淡水河谷 (VALE) 2001 Q4 法說會逐字稿

Good day, everyone. Welcome to today's conference call, and thank you for holding. Today's call is being recorded. With us today for opening remarks and introductions, I'll now turn the call over to Ms. Melanie Carpenter. Please go ahead.

Thank you.

Hello and good morning, everyone. Welcome to CVRD's fourth quarter 2001 results conference call. I'm Melanie Carpenter with I-Advize Corporate Communications.

Joining us today from Rio de Janeiro are Mr. , the executive director of the corporate center of investor relations; Mr. , the head of investor relations; and Mr. , the chief accountant. They will be discussing the fourth quarter 2001 earnings which were released last Wednesday. This release will be available on CVRD's website at www.cvrd.com.br in the Investor Relations section. We also would encourage you to review the simultaneous web-cast presentation that is also available on the company's web site, with links on the Investor Relations section.

As a precaution, we need to remind you that any forward-looking statements made by CVRD's management today will be made under the SEC's safe harbor of the Private Securities Litigation Reform Act of 1995. And they may differ this materially as a result of various conditions. These conditions are outlined in company materials, and are readily available upon request.

As a reminder, if you wish to ask a question after Mr. presentation, you must be connected to the conference call via telephone. If you need these numbers or any assistance during today's call, please contact us in New York at 212-406-3690, and we will assist you.

During this Q&A session, we ask that you limit your questions to two so that everyone may get a chance to ask a question.

And with that I'd now like to turn the call over to Mr. for his presentation.

Go ahead, sir.

Thank you very much.

Good morning, everybody. I think we have a lot of reasons to be very happy today. Not just because the results we're talking about were very good records for the fifth year in a row. But mainly because we had two recent very important feedbacks from the market indicating a lot of confidence and trust in the company and its new strategic plan which is now very clear to everybody, the new government's model, the project, the skills and capabilities that we have to cope with and to deliver value to shareholders.

One of the signals was the recent issuance of the five-year $300 million bond, for the very adequate cost of around $455 basis points above Treasury. The rating of the operation was , five notches above the risk. It was an investment-grade operation. And more important, the lowest Brazilian five-year bond issue cost since the Russian moratorium in 1998.

The second signal, and more important signal, was the success in the global offering of the remaining tranche of the privitization shares, effectively concluding the expanding the base of CCRD investors, the flow to the secondary market and, of course, the liquidity of the company's stocks. Demand was more than three times the size of the offering; 132 new institutional investors from 17 countries, almost 800,000 new retail investors from Brazil, and with a final allocation of around 44 percent in Brazil and 56 percent internationally.

As we stressed in the road show for the IPO, and most of you heard about it, the company continues to produce a lot of cash, and that gives us a lot of comfort in terms of its financial strength and capacity to implement the full investments, without having to reduce the investors' reward in the form of dividends or interest on capital. That more on -- represented again a new record in actual terms, 1.77 billion reals or 4.61 reals per share, 38.4 percent greater or larger than in the year 2000.

So now if you follow the webcast presentation announce, again, a record 2001 11 billion reals and you can see that that most of this revenue is from the iron ore and logistic business and aluminum business, were the most and as we stated before, we expect this to be in a few years complemented by the corporate activities and also by some electric energy revenues.

The demand for iron ore is now very firm. We had a record sale of 143.6 million tons of iron ore, exceeded percent the record registered in the year 2000 of million tons of iron ore.

Also important to stress that the logistics business is starting to harvest the results of investments that we are gradually implementing in this business unit. The that were transported by the two proprietary railways and was 167.4 million tons, again a record, exceeding the previous record obtained in the year 2000 of 164 million tons.

It is important to say that more importantly the general that we are getting from the more important customers to be targeted in this business in Brazil reached a figure of billion tons per kilometer -- the parameter in this case is the , the tons per kilometer -- . I mean, it was 4 percent higher again than the previous record in the year 2000 of 12.4 billion of .

In terms of the again, the company is proving to be very profitable and very consistent in the growth of its earnings. The average growth rate for these earnings through the privatization achieved, again, a record figure of percent per annum; total earnings for the year 2001 was 3.051 billion reals and that's, again, percent higher than the figure that we had in the year 2000.

