adjustments relating to investments in affiliates
Balance January 1 ......................................................... 8 (6) (7)
Change in the year ...................................................... 2 14 1
--------- --------- ---------
Balance December 31 ....................................................... 10 8 (6)
--------- --------- ---------
Total other cumulative comprehensive income .................................. (3,465) (3,040) (2,847)
--------- --------- ---------
Appropriated retained earnings
Balance January 1 .......................................................... 3,537 3,567 5,212
Transfer to retained earnings .............................................. (14) (30) (1,458)
Transfer to capital stock .................................................. (311) - (187)
--------- --------- ---------
Balance December 31 ........................................................ 3,212 3,537 3,567
--------- --------- ---------
Retained earnings
Balance January 1 .......................................................... 1,647 1,186 (193)
Net income ................................................................ 1,287 1,086 412
Interest attributed to stockholders
Preferred class A stock ($1.99, $1.70 and $1.28 per share in 2001,
2000 and 1999) ......................................................... (276) (230) (172)
Common stock ($1.99, $1.70 and $1.28 per share in 2001, 2000 and 1999) ... (488) (425) (319)
Appropriation from reserves ............................................... 14 30 1,458
--------- --------- ---------
Balance December 31 ........................................................ 2,184 1,647 1,186
------------ --------- --------- ---------
Total stockholders' equity ................................................... 383,843,795 4,640 4,569 4,691
============ ========= ========= =========
Comprehensive income is comprised as follows:
Net income ................................................................ 1,287 1,086 412
Amounts not recognized as net periodic pension cost ....................... 100 (100) 153
Cumulative translation adjustments ........................................ (503) (437) (1,800)
Unrealized gain on available-for-sale security ............................ (24) (30) 24
Adjustments relating to investments in affiliates ......................... 2 14 1
--------- --------- ---------
Total comprehensive income (loss) ............................................ 862 533 (1,210)
========= ========= =========
See notes to consolidated financial information.
F-7
Notes to the Consolidated Financial Statements
Expressed in millions of United States dollars, unless otherwise stated
1 The Company and its operations
Companhia Vale do Rio Doce (CVRD) is a limited liability company, duly
organized and existing under the laws of the Federative Republic of
Brazil. Our operations are carried out through CVRD and its subsidiary
companies, joint ventures and affiliates, and mainly consist of mining,
non-ferrous metal production and logistics, as well as pulp and paper,
aluminum and steel activities. Further details of our operations and those
of our joint ventures and affiliates are described in Note 16.
The main operating subsidiaries we consolidate are as follows:
Head office Principal
Subsidiary % ownership location activity
--------------------------------------------- ----------- ------------- ------------------------
Ferteco Mineracao S.A. - FERTECO 100 Brazil Iron ore and pellets
Para Pigmentos S.A. 80 Brazil Kaolin
SIBRA - Eletrosiderurgica Brasileira S.A. 98 Brazil Ferrous alloys
Navegacao Vale do Rio Doce S.A. - DOCENAVE 100 Brazil Shipping
Vale do Rio Doce Aluminio S.A. - ALUVALE 100 Brazil Aluminum
Itabira Rio Doce Company Ltd. - ITACO 100 Cayman Island Trading
Rio Doce International Finance Ltd. - RDIF 100 Bahamas International finance
CELMAR S.A. - Industria de Celulose e Papel 85 Brazil Pulp
Florestas Rio Doce S.A. 100 Brazil Pulp
Rio Doce Manganese Europe - RDME 100 France Ferrous alloys
Urucum Mineracao S.A. 100 Brazil Iron ore
2 Summary of significant accounting policies
In preparing the consolidated financial information, we are required to
use estimates to account for certain assets, liabilities, revenues and
expenses. Our consolidated financial information therefore includes
various estimates concerning the selection of useful lives of property,
plant and equipment, provisions necessary for contingent liabilities, fair
values assigned to assets and liabilities acquired in business
combinations, income tax valuation allowances, employee post-retirement
benefits and other similar evaluations; actual results may vary from our
estimates.
(a) Basis of presentation
We have prepared the consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"), which differ in certain respects from the Brazilian
accounting principles that we use in preparing our statutory financial
information.
The U.S. dollar amounts for the period presented have been remeasured
(translated) from the Brazilian currency amounts in accordance with the
criteria set forth in Statement of Financial Accounting Standards 52 -
"Foreign Currency Translation" ( SFAS 52).
Prior to July 1, 1997, Brazil was considered under SFAS 52 to have a
highly inflationary economy, defined as an economy in which the cumulative
inflation rate over the latest thirty-six month period has exceeded 100%.
Accordingly, up to June 30, 1997, we adopted the U.S. dollar as both our
functional currency and reporting currency.
As from July 1, 1997, we concluded that the Brazilian economy had ceased
to be highly inflationary and changed our functional currency from the
reporting currency (U.S. dollars) to the local currency (Brazilian reais).
Accordingly, at July 1, 1997, we translated the U.S. dollar amounts of
non-monetary assets and liabilities into reais at the current exchange
rate, and those amounts became the new accounting bases for such assets
and liabilities. The resulting deferred taxes associated with the
differences between the new functional currency bases and the tax bases,
including those relating to
F-8
affiliates and joint ventures, net of related valuation allowances, were
reflected in the cumulative translation adjustments component of
stockholders' equity.
We have remeasured all assets and liabilities into U.S. dollars at the
current exchange rate at each balance sheet date (R$2.3204 and R$1.9554 to
US$1.00 at December 31, 2001 and 2000, respectively), and all accounts in
the statements of income (including amounts relative to local currency
indexation and exchange variances on assets and liabilities denominated in
foreign currency) at the average rates prevailing during the period. The
translation gain or loss resulting from this remeasurement process is
included in the cumulative translation adjustments account in
stockholders' equity.
The net exchange transaction loss included in our statement of income was
$410, $115 and $265 in 2001, 2000 and 1999, respectively, with the line
"Foreign exchange and monetary losses, net".
(b) Basis of consolidation
All majority-owned subsidiaries where we have both share and management
control are consolidated, with elimination of all significant intercompany
accounts and transactions. Investments in unconsolidated affiliates and
joint ventures are reported at cost less amortized goodwill plus our
equity in undistributed earnings or losses. Included in this category are
certain joint ventures in which we have majority ownership but, by force
of shareholders' agreements, do not have effective management control. We
provide for losses on equity investments with negative stockholders'
equity where applicable (see Note 10).
We evaluate the carrying value of our listed investments relative to
publicly available quoted market prices. If the quoted market price is
below book value, and such decline is considered other than temporary, we
write-down our equity investments to quoted market value.
We define joint ventures as businesses in which we and a small group of
other partners each participate actively in the overall entity management,
based on a shareholders agreement. We define affiliates as businesses in
which we participate as a minority stockholder but with significant
influence over the operating and financial policies of the investee.
(c) Business combinations
We adopt the procedures determined by Accounting Principles Board Opinion
16 - "Business Combinations" (APB 16) to recognize acquisitions of
interests in other companies. The method of accounting normally used in
our business combination transactions is the "purchase method", which
requires that acquirers reasonably determine the fair value of the
identifiable assets and liabilities of acquired companies, individually,
in order to determine the goodwill paid in the purchase to be recognized
as an intangible asset. On the acquisition of assets which include the
rights to mine reserves of natural resources, the establishment of values
for these assets includes the placing of fair values on purchased
reserves, which are classified in the balance sheet as property, plant and
equipment.
Goodwill recorded in our business combination transactions realized prior
to July 1, 2001 is amortized in a systematic manner over the periods
estimated to be benefited through December 31, 2001.
For acquisitions after July 1, 2001 goodwill resulting from the
acquisitions is not amortized.
(d) Inventories
Inventories are stated at the average cost of purchase or production,
lower than replacement or realizable values. We record allowances for
slow-moving or obsolete inventories when considered appropriate,
reflecting our periodic assessment of recoverability. A write-down of
inventory utilizing the allowance establishes a new cost basis for the
related inventory.
Finished goods inventories include all related materials, labor and direct
production expenditures, and exclude general and administrative expenses.
(e) Property, plant and equipment
Property, plant and equipment are recorded at cost, including interest
cost incurred during the construction of major new facilities. We compute
depreciation on the straight-line basis at rates which take into
consideration the useful lives of the items, principally an average of 80
years for the railroads, 20 years for ships, 25 years for buildings and
improvements and between 10 to 20 years for mining and other equipment.
Expenditures for maintenance and repairs are charged to operating costs
and expenses as incurred.
F-9
We capitalize the costs of developing major new ore bodies or expanding
the capacity of operating mines and amortize these to operations on the
unit-of-production method based on the total probable and proven quantity
of ore to be recovered. Exploration costs are expensed until viability of
mining activities is established; subsequently such costs are capitalized
together with further exploration costs. We capitalize mine development
costs as from the time we actually begin such development.
(f) Available-for-sale equity securities
Equity securities classified as "available-for-sale" are recorded in
accordance with SFAS 115 "Accounting for Certain Investments in Debt and
Equity Securities". Accordingly, we exclude unrealized holding gains and
losses, net of taxes, if applicable, from income and recognize them as a
separate component of stockholders' equity until realized.
(g) Revenues and expenses
Revenues are recognized when title has transferred to the customer or
services are rendered. Expenses and costs are recognized on the accrual
basis. Revenue from exported products is recognized when such products are
loaded on board the ship. Revenue from products sold in the domestic
market is recognized when delivery is made to the customer. Revenue from
transportation services, other than shipping operations, is recognized
when the service order has been fulfilled. Shipping operations are
recorded on the completed voyage basis and net revenue, costs and expenses
of voyages not completed at period-end are deferred. Anticipated losses on
voyages are provided when probable and can be reasonably estimated.
(h) Environmental and site reclamation and restoration costs
Expenditures relating to ongoing compliance with environmental regulations
are charged against earnings or capitalized as appropriate. These ongoing
programs are designed to minimize the environmental impact of our
activities. With respect to our two major iron ore mines at Itabira and
Carajas, which have extensive remaining reserves, liabilities for final
site reclamation and restoration costs will be recorded when the
respective reclamation and restoration strategies can be reasonably
determined and the related costs can be reasonably estimated.
(i) Compensated absences
We fully accrue the liability for future compensation to employees for
vacations vested during the year.
(j) Income taxes
In accordance with SFAS 109 "Accounting for Income Taxes", the deferred
tax effects of temporary differences have been recognized in the
consolidated financial statements. A valuation allowance is made when we
believe that it is more likely than not that tax assets will not be fully
recoverable in the future.
(k) Statement of cash flows
Cash flows relating to overnight financing and investment are reported
net. Short-term investments that have a ready market and maturity to us,
when purchased, of 90 days or less are considered cash equivalents.
At December 31, 2001 and 2000 dividends of $132 and $133, respectively,
received from equity method affiliates and joint ventures have been netted
against the equity in results of these entities in the statement of cash
flows. For comparative purposes dividends received in 1999 of $64 have
been reclassified from investing activities to reflect the same
presentation.
(l) Earnings per share
Earnings per share are computed by dividing net income by the weighted
average number of common and preferred shares outstanding during the
period.
(m) Interest attributed to stockholders
As from January 1, 1996 Brazilian corporations are permitted to attribute
interest on stockholders' equity. The calculation is based on the
stockholders' equity amounts as stated in the statutory accounting records
and the interest rate applied may not exceed the long-term interest rate
(TJLP) determined by the Brazilian Central Bank. Also, such interest may
not exceed the greater of 50% of net income for the year or 50% of
retained earnings plus revenue reserves.
F-10
The amount of interest attributed to stockholders is deductible for income
tax purposes. Accordingly, the benefit to us, as opposed to making a
dividend payment, is a reduction in our income tax charge equivalent to
the statutory tax rate applied to such amount. Income tax is withheld from
the stockholders relative to interest at the rate of 15%, except for
interest due to the Brazilian Government which is exempt from tax
withholdings.
We have opted to pay such tax-deductible interest to our stockholders and
have therefore accrued the amounts due as of December 31, 2001 and 2000,
with a direct charge to stockholders' equity.
Under Brazilian law interest attributable to stockholders is considered as
part of the annual minimum dividend (See Note 13). Accordingly such
distributions are treated as dividends for accounting purposes.
n) Derivatives and hedging activities
As of January 1, 2001 we adopted SFAS 133 "Accounting for Derivative
Financial Instruments and Hedging Activities", as amended by SFAS 137 and
SFAS 138. Those standards require that we recognize all derivative
financial instruments as either assets or liabilities on our balance sheet
and measure such instruments at fair value. Changes in the fair value of
derivatives are recorded in each period in current earnings or in other
comprehensive income, in the later case depending on whether a transaction
is designated as an effective hedge.
The transition adjustment relating to the fair value of derivatives
existing as of December 31, 2000 is recorded as a charge of $8 in our
statement of income for the year ended December 31, 2001. In view of the
immateriality of this effect of a change in accounting principle the
corresponding amount was included with other non-operating expenses.
Certain of our affiliated companies and joint ventures also recorded
similar charges, of which our portion of $4 is included in the caption
"Equity in results of affiliates and joint ventures" in the statement of
income.
Further information about our derivatives and hedging activities is
included in Note 19.
(o) Comprehensive income
We have disclosed comprehensive income as part of the Statement of Changes
in Stockholders' Equity, in compliance with SFAS 130 - "Reporting
Comprehensive Income".
(p) Recently-issued accounting pronouncements
In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS
141 "Business Combinations" and SFAS 142 "Goodwill and Other Intangible
Assets". We do not expect that the provisions of SFAS 141 will affect our
current accounting practices relative to business combinations. However,
the adoption of SFAS 142 on January 1, 2002 (or immediately for goodwill
relating to acquisitions after June 30, 2001) is expected to have the
following effects:
(i) goodwill relative to consolidated subsidiaries will no longer be
amortized, but will be aggregated to reporting units and subject at
least annually to testing for impairment, considering the reporting
unit as a whole.
(ii) goodwill relative to affiliates and joint ventures will no longer be
amortized but will remain allocated to the respective investment and
included in the measurement of the gain or loss on sale, or the loss
arising from an other than temporary decline in the value of the
investment.
Goodwill charged against earnings for the year December 31, 2001 totaled
$45 relating to subsidiaries and $47 relating to equity investees which
were classified as other operating expenses and equity in results of
affiliates and joint ventures, respectively.
In June 2001 and August 2001, respectively, the FASB also issued SFAS 143
"Accounting for Asset Retirement Obligations" and SFAS 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" . SFAS 143 is effective
for us as from January 1, 2003 and we are still studying the potential
effects that adoption may have on our financial statements. SFAS 144 will
be effective for us as from January 1, 2002 and the provisions thereof
generally are to be applied prospectively.
F-11
3 Our privatization
In May 1997, we were privatized by the Brazilian Government, which
transferred voting control to Valepar S.A. ("Valepar"). The Brazilian
Government has retained certain rights with respect to our future
decisions and those of Valepar and has also caused us to enter into
agreements which may affect our activities and results of operations in
the future. These rights and agreements are:
. Preferred Special Share. The Brazilian Government holds a preferred
special share of CVRD which confers upon it permanent veto rights
over changes in our (i) name, (ii) headquarters location, (iii)
corporate purpose with respect to mineral exploration, (iv) continued
operation of our integrated iron ore mining systems and (v) certain
other matters.
. Preferred Class A Share of Valepar. The Brazilian Government holds a
preferred class A share of Valepar which confers upon it approval
rights for a period of five years in respect of (i) concentration of
ownership of Valepar by particular types of investors in excess of
prescribed limitations and (ii) changes in the Valepar holding
company structure relating to ownership of our common shares.
. Shareholder revenue interests. On July 7, 1997, we issued to
shareholders of record on April 18, 1997 (including the Brazilian
Government) revenue interests providing holders thereof with the
right to receive semi-annual payments based on a percentage of our
net revenues above threshold production volumes from identified
mining resources. These instruments are not secured by the
corresponding mineral reserves and deposits.
