淡水河谷 (VALE) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded. At this time, I’d like to turn the conference over to Ms. Lydia [Borros] from Financial Investor Relations, Brazil. Please go ahead.

Good morning, ladies and gentlemen, and welcome to CVRD’s conference call to discuss third quarter 2005 results. I would like to mention that a slide presentation has also been made available on the Company’s Website at www.cvrd.com.br during this call.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of [1996]. Actual performance could differ materially from those anticipated in any forward-looking comments as a result of macro economic conditions, marketplace and other factors.

With us today are Mr. Fabio Barbosa, CVRD’s Chief Financial Officer, and Jose Carlos Martins, Executive Director of Sales Minerals. First, Mr. Barbosa will comment on the third quarter 2005 results. Afterwards, management will be available for a question-and-answer session. It’s now my pleasure to turn the call over to management. Mr. Barbosa, you may now begin.

Good afternoon, ladies and gentlemen. It’s a pleasure to be with you today. We have, again, my colleague, Jose Carlos Martins, here with us. Also, we will have Mr. Jose Lancaster, Executive Director for Non-Ferrous, but he’s in Canada, as you may imagine. We have some news today about Canico, and we’ll comment a little bit later on.

But, let us start with some highlights on our third quarter results. Again, we posted very strong results with several records. In terms of iron ore and ferrous sales, they reached $55.3 million, a growth of 8% on a year-over year basis. Potash sales - a new record of 197,000 tons, reflecting the consumption of [unintelligible], but also this production is in part related to the expansion that we just concluded in the third quarter. General cargo transportation almost 7.8 billion net ton kilometer and 4.3% growth on a year-over year basis. Port services - 8.3 billion tons this quarter.

In terms of our operational margin, we continue to be very strong. Our EBIT margin the third quarter reached 40.8%. Net earnings on a 12-month basis in the 12 months ended September 30 reached almost $4.4 billion, a very strong performance.

Despite what you’ll see on the next chart, the surge in costs that we have been facing particularly this year. This cost increase has to do with the cycle we are into right now. It’s natural to expect a change in relative prices of several inputs used in our production, and this has, of course, been absurd. Since the steel material to produce; for instance, alumina, coke and all the materials involved in our production, they are facing important cost pressure. But, also, we have to recognize the fact that the appreciation of the real is hurting our margins a little bit compared to what would be in the absence of this process. Again, part of it is a natural phenomenon related to the cycle. This is a long cycle. When commodity prices are up, it’s natural to expect a negative correlation with the position of the U.S. dollar against currencies of commodity producers in producing countries. That’s precisely what’s happening, but particularly in the case of Brazil, in the last 12 months we saw a major appreciation of the real. It reached 30%, and this growth is well above the appreciation that was observed in several other countries, where they also mine, like Canada and like Australia. So, this is a peculiar aspect of our operation here, as we have the bulk of operations in Brazil.

We’re coming in more detail to this issue, I would say-- I would like to highlight, as we put there, when we compare the third quarter of ’05 with the first quarter of ’04 when we had total costs of goods sold around $980 million. Now, in the third quarter, we had $1.6 billion. You see there the increasing importance of outsourced services and materials. Materials now represent almost 19% of total costs, and I would like to highlight the increased cost of conveyor belts, supplies, parts and components in general. In the case of outsourced services, the cost increase is very much related to the increasing costs in [unintelligible] Caemi and transportation, just to give you a brief idea. In the third quarter of ’04, the cost of freight per ton there was 14.70 reals. In the third quarter of ’05, the cost of freight per ton was 15.50 reals. In this period, the currency appreciated around, on an average basis, 21%. So, this gives you an idea of the cost pressure that we are facing. Also, in order to take advantage of the momentum of this cycle, we are speeding up the waste removal in our operations in order to uncover more ore to be dug in our operations in order to prepare for a less favorable environment. But, in a way, this has an impact in cost that is not reflected in our addition of production, and it’s reported there also within this item, outsourced services. All together, $1.6 billion in this item.

Our revenue growth was the main driver of our adjusted EBITDA increase. Compared to the third quarter of ’04, it was slightly over $1 billion. Now, in the third quarter of ’05, it was $1.7 billion. You see there the negative effect of appreciation of the real is estimated at $255 million, partially offsetting the price increase that we brought in most of our products, as you see there as well, with a total impact of prices of $840 million.

I would also like to realize the effort that we are implementing in terms of research and development. We charge in full all of our development in mineral exploration and research and development. We charge it in full all across the structure. It’s a conservative approach but one that we are extremely comfortable with, as it’s a risk venture as you all know, but CVRD has its policy to charge in full all investments there as costs.