More importantly than the earnings, as I always say, is strong cash generation capacity of measured by our . And again, we achieved a record figure of 4.128 billion reals of consolidated basis, with a very high margin of 48.5 percent in the year 2001.

Again, the contribution for the basic composition, we see that the ferrous minerals area, basically meaning iron ore and manganese, are responsible for 74 percent of this cash generation. Logistics is gradually growing and reaching its space in this pie. Aluminum, again, had a very good performance this year, representing 10 percent of , more importantly managing to operational cash generation rather than anything else.

If we compare our performance with our peers, getting to the last picture in this webcast presentation, you see that our figures, generally speaking about returns on margin or dividend yield in this last year was always more significant, was bigger than the ones of our peers. Unfortunately, this is not yet reflected in the market price of our shares, and therefore the total shareholder return, which is our main target from now on, is not yet the very best in the sector.

But these figures have already proved that we have all the skills and capabilities to focus on the plan, on the projects, and gradually deliver the value and prove to shareholders that we are able to effectively implement the plan and realize its values.

And it is important, again, to stress that the way we intend to be divulging to the market the targets, the value goals and how we are along the time in terms of achieving these goals, all of this will be clearly stated and measured through the implementation of the cash value added model in the company that will very clearly -- I mean, give investors a very comfortable way to follow it up and check whether we are or not delivering the plan -- the results of the project.

To finish this introduction so that we can concentrate on the question and answers, about the specific results for the third quarter, I don't think there's anything to be stressed. On the contrary, it was a very regular and in-line quarter. So that if you look at the results for the year, you'll see that the very atypical quarter was the third quarter, when we had tremendous accountancy loss in terms of the effect of the currency devaluation on the company's debt, that was more than compensated by the extraordinary results that we've obtained by selling off some non-core assets like pulp and paper, et cetera.

Except for that, the first, the second and now the fourth quarter are very typical, very normal, very in-line. And we think that's the typical trend of the operational results of CVRD.

So I think that in general terms that's all I have to say, so we better focus on the question and answers. We're prepared to answer your questions.

Thank you.

To ask a question today, please signal us by pressing star-1 on your telephone at this time. Again, that's star-1 to ask a question.

First up is at Goldman Sachs.

Yes, good morning,

Good morning, gentlemen.

Couple of questions. The first one is with regards to the order line in your fourth quarter results. There was a large, and you have excluded that from your EBITDA, arguing that it was not recurring. In your press release, you announced that it was due to the writeoffs of some premiums of previously acquired assets, like , I think as well. Could you please go through the reasons why you came out with such drastic write-downs and how did that affect, you know, that line going forward?

, the idea was in all of the discussion, both at the executive level or at the board levels, always pressed that we need to be as conservative as possible in terms of position from our investment on balance sheets. And clearly there were some investments like in the case of or in the case of where we had an over-priced register that in practice does not compare to the effective value that we could get for this participation in the case we sell them off, or eventually if we want just to give investors a clear view of how much they are worth today.

So we decided to all of the over-priced that were registered in our balance sheet to be written down. And that's, on the one hand, a conservative behavior. On the other hand, it's a chance for us to give a more clear perspective on the effective present value of this participation.

Of course, we believe that if, at the end of the day, the Brazilian sector is restructured and we end up in the position of being able to sell off or participate in this restructuring and our share become important in this process, of course we expect that the effective value of this share would be then brought up.

But for the time being, it is more -- I mean, it's safer. It's more adequate that we write these values down to their effective values today rather than seeing a balance sheet inflated by over-pricing .

By the way, , there is a complete breakdown of these operation expense, quarter by quarter, in our web site.

And last but not least, in terms of eventual recurrent , there are no recurrent . On the contrary, that was a decision that was made by the board to be as more conservative as possible, which means that at the end of the day, if in the future we get to recover value from those participations, we will be making additional . But we will never be registering additional .

Second question, and final, it's with regards to your U.S. gap numbers, is the accounting treatment that you have given on those going to be the same when you report your U.S. gap numbers for the fourth quarter?

Of course, yes.

And when should we expect those U.S. gap numbers to come out?

Checking with the chief accountant.