In addition to the preferred special share mentioned above, the National
Treasury and the Banco Nacional de Desenvolvimento Economico e Social -
BNDES, the Government - owned development bank, together hold 32% of our
common shares and 4% of our preferred shares, which in aggregate
represents 22% of our total capital at December 31, 2001. These common
shares were sold through a public offering in Brazil and abroad which was
completed on March 27, 2002.
4 Major acquisitions and disposals during the years presented
We made the following acquisitions during the periods presented. Pro forma
information with respect to results of operations is not presented since
the effects are not considered material to an understanding of our
consolidated financial statements.
(a) On May 11, 2000, we acquired the entire capital of Mineracao SOCOIMEX
S.A., a non-public company whose main activity is production and
commercialization of iron ore, for the total price of $55, being an
initial cash payment of $47 and two further cash payments of $3 and $5, in
2001 and 2002, respectively, plus interest based on 89% of the Brazilian
Interbank Rate through the payment date. The increment of the fair value
over the book value of SOCOIMEX at the date of purchase was entirely
attributable to its mineral reserves, which are included in the property,
plant and equipment. In August 2000 SOCOIMEX was merged into CVRD.
(b) On May 30, 2000, we acquired 4,026,694,190 common shares and 4,231,324,374
preferred shares of S.A. Mineracao Trindade - SAMITRI, representing 79.27%
of the voting capital and 63.06% of the total capital for $520 in cash,
becoming the controlling stockholder. At the date of the purchase, SAMITRI
was a publicly listed Brazilian iron ore mining company, which also owned
a 51% interest in the voting capital of SAMARCO Mineracao S.A., a large
iron ore pellets producer (see Note 10). On June 29, 2000, we sold 1% of
the share capital of SAMARCO to BHP Brasil Ltda. (BHP), a subsidiary of
The Broken Hill Proprietary Company Limited of Australia, for $8, to
equalize our shareholdings in the joint venture.
F-12
(c) The assets and liabilities acquired as a result of the above transactions
and corresponding goodwill were as follows:
Consolidated Subsidiaries
-----------------------------------
Unconsolidated
joint venture
SAMARCO SAMITRI SOCOIMEX
--------------- --------------- ---------------
Fair value of assets ................... 1,006 293 77
Fair value of liabilities .............. (450) (144) (22)
--------------- --------------- ---------------
Net assets at fair value ............... 556 149 55
--------------- --------------- ---------------
Interest acquired ...................... 50.00% 63.06% 100.00%
Fair value of net assets acquired ...... 278 94 55
Attributable to minority stockholders
of SAMITRI (36.94%) ................... (103) - -
Tax benefits ........................... 31 - -
--------------- --------------- ---------------
Effective interest acquired ............ 206 94 55
Purchase price ......................... 252 268 55
--------------- --------------- ---------------
Goodwill ............................... 46 174 -
=============== =============== ===============
The main assets for which fair values differ from book values are
inventories and property, plant and equipment. We determined the fair
values of inventories based on the current replacement costs for raw
materials and the estimated selling prices for finished goods, net of
disposal costs and a selling margin. The fair values of property, plant
and equipment were determined based on current replacement costs for
similar capacity and the estimated market value of purchased reserves.
Deferred taxes were recorded for the differences between fair values and
tax bases.
For SAMARCO, SAMITRI and SOCOIMEX inventories were valued at $36, $38 and
$9, respectively, property, plant and equipment were valued at $830, $161
and $58, respectively, and the deferred tax liability was $60, $49 and
$15, respectively.
We had adopted a policy to amortize the goodwill on the SAMITRI and
SAMARCO purchases on the straight-line basis over a period of 6 years,
starting on the date of acquisition. However, as explained in note 2(p),
upon adoption of SFAS 142 on January 1, 2002 such straight-line
amortization will cease.
(d) On September 22, 2000 we acquired via public tender a further
1,014,529,197 common shares and 3,716,344,366 preferred shares of SAMITRI
bringing our ownership to 99.25% of the voting capital and 99.19% of the
total capital. The cash cost of this purchase was $180 and resulted in
additional goodwill of $27, all attributed to SAMARCO.
(e) In October 2000, we acquired 50% of Gulf Industrial Investment Company
(GIIC), a pelletizing company located in Bahrain, for $91, including
goodwill of $20 totally amortized.
(f) On April 27, 2001 we acquired 100% of Ferteco Mineracao S.A. - FERTECO, a
non-public company whose main activity is production and commercialization
of iron ore and pellets, for $523 in cash.
The assets and liabilities acquired and corresponding goodwill were as
follows:
Fair value of assets ...................................... 401
Fair value of liabilities ................................. (251)
-------
Net assets at fair value .................................. 150
Purchase price ............................................ 523
-------
Goodwill .................................................. 373
=======
F-13
For FERTECO inventories were valued at $57, property, plant and equipment
were valued at $178, and the deferred tax liability was $24.
(g) On January 14, 2000 we sold 20.81% of the capital of Alumina do Norte do
Brasil S.A.- ALUNORTE and a beneficial interest in 8% of the capital of
Mineracao Rio do Norte S.A. - MRN owned by us for an aggregate of $164,
resulting in a gain of $54. The total consideration of $164 was received
in cash; however, $120 was received through the issue and sale of
Perpetual Notes with a fair value of $55 and this fair value continues to
be reported as a liability and periodically adjusted based on an early
termination formula reflecting the underlying profitability of MRN.
(h) On March 9, 2001 we transferred our 10.33% interest in Companhia
Siderurgica Nacional - CSN to VALIA, as a special pension plan
contribution, for $249 (fair market value determined based on the weighted
average price of the last thirty trading sessions at the Sao Paulo stock
exchange in the period ended on March 9, 2001). This transfer resulted in
a gain of $107.
(i) On April 27, 2001 we concluded the sale of our 32.00% interest in Bahia
Sul Celulose S.A. - BSC for $318, received in cash on May 7, 2001. This
operation resulted in a gain of $170.
(j) On June 6, 2001 we concluded the sale of our 51.48% interest in Celulose
Nipo-Brasileira S.A. - CENIBRA for $671, received in cash on September 14,
2001. This operation resulted in a gain of $507.
(k) In December 2001, we acting through our wholly-owned foreign subsidiary
Itabira Rio Doce Company Ltd. - ITACO, acquired 659,375,000 common shares
of Caemi Mineracao e Metalurgia S.A. (Caemi), corresponding to 50% of its
voting capital from Cayman Iron Ore Investment Co., Ltd., a wholly-owned
subsidiary of Japan's Mitsui & Co., Ltd. (MITSUI) for US$ 279. Caemi is a
Brazilian company headquartered in Rio de Janeiro, which operates in the
iron ore, kaolin, refractory bauxite and railroad sectors and is accounted
for as an equity investee.
This acquisition was approved by the European Commission subject to the
commitment for Caemi to sell its equity investment in Quebec Cartier
Mining Company (QCM), a Canadian producer of iron ore and pellets.
CVRD and Mitsui each of which holds 50% of Caemi's common shares, entered
into a shareholder agreement requiring both shareholders to approve all
major decisions affecting Caemi.
The estimated assets and corresponding goodwill were as follows:
December 31, 2001
-----------------
Estimated fair value of assets ........................ 1,127
Estimated fair value of liabilities ................... (734)
-----------------
Net assets at book value .............................. 393
Interest in total capital acquired .................... 16.82%
Estimated fair value of net assets acquired ........... 66
Purchase price ........................................ 279
-----------------
Goodwill .............................................. 213
=================
5 Income taxes
Income taxes in Brazil comprise federal income tax and social
contribution, which is an additional federal tax. The statutory enacted
tax rates applicable in the periods presented are as follows:
Year ended December 31 - %
-----------------------------------
2001 2000 1999
--------- --------- ---------
Federal income tax .............. 25 25 25
Social contribution (*) ......... 9 12 to 9 8 to 12
--------- --------- ---------
Composite tax rate .............. 34 37 to 34 33 to 37
========= ========= =========
F-14
(*) As from May 1, 1999 through January 31, 2000, the social contribution
rate was increased from 8% to 12%. February 1, 2000 to December 31,
2002 the rate was reduced to 9%.
The amount reported as income tax benefit in this consolidated financial
information is reconciled to the statutory rates as follows:
Year ended December 31
-----------------------------------
2001 2000 1999
--------- --------- ---------
Income before income taxes, equity results and minority interests ................. 1,120 731 670
========= ========= =========
Federal income tax and social contribution expense at statutory enacted rates ..... (381) (249) (248)
Adjustments to derive effective tax rate:
Tax benefit on interest attributed to stockholders .............................. 260 222 181
Exempt foreign income ........................................................... 226 69 (4)
Tax-dedutible in goodwill business combination .................................. 58 - -
Tax effect related to provision for losses and write-downs ...................... 59 - -
Tax incentives .................................................................. 26 31 -
Valuation allowance reversal (provision) ........................................ (44) (51) 37
Other non-taxable gains ......................................................... 14 10 1
--------- --------- ---------
Federal income tax and social contribution expense in consolidated statements of
income .......................................................................... 218 32 (33)
========= ========= =========
We have certain tax incentives relative to our iron ore and manganese
operations in Carajas and other from gold and potash operations. The
incentives comprise full income tax exemption on defined production levels
up to 2005 and partial exemption up to 2013. An amount equal to the tax
saving must be appropriated to a reserve account within stockholders'
equity (Note 13) and may not be distributed in the form of cash dividends.
The major components of the deferred tax accounts in the balance sheet are
as follows:
As of December 31
-------- --------
2001 2000
-------- --------
Net current deferred tax assets
Accrued expenses deductible only when disbursed .................................. 265 89
-------- --------
265 89
======== ========
Long-term deferred tax assets and liabilities
Assets
Deferred tax relative to temporary differences:
Established on the July 1, 1997 change in functional currency, less reversals .... 9 16
Relative to investments acquired ................................................. 9 15
Tax-deductible goodwill in business combinations ................................... 134 103
Related to provision for losses and write-downs of investments ..................... 120 61
Additional retirement benefits provision (in 2000 net of
unrecognized pension obligation) ................................................. 58 158
Tax loss carryforwards ............................................................. 220 190
Other temporary differences ........................................................ 21 6
-------- --------
571 549
-------- --------
Liabilities
Inflationary income ................................................................ (25) (32)
Prepaid retirement benefit ......................................................... (34) -
Fair value adjustments in business combinations .................................... (72) (61)
-------- --------
(131) (93)
-------- --------
Valuation allowance
Beginning balance .................................................................. (201) (178)
Translation adjustments ............................................................ 32 15
Additions .......................................................................... (44) (51)
Reversals .......................................................................... - 13
-------- --------
Ending balance ..................................................................... (213) (201)
-------- --------
Net long-term deferred tax assets .................................................. 227 255
======== ========
F-15
6 Cash and cash equivalents
As of December 31
-------------------
2001 2000
-------- --------
Cash .............................................. 22 28
Deposits in local currency ........................ 76 694
Deposits in United States dollars ................. 1,019 489
-------- --------
1,117 1,211
======== ========
7 Accounts receivable
As of December 31
-------------------
2001 2000
-------- --------
Customers
Domestic ....................................... 170 198
Export, all denominated in
United States dollars ........................ 408 312
-------- --------
578 510
Allowance for doubtful accounts ................... (21) (14)
Allowance for ore weight credits .................. (8) (6)
-------- --------
Total ............................................. 549 490
======== ========
Accounts receivable from customers in the steel industry amount to 28.3%
and 16.3% of domestic receivables (export receivables - 91.5% and 78.8%)
at December 31, 2001 and 2000, respectively. No single customer accounted
for more than 10% of total revenues in any of the years presented.
8 Inventories
As of December 31
-------------------
2001 2000
-------- --------
Finished products
Iron ore ........................................ 110 100
Gold ............................................ 5 4
Manganese ....................................... 27 7
Ferrous alloys .................................. 28 32
Others .......................................... 16 34
Spare parts and maintenance supplies .............. 137 129
-------- --------
323 306
======== ========
F-16
9 Property, plant and equipment
a) Per business area:
As of December 31, 2001 As of December 31, 2000
--------------------------------------- ---------------------------------------
Accumulated Accumulated
Cost depreciation Net Cost depreciation Net
----------- ----------- ----------- ----------- ----------- -----------
Ferrous
Ferrous - Southern System
Mining ...................... 1.000 460 540 1.096 533 563
Railroads ................... 935 463 472 1.022 513 509
Marine terminals ............ 194 92 102 157 102 55
----------- ----------- ----------- ----------- ----------- -----------
2.129 1.015 1.114 2.275 1.148 1.127
Ferrous - Northern System
Mining ...................... 733 308 425 691 310 381
Railroads ................... 1.075 408 667 1.206 439 767
Marine terminals ............ 202 97 105 222 108 114
----------- ----------- ----------- ----------- ----------- -----------
2.010 813 1.197 2.119 857 1.262
Pelletizing ................. 198 108 90 194 123 71
Ferrous-alloys .............. 206 106 100 278 140 138
Energy ...................... 82 6 76 77 4 73
Construction in progress .... 569 - 569 406 - 406
----------- ----------- ----------- ----------- ----------- -----------
5.194 2.048 3.146 5.349 2.272 3.077
----------- ----------- ----------- ----------- ----------- -----------
Non-Ferrous
Potash ...................... 50 17 33 47 16 31
Gold ........................ 256 167 89 295 132 163
Kaolin ...................... 96 21 75 91 12 79
Research and projects ....... 17 9 8 19 10 9
Construction in progress .... 35 - 35 43 - 43
----------- ----------- ----------- ----------- ----------- -----------
454 214 240 495 170 325
----------- ----------- ----------- ----------- ----------- -----------
Logistics
General cargo ............... 353 179 174 349 173 176
Maritime transportation ..... 238 130 108 351 167 184
Construction in progress .... 23 - 23 14 - 14
----------- ----------- ----------- ----------- ----------- -----------
614 309 305 714 340 374
----------- ----------- ----------- ----------- ----------- -----------
Holdings
Pulp and paper .............. 58 13 45 175 26 149
Others ...................... 14 7 7 - - -
Construction in progress .... 45 - 45 - - -
----------- ----------- ----------- ----------- ----------- -----------
117 20 97 175 26 149
----------- ----------- ----------- ----------- ----------- -----------
Corporate Center
Corporate ................... 40 17 23 41 15 26
Construction in progress .... 2 - 2 4 - 4
----------- ----------- ----------- ----------- ----------- -----------
42 17 25 45 15 30
----------- ----------- ----------- ----------- ----------- -----------
Total ......................... 6.421 2.608 3.813 6.778 2.823 3.955
=========== =========== =========== =========== =========== ===========
b) Per type of assets:
As of December 31, 2001 As of December 31, 2000
--------------------------------------- ---------------------------------------
Accumulated Accumulated
Cost depreciation Net Cost depreciation Net
----------- ----------- ----------- ----------- ----------- -----------
Land and buildings ............ 678 255 423 824 289 535
Installations ................. 1.470 775 695 1.634 885 749
Equipment ..................... 673 306 367 597 290 307
Ships ......................... 235 127 108 348 165 183
Railroads ..................... 1.675 729 946 1.741 770 971
Mine development costs ........ 302 77 225 326 83 243
Others ........................ 714 339 375 841 341 500
----------- ----------- ----------- ----------- ----------- -----------
5.747 2.608 3.139 6.311 2.823 3.488
Construction in progress ...... 674 - 674 467 - 467
----------- ----------- ----------- ----------- ----------- -----------
Total ......................... 6.421 2.608 3.813 6.778 2.823 3.955
=========== =========== =========== =========== =========== ===========
Losses on disposals of property, plant and equipment totaled $48, $47 and
$23 in 2001, 2000 and 1999, respectively. In 2001, 2000 and 1999,
disposals mainly relate to sales of ships, trucks, locomotives and other
equipment which were replaced in the normal course of business.