When we compare the third quarter of ’05 with the second quarter of ’05 and we take out the effect of the redirected adjustments of price in iron ore, you see that our EBITDA figures are virtually flat. On an adjusted basis, our EBITDA would be $1.750 billion in the second quarter. Again, it’s $1.712 billion in the third quarter of ’05. With that performance, we achieved the thirteenth consecutive quarter of adjusted EBITDA growth, and our EBITDA on the last 12 months ended in September reached almost $5.8 billion in the quarter ending September. Out of this result, about 80% was generated in the ferrous minerals division, led by [unintelligible] today with us. 10% of the total EBITDA was generated in our aluminum. Logistics - 7%. And, non-ferrous still a very small chunk of the total with 2.8%. This very strong cash flow generation allowed us to improve further our balance sheet, and in this quarter, the interest coverage EBITDA ratio reached-- Our EBITDA was covered 21 times - the short-term interest payments that we have in our balance, up from 17.7 times. It’s almost triple the ratio that was at December 31, [2001]. The terms of total debt EBITDA also came down to 0.68 from 2.05 at December 31, [2001] as well.

We managed to achieve the investment grade rating by S&P just now in October, and with this step we now have three investment grade ratings entered by those agencies. We reaffirm with that transaction that we implemented last month - the quality of our credit in the market with the reopening of the [unintelligible].

I would like to take this opportunity to qualify the transaction with Caemi. They are a subsidiary. This produced some [unintelligible] in the market. In our view, this transaction was fully disclosed in the market. It’s a very short-term one and in our view is just an adjustment of cash flow with no repercussion and no consequence whatsoever in terms of the dividends policy of Caemi or the investment program of Caemi and any other decision that will be taken by Caemi. Again, it’s a very short-term transaction that is remunerating Caemi well above what it would get in the market in normal circumstances. We don’t see that as a transaction different from any other transaction that would be different from any cash flow optimization of the Group. However, we understood the market’s message in terms of the transaction, and I would like to reaffirm with those that I haven’t talked yet that this transaction will be liquidated no later than January next year when it’s the original maturity of this transaction. Again, it’s not a transaction that was [unintelligible]. It was favorable to Caemi, it was favorable to CVRD. We will liquidate it at a schedule no later than January 2006 with no consequence to the intended investment plan of Caemi and no consequence in terms of dividends, payments to Caemi’s shareholders. I like to play this card at this point beforehand.

Turning to the second session of our presentation today, we are showing very impressive figures in terms of CapEx so far in the first nine months of the year. We had $2.3 billion spent so far, on a 12-month basis, almost $3 billion. The disbursements in CapEx are very much in line with our annual forecast of $3.3 billion, if you see the 12-month figure. And, in terms of projects, we spent $12.6 billion. Research and development - $181 million. Stay in business - $519 million.

We delivered three major projects. Fabrica Nova that is a new iron ore project that will be producing 50 million tons of iron ore on an annual basis and which is already producing for us. It’s a very strong performer. Martins could comment there as well. Taquari-Vassouras is our potash expansion that we started up in this third quarter with an annual capacity of 850,000 tons. And, finally our power plant at Aimores. After long time of expectation, we were able to deliver this project, and it’s already operating.

We also made some important decisions in terms of investments. For instance, in the case of Caemi and [unintelligible] in Itabiritos project is a pelletizing plant at the capacity of 7 million tons per year. This pelletizing plant will cost $462 million. The concentration plant comes together with this plant $282 million. Martins will comment a little bit on this subject in the Q&A session, if you want. They should make that start up in the first half of 2008. But, more than that-- I like to have Martins’ commenting on the main drivers of the global demand of pellets. He’s very keen in this market, and he’ll like to make to his comments after his comments on the potential growth of this specific segment of the iron ore market.

Good morning, everybody. Talking specifically about the pellet market, we believe that this market will grow above our normal market because of several reasons behind that. The first reason is for DRI plant. This graph [unintelligible] drives which you see mainly in Italy. A lot of DRI plants are being developed there. We believe that they’re going to have a very strong growth in DRI pellet mainly in Middle East and some gas-rich countries. The second reason for the growth of pellet is the quest of environment. Pellet is more environment friendly than sinter. Carbon emission is much lower. So, we see in several countries a lot of restrictions for sinter plants that are bringing the cost building new sinter plants very high. So, there is another reason for increasing demand of pellets - to substitute sinter. The other reason for increasing pellet is the reduction of lump ore production [unintelligible]. Lump is less available now in the total iron ore production, so you need lump or pellet to fill the blast furnace. Otherwise, you increase a lot its lag production, which is also an environmental problem. If you are not able to sell this lag to use in the cement industry, you have a big problem with the lag disposal. So, reducing this lag rate in the blast furnace is very important factor also acting, and this will drive additional demand for pellet. And, the last issue is the productivity increase. This case is mainly when you have your blast furnace operating at full capacity. The only way to get additional production is by using more pellets because pellet is more productive to use. So, this situation mainly happens when you are operating full capacity. When you have some slow down in the still demand normally, you have a reduction in pellet use. But, the situation now days is that most of the blast furnace worldwide are operating full capacity, and the cost to build another blast furnace with coke ovens and other ancillary equipment brings capital costs very high. So, there is another compelling reason to use pellets, because it can increase your productivity. You can increase your production without having to invest more in hot metal production. So, these factors together is a compelling reason for increasing the pellet consumption. Because of our assessment of this opportunity, we approved the capacity increase at the Samarco, a subsidiary where we have a 50% stake. From our view increased invest almost $1.1 billion, increasing pellet production for 7 million tons per year. Those investments in mining and concentration plants together will be around $1.1 billion. We also proved investment in [MEBR], which Fabio already told you, to start the first pelletizing plant for MEBR. The situation in the southern system of Brazil is that we are going to generate more and more pellet feed, so the strategy of combining growing markets for pellets with more generation - stronger market on pellets with marginalization of pellet feed in the southern system is a very good combination for us because we are going to increase production of a kind of iron ore that we’ll have more demand. Besides of that, not taking into account only our investment in pellet plant, China is increasing a lot of pellet capacity. Because the Chinese iron ore is mainly suitable for pellet plants, but they need to correct their quantity, so they need the Brazilian pellet feed also. We think that the combined market of pellet feed and pellet will grow above the market of iron ore as a whole. This strength will be very beneficial for CVRD because our pellet generation is going to increase not only in our mines but also in MEBR mine.