Thank you very much.

Just one second. Beginning of May, .

OK. Perfect. Thank you.

Moving onto the next question, this is at CS FirstBoston.

Hey, , good morning.

I was just wondering here if we could talk a bit about the future. We'ce been surprised with some strong volumes that we're feeling that are coming through in the first quarter, so I wonder if you could share with us what your expectations are of volumes in the first quarter and also for the full year of 2002.

, we are being very positive about the prospects for this year's sales in terms of volume. Demand in terms of volume is very , and we're going to be announcing information today from our . In March, we broke a record in terms of production of steel and iron ore. I don't have the figure by heart, but we'll soon be announcing it.

So we think that we -- if we consider the performance that we're having in iron ore/steel, we're going to be selling up this year more iron ore than last year. That's the perspective for the year. We are being very positive about this.

Anything new about the price negotiations?

Not really. The seventh round of negotiations and no final figure was obtained. We're entering, I think, the eighth round of negotiation. It's very atypical. It seems to me for the very first time in many years that we are entering April. But I mean, no news yet, although the prospects, as we explained before, did not change.

I mean, in many case we are expecting something very flat. And we don't think anything expected to change in the mood of the negotiations and in the environment of the negotiations.

We have a question now from at UBS Warburg.

Hi, . If you could just expand a little bit more on the iron ore outlook for both the pellets and the fine. And, yes, we realize that you did make some acquisitions, so obviously in 2002 you will be selling more iron ore, but on an apples-to-apples basis, can you give us an idea of what you're looking at for volume, both fine and pellets?

You're right. When we say that we're expecting to be selling off more iron ore as a whole than last year, that's the overall figure. We're still not yet quite comfortable about the demand for pellets, but there are indications that in the second half of the year there will be a recovery in the demand for pellets. We're not yet in a position to be announcing the forecast, but we expect the first half of the year, kind of, repeat the same with the pellet demand still recovering and prospects for pellets in the second half of the have some more information.

Right now we have a very strong demand from , so it's more than offsetting the lower sales to other parts of the world.

Regarding to pellets, we are feeling the first signs of recovery in the demand for pellets. We commissioned last week our new pelletizing plant of . We expect to produce million tons until December.

Our first idea was to replace production in , but as far as we are feeling the market, we believe that there will be no need to stop production of .

In an apples-to-applies basis, we are expecting a small growth now over 2001.

We're going to need a to confirm this trend by the end of the second quarter of the year.

Question now from at Bear Stearns.

Hi, good morning. It's at Bear Stearns. Just two questions for you.

One is on the U.S. gap numbers. Just wondering how you explain the long delay between the availability of Brazilian gap numbers and the availability of U.S. gap numbers. And wondering whether that trend is going to continue heading into 2002.

You're touching upon a that I have to apologize for . The thing is, we're trying to improve this because there's no way to be as quick as in the preparation of with the U.S. gap figures. it should be better for us to announce both results at the same time. That means that both would come out to the market a bit later or continue to be divulging the Brazilian gap figures as soon as they get ready and a few weeks later announcing the U.S. gap figures.

I mean, I'm not in a position to guarantee to you that we'll not be able to be announcing both figures at the same time. We're trying to put some effort on this. But for the time being, the U.S. gap figures will continue to come out, kind of, 10, 15 days minimum after the Brazilian gap figures.

What we could do is delay the announcement of the Brazilian gap figures so that to announce the two gaps together, but for the time being our impression is that, although that's not the ideal picture, it's better to divulge the Brazilian gap figures as soon as they are available and then announce the U.S. gap figures when they get ready.

If you have any comments on this and you want to suggest that we behave different, we're open to discuss this with the market.

Just a follow-up question, then one other quick question. The follow-up would be, given that they're the same companies that are consolidated under Brazilian and U.S. gap, I'm just wondering again why is it that one is easier or faster to do than the other.

And then my other question is, if you could just walk us through, it looks like between the consolidated numbers and the parent company numbers the difference in net was about $1.2 billion. Wonder how you allocate that $1.2 billion outside of the parent company.

We have the aluminum companies that are not consolidated under the gap criteria. We have from companies like steel companies that are not consolidated under the gap numbers. There's two items explain the treatment.