F-17
10 Investments
As of December 31
------------------------------------------------------
2001 Investments
----------------------------------- ---------------
(1)Net
income
Participation (loss)
in capital (1)Net for the
(%) equity year 2001 2000
--------------- ------ ------- ----- -----
Investments in affiliated companies and joint ventures voting total
------ -----
Steel
Usinas Siderurgicas de Minas Gerais S.A - USIMINAS (3) ............. 22.99 11.46 279 (3) 32 40
Companhia Siderurgica Nacional - CSN (2) ........................... - - - - - 167
Companhia Siderurgica de Tubarao - CST (3) ......................... 20.51 22.85 79 (4) 18 35
California Steel Industries Inc. - CSI ............................. 50.00 50.00 195 (6) 98 119
Paper and pulp
Celulose Nipo-Brasileira S.A. - CENIBRA (2) ........................ - 17 - 210
Bahia-Sul Celulose S.A - BSC (2) ................................... - 6 - 162
Aluminum and bauxite
Mineracao Rio do Norte S.A. - MRN .................................. 40.00 40.00 386 81 154 153
Valesul Aluminio S.A. - VALESUL .................................... 54.51 54.51 93 21 51 44
Alumina do Norte do Brasil S.A. - ALUNORTE ......................... 50.31 45.58 142 (13) 89 80
Pellets
Companhia Nipo-Brasileira de Pelotizacao - NIBRASCO ................ 51.11 51.00 32 (3) 16 28
Companhia Hispano-Brasileira de Pelotizacao - HISPANOBRAS .......... 51.00 50.89 36 9 18 21
Companhia Coreano Brasileira de Pelotizacao - KOBRASCO ............. 50.00 50.00 4 (17) 2 12
Companhia Italo-Brasileira de Pelotizacao - ITABRASCO .............. 51.00 50.90 26 8 13 16
Gulf Industrial Investment Company - GIIC(5) ....................... 50.00 50.00 75 13 38 93
SAMARCO Mineracao S.A(5) ........................................... 50.00 50.00 433 36 258 318
Others
Fertilizantes Fosfatados S.A. - FOSFERTIL (3) ...................... 10.96 10.96 264 47 29 31
Caemi Mineracao e Metalurgia S.A ................................... 50.00 16.82 393 - 289 -
Salobo Metais S.A (4) .............................................. 50.00 50.00 44 - 22 25
Ferrovia Centro-Atlantica S.A - FCA(5) ............................. 20.00 45.65 - (47) - 82
Others ............................................................. - - 62 131
------ ------
1,189 1,767
Investments at cost
SIDERAR (market value $11 in 2001 - $42 in 2000) ................... 4.85 4.85 15 15
Unrealized holding gains on equity security ........................ (4) 27
MRS Logistica S.A .................................................. 17.19 9.76 22 -
Others ............................................................. 5 7
------ ------
1,227 1,816
====== ======
Change in provision for losses on equity investments:
Para Pigmentos S.A .................................................
Vale Usiminas Participacoes S.A. - VUPSA ...........................
Alumina do Norte do Brasil S.A. - ALUNORTE .........................
Aluminio Brasileiro S.A. - ALBRAS ..................................
Companhia Ferroviaria do Nordeste ..................................
As of December 31
-------------------------
Equity
Adjustments
-------------------------
2001 2000 1999
----- ----- -----
Investments in affiliated companies and joint ventures
Steel
Usinas Siderurgicas de Minas Gerais S.A - USIMINAS (3) ............. - 7 (13)
Companhia Siderurgica Nacional - CSN (2) ........................... 9 13 3
Companhia Siderurgica de Tubarao - CST (3) ......................... (1) 22 (5)
California Steel Industries Inc. - CSI ............................. (3) 17 22
Paper and pulp
Celulose Nipo-Brasileira S.A. - CENIBRA (2) ........................ 9 66 (4)
Bahia-Sul Celulose S.A - BSC (2) ................................... 2 42 13
Aluminum and bauxite
Mineracao Rio do Norte S.A. - MRN .................................. 32 36 10
Valesul Aluminio S.A. - VALESUL .................................... 11 12 -
Alumina do Norte do Brasil S.A. - ALUNORTE ......................... (6) 11 -
Pellets
Companhia Nipo-Brasileira de Pelotizacao - NIBRASCO ................ (2) 11 10
Companhia Hispano-Brasileira de Pelotizacao - HISPANOBRAS .......... 5 9 7
Companhia Coreano Brasileira de Pelotizacao - KOBRASCO ............. (8) 2 (11)
Companhia Italo-Brasileira de Pelotizacao - ITABRASCO .............. 4 7 7
Gulf Industrial Investment Company - GIIC(5) ....................... (17) 1 -
SAMARCO Mineracao S.A(5) ........................................... 11 8 -
Others
Fertilizantes Fosfatados S.A. - FOSFERTIL (3) ...................... 5 5 7
Caemi Mineracao e Metalurgia S.A ................................... - - -
Salobo Metais S.A (4) .............................................. - - -
Ferrovia Centro-Atlantica S.A - FCA(5) ............................. (95) (30) -
Others ............................................................. (5) 21 (5)
------ ------ ------
(49) 260 41
Investments at cost
SIDERAR (market value $11 in 2001 - $42 in 2000) ................... - - -
Unrealized holding gains on equity security ........................ - - -
MRS Logistica S.A .................................................. - - -
Others ............................................................. - - -
------ ------ ------
(49) 260 41
====== ====== ======
Change in provision for losses on equity investments:
Para Pigmentos S.A ................................................. - - (15)
Vale Usiminas Participacoes S.A. - VUPSA ........................... - - (56)
Alumina do Norte do Brasil S.A. - ALUNORTE ......................... - - (89)
Aluminio Brasileiro S.A. - ALBRAS .................................. 4 66 (104)
Companhia Ferroviaria do Nordeste .................................. (8) (4) (4)
------ ------ ------
(4) 62 (268)
====== ====== ======
(1) Based on US GAAP financial statements.
(2) Investments sold in 2001.
(3) Value based on quoted market price at December 31, 2001 is $41 and
$172 for Usiminas and CST, respectively. Investments in Usiminas and
CST are presented net of write-down provisions of $185 and $215,
respectively, for all periods presented.
(4) Development stage enterprise.
(5) Equity adjustments incudes amortization of goodwill in the amounts of
Samarco $7, GIIC $23 and FCA $74.
F-18
Goodwill included in the above investments is as follows:
As of December 31
-------------------
-------- --------
Investee 2001 2000
------------------------------------------- -------- --------
Alumina do Norte do Brasil S.A. - ALUNORTE ........ 24 30
SAMARCO Mineracao S.A ............................. 41 59
Ferrovia Centro-Atlantica S.A. - FCA .............. - 22
Gulf Industrial Investment Company - GIIC ......... - 20
Caemi Mineracao e Metalurgia S.A .................. 223 -
-------- --------
288 131
======== ========
Based on our revised expectation for profitability and other economic
facts, we fully amortized the remaining goodwill relative to FCA and GIIC
in 2001.
The combined financial position and results of operations of our
affiliates in the steel sector is as follows:
Steel sector affiliates (Combined)
----------------------------------
As of December 31
----------------------------------
2001 2000
--------------- ---------------
Balance sheet
Current assets .......................... 1,139 3,094
Noncurrent assets ....................... 6,070 10,231
Current liabilities ..................... (1,071) (2,695)
Noncurrent liabilities .................. (2,584) (5,094)
Purchase accounting adjustments ......... (3,001) (3,175)
--------------- ---------------
Stockholders' equity .................... 553 2,361
=============== ===============
Investments ............................. 148 361
=============== ===============
Steel sector affiliates (Combined)
-----------------------------------
Year ended December 31
-----------------------------------
2001 2000 1999
--------- --------- ---------
Statement of operations
Net sales ............................... 3,293 4,581 4,174
Costs and expenses ...................... (3,276) (4,082) (4,790)
Purchase accounting adjustments ......... 3 24 83
--------- --------- ---------
Income before income taxes .............. 20 523 (533)
Income taxes ............................ 59 (199) 556
--------- --------- ---------
Net income .............................. 79 324 23
========= ========= =========
Equity adjustments ...................... 5 59 7
========= ========= =========
F-19
Information with respect to other major affiliates' financial position and
results of operations is as follows:
As of December 31
------------------------------------------------------------------------
CAEMI ALUNORTE ALBRAS MRN
------ ----------------- ----------------- -----------------
2001 2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ------ ------ ------
Balance Sheet
Current assets ............... 398 159 130 158 128 55 90
Noncurrent assets ............ 729 509 505 510 627 425 349
Current liabilities .......... (307) (95) (79) (219) (247) (35) (19)
Noncurrent liabilities ....... (427) (431) (454) (463) (538) (59) (37)
------ ------ ------ ------ ------ ------ ------
Stockholders' equity ......... 393 142 102 (14) (30) 386 383
====== ====== ====== ====== ====== ====== ======
Our participation ............... 16.82% 45.58% 49.29% 51.00% 51.00% 40.00% 40.00%
------ ------ ------ ------ ------ ------ ------
Investments ..................... 66 65 50 (7) (15) 154 153
====== ====== ====== ====== ====== ====== ======
Year ended December 31
-------------------------------------------------------------------------------------------
ALUNORTE ALBRAS MRN
------------------------- ---------------------------- ----------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------ ------ ------ ------
Statement of Operations
Net sales .................... 294 322 253 472 551 459 211 217 205
Costs and expenses ........... (302) (327) (446)(*) (429) (452) (755)(*) (121) (109) (156)
Income (loss) before income
taxes ...................... (8) (5) (193) 43 99 (296) 90 108 49
Income taxes ................. (5) 28 56 (35) 30 93 (9) (17) (23)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ............ (13) 23 (137) 8 129 (203) 81 91 26
====== ====== ====== ====== ====== ====== ====== ====== ======
Our participation ............... 45.58% 49.29% 65.82% 51.00% 51.00% 51.00% 40.00% 40.00% 40.00%
Participation in results ........ (6) 11 (89) 4 66 (104) 32 36 10
Change in provision for losses .. - 89 (4) (66) 104 - - -
------ ------ ------ ------ ------ ------ ------ ------ ------
Equity adjustments .............. (6) 11 - - - - 32 36 10
====== ====== ====== ====== ====== ====== ====== ====== ======
(*) Includes exchange losses of $213 (ALUNORTE), and $378 (ALBRAS) for the
year ended December 31, 1999 - see Note 20.
The provision for losses on equity investments of $9 and $21 at December
31, 2001 and 2000, respectively, relates to our investments in affiliates
which have reported negative stockholders' equity in their financial
statements prepared in accordance with US GAAP and in circumstances where
we have assumed commitments to fund our share of the accumulated losses,
if necessary, through additional capital contributions or other means.
Accordingly we (a) first reduce the value of the investment to zero and
(b) subsequently provide for our portion of negative equity. The provision
is comprised as follows:
Cia
Ferroviaria
do Nordeste ALBRAS TOTAL
------------ ------------ ------------
Provision at January 1, 2000 ......... (4) (83) (87)
Change in provision - results ........ (4) 66 62
Payment of capital ................... 1 - 1
Translation adjustment ............... 1 2 3
------------ ------------ ------------
Provision at December 31, 2000 ....... (6) (15) (21)
Change in provision - results ........ (8) 4 (4)
Payment of capital ................... 10 - 10
Translation adjustment ............... 2 4 6
------------ ------------ ------------
Provision at December 31 , 2001 ...... (2) (7) (9)
============ ============ ============
F-20
Our participation in ALUNORTE (45.58% at December 31, 2001) changed
several times during the periods presented, but we did not consolidate the
financial statements of this investee due to the temporary nature of our
increased holding. Movements on the investment account and related
provision during the three years ended December 31, 2001 are as follows:
ALUNORTE
Total shares of shares owned
ALUNORTE by CVRD
(in thousands) (in thousands) Investment Goodwill
--------------- --------------- --------------- ---------------
Balance January 1, 1999 ....................... 325,107 174,279 - -
Purchase of additional participation:
January 1999 ................................ 453,921 124,491 68 48
December 1999 ............................... 598,184 144,263 55 30
Participation in 1999 losses .................. - - (89) -
Translation adjustment ........................ - - (7) -
--------------- --------------- ---------------
Balance December 31, 1999 ..................... 598,184 443,033 27 78
Sale of participation in January 2000 ......... 598,184 (124,491) (7) (48)
Changes in participation-subscriptions by
other shareholders ............................ - - 19 -
Capital call .................................. 673,494 13,437 5 -
Participation in 2000 net income .............. - - 11 -
Translation adjustment ........................ - - (5) -
--------------- --------------- ---------------
Balance December 31, 2000 ..................... 673,494 331,979 50 30
Purchase of additional participation .......... 211,916 71,542 20 -
Changes in participation-subscriptions by
other shareholders ............................ - - 6 -
Participation in 2001 net income .............. - - (6) -
Goodwill amortized ............................ - - - (1)
Translation adjustment ........................ - - (5) (5)
--------------- --------------- ---------------
Balance December 31, 2001 ..................... 885,410 403,521 65 24
=============== =============== ===============
Provision Net
--------------- ---------------
Balance January 1, 1999 ....................... (9) (9)
Purchase of additional participation:
January 1999 ................................ 9 125
December 1999 ............................... - 85
Participation in 1999 losses .................. - (89)
Translation adjustment ........................ - (7)
--------------- ---------------
Balance December 31, 1999 ..................... - 105
Sale of participation in January 2000 ......... - (55)
Changes in participation-subscriptions by
other shareholders ............................ - 19
Capital call .................................. - 5
Participation in 2000 net income .............. - 11
Translation adjustment ........................ - (5)
--------------- ---------------
Balance December 31, 2000 ..................... - 80
Purchase of additional participation .......... - 20
Changes in participation-subscriptions by
other shareholders ............................ - 6
Participation in 2001 net income .............. - (6)
Goodwill amortized ............................ - (1)
Translation adjustment ........................ - (10)
--------------- ---------------
Balance December 31, 2001 ..................... - 89
=============== ===============
On January 14, 2000 we entered into a structured transaction with an
unrelated party to sell both a 20.81% of the capital of ALUNORTE and a
beneficial interest in 8% of the capital of MRN owned by us for a total of
$164, resulting in a net gain to us of $54, recorded in other operating
income, as follows:
Book value of 124,491 thousand shares of ALUNORTE sold ..... (7)
Goodwill amortized ......................................... (48)
Book value of beneficial interest in 8% of MRN ............. -
--------
(55)
Cash received by us
On transfer of ALUNORTE shares ............................ 44
On issue and sale of Perpetual Notes ...................... 120
Fair value of Perpetual Notes .............................. (55)
--------
Gain recognized on the transaction ......................... 54
========
The Perpetual Notes are exchangeable for 48 billion preferred shares of
the affiliate MRN (initially equivalent to 8% of the total number of
shares of MRN owned by us). Interest is payable on the Notes in an amount
equal to dividends paid on the underlying preferred shares, relative to
periods starting as from the 2000 fiscal year. The Notes may be redeemed
at our option or the Noteholders at any time by transfer of the underlying
preferred shares to the Noteholders, providing the rights of pre-emption
of the existing shareholders of MRN have been waived or have expired.
Redemption by transfer of the underlying net assets of MRN is compulsory
if certain events occur, including the liquidation or merger of MRN or the
transfer of MRN's asset and liabilities to a consortium formed by its
shareholders to take over the operations of MRN. In the event of early
termination the Notes may be redeemed, at the option the Noteholders, in
lieu of transfer of the shares, for a cash sum equal to $48 plus the net
present value of average annual earnings declared and paid by MRN for the
three years immediately preceding such termination multiplied by 20 and
discounted by 10% per year. This latter amount represents a fair value of
$55.