So, you see that’s a very important investment program in our pelletizing capacity. Together with that, we, of course, are exploiting our competitive advantage in the aluminum chain, particularly on the upstream, bauxite and alumina. We just approved second stage in Paragominas that will increase the total production of that mine-- That’s fully owned by CVRD-- to about 9.9 millions tons per year by the first part of 2008. This reinvestment will also enjoy the advantages of the slurry pipeline that is going to minimize mine refining transportation costs.

As for Alunorte, we are almost concluding that portion of stage four and five with 1.9 million tons. We already approved a further expansion of Alunorte for an additional capacity of 1.9 million tons. And, with that, Alunorte will become the largest refinery in the world with 6.3 million tons per year capacity.

We also managed to get the board approval for the second copper project, 118, with a capacity of 36,000 tons per year of copper cathode. The CapEx is $232 million, and the start up is estimated first half of 2008. As you may recall, this project has a lot of synergies with Sossego and even with the Vermelho project. In the case of Sossego, the outside material that was removed to dig, the sulfite ore that is there, will be transported to the 118. Then what will happen with the sulfite ore that is there in the 118 deposit. So, there’s a lot of synergies to explore jointly with the 118 and the Sossego project. Together, with this basic synergy, let’s say, we have also the synergies represented by the sulfuric acid plant that will operate-- also attend the copper demand but also the demand from the Vermelho project, the nickel project we have there. So, it’s what we have always told you about the synergies of having-- In a very rich mineral province like ours, there are several opportunities to promote our organic growth, and we are doing that.

You see on the next slide our pipeline of projects. Of course, this may be at a later discussion we’ll have with our board until the end of this year regarding our budget for 2006 and also due to the expected conclusion of the Canico transaction. Anyway, it’s an impressive pipeline of projects. In the last 36 months, CapEx reached $6.5 million. Just in 2005, we have this $3.3 billion budget for our CapEx program, a very important investment program in the industry that should be further enhanced by the Canico project if we manage to conclude the transaction.

Turning to the outlook of the markets. In our view, the world economy should continue to perform very strongly. We put there the PMI, as usual, and you see that in the last few months, there was a clear reversal of the downward trend. We have very good signs of the U.S. economy. A very interesting reaction in some European economies, particularly Germany; that’s showing much stronger growth. Of course, [unintelligible] of growth that has been preparing there. Also, in Japan. We have been commenting with you for some time now that the important component of domestic demand in Japan-- It’s not only the issue of the composition of aggregate demand. The very fact that the domestic demand is there shows that this new growth cycle that we hope is maybe more sustainable on a long-term basis, given the quality of the demand that is there. [Unintelligible] is back, and the country is growing at a higher growth rate.

In terms of specific market in iron ore, we believe that in the short term several indicators point to our global access of demand. Strong Chinese demand. The very low inventory level of the Chinese board. They’re very aggressive. The level of the spot market and the fact that there is no idle capacity and more iron ore miners. In terms of the steel consumption in China, we see that it is accelerating. They are buying. The consumption is growing there. Fixed asset investments, which a very good indicator of future steel consumption, is growing at 27% annual rate. So, a very strong steel, as you saw the growth in the third quarter of China was-- The Chinese economy 9.4%. Growth continues to be observed, and there is no indication whatsoever of the weakening of the demand. In terms of the Chinese imports of steel, after a very brief period and a very small volume of net exports in late 2004 and early 2005, what we see now is a major shift in terms of net imports. The latest figures I saw a total net imports is even above the figure that you see there in the chart of $1.2 million at September ’05. Chinese iron ore imports reached almost 200 million tons in the first nine months of 2005. 199 million tons, a 31.7% growth compared to the same period last year. Remember, in 2004, Chinese imports grew by almost 60 million tons, and this year they should grow by about the same volume, from a much higher base. So, from 208 million tons to maybe 270 million tons. We are at maybe right now. So, demand for import of iron ore continues to be very, very strong. And, you see also that inventories are at a very low level. So, inventories-- Considering the signs of this steel production, we would expect to see inventories of around 45 million tons available. What we see should be enough only to stay production for two and a half to three weeks. So, it’s a very low level in our view. And, more than that, the quality that we are observing here, according to [unintelligible], it’s a very poor one. Inventories and down, and the pressure is there.