The question about the delay in time between the Brazilian figures and the U.S. gap figures, doesn't necessarily have to do with the amount of companies that is consolidated . For instance, in the way we work with the external auditors that needs to be changed, because normally these things happen in a . And I told you we are trying to do our best to try to announce them as together as possible.

OK. Thank you very much.

We'll continue with our question-and-answer session. Again a reminder to please limit yourselves to two questions in the interest of addressing as many questions as possible.

We'll move on now to at Merril Lynch.

, your line is open if you have a question, please.

Sorry.

Good afternoon, and . I have two questions. Could you give us an idea about for '02 and if he will be in the range of $800 to $900 million?

And my second question would be, for '02 income tax revision, do you believe in cash regarding this provision or not? These are my questions.

for this year, , the announced figure is $956 million.

I'm sorry I could not get your second question. Could you repeat it?

Yes, sure. For this year, income tax revision, do you believe in cash provision or you believe these will be non-cash items?

Effective expenditure, cash expenditure for income tax this year? deborah: Yes. Yes.

Probably we're not going to be expending any income tax this year. We have more than enough credits to compensate with. We still don't know the picture for next year, but we're almost sure that in 2002 the company will continue to be exempted in practical terms of the income tax payment.

OK. Thanks a lot for your answers.

We now have a follow-up question from at Goldman Sachs.

Yes, a quick follow-up, more on the strategic front. With regard to the disposal of assets, you mentioned that there are some minority interests on the steel industry that you would like to dispose of. If you could give us some kind of time frame of when do you see, and which assets do you think you're going to be selling over the next couple of years.

, it's, kind of, a very difficult question to answer. I mean, one thing is the strategic decision not to hold any capital invested in the steel sector. The other is how long will it take for the steel sector to complete its restructuring, especially here in Brazil, once it depend on the global restructuring that is taking place.

You know that the situation we have here in Brazil with all of the steel producers, kind of, fragmented is not . So there's a chance that some of these people will have to get together, which is not that easy in terms of the relations if there's companies, different shareholders, different interests, et cetera.

So what I was trying to point out is the fact that we know that our participation, our holdings in the steel companies, they are undervalued. They are in real terms worth much more than their market price today. So if we rush participations, we would be money. And that's what we don't want to do.

On the other hand, in fact to recover the value we have to follow up and monitor the movements in the market restructuring, and try to obtain or recover as much value as possible from the restructuring process, either by participating in the composition of a new big consolidated company, and for a while, we would have to stay there until the market price goes up, and we end up in a position to be selling off at market prices and recovering the effective value; or , we find our means and ways to negotiate the participation directly with a potential buyer for this properly positioned in the new company or different companies or whatever.

So I'm talking about theory. In practice, we have to wait and see who's going to be leading the process, who's the potential buyer, and what is the effective format that the new will take in Brazil, so that we can better estimate how much we'll and when.

For the time being, all I can say is that we are effectively monitoring all of the different characters in this play, what are their moves, what are their interests, what chances do we have in helping out those people in building up a new form of Brazilian steel industry. But nothing concrete can be announced.

Right. OK. So, just to understand the process a little bit better, what would CVRD get in exchange of you deciding where your minority interests on the steel industry are going to go? Is it that you would like to be a minority shareholder of one of these mega-steel companies, or is that you want to, like, give them some kind of a long-term supply contract that you would get some kind of preferential treatment versus other iron ore producers? Is that what?

CVRD best position is not to have any capital at all steelmakers and have very good commercial relationships so that we maximize our sales of iron ore and we properly support the growth and consolidation.

But in practice, we know that, depending on the way that we expect restructuring takes place, we might add up having to stay for a while as a minority participator in this new company or group of companies.

But in theoretical terms, the second alternative is incorrect. We'd rather not participate in the steel sector. We'd rather not commit any capital for that, because it doesn't -- I mean, in strategic terms, it doesn't make sense for an iron ore supplier to participate in the capital of its clients, except in the case when we have to is to pool development of a new steel production or whatever. So that would guarantee the growth of the exploitation and sale of our iron ore.

In theoretical terms, the ideal picture is CVRD not participate in any new investment at all and having very good commercial relations with these companies that are going to be, at the end of the day, just very good clients of ours.