F-21
On October 6, 2000, with the objective of financing part of the expansion
in its alumina production capacity from 1.5 million tons to 2.3 million
tons per year, ALUNORTE called a capital increase of $126, to be paid up
in 6 installments. Up to December 31,2000, three of these installments
have been made and ALUVALE contributed with $25, changing its stockholding
interest to 48.58%.
During 1999 our 50%-owned affiliate VUPSA incurred significant losses, of
which we recognized our portion of $56 through the provision for losses on
equity investments. In December 1999 we acquired the remaining 50% of
VUPSA in exchange for the transfer of amounts owed to the seller from
subsidiaries of VUPSA amounting to $126, resulting in negative goodwill of
$86. At December 31, 1999 the balance sheet of VUPSA has been consolidated
and the negative goodwill used to reduce the carrying value of VUPSA's
property, plant and equipment.
In 2000, we acquired a further 34.41% of Ferrovia Centro-Atlantica S.A.,
for $25, bringing our participation to 45.65%.
Dividends received from investees aggregated $132, $133 and $64 in 2001,
2000 and 1999, respectively.
11 Short-term debt
Our short-term borrowings are principally from commercial banks and
include import and export financing denominated in United States dollars,
as follows:
As of December 31
-----------------------
2001 2000
---- ----
Export .................................. 498 386
Import .................................. 1 11
Working Capital ......................... 90 68
--- ---
589 465
=== ===
Average annual interest rates on short-term borrowings were 4.96% and
8.18% in 2001 and 2000, respectively.
F-22
12 Long-term debt
As of December 31
---------------------
Current liabilities Long-Term liabilities
------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Foreign debt
Loans and financing contracted in the following currencies,
maturing up to 2011:
United States dollars ................................. 192 170 1,104 990
Japanese Yen .......................................... 8 10 27 4
Others ................................................ 2 2 2 4
Fixed Rate Notes - US$ denominated ........................ -- -- 500 500
Export Securitization - US$ denominated ................... -- -- 300 300
Perpetual notes ........................................... -- -- 55 55
Accrued charges ........................................... 25 41 -- --
---- ---- ----- -----
227 223 1,988 1,853
---- ---- ----- -----
Local debt
Indexed by Long-Term Interest Rate - TJLP
maturing up to 2002 .................................... 28 6 9 40
Indexed by General Price Index-Market (IGPM)
maturing up to 2005 .................................... 21 21 31 49
Basket of currencies ..................................... 15 15 39 51
Capital Lease ............................................ -- 1 3 --
Shareholders revenue interests (Note 3) .................. -- 3 3
Indexed by U.S. dollars .................................. 4 11 100 24
Accrued charges .......................................... 1 3 -- --
---- ---- ----- -----
69 57 182 167
---- ---- ----- -----
Total ..................................................... 296 280 2,170 2,020
==== ==== ===== =====
The long-term portion at December 31, 2001 becomes due in the following
years:
2003 ................................................ 662
2004 ................................................ 725
2005 ................................................ 255
2006 ................................................ 151
2007 ................................................ 225
2008 and thereafter ................................. 97
No due date (Perpetual notes) ....................... 55
-----
2,170
=====
At December 31, 2001 annual interest rates on long-term debt were as
follows:
Up to 7% ............................................ 1,309
7.1% to 9% .......................................... 495
9.1% to 11% ......................................... 509
Over 11% ............................................ 89
Variable (Perpetual notes) .......................... 64
-----
2,466
=====
F-23
The indexes applied to debt and respective percentage variations in each
year were as follows:
2001 2000 1999
----- ---- -----
TJLP - Long-Term
Interest Rate (effective rate) ... 3.34 4.56 6.92
IGP-M - General Price Index - Market 10.40 9.95 20.10
United States Dollar ............... 18.70 9.30 48.01
Long-term debt at December 31, 2001 is guaranteed or secured as follows:
Amount of debt
guaranteed
--------------
Federal Government guarantee (for which we have provided
counter-guarantees) 308
Third party guarantees 150
Export receivables (securitization) 125
Ships 50
In October 2000 we issued $300 under a US dollar - denominated export
securitization program, divided into three tranches as follows:
Grace
Tenor Period Effective
Amount (years) (years) rate p.a.
------ ------- ------- -----------
Tranche 1 25 7 2 8.682%
Tranche 2 125 7 2 Libor+0.65%
Tranche 3 150 10 3 8.926%
---
300
===
Tranche 2 is guaranteed by an insurance contract with a major U.S.
insurance company.
On March 8, 2002 our wholly-owned subsidiary, Vale Overseas Limited,
issued $300 of 8.625% Enhanced Guaranteed Notes due March 8, 2007,
unconditionally guaranteed by us.
13 Stockholders' equity
Each holder of common and preferred class A stock is entitled to one vote
for each share on all matters that come before a stockholders' meeting,
except for the election of the Board of Directors, which is restricted to
the holders of common stock. As described in Note 3, the Brazilian
Government holds a preferred special share which confers on it permanent
veto rights over certain matters.
The Board of Directors authorized the acquisition of up to 9,832,691 of
our own preferred class A shares, to remain in treasury for subsequent
disposal or cancellation. As of December 31, 2001, 3,519,288 shares had
been acquired, at an average weighted unit cost of R$20.03 (minimum cost
of R$14.02 and maximum of R$24.19).
Both common and preferred stockholders are entitled to receive a dividend
of at least 25% of annual net income, upon approval at the annual
stockholders' meeting. In the case of preferred stockholders, this
dividend cannot be less than 6% of the preferred capital as stated in the
statutory accounting records. With respect to each of 2001, 2000 and 1999
we distributed dividends to preferred stockholders in excess of this
limit. Interest attributed to stockholders as from January 1, 1996 is
considered part of the minimum dividend.
Brazilian law permits the payment of cash dividends only from retained
earnings as stated in the
F-24
statutory accounting records and such payments are made in Reais. At
December 31, 2001, we had no undistributed retained earnings. In addition,
appropriated retained earnings at December 31, 2001 includes $2,215,
related to the unrealized income and expansion reserves, which could be
freely transferred to retained earnings and paid as dividends, if approved
by the stockholders.
No withholding tax is payable on distribution of profits earned as from
January 1, 1996, except for distributions in the form of interest
attributed to stockholders as explained in Note 2 (m).
Brazilian laws and our By-laws require that certain appropriations be made
from retained earnings to reserve accounts on an annual basis, all
determined in accordance with amounts stated in the statutory accounting
records, as detailed below:
Year ended December 31
-------------------------------
2001 2000 1999
------ ------ ------
Appropriated retained earnings
Unrealized income reserve
Balance January 1 .............. 874 1,062 1,636
Transfer to retained earnings .. (326) (188) (574)
----- ----- -----
Balance December 31 ............ 548 874 1,062
Expansion reserve
Balance January 1 .............. 1,546 1,367 1,685
Transfer to capital stock ...... (278) -- --
Transfer to retained earnings .. 399 179 (318)
----- ----- -----
Balance December 31 ............ 1,667 1,546 1,367
Legal reserve
Balance January 1 .............. 307 284 368
Transfer to retained earnings .. 18 23 (84)
----- ----- -----
Balance December 31 ............ 325 307 284
Fiscal incentive depletion reserve
Balance January 1 .............. 771 842 1,246
Transfer to retained earnings .. (122) (71) (404)
----- ----- -----
Balance December 31 ............ 649 771 842
Fiscal incentive investment reserve
Balance January 1 .............. 39 12 277
Transfer to capital stock ...... (33) -- (187)
Transfer (to) from retained
earnings ..................... 17 27 (78)
----- ----- -----
Balance December 31 ............ 23 39 12
----- ----- -----
Total appropriated retained earnings 3,212 3,537 3,567
===== ===== =====
The purpose and basis of appropriation to such reserves is described below:
o Unrealized income reserve - this represents principally our share of
the earnings of affiliates and joint ventures, not yet received in
the form of cash dividends.
o Expansion reserve - this is a general reserve for expansion of our
activities.
o Legal reserve - this reserve is a requirement for all Brazilian
corporations and represents the appropriation of 5% of annual net
income under Brazilian GAAP up to a limit of 20% of capital stock
under Brazilian GAAP.
o Fiscal incentive depletion reserve - this represents an additional
amount relative to mineral reserve depletion equivalent to 20% of the
sales price of mining production, which is deductible for tax
purposes providing an equivalent amount is transferred from retained
earnings to the reserve account. This fiscal incentive expired in
1996.
o Fiscal incentive investment reserve - this reserve results from an
option to designate a portion of
F-25
income tax otherwise payable for investment in government approved
projects and is recorded in the year following that in which the taxable
income was earned. As from 2000, this reserve also contemplates the tax
incentives described in Note 5.
14 Pension plans
Since 1973 we have sponsored a defined benefit pension plan (the "Old
Plan") covering substantially all employees, with benefits based on years
of service, salary and social security benefits. This plan is administered
by Fundacao Vale do Rio Doce de Seguridade Social -- VALIA and was funded
by monthly contributions made by us and our employees, calculated based on
periodic actuarial appraisals.
In May 2000, we implemented a new pension plan, which is primarily a
defined contribution plan with a defined benefit feature relative to
service prior to May 2000 (the "New Plan"), and offered our active
employees the opportunity of transferring to the New Plan. Over 98% of our
active employees opted to transfer to the New Plan. The Old Plan will
continue in existence, covering almost exclusively retired participants
and their beneficiaries.
The following information details the status of the defined benefit
elements of our plans in accordance with SFAS 132 "Employers' Disclosure
about Pensions and Other Post-retirement Benefits":
(a) Change in benefit obligation
As of December 31
-------------------
2001 2000
----- -----
Benefit obligation at beginning of year ...... 1,596 1,440
Service cost ................................. 2 10
Interest cost ................................ 78 91
Benefits paid ................................ (88) (109)
Plan amendments .............................. -- (13)
Effect of exchange rate changes .............. (252) (65)
Actuarial loss ............................... 52 242
----- -----
Benefit obligation at end of year ............ 1,388 1,596
===== =====
The actuarial loss of $ 242 in the year ended December 31, 2000 is mainly
due to the adoption of a new mortality table which is considered to better
reflect the current life expectancy of the plan participants.
(b) Change in plan assets
As of December 31
----- -----
2001 2000
----- -----
Fair value of plan assets at beginning of year .. 1,189 1,231
Actual return on plan assets .................... 220 128
Special employer contributions (Note 4 (i)) ..... 249 --
Employer contributions .......................... 17 34
Employee contributions .......................... -- 5
Benefits paid ................................... (88) (109)
Effect of exchange rate changes ................. (213) (100)
----- -----
Fair value of plan assets at end of year ........ 1,374 1,189
===== =====
F-26
Plan assets at December 31, 2001 include $83 of portfolio investments in
our own shares ($95 at December 31, 2000) and $12 of shares of related
parties ($9 at December 31, 2000), as well as $551 of Federal Government
Securities ($480 at December 31, 2000).
(c) Accrued pension cost liability
As of December 31
--------------------
2001 2000
------ ------
Funded status, excess of benefit obligation
over plan assets.............................. 14 407
Unrecognized net transitory obligation ......... (94) (125)
Unrecognized net actuarial loss ................ (19) (152)
------ ------
Accrued pension cost liability (prepaid
pension cost) ................................ (99) 130
====== ======
(d) Recognition of additional minimum liability
As of December 31
--------------------
2001 2000
------ ------
Accrued pension cost liability .................... -- 130
Unrecognized pension obligation, limited to
unrecognized net transitory obligation ............ 14 125
Additional amount recognized in stockholders'
equity .......................................... -- 151
----- -----
Minimum liability ................................. 14 406
===== =====
Assumptions used in each period (expressed in nominal terms)
2001 2000
---------- ----------
Discount rate ..................................... 11% p.a. 11% p.a.
Expected return on plan assets .................... 11% p.a. 11% p.a.
Rate of compensation increase ..................... 6.82% p.a. 6.82% p.a.
Net pension cost includes the following components:
Year ended December 31
--------------------------
2001 2000 1999
---- ---- ----
Service cost - benefits earned during the period 2 10 31
Interest cost on projected benefit obligation .. 78 91 126
Actual return on assets ........................ (220) (128) (345)
Amortization of initial transitory obligation .. 12 15 17
Net deferral ................................... 160 58 241
---- ---- ----
32 46 70
Employee contributions ......................... -- (5) (15)
---- ---- ----
Net periodic pension cost ...................... 32 41 55
==== ==== ====
In addition to benefits provided under our pension plan accruals have been
made relative to supplementary benefits extended in previous periods as
part of early-retirement program. Such accruals included in long-term
liabilities totaled $173 and $185, at December 31, 2001 and 2000,
respectively, plus $28 and $30 in current liabilities.
The cost recognized in the years 2001 and 2000 relative to the defined
contribution element of the New Plan was $5 and $3, respectively.
F-27
15 Commitments and contingencies
(a) At December 31, 2001, we had extended guarantees for borrowings obtained
by affiliates and joint ventures in the amount of $702, of which $492 is
denominated in United States dollars and the remaining $210 in local
currency. These guarantees include $317 relative to ALBRAS and $51
relative to ALUNORTE (see Note 10).
(b) CVRD and its subsidiaries are defendants in numerous legal actions in the
normal course of business. Based on the advice of our legal counsel,
management believes that the provision made against contingent losses is
sufficient to cover probable losses in connection with such actions.
The provision for contingencies and the related judicial deposits are
composed as follows:
As of Decem ber 31
--------------------------------------------------------
2001 2000
---------------------------- --------------------------
Provision for Judicial Provision for Judicial
contingencies deposits contingenies deposits
------------- -------- ------------- --------
Lab or claims .................... 147 50 114 60
Civil claims ..................... 123 53 137 58
Tax - related actions ............ 177 131 80 54
Others ........................... 5 1 7 1
------------- -------- ------------- --------
452 235 338 173
------------- -------- ------------- --------
Long -term ....................... 452 235 338 173
============= ======== ============= ========
Labor-related actions principally comprise employee claims for (i) payment
of time spent travelling from their residences to the work-place, (ii)
additional payments for alleged dangerous or unhealthy working conditions
and (iii) various other matters, often in connection with disputes about
the amount of indemnities paid upon dismissal.
Civil actions principally relate to claims made against us by contractors
in connection with losses alleged to have been incurred by them as a
result of various past government economic plans during which full
indexation of contracts for inflation was not permitted.
Tax-related actions principally comprise our challenges of changes in
basis of calculation and rates of certain revenue taxes and of the tax on
financial movements - CPMF.
We continue to vigorously pursue our interests in all the above actions
but recognize that probably we will incur some losses in the final
instance, for which we have made provisions.
Our judicial deposits are made as required by the courts for us to be able
to enter or continue a legal action. When judgment is favorable to us, we
receive the deposits back; when unfavorable, the deposits are delivered to
the prevailing party.
Contingencies settled in the years December 31, 2001 and 2000 aggregated
$6 and $36, respectively, and additional provisions aggregated $79 and
$101 in these years, respectively.
(c) We are defendants in two actions seeking substantial compensatory damages
brought by the Municipality of Itabira, State of Minas Gerais, which we
believe are without merit. Due to the remote likelihood that any loss will
arise therefrom no provision has been made in the financial statements
with respect to these two actions.
(d) We are committed under a take-or-pay agreement to take delivery of
approximately 175,950 metric tons per year of aluminum from ALBRAS at
market prices. This estimate is based on 51% of ALBRAS expected production
and, at a market price of $1,453.66 per metric ton at December 31,
F-28
2001, represents an annual commitment of $256. We are also committed to
take-or-pay 437,214 metric tons per year of alumina produced by ALUNORTE
which at a market price of $176.08 per metric ton at December 31, 2001,
represents an annual commitment of $77. Actual take from ALBRAS was $220,
$242 and $222 in 2001, 2000 and 1999, respectively, and direct from
ALUNORTE (net of take ceded to ALBRAS) was $36, $52 and $30 in 2001, 2000
and 1999, respectively.