Turning to the spot market, it’s interesting to notice that it increased share of the spot market in the sea borne trade. It was estimated at 3% in 2003. In 2005, our best estimate is it should reach 9% of the sea borne trade that could reach 670 million tons this year of 2005. Not only the sea borne is growing, but also the spot market, indicating the imbalance of the market is growing as a share, as a percentage, of the total sea borne freight. This phenomena just reaffirms our view that there is an excess of demand compared to the constraints of supply that we do have in our industry.

And, this excess of demand is fully reflected in our view existence of our spot price above the regular adjusted [CNF] price of CVRD. For instance, you see there in this next chart that if we consider our CNF basis it is still $18.20 cheaper than the spot price we charge to the Chinese producers of steel in that market. So, it’s a clear indication, again, of an imbalance there. It’s interesting to notice that before the price increase of this year, our CNF price would be around $56.00 per ton. Now, it’s around $68 per ton. The actual cost increase for the Chinese producers are much lower than the actual price increase of iron ore due to precisely the very reduction of the cost of freight.

And, then, we have the fact that there is no idle capacity. This chart is very interesting, showing that in the last 20 years the unit has operated with an average idle capacity of 7%. Currently, there is no idle capacity. This means that the market is very tight on one side, and this also means that we are facing additional cost pressures, as we are stretching our systems to their very limit. So, costs are there; the appreciation of the real is there. And, in order to deal with this situation, we must have the right incentives to invest and increase our capacity in the long term and to rebalance the market.

According to our forecast, the sea borne trade this year will reach 670 million tons, and in 2008 it should reach $815 million tons. This increase is increasing our sea borne trade, and our sea borne estimate should be, of course, driven mostly by China with 390 million tons of imports by the same year of 2008.

Turning briefly to the copper market, we see a very strong performance of prices, let’s say, due to very low inventory levels, some disruption in supply, and, of course, the usual suspect - the Chinese demand contributing to this achievement of copper prices to [unintelligible]. This happened this very week and two weeks ago as well. As we see the global growth prospects and the level of inventory that are prevailing, we do believe that this situation should continue for the next few months.

This same imbalance is also observed in the alumina market with a sizeable shortage being observed. Some spot market transaction above $500 per ton. More than that, this is representing, in our view, a structural change in the long-term prices for alumina as new contracts to be established on a long-term basis should be above the usual 12.5% or 13% range of the aluminum price, reflective, of course, [unintelligible].

Those are my initial comments. To conclude, I’d like to mention that we are confident that this Canico transaction, if we are able to achieve an agreement with at least 50% of the shareholders plus one share-- If we are able to do that, it will be a very important project for CVRD. It’s an interesting project. We have unique synergies, I would say. CVRD has unique synergies with Canico in terms of the project that is supposed to be implemented. We do believe that with this acquisition, we will be consolidating our presence in the nuclear industry and complementing our basket of products in a more meaningful way - the basket of products that we are able to offer to our major clients in the steel industry.

So, myself and my peers will be available to answer any questions you might have. Thank you very much.

[OPERATOR INSTRUCTIONS]. Our first question comes from Alberto Arias from Goldman Sachs.

Yes. Good morning, Fabio. Good morning, Martins. The first question is with regards to Carajas. We have seen several quarters in a row that there’s been reports of operating problems. I remember in the first quarter you had implemented an emergency plan because you had a decline in your iron ore volumes out of Carajas. It was 20 million metric tons in the fourth quarter. It came down to 21% to 15.9 in the first quarter. Then it recovered to 18 million metric tons the second quarter, and now it’s declined again. I know that some of your most important growth plans in the iron ore industry are in Carajas. Could you explain to us what are-- if there is something more structural that we’re seeing that you cannot resolve. And, is there a risk that you are not going to deliver the growth expectations that you have at Carajas for some structural reasons? And, then I have a follow-up question on Canico. But, maybe first on Carajas.

Relating to Carajas, we are there expanding there to 100 million tons. We have almost three projects underway. We concluded the 75 million tons capacity project. We expanded to 85 million tons capacity, and we just started working on the 100 million ton capacity. So, Carajas is a single mine with a single system. To have all these projects underway in the same mine brings a lot of interference. What we are facing there is mainly the interference problem from this process. We don’t see any kind of structural problems besides the interference of the new projects. And, for this year, if you look only the sea borne market, in Carajas we intended to be very close to our budget there, in spite of all these problems. So, what I can tell you is that we don’t have there any kind of structural big problems, but mainly the interference of these projects that are underway. And, we have problems with two of the contractors, problems with equipment deliveries and trucks, tires and everything affecting the development of the capacity improvement. We think that by next year we are going to have everything on time again. But, for sure, we face a lot of problems with expansion of the mining capacity. And, we are also now working in a conceptual project to increase the capacity above 100 million tons to reach 130 million tons by 2009. Additionally, Fabio told you a lot about the impact of Brazilian currency strengthening in our cost structure. To cope with demand we have been making a lot of efforts to increase production, and this surely is affecting our cost structure also. So, I think that for next year, we are going to be in a better position to control this cost and to bring production under the [unintelligible].