OK. And the final -- if you could give us an update on what is happening with your participation on . There were comments by the company saying that perhaps you are going through the merger of and , so that there would be an independent company. And also if you elaborate on the sale of which is a subsidiary of . Where are we in the process of restructuring your participation in those two companies?

, unfortunately due to confidentiality agreements, there's not much that I can say about these two things, except what you already know. We are negotiating with for the future development of . It might involve or not, but again there's nothing 100 percent . And is, by definition, an independent company and industry.

If we come out with a structure by the merger of and , that is a good idea, . There is nothing concrete about that.

About , of course everyone knows that the only undertaking that was required by the European commission was that sells off so that the acquisition . There's a trustee taking care of this, and we have to wait until they decide what to do.

We'll continue in just a moment. Again, please limit yourselves to two questions, and then if you have additional questions, you may signal again later in the session.

We'll move on now to a question from at HSBC.

Hi, this is actually I'm joining this afternoon.

Good afternoon, Mr. , Mr. . Your earning price is -- I know you're still finishing the negotiation season, but would you give us a guidance on prices for the first quarter 2002, comparison to the fourth quarter last year?

There are no differences in price in the first quarter of '02 to fourth quarter of '01. We are negotiating the price for the first time as Mr. , for the first time in many years, we entered the new Japanese fiscal year without new price. There is a fast negotiation, so the price reference is the same; it didn't change.

Comparing first quarter '02 with first quarter '01, reference price increases by 4.3 percent. But when we have the new price, we've for you and Brazil, so there will be . There is an in our account with the client. It's regular procedures. And from the four Japanese and Asian clients, we'll have the same .

This is the regular procedure that commands for negotiations and shipment in the iron ore industry.

OK. Thanks.

There's another question from at Merril Lynch.

Hi again. I'd like to get -- I mean if you can give us an idea of for the first quarter of '02, just to give us a guidance if it's possible.

And , you mentioned that right now demand is strong mainly because of Asia. Are you talking about demand only for fine or it also include pellet?

On a consolidated base, we can expect an increase in iron ore fine shipment. On the other hand, added demand of course for '02 in a few weeks -- right now we are as I said, we are getting signs that these demands for is starting to recover. So we can expect a in the second quarter of '02.

OK. And you once said on a consolidated basis, you can expect an increase for fine. But could you like -- is it reasonable to expect something in the range of 5 percent year on year, or not? Is it too high?

Right now, we are expecting increase...

OK.

... on an apple-to-apple basis.

Year on year, OK.

And my second question would be, just a follow-up regarding the told me that you are expecting $966 million in 2002. I mean, do you guys believe that it's going to happen as it happened in 2001 when the budget was much higher than they realize it? One, I mean, can we expect...

... one of the main reasons for the decrease in in 2001 was due to the way our depreciation against the we have this year our main product will be, for instance, the , only 25 percent of the is to it. If there is depreciation of the against the the will be lower than the budget .

The other thing to stress is that, the budget process is a dynamic process. So, for instance, if you take on you will see that some of the investment that we are expecting to be putting into practice in the system could be once we succeeded in acquiring for so this new dynamic process when we do not include acquisitions in the budget, but once they happen they might interfere in the budget and some things could be added, postponed or rearranged.

But just to add to what said, what is important is not the budget. What is the cost of product. I'll give you an example. The project, the cost of the was budget in and the cost was $31, a very competitive cost. We are always pursuing low costs. This is our to achieve that.

The other example is the project. We started with a budget of $ million. Due to some revisions, some negotiations now the budget for project is $383 million and the zone is $ that went up the lowest in the so these are our main is to reduce costs of .

In terms of your , can you break down 2002 and exactly what you're going to spend that on? And then also, can you explain the increase in expenses in the fourth quarter?

The expense of what?

Selling expenses. They were a little bit higher than we had expected, and I wondered what that was related to.