(e) We and BNDES entered into a contract, known as the Mineral Risk Contract,
in March 1997, relating to prospecting authorizations for mining regions
where drilling and exploration are still in their early stages. The
Mineral Risk Contract provides for the joint development of certain
unexplored mineral deposits in approximately two million identified
hectares of land in the Carajas region, as well as proportional
participation in any financial benefits earned from the development of
such resources. Iron ore and manganese deposits already identified and
subject to development are specifically excluded from the Mineral Risk
Contract.
Pursuant to the Mineral Risk Contract, we and BNDES each agreed to provide
$205, which represents half of the $410 in expenditures estimated as
necessary to complete geological exploration and mineral resource
development projects in the region over a period of five years. Under
certain circumstances, this period may be extended for an additional two
years. We oversee these projects and BNDES advances us half of our costs
on a quarterly basis. Under the Mineral Risk Contract, as of December 31,
2001, each of us and BNDES had remaining commitments to contribute an
additional $89 toward exploration and development activities. We both
expect to fund a portion of these contributions through the end of 2001.
In the event that either of us wishes to conduct further exploration and
development after having spent such $205, the contract provides that each
party may either choose to match the other party's contributions, or may
choose to have its financial interest proportionally diluted. If a party's
participation in the project is diluted to an amount lower than 40% of the
amount invested in connection with exploration and development projects,
then the Mineral Risk Contract provides that the diluted party will lose
(1) all the rights and benefits provided for in the Mineral Risk Contract
and (2) any amount previously contributed to the project.
Under the Mineral Risk Contract, BNDES has agreed to compensate us for our
contribution of existing development and ownership rights in the Carajas
region through a finder's fee production royalty on mineral resources that
are discovered and placed into production. This finder's fee is equal to
3.5% of the revenues derived from the sale of gold, silver and platinum
group metals and 1.5% of the revenues derived from the sale of other
minerals, including copper, except for gold and other minerals discovered
at Serra Leste, for which the finder's fee is equal to 6.5% of revenues.
(f) At the time of our privatization in 1997, we issued shareholder revenue
interests known in Brazil as "debentures" to our then-existing
shareholders, including the Brazilian Government. The terms of the
"debentures", which are described below, were set to ensure that our
pre-privatization shareholders, including the Brazilian Government, would
participate alongside us in potential future financial benefits that we
are able to derive from exploiting our mineral resources.
In preparation for the issuance of the debentures, we issued series B
preferred shares on a one-for-one basis to all holders of our common
shares and series A preferred shares. We then exchanged all of the series
B shares for the debentures at par value. The debentures are not
redeemable or convertible, and do not trade on a stapled basis or
otherwise with our common or preferred shares. At present the debentures
cannot be traded. Holders will be able to trade the debentures only after
a three-month period that will commence upon completion of the sale by the
Brazilian Government of its 32% stake in our common shares, which occurred
on March 27, 2002 (see Note 3). We will be required to register the
debentures with the CVM in order to permit trading at this time.
Under Brazilian Central Bank regulations, pre-privatization shareholders
that held their shares through our preferred share American Depositary
Receipt, or ADR, program were not permitted to receive the debentures or
any financial benefits relating to the debentures. We sought approval from
the Central Bank to distribute the debentures to the ADR holders, but the
Central Bank rejected our request. We intend to renew our request to the
Central Bank, but we cannot be sure that we will succeed. If the Central
Bank does not approve our request, the ADR depositary will not be able to
distribute the debentures to the ADR holders and will not be able to sell
the debentures. Therefore, unless the Central Bank approves our request,
the debentures will not have any value for ADR holders.
F-29
Under the terms of the debentures, holders will have the right to receive
semi-annual payments equal to an agreed percentage of our net revenues
(revenues less value added tax) from certain identified mineral resources
that we owned as of May 1997, to the extent that we exceed defined
threshold production volumes of these resources, and from the sale of
mineral rights that we owned as of May 1997. Our obligation to make
payments to the holders will cease when the relevant mineral resources are
exhausted. Based on current production levels, and estimates for new
projects for the cast is to start payments referring to cooper resource in
2004 we would related to iron ore resources in approximately 2012, and
payments related to other mineral resources in later years.
The table below summarizes the amounts we will be required to pay under
the debentures based on the net revenues we earn from the identified
mineral resources and the sale of mineral rights.
Area Mineral Required Payments by CVRD
----------------------- ---------------- ----------------------------------------------------
Southern System Iron ore 1.8% of net revenue, after total production from May
1997 exceeds 1.7 billion tons.
Northern System Iron ore 1.8% of net revenue, after total production from May
1997 exceeds 1.2 billion tons.
Pojuca, Andorinhas, Gold and copper 2.5% of net revenue from the beginning of commercial
Liberdade and Sossego production.
Igarape Bahia and Gold and copper 2.5% of net revenue, after total production from the
Alemao beginning of commercial production exceeds 70 tons of
gold.
Fazenda Brasileiro Gold 2.5% of net revenue after total production from the
beginning of commercial production exceeds 26 tons.
Other areas, excluding Gold 2.5% of net revenue.
Carajas/ Serra Leste
Other areas owned as Other minerals 1% of net revenue, 4 years after the beginning of
of May 1997 commercial production.
All areas Sale of mineral 1% of the sales price.
rights owned as
of May 1997
(g) At December 31, 2001 we have provided $29 for environmental liabilities.
Such provisions relate to site restoration at mines already closed or
which are expected to be closed in the next two years.
We use various judgments and assumptions when measuring our environmental
liabilities. Changes in circumstances, law or technology may affect our
estimates and we periodically review the amounts accrued and adjust them
as necessary. Our accruals do not reflect unasserted claims because we are
currently not aware of any such issues. Also the amounts provided are not
reduced by any potential recoveries under cost sharing, insurance or
indemnification arrangements because such recoveries are considered
uncertain .
16 Segment and geographical information
In 1999 we adopted SFAS 131 "Disclosures about Segments of an Enterprise
and Related Information" with respect to the information we present about
our operating segments. SFAS 131 introduced a "management approach"
concept for reporting segment information, whereby financial information
is required to be reported on the basis that the top decision-maker uses
such information internally for evaluating segment performance and
deciding how to allocate resources to segments. Our business segments are
currently organized as follows:
F-30
Ferrous products - comprises iron ore mining and pellet production, as
well as the Northern and Southern transportation systems, including
railroads, ports and terminals, as they pertain to mining operations.
Manganese mining and ferrous alloys are also classified in this segment.
Non-ferrous products - comprises the production of gold and other
non-ferrous minerals.
Logistics - comprises our transportation systems as they pertain to
external commercial operations, and the operations of our ships.
Holdings - divided into the following sub-groups:
o Pulp and paper - comprises our forestation activities and investments
in joint ventures and affiliates engaged in the manufacture of pulp
and paper products.
o Aluminum - comprises aluminum trading activities and investments in
joint ventures and affiliates engaged in bauxite mining, alumina
refining and aluminum metal smelting.
o Steel - comprises our investments in joint ventures and affiliates
operating in the steel industry.
o Others - comprises our investments in joint ventures and affiliates
engaged in other businesses.
Corporate Center - the Corporate Center is responsible for accounting and
control, finance, legal matters, human resources and administration,
investor and external relations and internal auditing.
Information presented to top management with respect to the performance of
each segment is generally derived directly from the accounting records
maintained in accordance with Brazilian corporate law together with
certain minor inter-segment allocations, and is focused primarily on
return on capital employed (ROCE), net operating profit less taxes (NOPLT)
as well as net income.
In 2000 we transferred various accounting, control, legal and information
technology functions from the operating divisions to our Corporate Center.
We estimate that this transfer increased the costs in our Corporate Center
by approximately $8, and reduced the costs of our ferrous, non ferrous and
logistics segments by $6, $1 and $1, respectively.
Consolidated net income and principal assets are reconciled as follows
(certain minor reclassifications have been made to the 2000 and 1999
information to be comparable with that for 2001):
F-31
Consolidated net income and principal assets are reconciled as follows:
2001
--------------------------------------------------------------------------------------------------------
Holdings
-------------------------------------
Non Pulp and Corporate
Ferrous ferrous Logistics paper Aluminum Steel Others Center Eliminatins Consolidated
------- ------- --------- -------- -------- ----- --------- ------ ----------- ------------
RESULTS
Revenues - Export ......... 3,559 173 147 47 282 -- -- -- (1,359) 2,849
Revenues - Domestic ....... 1,082 79 344 8 1 -- -- -- (231) 1,283
Cost and expenses ......... (3,218) (197) (422)(1) 628(2) (259) 120(3) -- (759) 1,541 (2,566)
Interest revenue .......... 169 1 11 3 7 3 -- -- (59) 135
Interest expense .......... (368) (10) (11) -- (1) (4) -- -- 59 (335)
Depreciation .............. (167) (17) (26) (2) -- -- -- -- -- (212)
Pension plan .............. (27) (3) (2) -- -- -- -- -- -- (32)
Equity and provision for
losses .................. (1) 1 (114) 11 41 5 4 -- -- (53)
Income taxes .............. 1 -- (3) -- 1 -- -- 219 -- 218
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
Net income ................ 1,030 27 (76) 695 72 124 4 (540) (49) 1,287
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Sales classified by
geographic destination:
Export market
Latin America ............. 238 -- 65 -- 9 -- -- -- (118) 194
United States ............. 247 139 21 47 73 -- -- -- (112) 415
Europe .................... 1,469 33 44 -- 173 -- -- -- (490) 1,229
Middle East ............... 216 -- 4 -- -- -- -- -- (20) 200
Japan ..................... 525 -- 10 -- 12 -- -- -- (245) 302
Asia, other than Japan .... 864 1 3 -- 15 -- -- -- (374) 509
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
3,559 173 147 47 282 -- -- -- (1,359) 2,849
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
Domestic market ........... 1,082 79 344 8 1 -- -- -- (231) 1,283
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
4,641 252 491 55 283 -- -- -- (1,590) 4,132
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Assets:
Property, plant and
equipment, net .......... 3,146 240 305 90 -- -- 7 25 -- 3,813
Capital expenditures ...... 506 40 25 22 -- -- -- 2 -- 595
Investments in affiliated
companies and joint
ventures and other
investments, net
provision for losses..... 673 29 34 -- 287 159 36 -- -- 1,218
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Capital employed .......... 2,980 249 313 50 18 13 7 (4) 4 3,630
NOPLT ..................... 1,356 56 149 2 25 14 -- (82) (49) 1,471
ROCE ...................... 46% 22% 48% 4% 139% 108% -- -- -- 41%
(1) - Includes provisions $101 to reflect realizable value of assets
(2) - Includes $170 profit on sale of Bahia Sul Celulose S.A. - BSC and $507
profit on sale of Celulose Nipo-Brasileira S.A. - CENIBRA
(3) - Includes $107 profit on sale of Companhia Siderurgica Nacional - CSN
F-32
2002
--------------------------------------------------------------------------------------------------------
Holdings
-------------------------------------
Non Pulp and Corporate
Ferrous ferrous Logistics paper Aluminum Steel Others Center Eliminatins Consolidated
------- ------- --------- -------- -------- ----- --------- ------ ----------- ------------
RESULTS
Revenues - Export .......... 2,849 198 195 121 351 - - - (1,068) 2,646
Revenues - Domestic ........ 1,000 90 403 21 12 1 - - (104) 1,423
Cost and expenses .......... (2,585) (214) (418) (156) (261) (10) - (578) 1,196 (3,026)
Interest revenue ........... 52 1 1 7 25 5 - 173 (56) 208
Interest expense ........... (74) (12) (6) - (2) (6) - (247) 32 (315)
Depreciation ............... (115) (30) (22) (22) - - - (6) - (195)
Pension plan ............... (7) (2) - - - - - - - (9)
Equity and provision
for losses ............... 46 - (22) 108 126 59 5 - - 322
Income taxes ............... 8 - 5 (7) (5) (48) - 79 - 32
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
Net income ................. 1,174 31 136 72 246 1 5 (579) - 1,086
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Sales classified by
geographic destination:
Export market
Latin America .............. 224 - 30 - 23 - - - (91) 186
United States .............. 252 156 64 73 39 - - - (108) 476
Europe ..................... 969 35 75 48 237 - - - (222) 1,142
Middle East ................ 209 - 6 - 16 - - - (19) 212
Japan ...................... 544 4 15 - 34 - - - (308) 289
Asia, other than Japan ..... 651 3 5 - 2 - - - (320) 341
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
2,849 198 195 121 351 - - - (1,068) 2,646
Domestic market ............ 1,000 90 403 21 12 1 - - (104) 1,423
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
3,849 288 598 142 363 1 - - (1,172) 4,069
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Assets :
Property, plant and
equipment, net ........... 3,077 325 374 149 - - - 30 - 3,955
Capital expenditures ....... 373 50 14 - - - - 10 - 447
Investments in affiliated
companies and joint
ventures and other
investments, net provision
for losses................ 519 31 151 372 262 423 37 - - 1,795
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Capital employed ........... 3,064 316 390 135 (10) 1 14 (6) 8 3,912
NOPLT ...................... 1,155 52 165 (44) 23 (54) - (63) 16 1,250
ROCE ....................... 38% 16% 42% (33%) - - - - - 32%
F-33
1999
--------------------------------------------------------------------------------------------------------
Holdings
-------------------------------------
Non Pulp and Corporate
Ferrous ferrous Logistics paper Aluminum Steel Others Center Eliminatins Consolidated
------- ------- --------- -------- -------- ----- --------- ------ ----------- ------------
RESULTS
Revenues - Export .......... 1,989 143 100 101 318 - - - (578) 2,073
Revenues - Domestic ........ 639 96 318 10 62 - - - (41) 1,084
Cost and expenses .......... (1,435) (151) (396) (103) (367) - - (428) 619 (2,261)
Interest revenue ........... 46 - 8 4 9 - - 170 (37) 200
Interest expense ........... (50) - (13) - (6) - - (201) 37 (233)
Depreciation ............... (120) (16) (21) (6) - - - - - (163)
Pension plan ............... (21) (4) (3) - - - - - - (28)
Equity and provision for
losses ................... (44) (15) (9) 9 (182) 7 - 7 - (227)
Income taxes ............... - - 14 (5) - - - (42) - (33)
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
Net income ................. 1,004 53 (2) 10 (166) 7 - (494) - 412
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Sales classified by
geographic destination:
Export market
Latin America .............. 149 - 13 - 5 - - - (60) 107
United States .............. 147 139 34 62 23 - - - (71) 334
Europe ..................... 621 - 31 39 146 - - - (110) 727
Middle East ................ 146 - 3 - - - - - (13) 136
Japan ...................... 351 - 9 - 94 - - - (83) 371
Asia, other than Japan ..... 575 4 9 - 50 - - - (241) 397
Others ..................... - - 1 - - - - - - 1
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
1,989 143 100 101 318 - - - (578) 2,073
Domestic market ............ 639 96 318 10 62 - - - (41) 1,084
------- ------ ------ ------ ------ ------ ------- ------ ------- ------
2,628 239 418 111 380 - - - (619) 3,157
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Assets :
Property, plant and
equipment, net ........... 2,950 400 404 158 - - - 31 - 3,943
Capital expenditures ....... 201 56 4 - - - - 4 - 265
Investments in affiliated
companies and joint
ventures and other
investments, net
provision for loss ....... 116 33 68 318 208 426 34 - - 1,203
======= ====== ====== ====== ====== ====== ======= ====== ======= ======
Capital employed ........... 3,081 399 419 148 9 - - (9) - 4,047
NOPLT ...................... 1,055 68 28 6 28 - - (309) 11 887
ROCE ....................... 34% 17% 7% 4% 311% - - - - 22%
F-34
17 Related party transactions
Transactions with major related parties (including agencies of the
Brazilian Federal Government) resulted in the following balances:
As of December 31
---------------------------------------------------------
2001 2000
------ ----------- ------ -----------
Assets Liabilities Assets Liabilities
AFFILIATED COMPANIES AND JOINT VENTURES
ALUNORTE (1) ......................... 321 76 332 45
CENIBRA (2) .......................... -- -- 126 41
Salobo Metais S.A (3) ................ 70 -- 76 --
FCA .................................. 154 2 151 18
HISPANOBRAS .......................... 21 28 21 23
ITABRASCO ............................ 18 17 17 22
NIBRASCO ............................. 20 5 29 38
KOBRASCO ............................. 35 25 34 7
Wilsea Shipping Inc .................. -- -- -- 34
USIMINAS ............................. 23 -- 24 --
ALBRAS ............................... 1 15 1 24
URUCUM ............................... -- -- 8 1
Others ............................... 154 106 133 85
EMPLOYEE FUNDS
Fundacao Vale do Rio Doce ............ -- -- -- 1
VALIA ................................ -- 1 -- 40
BRAZILIAN FEDERAL GOVERNM ENT
Banco do Brasil S.A (4) .............. 83 -- 85 3
Rede Ferroviaria Federal S.A ......... 11 32 13 39
BNDES ................................ 6 163 7 158
--- --- --- ---
917 470 1,057 579
=== === === ===
Current .............................. 350 293 337 378
=== === === ===
Long-term ............................ 567 177 720 201
=== === === ===
(1) Includes onlending outstanding balance of $192 (2000 - $204), with
identical conditions and terms, of a $200 U.S. dollar denominated loan
obtained by us from the Nippon Amazon Aluminium Company (NAAC) in January
1997 (bearing interest of 6.41% p.a. and maturing up to 2011).