Okay. The follow-up question on Canico. Fabio, you have increased your bid on Canico by 21%. Canico put out another feasibility study just last week. There was no significant change in terms of resource or CapEx. We get the sense that there was not a competing bid, given that probably the most likely counterbidder there involving a merger among themselves. What has driven you to sweeten the bid if there was no other potential competing bid out there and maybe the price? You had said many times that you believe that 17 was a fair price to Canico shareholders.

Of course, we reacted to the market. We do believe that we have synergies there. More than that, this project could bring us a stronger presence in the nickel industry. What happened is that we observed the market indicated just after our proposal. There was a major change in the shareholder base. With that, we stretched our estimate of cash flows, and we tried to get the best proposal that would attract the management and the board of Canico to support our proposal. Clearly, I don’t share your view that there is no other potential bidder there. But, clearly, in order to get management’s support and the board’s support, we had to move and also respond to the market circumstances. Now, we have a bid that is greater in our view and that captures the synergies, and also we can count now on the full support of the board, the directors and senior management of Canico and also from their financial adviser that issued a financial opinion on the asset. So, it’s a set of circumstances and negotiations we went through all during this week. We believe that we’ll be able to conclude shortly this process [unintelligible].

Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from Jorge Beristain from Deutsche.

Hi. Good morning, Fabio. Jorge Beristain with Deutsche Ixe. My question relates more to the non-iron ore businesses. We saw a strong deterioration quarter on quarter in your EBITDA output at alumina chain operations from around $150 million steady state down to $110. We also saw a very strong change quarter on quarter in your non-ferrous businesses. Copper is understandable. You’re still not getting your production up to normalized rates there. But, I wonder if you could talk a little bit to the point of when do you see these non-iron ore operations normalizing and if in fact you view that the main reasons are one-offs or if there are some structural changes happening where we’re seeing perhaps cost inflation bringing down the normalized margins of your lower margin businesses.

Thank you, Jorge. In the case of alumina and steel, the energy costs that we are facing-- You see that in the case of [unintelligible], in the third quarter of ’04, the average cost of a certain part of energy was around $22 million. In the third quarter of ’05, this cost was $44 million. It’s a major change there. We’re also facing some costs related to input in the production of alumina in particular with soda and coke. Coke is [unintelligible] reflects in the market that we have been observing. I could mention caustic soda and oil as we put in the press release. But also [unintelligible] and other costs related to the adjustment of the salaries that in the case of the alumina chain is slightly earlier than in the case of CVRD. The end of the second quarter is fully reflected in the third quarter.

As for the other businesses, copper-- We weren’t able to get the drilling machines that we hoped for on a timely basis, and we are not operating in the most efficient way yet. The ramp up period is taking more than we expected, actually. We hope to conclude gradually, particularly in the first quarter of ’06. We have to-- We don’t know if we’ll be able to show strong performance in copper in the fourth quarter, given this cost and the unavailability of the right equipment to operate.

As for kaolin business, as you pointed out, and on the other non-iron ore business, here we had a disappointing performance this quarter. There was a specific event of postponement of a shipment of 18,000 tons, but also there was a write off of part of the investment there. This write off was due to the poor quality of the materials that are there. We are trying to in a way recycle this material in order to use it. But, we consider that we lost this material, and that affected the performance of this specific business in this quarter. I am not sure, to be very open with you, if we’ll be able to recover this 6,000 tons of kaolin that we lost due to the quality that did not meet the specification of our client.

Potash. We believe that was a good performance in logistics as you saw in the figures. Net gains in the other ferrous businesses-- Manganese. I don’t know if Martins has a specific comment here.

In the case of manganese, we are suffering a lot with prices. Prices for manganese went down sharply. One of the main reasons besides that was refusal of the American government to sell the strategic stock of manganese. This brought the price down very sharply in the United States, and it influenced the price all over the world. As you probably know, in this kind of market, the price volatility is very high. So, we are facing a lot of difficulties with our alloys - manganese alloy business. Much with the ore-- The price for ore are stable, but the price for alloys are very variable.

Thank you.

Our next question comes from Mr. Rodrigo Barros from Unibanco.

Good morning, gentlemen. My first question in regards to [Calle de Piedre]. I would like to see CVRD’s view on where the iron ore bought from Calle de Piedre will be delivered - at the mine or at the port?

Yes. It’s very clear for us. We bought the iron ore at the port.

Okay. And, my second question is in regards to your long-term capital structure now that you’re investment grade. Could you give us some guidance on how to project the debt of CVRD a few years from now? What’s your goal in terms of maybe net debt to EBITDA or interest curve or something like that?

