Vale do Rio Doce
1st Half Information
1999
Quarterly Information filed with the Comissão de Valores Mobiliários - CVM (Brazilian Securities Commission) on August 04, 1999.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE OPERATING IN JUNE 30, 1999 COMPARED WITH JUNE 30, 1998
(Expressed in thousands of Reais)
GENERAL ASPECTS
Due to the diversified nature of its operations, the Company's management believes that the following factors should be taken into consideration in order to permit an adequate analysis:
(a)The prices for the products and services of the Company and its subsidiaries and jointly controlled companies are determined by world market prices, or are considerably influenced thereby. Prices of iron ore and pellets are agreed on an annual basis and set for the following twelve months. Prices of aluminum, gold and pulp have historically fluctuated widely, due to supply and demand conditions, thus considerably influencing the results of the Company and its subsidiaries and jointly controlled companies. This price volatility should continue over the next few years, in line with global economic cycles;
(b)About 65% of the Company’s revenue at 06/30/99 is derived from exports and a part of the internal market sales denominated in U.S. dollars, while the costs are in great part incurred in Reais. Consequently, fluctuations in the exchange rate between the two currencies have a significant impact on the operating cash flows of the Company;
(c)Approximately 98% of the short-term and long-term loans of the Company at 06/30/99 are denominated in U.S. dollars. As a result, exchange rate fluctuations have a significant impact on the financial expenses of the Company;
(d)The variations of the main currencies and indices in 1999 and 1998 in terms of percentages in relation to the Real, which impacted the results of the Company and its subsidiaries, jointly controlled companies and affiliated companies, were as follows:
RESULTS
The results of the Company for the period were R$ 608,779, (R$ 323,099 for the first quarter and R$ 285,680 for the second quarter) representing growth of 16.4% compared to R$ 523,155 in 1998, increasing the income per outstanding share to R$ 1.58 in 1999 against R$ 1.35 in 1998. The net income for the second quarter was R$ 285,680 in 1999, a growth of 3.8% compared to R$ 275,311 for the same period of 1998.
SHAREHOLDER REMUNERATION
The Board of Directors, at an ordinary meeting held 08/04/99, decided to accept the recommendation of the Executive Board to pay interest on stockholders’ equity in the amount of R$ 1.11 per share (common and ordinary), in a total amount of R$ 427,239 (representing 70.1% of the net income for the semester), an increase of 47% over the remuneration paid to shareholders in the same period of the previous year.
Payment will commence on 08/20/99, and will be net of 15% withholding tax, pursuant to Law No. 9,249/95.
COFINS AND PIS
The Company maintains in its long-term liabilities a contingency provision deemed sufficient by its legal advisors to cover any extra expense that could arise due to the recent interpretation by the Supremo Tribunal Federal (Federal Supreme Court) regarding the constitutionality of the incidence of taxes other than ICMS (VAT) on the revenues from mining activities.
EFFECTS OF DEFERRAL OF EXCHANGE-RATE VARIATION
CVM (Brazilian Securities Exchange Commission) Ruling No. 294/99 permits the deferment, to be amortized over a maximum four years, of the negative net result caused by exchange-rate variation adjustments on the balances of obligations and credits occurring in the quarter ended 03/31/99. The amortization of this deferral will be complemented based on the future settlement of the liabilities in foreign currency.
At 03/31/99 CVRD (Parent Company) presented a positive net result derived from exchange-rate variation adjustments and therefore there was no deferral.
However, some of the Company’s subsidiaries and jointly controlled companies, mainly in the aluminum and pulp and paper areas, presented negative net results and made deferrals, which are reflected in the equity adjustments.
CAPITAL EXPENDITURES
The Company’s capital expenditure in the first semester of 1999 was R$ 201,867, representing 23.5% of the budget approved for 1999. This amount is 15.8% lower than the previous year, which totaled R$ 239,935.