(2) Includes onlending outstanding balance of $94 (2000 - $117), with
identical conditions and terms, of a $200 U.S. dollar denominated loan
obtained by us from the Japanese Eximbank in 1996, bearing interest of
6.21% p.a. and maturing up to 2004.
(3) Convertible debentures bearing interest of IGPM plus 6.50% p.a., maturing
up to 2002.
(4) Represents interest bearing deposits and investment funds.
F-35
These balances are included in the following balance sheet classifications:
As of December 31
---------------------------------------------------------
2001 2000
------ ----------- ------ -----------
Assets Liabilities Assets Liabilities
Current assets
Cash and cash equivalents ............ 83 -- 85 --
Accounts receivable .................. 106 -- 125 --
Loans and advances to related parties 160 -- 121 --
Others ............................... 1 -- 6 --
Other assets
Loans and advances to related parties 555 -- 704 --
Others ............................... 12 -- 16 --
Current liabilities
Suppliers ............................ -- 101 -- 179
Current portion of long-term debt .... -- 22 -- 30
Loans from related parties ........... -- 168 -- 152
Others ............................... -- 2 -- 17
Long-term liabilities
Long-term debt ....................... -- 156 -- 128
Loans from related parties ........... -- -- -- 21
Others ............................... -- 21 -- 52
---- ---- ----- ----
917 470 1,057 579
==== ==== ===== ====
The principal amounts of business and financial operations carried out with
major related parties are as follows:
Year ended December 31
----------------------------------------------------
2001 2000 1999
--------------- --------------- ----------------
Income Expense Income Expense Income Expense
------ ------- ------ ------- ------ -------
AFFILIATED COMPANIES AND JOINT VENTURES
CST ................................ 146 -- 166 -- 135 --
NIBRASCO ........................... 135 132 172 205 44 58
ALUNORTE ........................... 84 38 42 93 167 28
SIDERAR ............................ 30 -- 18 -- 30 --
ITABRASCO .......................... 67 33 66 24 57 23
HISPANOBRAS ........................ 74 74 75 77 26 50
KOBRASCO ........................... 75 63 76 18 62 67
CENIBRA ............................ 30 46 33 123 78 99
USIMINAS ........................... 59 -- 47 -- 18 --
ACOMINAS ........................... 4 -- 7 -- 8 --
ALBRAS ............................. 5 208 6 216 14 205
VALESUL ............................ -- -- 4 -- -- 24
MRN ................................ -- 17 1 17 -- 20
Others ............................. 95 142 82 75 80 59
BRAZILIAN FEDERAL GOVERNMENT
Banco do Brasil S.A ................ 27 -- 46 24 46 14
Petroleo Brasileiro S.A. - PETROBRAS 2 18 6 11 1 17
Centrais Eletricas Brasileiras S.A . 1 -- -- -- -- --
BNDES .............................. 1 19 1 18 1 12
------ ------- ------ ------- ------ -------
835 790 848 901 767 676
====== ======= ====== ======= ====== =======
F-36
These amounts are included in the following statement of income classifications:
Year ended December 31
----------------------------------------------------
2001 2000 1999
--------------- --------------- ----------------
Income Expense Income Expense Income Expense
------ ------- ------ ------- ------ -------
AFFILIATED COMPANIES AND JOINT VENTURES
Sales of iron ore and pellets ........ 518 349 494 313 288 175
Revenues from transportation services 85 - 133 - 89 -
Cost of aluminum products ............ - 254 - 327 - 271
Financial income/expenses ............ 180 59 117 79 101 59
Others ............................... 52 128 104 182 289 171
------ ------- ------ ------- ------ -------
835 790 848 901 767 676
====== ======= ====== ======= ====== =======
18 Fair value of financial instruments
The carrying amount of our current financial instruments generally
approximates fair market value because of the short-term maturity or
frequent repricing of these instruments.
The market value of long-term investments, where available, is disclosed
in Note 10 to these financial statements.
Based on borrowing rates currently available to us for bank loans with
similar terms and average maturities, the fair market value of long-term
debt at December 31, 2001 is estimated as follows:
As of December 31
---------------------
2001 2000
------ ------
Fair market value ................ 2,102 2,022
Carrying value ................... 2,170 2,020
Fair market value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments. Changes in assumptions could significantly affect the
estimates.
19 Derivative financial instruments
Volatility of interest rates, exchange rates and commodity prices are the
main market risks to which we are exposed - all three are managed through
derivative operations. These have the exclusive aim of reducing exposure
to risk. We do not use derivatives for speculation purposes.
We monitor and evaluate our derivative positions on a regular basis and
adjust our strategy in response to market conditions. We also periodically
review the credit limits and credit worthiness of our counter-parties in
these transactions. In view of the policies and practices established for
operations with derivatives, management considers the occurrence of
non-measurable risk situations as unlikely.
As from January 1, 2001 we adopted SFAS 133 "Accounting for Derivative
Financial Instruments and Hedging Activities", as amended by SFAS 137 and
SFAS 138, and began to recognize all derivatives on our balance sheet at
fair value. Accordingly we recognized an initial transition adjustment of
$12 as a charge in our statement of income relative to net unrealized
losses on contracts open as of December 31, 2000. Subsequently to January
1, 2001 all derivatives have been adjusted to fair market value at each
balance sheet date and the change included in current earnings.
F-37
For the year ended December 31, 2001 the movement of unrealized and realized
gains or losses on derivative financial instruments is as follows:
Net Gains (losses)
------------------------------------------
Interest
Gold rates (libor) Currencies Total
---- ------------- ---------- -----
Initial unrealized gains and losses at January 1, 2001 .. 9 (8) (4) (3)
Change in the period .................................... 2 (36) (4) (38)
(Gains) and losses realized in the period ............... (4) 8 4 8
--- ---- --- ----
Unrealized gains and (losses) at December 31, 2001 ...... 7 (36) (4) (33)
=== ==== === ====
Realized and unrealized gains and losses are included in our income statement
under the following captions:
Gold - other operating costs and expenses;
Interest rates - financial expenses;
Currencies - foreign exchange and monetary losses, net.
Final maturity dates for the above instruments are as follows:
Gold ......................................................... December 2005
Interest rates (libor) ....................................... October 2007
Currencies ................................................... April 2005
(a) Interest Rate and Exchange Rate Risk
Interest rate risks mainly relate to that part of the debt borrowed at
floating rates. The foreign currency debt is largely subject to
fluctuations in the London Interbank Offered Rate - LIBOR. That portion of
local currency denominated debt that is subject to floating rates is
linked to the Long Term Interest Rate - TJLP, fixed quarterly by the
Brazilian Central Bank. Since May 1998, we have used derivative
instruments to protect overselves against fluctuations in the LIBOR rate.
There is an exchange rate risk associated with our foreign currency
denominated debt. On the other hand, a substantial proportion of our
revenues are denominated in, or automatically indexed to, the U.S. dollar,
while the majority of costs are expressed in reais. This provides a
natural hedge against any devaluation of the Brazilian real against the
U.S. dollar. When events of this nature occur, the immediate negative
impact on foreign currency denominated debt is offset over time by the
positive effect of devaluation on future cash flows.
With the advent of a floating exchange rate regime in Brazil in January
1999, we adopted a strategy of monitoring market fluctuations, using
derivatives to protect against specific risks from exchange rate
variation.
From time to time we enter into foreign exchange derivative swap
transactions seeking to change the characteristics of our real-denominated
cash investments to US dollar-indexed instruments. The extent of such
transactions depends on our perception of market and currency risk, but is
never speculative in nature. All such operations are marked-to-market at
each balance sheet date and the effect included in financial income or
expense. During the years December 31, 2001 our use of such instruments
was not significant.
(b) Commodity Price Risk
We also use derivative instruments to manage exposure to changing gold
prices. Derivatives allow the fixing of an average minimum profit level
for future gold production. However, they may also have the effect of
eliminating potential gains on certain price increases in the spot market
for gold. We manage
F-38
our contract positions actively, and the results are reviewed at least
monthly, allowing adjustments to targets and strategy to be made in
response to changing market conditions. In the case of gold derivatives,
our policy has been to settle all contracts through cash payments or
receipts, without physical delivery of product.
Our affiliates Albras and Alunorte manage the risk of fluctuating aluminum
prices using derivatives, allowing an average minimum profit level for
future production and ensuring stable cash generation. However, they may
also have the effect of eliminating potential gains on certain price
increases in the spot market for aluminum. We account for both affiliates
using the equity method.
In December 2000, we introduced a new risk management system to evaluate,
measure and manage the market risk associated with our financial
activities, using the value-at-risk - VAR method. VAR incorporates a
variety of risk factors which affect our results, including commodity
prices, interest and exchange rate volatilities, as well as the
correlation between all these variables. This tool will permit more
efficient monitoring of market risk exposure.
20 Information about independent accountants
Our consolidated financial statements are audited by
PricewaterhouseCoopers Auditores Independentes. The financial statements
of certain of our subsidiaries and affiliates have been audited by
independent accountants other than PricewaterhouseCoopers Auditores
Independentes and, as mentioned in their report, PricewaterhouseCoopers
Auditores Independentes has relied on such audits when expressing their
opinion on our consolidated financial statements.
The following entities prepare financial statements in US GAAP which are
audited in accordance with auditing standards generally accept in the
United States of America:
Auditors Years Audited City State Country
-------- ------------- ---- ----- -------
Aluminio Brasileiro S.A. - ALBRAS ................... DTT 2001, 2000, RJ RJ Brazil
1999
Alumina do Norte do Brasil S.A. - ALUNORTE .......... DTT 2001, 2000, RJ RJ Brazil
1999
Vale do Rio Doce Aluminio S.A. - ALUVALE ............ DTT 2001, 2000, RJ RJ Brazil
1999
Bahia Sul Celulose S.A . (4) ........................ KPMG 2001, 2000, SP SP Brazil
1999
Orange
California Steel Industries , Inc. .................. KPMG LLP 2001, 2000, County CA USA
1999
Celulose Nipo-Brasileira S.A. - CENIBRA (1) (4) ..... DTT 2001, 2000, BH MG Brazil
1999
Navegacao Vale do Rio Doce S.A. - DOCENAVE .......... DTT 2001, 2000, RJ RJ Brazil
1999
DOCEPAR S.A. (1) .................................... DTT 2001, 2000, RJ RJ Brazil
1999
Companhia Hispano-Brasileira de Pelotizacao -
HISPANOBRAS ....................................... AA 2001, 2000, Vitoria ES Brazil
1999
Companhia Italo-Brasileira de Pelotizacao - ITABRASCO AA 2001, 2000, Vitoria ES Brazil
1999
Companhia Coreano Brasileira de Pelotizacao -
KOBRASCO (2) ...................................... DTT 2001, 2000 RJ RJ Brazil
Mineracao Rio do Norte S.A. ......................... AA 2001, 2000, RJ RJ Brazil
1999
Companhia Nipo-Brasileira de Pelotizacao - NIBRASCO . DTT 2001, 2000, RJ RJ Brazil
1999
Valesul Aluminio S.A. ............................... KPMG 2001, 2000, RJ RJ Brazil
1999
Companhia Siderurgica Nacional (1) (4) .............. AA 2000, 1999 RJ RJ Brazil
In addition to the above the following entities prepare financial statements in
Brazilian GAAP which are audited in accordance with auditing standards
generally accepted in Brazil. PricewaterhouseCoopers Auditores Independentes
relies on such audits but is responsible for reviewing the US GAAP translation
and, if applicable, US GAAP adjustments.
F-39
Auditors Years Audited City State Country
-------- ------------- ---- ----- -------
Terminal Vila Velha S.A. ............................ DTT 2001, 2000, RJ RJ Brazil
1999
Nova Era Silicon S.A. ............................... DTT 2001, 2000 BH MG Brazil
Nova Era Silicon S.A. ............................... Trevisan 1999 BH MG Brazil
Celmar S.A. - Industria de Celulose e Papel (2) ..... DTT 2001, 2000 RJ RJ Brazil
SIBRA Eletrosiderurgica Brasileira S.A. (3) ......... DTT 2001, 2000 Salvador BA Brazil
AA - Arthur Andersen S/C
DTT - Deloitte Touche Tohmatsu
RJ - Rio de Janeiro
MG - Minas Gerais
BH - Belo Horizonte
SP - Sao Paulo
ES - Espirito Santo
BA - Bahia
(1) Audited by PricewaterhouseCoopers in 1998.
(2) Audited by PricewaterhouseCoopers in 1999 and 1998.
(3) Consolidated as from 2000.
(4) Investment sold in 2001.
F-40
INDEX TO FINANCIAL STATEMENTS OF VALE OVERSEAS
Report of PricewaterhouseCoopers Auditores Independentes dated
March 26, 2002 regarding Vale Overseas for the year ended
December 31, 2001..................................................... F-42
Balance Sheet as of December 31, 2001.................................... F-43
Notes to Balance Sheet................................................... F-44
F-41
Report of Independent Accountants
To the Board of Directors and Stockholders
Vale Overseas Limited
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of Vale Overseas Limited at December 31, 2001
in conformity with accounting principles generally accepted in the United
States of America. This balance sheet is the responsibility of the Company's
management; our responsibility is to express an opinion on this balance sheet
based on our audit. We conducted our audit of this statement in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the balance sheet is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the balance sheet, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
March 26, 2002
PricewaterhouseCoopers
Auditores Independentes
F-42
Vale Overseas Limited
Balance sheet at December 31
Expressed in thousands of U.S. dollars
-------------------------------------------------------------------------------
Assets 2001
---------
Current assets
Cash and cash equivalent 1,000
---------
1,000
=========
Liabilities
Stockholders' equity
Common stock (1,000 common shares
of a par value of US$1.00 each) 1,000
---------
1,000
=========
The accompanying notes are an integral part of these financial statements.