Well, our idea is to get even closer to the top players in our industry, which is a capital-intensive industry. We have improved several indicators, as you can see in our statement. We still have some improvements in the structure to reach that. I would agree with you that given the [unintelligible] - the leverage that we have now, it may not reflect in the long term the optimal structure that we could achieve. However, this is a process. We are building our reputation in the market. And, then, we believe that we still have some room for further improvement in terms of our rating. Our spreads to other companies with the same rating are still higher. So, we are in the process of building this reputation, but I would agree that in the long term, the capital structure should be optimized with slightly more leverage. But, it will not be different from the major players’ indicators that we may see in the long term.

Okay. Thank you very much, Fabio.

Our next question comes from Mr. [Jean de Madedos] from Banco Pactual.

Hi. My first question is regarding your new offer for Canico. I just wonder if you could give us an idea on the timing for all the remaining steps, assuming that most shareholders accept your offer and, also, the legal requirements that you should attempt in Brazil and in Canada before completing the offer. This is my first question.

Thank you, Jean. The timing of the offer will stand until November 28. So, we have to have the 50% plus one share by November 28. This is the time that we are working with. Of course, if we have, as we do have now, support by the management and the board of Canico and a strong recommendation with the other shareholders, this process could be anticipated. So, it could be concluded earlier. But, it will all depend on the market conditions.

Okay. My second question regarding Caemi and venture company that-- You mentioned that it will not hurt Caemi’s dividends in the next few months or the next few quarters. Could you expect Caemi’s dividends to improve and maybe Caemi to revise the dividend policy for the next-- let’s say, 2006? Thank you.

Again, as you mentioned, this will not change any idea Caemi might have about the dividends in 2006. We try not to announce the event, so I cannot comment on that. But, the point I was trying to make is that this transaction was a very short-term one, and it will not affect in any way, in any direction, in any possibility the decision that will be taken regarding dividends to be paid in 2006. Okay?

Okay. Thank you.

The next question comes from Andre Perez from Morgan Stanley.

Hi, Fabio. Just two questions. One on the deal with Caemi and CVRD. Are you considering any measures or changes to your bylaws that would insure that something like this would not occur again? Second, I saw that-- Obviously, you mentioned you faced delays in receiving equipment related to your copper project. Are you also seeing additional delays for other projects, and how could this affect the start-up time of a number of your expansions? Thank you.

On the first question, no. We don’t think that’s a matter of changing the bylaws. What I mentioned is that we heard market reaction, and we noticed that this reaction has to do with the transaction. So, we’ll take adequate measures in this regard. We have mentioned we will liquidate this transaction no later than January 2006.

As for your second question, the delays are a reality in our industry. This is part of our explanation why we believe the cycle would be further extended. If you do not consider the very fact that there is a circular demand provided by China and that is propelling the worldwide demand for minerals and metals, what you observe as that we have the industry equipment not fully prepared to deliver all the equipment that are being demanded. This should continue in the foreseeable future. Hello?

Yes. Thank you.

The next question comes from Andrea Weinberg from Merrill Lynch.

Hi, Fabio. Good morning. The first question on the costs. Costs did increase a lot year over year, but on a quarter-over-quarter basis, we didn’t see a major increase in costs. I just want to understand if we are seeing kind of instabilization of the increase in the costs if you take out the effect of the appreciation of the real - if your cost pressures are decreasing if you disregard appreciation on the real.

Andrea, the effect of the appreciation of the real, if you compare to the third quarter of ’04, was about $200 million - $203 million, to be precise - out of the increase of almost $600 million. So, one-third of it was actually related to the appreciation of the real. We also had the effect of volumes. It’s about 10% of the total cost increase. And, we managed to achieve a good price increase on iron ore and pellets on the third-party acquisition. As we are buying more to supply our clients, they also grew by, in this same comparison, about $83 million. There’s a structural component there that’s a combination of a larger asset base and an appreciation of the real that increased appreciation. I would also mention that outsourced services-- They are, of course, very much related with the appreciation of the real and the very increase of production that we are observing in Caemi and CVRD. And, in the case of [unintelligible], we are observing the aspects of the cycle in a way with the increasing alumina prices [unintelligible], and the impact of that on the average tariff that we obtain to [unintelligible] Alunorte to supply our plant there. They are in a major part related to the cycle. There isn’t a specific aspect of the appreciation of the real that is, again, peculiar to Brazil. The degradation of the appreciation is not being observed in other countries, so this is country specific in a way. This has to do with the market policies, and I want to speak later on that. So, there are some structural components, and there are some cyclical components-- more short-term components that would not be in place on a permanent basis. For instance, the bonus paid to our employees in the negotiation of labor contracts. The bonus was around $50 million. This would not be recurring. So, I think it’s a combination. But, the bulk of the cost pressure has a structural component.

Okay. Quickly, on Caemi again, is there any chance that we could see CVRD implementing this similar dividend policy at Caemi that you have, which means announcing a minimum dividend and paying twice a year.

We are not considering at the moment any change in the dividend policy of Caemi.

Okay.

The next question comes from Joseph Carvin of Ultima Partners.