GROSS MARGIN
The improvement of the gross margin from 46.6% to 52.7% was due to an increase of 18.7% in operating revenue (from R$ 1,703,278 to R$ 2,022,382), while the cost of products and services grew 5.7% (from R$ 882,003 to R$ 932,071).
The devaluation of the Real against the US Dollar had a positive influence on the Company’s revenues from products and services. On the other hand, the fall in prices had a negative impact on gross margin, as did the decrease in iron ore and pellet, gold and potash sales and transportation and port services for the first semester.
The increase in cost of products and services is due in great part to higher spending on acquisition of pellets, due to the devaluation of the real against the dollar.
QUANTITIES SOLD IN THE FIRST SEMESTER OF 1999 COMPARED WITH THOSE OF THE FIRST SEMESTER OF 1998 (IN THOUSANDS OF METRIC TONS EXCEPT FOR GOLD)
1999 / 1998Southern / Northern
System / System / Total / Total / %
External market
Iron ore / 8,771 / 19,776 / 28,547 / 32,501 / (12.2)
Pellets / 6,553 / - / 6,553 / 7,512 / (12.8)
15,324 / 19,776 / 35,100 / 40,013 / (12.3)
Internal market
Iron ore sold to steel companies / 4,407 / 902 / 5,309 / 7,532 / (29.5)
Iron ore sold to pelletizing affiliates / 3,827 / - / 3,827 / 4,400 / (13.0)
Pellets / 646 / - / 646 / 370 / 74.6
8,880 / 902 / 9,782 / 12,302 / (20.5)
Total
Iron ore / 17,005 / 20,678 / 37,683 / 44,433 / (15.2)
Pellets / 7,199 / - / 7,199 / 7,882 / (8.7)
24,204 / 20,678 / 44,882 / 52,315 / (14.2)
Railroad transportation / 27,772 / 2,000 / 29,772 / 33,520 / (11.2)
Port services / 18,246 / 791 / 19,037 / 22,031 / (13.6)
Gold (kg) / 7,389 / 8,069 / (8.4)
Manganese / 416 / 372 / 11.8
Potash / 238 / 262 / (9.2)
The gross revenue was composed of the following, per product:
06/30/99 06/30/98
R$2,022,382R$1,703,278
The cost of products and services was composed of the following:
06/30/99 06/30/98
R$932,071 R$882,003
GAIN (LOSS) ON INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD
The result of investments accounted for by the equity method in the period varied from a gain of R$ 78,571 in 1998 to R$ 142,621 in 1999, mainly due to the exchange rate gain on investments abroad. It should be pointed out that the balance of exchange rate variation deferred by affiliated companies at 06/30/99 was R$ 474,000.
The figures broken down by area do not necessarily represent the individual results by company, but rather the amounts applicable to the business area. The individual results, therefore, are segregated by activity, and possible effects that can be compensated among the companies have not been considered.
FERROUS
IRON ORE AND PELLETS
NIBRASCO – An equity result R$ 3,742 lower, due to the provision of R$ 3,000 for PIS.
HISPANOBRÁS – An equity result R$ 2,925 higher, in function of the effects of exchange rate variation on assets indexed in US dollars. In operational terms there was a gross increase in US dollar sales, reduced in part by a 8.2% lower sales volume (1,744 thousand tons in 1999 against 1,900 thousand tons in 1998).
ITABRASCO – An improved equity result of R$ 5,479 due to the exchange rate effects on assets indexed in US dollars. In operational terms, the gross profit rose due to sales in dollars, offset in part by a 2.8% fall in sales volume (1,550 thousand tons in 1999 versus 1,594 thousand tons in 1998).
RDIF – Improved equity result of R$ 117,197 due to exchange rate variation.
MANGANESE AND FERRO-ALLOYS
SEAS – Better equity result of R$ 2,938 due to exchange rate variation, partially offset by a fall in the gross income.