F-43
Vale Overseas Limited
Notes to the Balance Sheet
at December 31, 2001
--------------------------------------------------------------------------
1 Operations
Vale Overseas Limited ( the "Company"), located in the Cayman Islands, was
constituted in April, 2001 as a wholly-owned subsidiary of Companhia Vale
do Rio Doce and operates principally as finance company.
2 Presentation of financial statements
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("US GAAP").
The transactions are accounted for in United States dollars and are tax
exempt.
3 Cash and cash equivalents
Cash and cash equivalents are denominated in U.S. dollars and represented,
by short-term bank deposits.
4 Subsequent event
On March 8, 2002, the Company issued US$ 300,000,000 of 8.625% Enhanced
Guaranteed Notes due March 8, 2007 Unconditionally Guaranteed by Companhia
Vale do Rio Doce.
* * *
F-44
INDEX TO AUDIT REPORTS FROM INDEPENDENT ACCOUNTANTS LISTED
IN NOTE 20 TO OUR CONSOLIDATED FINANCIAL STATEMENTS
Report of Deloitte Touche Tohmatsu dated January 24, 2002 with respect
to the financial statements of Albras for the three years ended
December 31, 2001, 2000 and 1999 ................................... B-3
Report of Deloitte Touche Tohmatsu dated January 24, 2002 with respect
to the financial statements of Alunorte for the three years ended
December 31, 2001, 2000 and 1999 ................................... B-4
Report of Deloitte Touche Tohmatsu dated January 25, 2002 with respect
to the financial statements of Aluvale for the three years ended
December 31, 2001, 2000 and 1999 ................................... B-5
Report of KPMG LLP dated February 6, 2001 with respect to the
financial statements of Bahia Sul Celulose S.A. for the two years
ended December 31, 2000 and 1999 ................................... B-6
Report of KPMG LLP dated January 21, 2002 with respect to the
financial statements of CSI for the three years ended December 31,
2001, 2000 and 1999 ................................................ B-7
Reports of Deloitte Touche Tomahtsu dated January 25, 2002 and January
21, 2000 with respect to the financial statements of Cenibra for
the three years ended December 31, 2001, 2000 and 1999 ............. B-8
Report of Deloitte Touche Tohmatsu dated January 25, 2002 with respect
to the financial statements of Docenave for the three years ended
December 31, 2001, 2000 and 1999 ................................... B-11
Reports of Deloitte Touche Tohmatsu dated January 25, 2002 and February
18, 2000 with respect to the financial statements of Docepar for
the two years ended December 31, 2001, 2000 and 1999 ............... B-12
Report of Arthur Andersen S/C dated January 24, 2002 with respect to
the financial statements of Hispanobras for the three years ended
December 31, 2001, 2000 and 1999 ................................... B-14
Report of Arthur Andersen S/C dated January 24, 2002 with respect to
the financial statements of Itabrasco for the three years ended
December 31, 2001, 2000 and 1999 ................................... B-15
Report of Deloitte Touche Tohmatsu dated January 18, 2002 with respect
to the financial statements of Kobrasco for the two years ended
December 31, 2001 and 2000 ......................................... B-16
Report of Arthur Andersen S/C dated January 25, 2002 with respect to
the financial statements of MRN for the three years ended December
31, 2001, 2000 and 1999 ............................................ B-17
Report of Deloitte Touche Tohmatsu dated January 18, 2002 with respect
to the financial statements of Nibrasco for the three years ended
December 31, 2001, 2000 and 1999 ................................... B-18
B-1
Report of KPMG Auditores Independentes dated January 17, 2002 with
respect to the financial statements of Valesul for the three years
ended December 31, 2001, 2000 and 1999 ............................. B-19
Reports of Deloitte Touche Tohmatsu dated January 30, 2002 and
February 2, 2001 with respect to financial statements of Terminal
Vila Velha S.A for the three years ended December 31, 2001, 2000,
and 1999 (English Version) ......................................... B-20
Report of Deloitte Touche Tohmatsu dated January 25, 2002 with respect
to financial statements of Nova Era Silicon S.A. for the two years
ended December 31, 2001 and 2000 (English Version) ................. B-22
Report of Trevisan dated January 18, 2000 with respect to financial
statements of Nova Era Silicon S.A. for the two years ended
December 31, 1999 and 1998 (English Version) ....................... B-24
Report of Deloitte Touche Tohmatsu dated January 25, 2002 with respect
to financial statements of Celmar S.A.-Industria de Celulose e
Papel for the two years ended December 31, 2001 and 2000 (English
Version) ........................................................... B-26
Report of Deloitte Touche Tohmatsu dated February 15, 2002 with
respect to financial statements of SIBRA Eletrosiderurgica
Brasileira S.A. for the two years ended December 31, 2001 and
2000 ............................................................... B-27
B-2
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Stockholders of
ALBRAS - Aluminio Brasileiro S.A.
Barcarena - PA
We have audited the accompanying balance sheets of ALBRAS - Aluminio Brasileiro
S.A. as of December 31, 2001 and 2000, and the related statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
three-year period ended December 31, 2001 (all expressed in United States
dollars). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the financial position of ALBRAS - Aluminio
Brasileiro S.A. at December 31, 2001 and 2000 and the results of its operations
and its cash flows for the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte Touche Tohmatsu
January 24, 2002
B-3
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Stockholders
ALUNORTE - Alumina do Norte do Brasil S.A.
Barcarena - PA
We have audited the accompanying balance sheets of ALUNORTE - Alumina do Norte
do Brasil S.A. as of December 31, 2001 and 2000, and the related statements of
operations, changes in stockholders' equity and cash flows for the three-year
period ended December 31, 2001 (all expressed in United States dollars). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion the accompanying financial statements referred to above present
fairly, in all material respects, the financial position of ALUNORTE - Alumina
do Norte do Brasil S.A. as of December 31, 2001 and 2000 and the results of its
operations and its cash flows for the three-year period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte Touche Tohmatsu
January 24, 2002
B-4
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Vale do Rio Doce Aluminio S.A. - ALUVALE
We have audited the accompanying balance sheets of Vale do Rio Doce Aluminio
S.A. - ALUVALE as of December 31, 2001 and 2000, and the related statements of
operations, cash flows and changes in stockholders' equity for each of the
three years in the period ended December 31, 2001 (all expressed in United
States dollars). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of the Mineracao Rio do Norte S.A and Valesul Aluminio S.A, the
Company's investments which are accounted for by use of the equity method. The
Company's equity in the aforementioned affiliated companies' net assets at
December 31, 2001 and 2000, totaling US$204,951,000 and US$197,104,000,
respectively, and the Company's net equity in the aforementioned affiliated
companies' net income for the years ended December 31, 2001, 2000 and 1999,
totaling US$51,990,000, US$47,861,000 and US$10,538,000, respectively, are
included in the accompanying financial statements. The financial statements of
the above mentioned affiliated companies were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
the amounts included for such companies, is based solely on the reports of such
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
accompanying financial statements referred to above present fairly, in all
material respects, the financial position of Vale do Rio Doce Aluminio S.A. -
ALUVALE as of December 31, 2001 and 2000 and the results of its operations, the
changes in its stockholders' equity and its cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte Touche Tohmatsu
January 30, 2002
B-5
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Bahia Sul Celulose S.A.
We have audited the accompanying consolidated balance sheets of Bahia Sul
Celulose S.A. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and
comprehensive (loss) income and cash flows for each of the years in the
three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bahia Sul Celluose
S.A. and subsidiaries as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG Auditors Independentes
Sao Paulo, Brazil
February 6, 2001
B-6
INDEPENDENT AUDITORS' REPORT
The Board of Directors
California Steel Industries, Inc.
We have audited the accompanying consolidated balance sheets of California
Steel Industries, Inc. and subsidiary as of December 31, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of California Steel
Industries, Inc. and subsidiary as of December 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Orange County, California
January 21, 2002
B-7
INDEPENDENT AUDITORS' OPINION
To the Shareholders and Directors of
Celulose Nipo-Brasileira S.A. - CENIBRA
Belo Oriente/MG
We have audited the accompanying consolidated balance sheets of Celulose
Nipo-Brasileira S.A. - CENIBRA as of December 31, 2001 and 2000 and the related
statements of operations, changes in stockholders' equity and of cash flows for
the years then ended (all expressed in United States dollars). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celulose
Nipo-Brasileira S.A. - CENIBRA and its subsidiaries as of December 31, 2001 and
2000, the results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte Touche Tohmatsu
January 25, 2002
B-8
INDEPENDENT AUDITORS' OPINION
To the Shareholders and Directors of
Celulose Nipo-Brasileira S/A - CENIBRA
Belo Oriente/MG
We have audited the accompanying consolidated balance sheet of Celulose
Nipo-Brasileira S/A - CENIBRA as of December 31, 1999 and the related
statements of operations, changes in stockholders' equity and of cash flows for
the year then ended (all expressed in United States dollars). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of the
Company for the years ended December 31, 1998 and 1997 were audited by other
auditors whose reports, dated January 21, 1999 and February 6, 1998,
respectively, expressed qualified opinion for 1998, in relation to the same
matter mentioned in the third paragraph, the effect of which was US$6,500,000,
and an unqualified opinion for 1997.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance as to whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As mentioned in note 4, the Company has a lawsuit related to the deductibility
of the effects of the restatement determined by Law N(degree)7.730/89, which
established the "Plano Verao". Until December 31, 1997 the Company had recorded
a provision for contingency in the amount of US$6,518,000 related to the tax
effects (income tax and social contribution) for the use of the deductibility
mentioned above. In December 1998, based on the opinion of its legal advisors,
the management of the Company decided to revert the amount recorded as a
provision for contingency. The Company obtained favorable decisions in lower
courts, but the claim is still pending a decision in the Superior Court. We
understand that conservatively, the Company should have maintained the recorded
provision, and as such, the stockholders' equity as at December 31, 1999 is
overstated by approximately US$4,611,000.
In our opinion, except for the matter mentioned in the preceding paragraph, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Celulose Nipo-Brasileira S/A -
CENIBRA and
B-9
its subsidiaries as of December 31, 1999 and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte Touche Tohmatsu
January 21, 2000
B-10
INDEPENDENT AUDITORS' OPINION
To the Board of Directors and Stockholders
Navegacao Vale do Rio Doce S.A. - DOCENAVE
Rio de Janeiro - RJ
We have audited the accompanying consolidated balance sheets of Navegacao Vale
do Rio Doce S.A. - DOCENAVE and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, cash flows and changes
in stockholders' equity for the three-year period ended December 31, 2001 (all
expressed in United States dollars). These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the financial statements of the affiliated company, Wilsea Shipping,
Inc., the Company's investment which is accounted for by use of the equity
method. The Company's equity of US$647,000 and US$36,257,000 in the
aforementioned affiliated company's net assets at December 31, 2001 and 2000,
respectively, and net loss of US$610,000 and net income of US$13,984,000 and
US$783,000 in that company's net income (loss) for the years ended December 31,
2001, 2000 and 1999, respectively, are included in the accompanying financial
statements. The financial statements of the above mentioned affiliated company
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such company, is
based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
accompanying financial statements referred to above presented fairly, in all
material respects, the financial position of Navegacao Vale do Rio Doce S.A. -
DOCENAVE and subsidiaries as of December 31, 2001 and 2000, and the results of
its operations and its cash flows for the three-year period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte Touche Tohmatsu
January 25, 2002
B-11
INDEPENDENT ACCOUNTANTS' REPORT
To The Board of Directors and Stockholders of
DOCEPAR S.A.
Rio de Janeiro - RJ
We have audited the accompanying balance sheet of DOCEPAR S.A. (previously Vale
do Rio Doce Navegacao S.A. - DOCENAVE) as of December 31, 1999 and the related
statements of operations, cash flows and changes in stockholders' equity for
the year then ended (all expressed in United States Dollars). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of the affiliated company,
Companhia Siderurgica Nacional, the Company's investments which is accounted
for by use of the equity method. The Company's equity of US$133,569,000 in the
aforementioned affiliated company's net assets at December 31, 1999 and of
US$3,328,000 in that company's net income for the year then ended are included
in the accompanying financial statements. The financial statements of the above
mentioned affiliated company were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for such company, is based solely on the reports of such other
auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America Those standards require that we plan and
perform the audit to obtain reasonable assurance as to whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
accompanying financial statements referred to above present fairly, in all
material respects, the financial position of DOCEPAR S.A. as of December 31,
1999 and the result of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the
United States of America.
The Company is not presenting the comparative financial statements for the
years ended December 31, 1998 and 1997 due to certain corporate restructuring
changes in the reporting entity, as explained in note 1.
/s/ Deloitte Touche Tohmatsu
February 18, 2000
B-12
INDEPENDENT AUDITORS' OPINION
To The Board of Directors and Stockholders of
DOCEPAR S.A.
Rio de Janeiro - RJ
Brazil
We have audited the accompanying balance sheets of DOCEPAR S.A. as of December
31, 2001 and 2000 and the related statements of operations, cash flows and
changes in stockholders' deficiency for the years then ended (all expressed in
United States dollars). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of the affiliated company, Companhia Siderurgica Nacional, the
Company's investment which was sold during the year 2000 and was accounted for
by use of the equity method. The Company's gain related to the aforementioned
affiliated company was US$4,189,000 and US$3,328,000 for the year ended
December 31, 2000 and 1999, respectively. The financial statements of the above
mentioned affiliated company were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for such company, is based solely on the reports of such other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other accountants,
the accompanying financial statements referred to above present fairly, in all
material respects, the financial position of DOCEPAR S.A. as of December 31,
2001 and 2000 and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte Touche Tohmatsu
January 25, 2002
B-13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Companhia Hispano-Brasileira de
Pelotizacao - HISPANOBRAS:
(1) We have audited the accompanying balance sheets of Companhia Hispano-
Brasileira de Pelotizacao - Hispanobras (a Brazilian corporation and a
subsidiary of Companhia Vale do Rio Doce), translated into U.S. dollars, as of
December 31, 2001 and 2000, and the related translated statements of income,
changes in stockholders' equity and cash flows for the years ended December 31,
2001, 2000 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
(2) We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
(3) These translated financial statements have been prepared as the basis for
application of the equity method by its stockholders and, accordingly, they
translate the assets, liabilities, stockholders' equity and revenues and
expenses of Companhia Hispano-Brasileira de Pelotizacao - Hispanobras for that
purpose, as explained in Note 2.
(4) In our opinion, the financial statements referred to in paragraph 1 present
fairly, in all material respects, and for the purpose described in the
preceding paragraph, the financial position of Companhia Hispano-Brasileira de
Pelotizacao - Hispanobras as of December 31, 2001 and 2000, and the results of
its operations, the changes in its stockholders' equity and its cash flows for
the years ended December 31, 2001, 2000 and 1999, in conformity with the
generally accepted accounting principles of the United States of America.
/s/ Arthur Andersen
Rio de Janeiro, Brazil,
January 24, 2002
B-14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Companhia Italo-Brasdeira de
Pelotizacao - ITABRASCO:
(1) We have audited the accompaning, balance sheets of Companhia Italo-
Brasdeira de Pelotizacao - Itabrasco (a Brazilian corporation and a subsidiary
of Companhia Vale do Rio Doce), translated into US dollars, as of December 31,
2001 and 2000 and the related translated statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 2001, 2000
and 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
(2) We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
(3) These translated financial statements have been prepared as the basis for
application of the equity method by its stockholders and, accordingly, they
translate the assets, liabilities, stockholders' equity and revenues and
expenses of Companhia Italo-Brasdeira de Pelotizacao - Itabrasco for that
purpose, as explained in Note 2.