Hi, Fabio. Thank you. Congratulations on great third quarter results. I guess my question has pretty much been answered, so I’ll sort of make it as a comment. I wanted to thank you for clarifying what the Caemi transaction was because it’s important that the market understand that Caemi got a better rate of interest than it would have gotten just going into the market and, secondly, that it’s a short-term transaction. I’d also like to encourage you to think about your dividend policy both at the Caemi level as well as CVRD. Both your companies have tremendous amounts of cash, and the market’s obviously concerned about what you’re going to do with it. We just saw today a $25 billion share buy back from Intel, and I think that it’s important that as a company generating as much cash flow as you are, 21 times EBITDA versus interest expense, that you give the market some signals. So, I guess in January we’ll be looking forward to a more formal dividend policy at Caemi, and, obviously, you have one at CVRD. So, thank you for making that clarification. I think it was important.

Thank you very much for your observation, Joseph, and, of course, we are always open to discuss with our shareholders, investors and analysts any ideas they might have regarding our Company. Thank you very much for your comments.

Our next question or comment comes from Daniel Altman of Bear Stearns.

Hi. Good morning. Two questions, if I can. Firstly, on the alumina expansions on stage four and five and then on stage six and seven, how much of the expanded capacity will be sold into the spot market, and how much will be sold in the contract market? And, based on that assumption, do you have a target ROIC for particularly the six and seven expansion? The second question is on your strategy vis a vis Calle de Piedre and [Caje]. I understand that you are fighting the Caje ruling. Can you explain a little bit your strategy and also comment on the recent announcement by CSM that they now think Calle de Piedre is not only a 40 million ton mine but actually a 50 million ton mine?

Okay. On your first question, Daniel, we are, of course, negotiating the expansion project contracts six and seven. I would say that the bulk of our production will be sold through contracts in our state here. I don’t see any change in the percentage, maybe 10% or 15% or maximum 20%, if market conditions allow to be sold in the spot market, even in exploration of stage four, six and seven. Again, it’s business as usual in a way with some upward buyers, given the very strong market that is there. But, the bulk of the production should be sold through long-term contracts. I will ask my colleague, Martins, to answer your question about Calle de Piedre.

Well, Calle de Piedre used to be a legal issue with a business implication, and now it’s becoming a business issue with a legal implication. More and more it is the question of the legal procedures relating to the agreement we have and with some problems with the Caje decision. In Brazil when things like that go to the justice, the time for solution is very long. So, it’s very difficult to see what will be the development, considering this time that’s required to follow all the legal procedures in Brazil. So, it’s very difficult to tell you what will be the final solution for that.

The second issue is about the volume. We believe that we are supposed to Calle de Piedre because we work together several years, and we had the preferential rights for many, many years. We always believe that Calle de Piedre is a mine to produce around 40 million tons at most. But, they are conducting exploration nearby. You have the issue of moving from [unintelligible], which can increase production mainly of the pellet feed part of the mine. So, we don’t have enough information to tell you about what we continue to think about Calle de Piedre as a mine able to produce at most 40 million tons. We don’t believe that it can go beyond this in a short period of time.

Based on your market intelligence, are you seeing your customers talking with CSN to sign contracts, even before the right of first refusal issue is finally put to bed?

We don’t have information about that.

Okay. Thank you very much.

Our next question comes from Mr. Felipe Reis from Santander Investment.

My question is related to your two projects in Brazil. Actually, it would be helpful if you could provide some info about the status of the main projects, especially to Mariana and regarding the alumina project an update about ABC project would be great. Thanks.

Relating to these two projects, we have the project for [CRS] going through. Everything is settled - gas supply pipeline and the agreements between the shareholders. The CRS project which we will produce around 1.5 million tons of lead I can tell you is underway. And, CVRD will have a minor stake in this project. It’s below 10%. We will supply near 2.2 million tons of ferrous [unintelligible] for this project. We think that this project is now a reality. Another project which is developing very well is the CSI project - [unintelligible] project with distance. We are going to have 10% also, and this project is near the point to take the final decision. Relating to the Mariana project, it’s troubled with problems with environment permits and land property definition. So, this project is really focused mainly with governmental questions in the Mariana state. Probably, we will be delayed. But, we consider that-- If you take in consideration the extraordinary logistic advantage of this project you can see in the future, it’s not with the Chinese but with other interest - other companies that are interested in developing steel production in Brazil. So, Mariana in some ways is a very suitable place for building this project. It’s not a question if it’s going to be. The question is when it’s going to be built.

Okay. Further, the alumina plant with ABC, we are trying to reach a firm agreement with our Chinese counterpart. But, as you know, our pipeline, as you saw there in our chart, decided to de-operate in 2009. So, it’s a negotiation that of course will be helped by the very tight position in the market; we believe particularly due to the demand originated from China. Okay?

Okay. Thanks a lot.

Our next question comes from Katie Blaylock of Thames River Capital.

Hello. You mentioned with Canico the synergies that you see there. Are you able to quantify those at all? And, then, my second question is could you just remind us of your CapEx guidance for this year and for next, please?