URUCUM – A R$ 1,881 lower equity result due basically to the provision of R$ 3,000 for PIS and COFINS on mineral sales.
NON-FERROUS
PARÁ PIGMENTOS – A R$ 5,572 lower equity result due to amortization in the first semester of 1999 of deferred exchange rate effects that occurred with the devaluation of the real against the US dollar, offset in part by a 45.3% increase in sales volume (93 thousand tons in 1999 against 64 thousand tons in 1998).
LOGISTICS
DOCENAVE – A better equity result of R$ 64,800 in function of the exchange rate variation on assets indexed in US dollars, reduced partly by a 26.2% decrease in average freight rates (US$ 5.22 per ton in 1999 against US$ 7.07 per ton in 1998) and by appropriations in 1999 of expenses for ship drydocking in the amount of US$ 7,984.
FCA – A reduction of R$ 4,118 in the equity result due to the effects of exchange rate variation on the company’s debt, because it did not defer any exchange rate losses.
CFN – A negative equity result of R$ 6,741 was recorded in 1999. In 1998 this was recorded only starting in July.
FERROBAN – A negative equity result of R$ 8.814 was recorded in 1999. In 1998 the company was in the pre-operating phase.
SHAREHOLDING INTERESTS
STEEL MAKING
USIMINAS – Recorded an equity result of R$ 23,140 in 1999. This result was due to higher prices as well as to the recording of tax credits derived from its incorporation by COSIPA. Up to June 1998 the company’s results were recorded by the cost method.
CSI – Improved equity result of R$ 82,093, due to exchange rate variation.
CST – A R$ 104,210 reduction in equity result due to the effects of exchange rate variation on its debt, as the company did not defer exchange rate losses, and because of a 39% fall in the sales price for steel slabs to the foreign market, offset partially by an increase in volume sold of 29.4% (1.7 million tons in 1998 against 2.2 million in 1999).
. CSN – A R$ 10,031 reduction in the equity result du to the effects of exchange rate variation on the company’s debt.
PULP AND PAPER
BAHIA SUL – Lower equity result of R$ 4,054 due to exchange rate variation recorded in the semester. Although the company decided on deferment, the effect of this result was still substantially above that in the same semester of 1998. This negative impact was partly offset by a 26.8% increase in sales volume (293 thousand tons in 1999 against 231 thousand tons in 1998) and by a 27% increase in the average unit price in reais.
CENIBRA – A R$ 4,961 reduction in the equity result due to exchange rate variation recorded in the semester. Although the company decided on deferment, the effect of this result was still substantially above that in the same semester of 1998. This effect was partly offset by an 11.9% higher sales volume (404 thousand tons in 1999 against 361 thousand tons in 1998) and by the exchange rate gain on export sales, despite a 4.3% fall in the average unit sales price in US dollars (US$ 378.58 in 1999 versus US$ 395.63 in 1998).
ALUMINUM
ALBRAS – Reduction of R$ 27,757 in the equity result. Despite higher sales volume of 6.7% (176,699 tons in 1999 against 165,653 tons in 1998) and 36.3% higher net sales income (R$ 362,627 in 1999 against R$ 265,984 in 1998) due to the effects of exchange rate variation on revenue, these were completely offset by exchange rate effects on the company’s debt, which was only partially reduced by the decision to defer exchange rate variations in the amount of R$ 228,894.
ALUNORTE – A R$ 40,760 decrease in the equity result, principally because of the effects of exchange rate variation on the company’s debt, which was partly reduced by the decision to defer exchange rate effects in the amount of R$ 199,941. In operational terms, sales volume rose 17.8% (744,273 tons in 1999 against 631,985 tons in 1998) and the growth in revenues of 47.5% (R$ 212,386 in 1999 versus R$ 144,039 in 1998) due to exchange rate variation. Additionally, the change in shareholding from 53.61% in 1998 to 65.82% in 1999 represented a growth in the negative equity result of R$ 10,093.