(4) In our opinion, the financial statements referred to in paragraph 1 present
fairly, in all material respects, and for the purpose described in the
preceding paragraph, the financial position of Companhia Italo-Brasdeira de
Pelotizacao - Itabrasco as of December 31, 2001 and 2000, and the results of
its operations, the changes in its stockholders' equity and its cash flows for
the years ended December 31, 2001, 2000 and 1999, in conformity with the
generally accepted accounting principles of the United States of America.
/s/ Arthur Andersen
Rio de Janeiro, Brazil,
January 24, 2002
B-15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Companhia Coreano-Brasileira de Pelotizacao - KOBRASCO
Vitoria, Brazil
1. We have audited the accompanying consolidated balance sheets of Companhia
Coreano-Brasileira de Pelotizacao - KOBRASCO as of December 31, 2001 and
2000, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years then ended (all
expressed in United States dollars). These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of the Company for the year ended December 31, 1999
were audited by other auditors whose report thereon, dated January 14,
2000, expressed an unqualified opinion on those statements.
2 We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance as to whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
3. The Company did not record a valuation allowance in the amount of
US$24,758 thousand as of December 31, 2001, in respect of recoverable
value-added tax (ICMS) credits which originated from purchases of raw
materials and other supplies, the realization of which is currently not
determinable. Accordingly, the net income for the year and the
stockholders' equity are overstated in the amount of US$24,758 thousand
as of December 31, 2001.
4. In our opinion, except for the effects of the matter described in
paragraph 3, the accompanying consolidated financial statements referred
to above present fairly, in all material respects, the financial position
of Companhia Coreano-Brasileira de Pelotizacao - KOBRASCO as of December
31, 2001 and 2000, and the consolidated statements of operations and cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte Touche Tohmatsu
January 18, 2002
B-16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Mineracao Rio do Norte S.A.:
(1) We have audited the accompanying balance sheets of Mineracao Rio Do Norte
S.A. (a Brazilian corporation), translated into US dollars, as of December 31,
2001 and 2000, and the related translated statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
(2) We did not audit the financial statements of the associated company
Alunorte - Alumina do Norte do Brasil S.A. as of December 31, 2001 and 2000.
This investment represents 4% of the total assets (3% in 2000) and -1% of the
net income (7% in 2000). Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for that entity, is based solely on the report of the other
auditors.
(3) We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
(4) These translated financial statements have been prepared as the basis for
application of the equity method by the Company's stockholders and,
accordingly, they translate the assets, liabilities, stockholders' equity and
revenues and expenses of Mineracao Rio do Norte S.A. for that purpose, as
explained in Note 2.
(5) In our opinion, based on our audits and on the report of other auditors, as
mentioned in paragraph 2, the financial statements referred to in paragraph 1
present fairly, in all material respects, and for the purpose described in the
preceding paragraph, the financial position of Mineracao Rio do Norte S.A. as
of December 31, 2001 and 2000, and the results of its operations, the changes
in its stockholders' equity and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Arthur Andersen
Rio de Janeiro, Brazil,
January 25, 2002
B-17
INDEPENDENT AUDITORS' OPINION
To the Board of Directors and Stockholders of
Companhia Nipo-Brasileira de Pelotizacao - NIBRASCO
Vitoria, Brazil
We have audited the accompanying balance sheets of Companhia Nipo-Brasileira de
Pelotizacao - NIBRASCO as of December 31, 2001 and 2000, and the related
statements of operations, changes in stockholders' equity and cash flows for
the three-year period ended December 31, 2001 (all expressed in United States
dollars). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements referred to above present
fairly, in all material respects, the financial position of Companhia
Nipo-Brasileira de Pelotizacao - NIBRASCO at December 31, 2001 and 2000, and
the results of its operations and its cash flows for the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in United States of America.
/s/ Deloitte Touche Tohmatsu
January 18, 2002
B-18
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Valesul Aluminio S.A.
We have audited the accompanying balance sheets of Valesul Aluminio S.A. as of
December 31, 2001 and 2000, and the related statements of income, changes in
stockholders' equity and comprehensive income/loss and cash flows for each of
the years in the three-year period then ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Brazil and in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance as to whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
1n our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valesul Aluminio S.A. as of
December 31, 2001, 2000 and 1999, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
As more fully described in Notes 4 and 8 to the financial statements, the
company has adjusted its property, plant and equipment and deferred income
taxes accounting balances as a result of corrections of errors. Consequently,
the Company's financial statements for 2000 and 1999 referred to above have
been restated to conform with these adjustments.
/s/ KPMG Auditors Independentes
Rio de Janeiro, Brazil
January 17, 2002
B-19
INDEPENDENT AUDITORS' OPINION
To The Stockholders and Board of Directors
TVV - Terminal de Vila Velha S.A.
Vitoria - ES
We have audited the balance sheets of TVV - Terminal de Vila Velha S.A. as of
December 31, 2000 and 1999, and the related statements of operations, changes
in stockholders' equity and changes in financial position for the years then
ended (all expressed in Brazilian Reais). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Brazil, and included: (a) planning the audit, considering the
materiality of the amounts presented, the number of transactions and the
Company's accounting and internal control systems; (b) examining, on a test
basis, the evidence supporting the amounts and disclosures in the financial
statements; and (c) the assessment of the accounting principles used and of the
significant estimates made by management, as well as the presentation of the
financial statements taken as a whole.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position as of December
31, 2000 and 1999, and the results of its operations, changes in its
stockholders' equity and changes in its financial position for the years then
ended, in conformity with Brazilian corporate law.
The translation of the financial statements into English have been made solely
for the convenience of readers outside of Brazil.
/s/ Deloitte Touche Tohmatsu
Vitoria,
February 2, 2001
B-20
INDEPENDENT AUDITORS' OPINION
To The Stockholders and Board of Directors
TVV - Terminal de Vila Velha S.A.
Vitoria - ES
We have audited the balance sheets of TVV - Terminal de Vila Velha S.A. as of
December 31, 2001 and 2000, and the related statements of operations, changes
in stockholders' equity and changes in financial position for the years then
ended (all expressed in Brazilian Reais). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Brazil, and included: (a) planning the audit, considering the
materiality of the amounts presented, the number of transactions and the
Company's accounting and internal control systems; (b) examining, on a test
basis, the evidence supporting the amounts and disclosures in the financial
statements; and (c) the assessment of the accounting principles used and of the
significant estimates made by management, as well as the presentation of the
financial statements taken as a whole.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position as of December
31, 2001 and 2000, and the results of its operations, changes in its
stockholders' equity and changes in its financial position for the years then
ended, in conformity with Brazilian corporate law.
The translation of the financial statements into English have been made solely
for the convenience of readers outside of Brazil.
/s/ Deloitte Touche Tohmatsu
Vitoria,
January 30, 2002
B-21
INDEPENDENT AUDITORS' REPORT
To the Management and Stockholders of
Nova Era Silicon S.A.
Belo Horizonte/MG
1. We have audited the accompanying balance sheets of Nova Era Silicon S.A.
as of December 31, 2001 and 2000, and the related statements of income,
changes in stockholders' equity and changes in financial position for the
years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
2. Except for matter mentioned in the third paragraph, we conducted our
audits in accordance with generally accepted auditing standards in
Brazil, which included: (a) planning of the engagement, considering the
materiality of the balances, the volume of transactions and the
accounting and internal control system of the Company; (b) examination,
on a test basis, of the evidence and records supporting the amounts and
disclosures in the financial statements; and (c) evaluation of the
accounting principles used and significant estimates made by the
management of the company, as well as the overall financial statement
presentation.
3. The Company has calculated the depletion of some of its forests, whose
net balance as of December 31, 2001 was R$3.257 thousand (R$3.760
thousand in 2000), at a 10% annual rate (straight line method). As
required by accounting principles, depletion of forests should be
calculated based on the volume of timber that has been extracted in
proportion to total potential volume, applied to total cost. We were
unable to measure the effects arising from the adoption of such a
procedure as of December 31, 2001 and 2000.
4. As of December 31, 1999, the Company elected to follow Resolution 294,
issued by the Brazilian Securities and Exchange Commission - CVM, and
recorded in its deferred assets the net loss on exchange variation for
the three-month period ended March 31, 1999. As required by accounting
principles, exchange variation should be charged to expenses in the
period in which they were incurred. Consequently, permanent assets and
stockholders' equity as of December 31, 2001 were overstated by R$2.066
thousand (R$4.128 thousand in 2000), and net income for the year then
ended was understated by R$2.062 thousand (R$2.062 thousand in 2000),
related to the respective amortization.
5. In our opinion, except for the effects, if any, of the matter mentioned
in the third paragraph and for the effects of the matter mentioned in the
fourth
B-22
paragraph, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Nova
Era Silicon S.A. as of December 31, 2001 and 2000, and the results of its
operations, the changes in its stockholders' equity and the changes in its
financial position for the years then ended, in conformity with accounting
principles established by Brazilian corporate law.
6. The translation of the financial statements into English have been made
solely for the convenience of readers outside of Brazil.
/s/ Deloitte Touche Tohmatsu
January 25, 2002
B-23
This is a free translation of the original report in Portuguese, issued in
January 18, 2000 of financial statements prepared in accordance with Brazilian
generally accepted accounting principles.
INDEPENDENT AUDITORS' REPORT
To The Shareholders and Management of
Nova Era Silicon S.A.
1. We have examined the balance sheets of Nova Era Silicon S.A. as of
December 31, 1999 and 1998, and the related statements of income, changes
in shareholders' equity and changes in financial position for the years
then ended, all prepared under the responsibility of management. Our
responsibility is to issue an opinion on these financial statements,
based on our audit.
2. Except for the subject referred to in paragraph 3, we conducted our audit
in accordance with Brazilian generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance
as to whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles and internal control system
used, and the significant estimates made by the management, as well as
evaluating the overall financial statements presentation. We believe that
our audit provides a reasonable basis for our opinion.
3. The Company has calculated the depletion of the forests, whose net amount
at December 31, 1999 is R$3,859 (R$3,998 at 1998), considering the
straight-line method and the rate of 10% per annum. Brazilian generally
accepted accounting principles require that depletion of the forest
should be calculated considering the amount of wood extracted in relation
to the total potential of extraction of the referred forests. The
possible effects related to the deviation of accounting principles has
not been measured as of the balance sheet dates.
4. Exercising the permission contained in the Deliberation 294 of the
Brazilian Securities Exchange Commission (CVM, the Comissao de Valores
Mobilanos) as of March 28, 1999, the company recorded the negative net
effect from exchange variation for the three-months period ended March
31, 1999 as a deferred asset. Brazilian generally accepted accounting
principles state that exchange variations are to be registered as an
expense on the period of their occurrence. Consequently, the permanent
assets (deferred assets)
B-24
and the shareholders' equity as of December 31, 1999 and the net income
for the year then ended are overstated in an amount of R$6.190 thousand.
5. In our opinion, except for the possible effects regarding the subject
mentioned in paragraph 3, and the effects of the exchange variation
mentioned in paragraph 4, the financial statements referred to in
paragraph 1 present fairly, in all material respects, the financial
position of Nova Era Silicon S.A. as of December 31, 1999 and 1998, the
results of its operations, the changes in its shareholders' equity and in
financial position for the years then ended, in accordance to accounting
practices prescribed by Brazilian corporate law.
Belo Horizonte, Brazil
January 18th, 2000 (except for the subject mentioned on the paragraph 3 that is
dated on January 31st, 2002)
/s/ Luiz Claudio Fontes
Luiz Claudio Fontes
CRC 1RJ032470/O-9 "T" PR "S" MG
Trevisan Auditores Independentes
CRC 2SP013439/O-5 "S" MG
B-25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
CELMAR S.A. - Industria de Celulose e Papel
Imperatriz - Maranhao
We have audited the accompanying balance sheets of CELMAR S.A. - Industria de
Celulose e Papel, as of December 31, 2001 and 2000, and the related statements
of changes in shareholders' equity and changes in financial position for the
years then ended (all expressed in Brazilian Reais). These financial statements
are a responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Brazil and included: (a) planning the audit, considering the
materiality of the amounts presented, the number of transactions and the
Company's accounting and internal control systems; (b) examining, on a test
basis, the evidence supporting the amounts and disclosures in the financial
statements; and (c) an assessment of the accounting principles and of the
significant estimates made by management, as well as the presentation of the
financial statements taken as a whole.
In our opinion, the fnancial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of CELMAR S.A.
- Industria de Celulose e Papel on December 31, 2001 and 2000 and the changes
in its shareholders' equity and changes in its financial position for the years
then ended, in conformity with accounting principles promulgated by Brazilian
Corporate Law.
The Company is in the pre-operating phase. As described in note 1, the Company
is currently assessing changes in the project, originally designed for pulp
production, now aiming at only making use of the already existing forested
areas. In addition, the Company's management is endeavoring to renegotiate its
loans and financing, in order to achieve financial equilibrium. The continuity
of the project and the recovery of already invested costs depend on the
financial success of the changes in the project, as well as on the ability to
secure new funds.
The accompanying financial statements have been translated from the original
version in Portuguese into English for the convenience of readers outside
Brazil.
/s/ Deloitte Touche Tohmatsu
January 25, 2002
B-26
INDEPENDENT AUDITORS' REPORT
To the Shareholders, Administrative Council and Directors of
SIBRA - ELETROSIDERURGICA BRASILEIRA S.A.
1. We have audited the accompanying consolidated balance sheets of SIBRA -
ELETROSIDERURGICA BRASILEIRA S.A. and Subsidiaries, as of December 31,
2001 and 2000, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows consolidated for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
2. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence; supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
3. In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of SIBRA -
ELETROSIDERURGICA BRASILEIRA S.A. and Subsidiaries at December 31, 2001
and 2000, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally
accepted in the United States of America.
4. As described in notes 13 and 15, the affiliated company Companhia
Paulista de Ferro-Ligas has various pending legal suits and notices of
violation. Based on the opinion of their legal advisors, Management has
constituted provisions, which it believes are sufficient to cover
expected losses in the amount of US$ 2,519 thousand.
/s/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSU
Auditores Independentes
Salvator - Brazil
February 15, 2002
B-27
INDEX TO EXHIBITS
Exhibit
Number
-------
1 Instrument corresponding to Articles of Incorporation and
By-laws, as revised on May 20, 2002 (English translation).
8 List of Subsidiaries.
10.1 Consent of PricewaterhouseCoopers Auditores Independentes for
the three years ended December 31, 2001, 2000 and 1999 (CVRD).
10.2 Consent of PricewaterhouseCoopers Auditores Independentes for
the year ended December 31, 2001 (Vale Overseas)
10.3 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Albras).
10.4 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Alunorte).
10.5 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Aluvale).
10.6 Consent of KPMG Auditores Independentes for the two years
ended December 31, 2000 and 1999 (Bahia Sul).
10.7 Consent of KPMG LLP for the three years ended December 31,
2001, 2000 and 1999 (CSI).
10.8 Consents of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Cenibra).
10.9 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Docenave).
10.10 Consents of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Docepar).
10.11 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2001 and 2000 (Kobrasco).
10.12 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (Nibrasco).
10.13 Consent of KPMG Auditores Independentes for the three years
ended December 31, 2001, 2000, and 1999 (Valesul).
10.14 Consent of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999 (CSN).
10.15 Consents of Deloitte Touche Tohmatsu for the three years ended
December 31, 2001, 2000 and 1999. (Terminal Vila Velha S.A.).
10.16 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2001 and 2000. (Nova Era Silicon S.A.).
10.17 Consent of Trevisan for the year ended December 31, 1999.
(Nova Era Silicon S.A.).
10.18 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2001 and 2000. (Celmar S.A.-Industria de Celulose
e Papel).
10.19 Consent of Deloitte Touche Tohmatsu for the two years ended
December 31, 2001 and 2000. (SIBRA Eletrosiderurgica
Brasileira S.A.).
10.20 Consent of AMEC Engineering and Construction Services.
10.21 Letter from CVRD regarding auditing by Arthur Andersen
2