Selling expense. No, we had in the fourth quarter have an increase of selling expense were almost of in the fourth quarter. What we had in the fourth quarter was an increase in the administrative expense. This was due to payments to our advisers. Regarding a breakdown of the budget for 2002, we had 60 percent allocated to mining. We have the remaining 40 percent is allocated to project and the total amount we are planning to spend in is about $400 million -- about $400 million. And we distributed among power generation projects. We are, as you know, we have several high under construction. We have seven, as a matter of fact. We are going to on the development of this project. The construction work are beginning this month and we are going to spend more than $100 million this year on the project.

And finally, we have the project in the mine this is the project which spans the capacity of 100,000 tons to 800,000 tons. And we are going to spend money on this project.

A full breakdown of the project we will supply it to you with all the details.

OK. Thank you.

You're welcome.

My question is regarding this on the factor. I would like to understand a little bit better the of lab market. I know that to increase value of its products. And this at the end of the day would end up with interests on this lab market. I would like to understand how the company invested development and the eventual that would be for the investment of CVRD.

And my second question is regarding the ideal capital structure of the company. the company any of an ideal capital structure that for the future?

OK. About the first question, when we talk about the support of and the future reduction, we're referring to a potential technological move in this industry. For the time being still belongs to the world is not an product. So that does for the time being what we have to do is basically support our clients that produce so that they can like, for instance, our most important project today is the expansion of CVRD, where we have an contract for the supply of iron ore. And the most important project for us in this case is CVRD implementing that but what we see in the trend is that more and more, for instance, in the United States, due to the problems they are facing today of their steel industry not being competitive in the of the production is that more and more they will move into furnaces or they will completely abandon the of the steel production chain and concentrate on and the finished product, product or the more technologically developed product.

In this case, we would have to support the growth of the production in the world.

And, for instance, our project in the north, the production in the north could easily become a production but we would only directly invest in the production of in the case we identify an existing demand for the and that we guarantee that we are going to be supporting this production with our iron ore.

But again, the fact that we intend to support this process doesn't mean that we intend to be producing except if a long time -- in the long run become more and more part of the iron ore production chain rather than the first step in the steel production chain. We don't want to compete with our clients, so we are not going to be producing except in the cases that when we are together with clients supporting their growth, due to specific or specific markets. And that's the picture.

What was your second question? Sorry, I don't remember.

(CROSSTALK)

... capital structure.

I remember it. We cannot talk about an ideal that relation, because in theoretical terms the idea relation depends on the cost of the money that you get from the market and from the equity market, and depends on the volatility of these markets in this specific areas you're talking to.

In our case, we normally refer to do two theoretical parameters that would give guidance to the limits that we need, in terms of financial coverage that would indirectly represent to ratio. Those are the -- coverage of interest expenses which needs to be in the excess of and for the time being we are much more than comfortable with that, because of big responsibility today which means that according to this parameter we have still a lot of room to additionally leverage the company without putting at risk the capital structure.

The other parameter to total debt compared to the generation. Or in other words, how long will we take to repay the total indebtedness with our cash generation? And again, the magic figure is three, the maximum figure should be three. In this case, this means that the total debt for the company should not exceed three times the generation. Again, we are very comfortable with this figure, because we are below two today with the of course, to growth with the results of all of the projects that we are implementing, which means that a long time we might be even in a more comfortable situation.

But that doesn't mean that we are rushing toward indebting the company and raising money just because we have this . I mean, our strategy for only raise money once we identify the specific project that might require this money raising or long-term if the cash becomes excessive, as somehow it already is excessive, but we are still kind of up ammunition for some potential acquisitions that we are studying, but that, of course, we are not in that position to be announcing which they are. But, you know, that in the case of some specific sectors we need to monitor what's going on in the market.

Once we this target, we'll be in a position to easily give back the excess money for investors. We are not going to be holding excess cash if we don't have the proper use for it.

Thank you very much for your participation. That will conclude the question-and-answer session. And I'll hand back to our speakers for closing remarks.

Thank you very much, everybody. I think that the a kind of superstition of ours, we always conclude this presentation wishing that next time we are in the position, again, to be announcing new records, because these things have had the chance to every quarter announced and records and records in terms of performance and , in terms of , and more importantly in terms of the reward that we are giving our investors. So let's hope that this year we succeed in implementing everything that we've announced and that the company continues to grow.

Thank you very much.

That concludes the conference call. Again, thank you for joining us.