MRN – An increase of R$ 7,234 in the equity result, due to a 24.4% rise in the sales volume (5,197 thousand tons in 1999 against 4,179 thousand tons in 1998) and the effect of exchange rate variation on revenues, partly reduced by a fall in the average unit sales price of 14.4% (US$ 20.98 per ton in 1999 against US$ 24.50 per ton in 1998).
VALESUL – A reduction of R$ 2,856 in the equity result due the constitution an July 1999 of an extraordinary contingency provision regarding INSS (Social Security) payments of R$ 3,500 and destination of cathodic residue of R$ 2,250.
ALUVALE – A reduction of R$ 7,325 in the equity result (own operations) because of the exchange rate effects on liabilities indexed in the US dollar, partially offset by a 34.2% increase in unit sales prices in reais (R$ 2,669.35 per ton in 1999 against R$ 1,989.07 per ton in 1998) and by a 9.1% increase in sales volume (24 thousand tons in 1999 versus 22 thousand tons in 1998).
ITACO – A reduction of R$ 5,876 in equity result mainly due to an increase in financial expenses in the semester.
OPERATING EXPENSES (INCOME)
The net operating expenses increased R$ 307,524 (R$ 550,298 in 1999 against R$ 242,774 in 1998), due to the reduction in net financial result in R$ 327,485 (a gain of R$ 33,567 in 1998 against a loss of R$ 293,918 in 1999), mainly due to exchange-rate variation accounted for on the net debt of the Company.
CASH FLOW
Generation of cash flow totaled R$ 1,229,739 in the first semester of 1999, or 62.4% of the net sales revenue, against R$ 724,523 during the same period in 1998 (43.9% of net sales revenue).
We point out that this cash flow generation included an extraordinary gain of R$ 358,149 from exchange rate hedge operations in the first quarter of 1999.
INCOME TAX AND SOCIAL CONTRIBUTION
Income tax and social contribution decreased R$ 57,712. It is worth mentioning the constitution of R$ 157,674 on 06/30/99 (R$ 95,587 on 06/30/98) relative to the income tax and social contribution benefit from paying interest on stockholders’ equity (see Note 8).
EXCHANGE RATE EXPOSURE
On 12/31/98 the Company had a negative net balance of R$ 163,000 linked to the US dollar. With the settlement of a significant part of the exchange rate hedge operations, CVRD had as of 06/30/99 an amount of R$ 1,174,000 exposed in US dollars (see Note 22).
quadrosi.xls (BALANCE)
quadrosI.xls (RESULT)
quadrosI.xls (EQUITY)
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COMPANHIA VALE DO RIO DOCE
NOTES TO THE FINANCIAL STATEMENTS
AT JUNE 30, 1999
(expressed in thousand of Reais)
(1)OPERATIONS
Companhia Vale do Rio Doce - CVRD is a publicly traded corporation whose predominant activities are mining, processing and sale of iron ore, pellets, gold, manganese and potash, as well as port and railroad transportation services. In addition, through its direct, and indirect subsidiaries and jointly controlled companies, CVRD operates in transoceanic and coastal shipping, forestation, geological studies and technological research services, steelmaking, and the production of aluminum and pulp and paper products.
(2)PRESENTATION OF FINANCIAL STATEMENTS
The financial statements have been prepared according to the accounting principles provided for in Brazilian corporate legislation as well as the rules and guidelines issued by the Comissão de Valores Mobiliários - CVM (Brazilian Securities Commission) and the Instituto Brasileiro de Contadores - IBRACON (Brazilian Accounting Institute).
In order to provide better information to the market, the Company is also presenting Statements of Cash Flows, which appear on page 12 as additional information.