Okay, Katie. Thank you. We would not like to disclose in full our synergies. We would like to work with the concept there, as I believe you understand as we are still in the process of getting the shareholders’ approval. What I would say in this regard is that the synergies are meaningful and allowed us to move as we did to reach this level of C$20.80 to pay and to get the full management and board support for this transaction. But, more than that, I cannot comment right now. You have to understand the constraints that we do have.

For your second question-- Sorry; could you repeat?

Just on the CapEx guidance for 2005 and for 2006. I just wondered if you’re still at the 3.3 for 2005.

For 2005, you saw the figure for the last 12 months. It’s around $3 billion. This is a very good estimate. It’s slightly higher. I would say $3.1 or $3.2 for the 12 months ended in December 2005. As for 2006, our first estimate, and this will be discussed with our board, is that CapEx there will be around $5 billion. But, we still have to check, of course, to get the discussed CapEx with our board and see what will be their final decision. Let me just warn you that this $2.1 or $2.2 billion of 2005-- this figure does not include the acquisition of Canico if we manage to do that. Okay? So, you should adjust this figure for the final transaction amount that will be concluded shortly, hopefully.

Okay. Thank you very much.

Your next question comes from Katherine [Sterritt] of Scotia Capital.

Hi there. I had a question in regards to Canico. In terms of the lock-up agreement with certain shareholders, it says that approximately 11.5% have agreed to lock up. I’m just wondering which shareholders that would be.

They are the management group, basically.

Management?

Management group. Yes.

Okay. And, one more question I had was I understand that [Inco Limited] owned just over 18% of Canico. Have you had any discussions with them prior to making an offer and whether they’ve given any indication of tendering their shares?

No. We didn’t have any discussions with them as to this proposal that we just changed. We don’t know what will be their reaction to this proposal. I believe that they will understand it’s a fair proposal to all Canico shareholders. And, management and the board are fully supportive of this proposition. But, we don’t have any specific information about their own views on the new proposal and how they would react to that.

Okay. Great. Thank you very much.

The next question comes from Alberto Arias from Goldman Sachs.

Yes. I just had a couple of follow-up questions. Fabio, did I hear correctly you say that the CapEx for next year is going to be $5 billion? Did I hear that right?

Yes, you did. I didn’t say that it will be; I said that we are estimating to present to our board a CapEx of about $5 billion. But, the final decision will be made by the board and will be announced. As we do every January, it will be announced in January the total investment program for 2006. The first estimate that we do have is about this figure, $5 billion.

I consider that that’s a huge, huge announcement. What is it in the budget that is going to so dramatically increase that CapEx? It’s around $2 billion above what I would assume. That is already a pretty high CapEx. Are you including acquisitions? Could you explain--? Is it an acceleration of some of your projects?

No, Alberto. This is basically-- In this very presentation, you see several projects. [Unintelligible], and some of them were already there next year. And, we are talking about that potentially-- Let’s imagine that we are able to conclude the discussion with the Canico shareholders. Two major nickel projects. The Vermelho project is a total CapEx cost of $1.2 million. While the other Canico project may be a similar activity on the long term. Both projects could be operational by 2008. So, a major investment would be implemented in 2006. So, I would say that there’s no acceleration, but some adjustments to the market circumstances and also some decisions that are taken by the Company - all of those combined with the sharp appreciation of the real. Just keep in mind that if we are talking about an appreciation the last 12 months of 30%, 30% of the real-- We have a major part of that cost in real. Just with this effect, you have a major increase in dollar terms of the CapEx quote. Okay? So, there’s no change in acceleration. The major change could be, of course, Canico. And, in this figure, we are already considering some-- If we manage to conclude this transaction, we are including some disbursements there next year.

And, just a follow-up question, the second and last one, on your exploration budget. Maybe this goes for Lancaster, which I believe is on the line. In this quarter, the third quarter, you doubled the exploration expenditure to a level of $104 million on the quarter. Most of that is on, I believe, greenfield exploration projects on an international basis, which, according to you, should be expensed into your income statement. Maybe Lancaster can give us an idea of how the exploration projects are going, and should we assume that CVRD should be putting $400 million in exploration every year?

Well, Lancaster is in Canada, Alberto. I’m sorry if I didn’t explain correctly. Lancaster was there, [unintelligible] just trying to reach an agreement that we announced today. I’ll try to address your point. We have an acceleration, of course, and this has to do with the work we’ve done in Australia and also in Mozambique. We are in a way implementing the research and development program of $375 million, although we might not get there the full amount, of course, this year. But, our very impressive performance from a cash standpoint in the third quarter, that should continue the fourth quarter as exploration in Mozambique and also in Australia are gaining momentum. For the following years, as we do have organic growth as our top priority, I would say that you should expect mineral exploration as a major, I think, in our investment program. But, so far, we don’t have a definition of what would be assigned and allocated to this item next year.

All right. Thanks.

That concludes today’s question and answer session. Mr. Barbosa, at this time you may proceed with your closing statements.

Okay. On my behalf and Martins, we would like to thank you for your participation, and, of course, as usual, we’ll be available for any other further questions you might have. Thank you very much for attending this conference.

That [inaudible] CVRD’s conference for today. Thank you very much for your participation. You may now disconnect.