(3)SIGNIFICANT ACCOUNTING POLICIES
a)The accrual basis of accounting is adopted by the Company;
b)Assets and liabilities that are realizable or due more than twelve months after the quarterly balance sheet date are classified as long-term;
c)Marketable securities are stated at cost plus accrued income earned through the quarterly balance sheet date;
d)Inventories are stated at average purchase or production cost, and imports in transit at the accumulated cost of each item, not exceeding market or net realizable value;
e)Assets and liabilities in foreign currencies are shown at exchange rates in effect at the quarterly balance sheet date. Those in local currency are restated based on contractual indexes;
f)Investments in subsidiaries, jointly controlled companies and affiliated companies are accounted for by the equity method, based on the stockholders' equity in the investees. Other investments are recorded at cost, less provision for unrealized losses when applicable, and
g)Property, plant and equipment (including interest incurred during the construction period of large-scale projects) are depreciated on the straight-line basis, at rates that take into consideration the useful lives of the assets. Depletion of mineral reserves is computed on the unit-of-production method.
(4)CASH AND CASH EQUIVALENTS
(*) For these investments the Company, in order to obtain more profitability, contracted swap operations with these financial institutions, mainly related to exchange rate and currency variations.
(5)ACCOUNTS RECEIVABLE FROM CUSTOMERS
The accounts receivable of the Company are composed as follows:
(6)TRANSACTIONS WITH RELATED PARTIES
Derived from sales and purchases of products and services or from loans, with maturities up to the year 2011, as follows:
(*)Included in “Accounts receivable from customers” and “Payable to suppliers and contractors.”
(7)INVENTORIES
(8)DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION
Income of the Company is subject to the normal tax system. The balances of deferred assets and liabilities are presented as follows:
(*) Recorded as “Recoverable taxes” under current assets, which also includes R$ 97,712 (R$ 70,152 in 03/31/99) mainly related to ICMS (VAT) and PIS (Social Integration Program)
In addition to the credits recorded, the Company has a lawsuit pending claiming elimination of the 51.83% monetary restatement for tax purposes applied to the months of January and February 1989 (“Plano Verão” monetary plan). It has already obtained an injunction for compensation of credits corresponding to the elimination of 42.72% instead of the 51.83% requested. The amount of these credits covered by the injunction total approximately R$ 424,000, and the accounting effects have not yet been recognized on the balance sheet.
The amounts reported as income tax and social contribution which affected income for the year are reconciled to the statutory rates as follows:
(9)STATEMENT OF INVESTMENTS IN SUBSIDIARIES, JOINTLY CONTROLLED AND AFFILIATED COMPANIES AND OTHER INVESTMENTS
Notes:
(a)Equity in companies located abroad is converted into local currency at rates in effect on the quarterly balance sheet date. The calculation of the equity method adjustment comprises the difference due to exchange rate changes, as well as participation in income;
(b)Notwithstanding the stockholdings, the classification as a jointly controlled company results from the degree of control exercised by the Company, which is shared with the other partners;
(c)Companies whose quarterly financial statements were not examined by independent accountants;
(d)The amounts of the investments in CST, Bahia Sul and in CSN and AÇOMINAS indirect by throughDOCEPAR are net of discounts of R$ 148,697, R$ 28,996, R$84,492 and R$ 11,928, respectively and the investments in USIMINAS, VALESUL and ALUNORTE (indirect by throughALUVALE) and Pará Pigmentos include premiums of R$78,977, R$ 4,201 and R$21,305 and R$ 15,161, respectively;
(e)The consolidated participation represents 32.02% (Florestas Rio Doce S.A. owns 2.69% of the capital);
(f)CST, FOSFERTIL, CSN (holding by DOCEPAR), USIMINAS and BAHIA SUL (preferred shares in the latter) are listed on Brazilian stock exchanges. At 06/30/99 the market values of the Company's investments were R$391,447, R$225,452, R$342,734, R$ 102,985 and R$64,237, respectively, although this does not necessarily reflect the realizable value of a representative lot of shares. The other investments in subsidiaries,jointly controlled companies and affiliated companies refer to companies that have no shares traded on stock exchanges;