As filed with the Securities and Exchange Commission on May 15, 2007.

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 20-F

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2006

Commission file number: 001-15030

 

COMPANHIA VALE DO RIO DOCE

(Exact name of Registrant as specified in its charter)

 

Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

 

Avenida Graça Aranha, No. 26

20030-900 Rio de Janeiro, RJ, Brazil

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of outstanding shares of each class of stock of CVRD as of December 31, 2006 was:

1,471,607,838 common shares, no par value per share

944,585,684 preferred class A shares, no par value per share

6 golden shares, no par value per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark which financial statement item the registrant has elected to follow.  Item 17 o     Item 18 þ

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

We have prepared our financial statements appearing in this annual report in accordance with generally accepted accounting principles in the United States (U.S. GAAP), which differ in certain respects from accounting practices adopted in Brazil (Brazilian GAAP). Brazilian GAAP is determined by the requirements of Law No. 6,404, dated December 15, 1976, as amended, which we refer to as the Brazilian corporation law, and the rules and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM. We also publish Brazilian GAAP financial statements in Brazil, which we refer to as our Brazilian corporation law financial statements. We use our Brazilian corporation law financial statements for:

 

 

Our financial statements and the other financial information appearing in this annual report have been translated from Brazilian reais into U.S. dollars on the basis explained in Note 3 to our financial statements, unless we indicate otherwise.

 

 

 

References to “real,” “reais” or “R$” are to Brazilian reais (plural) and to the Brazilian real (singular), the official currency of Brazil. References to “U.S. dollars” or “US$” are to United States dollars.

 

Unless otherwise specified, we use metric units.

 

References to “CVRD” are to Companhia Vale do Rio Doce. References to “Vale Overseas” are to our subsidiary Vale Overseas Limited. References to “CVRD Inco” are to our subsidiary, CVRD Inco Limited. References to “Inco” are to Inco Limited, which we acquired and subsequently renamed “CVRD Inco Limited.” References to “us” or “we” are to CVRD and, except where the context otherwise requires, its consolidated subsidiaries.

 

References to our “ADSs” or “American Depositary Shares” include both our common American Depositary Shares (our common ADSs), each of which represents one common share of CVRD, and our preferred American Depositary Shares (our preferred ADSs), each of which represents one preferred class A share of CVRD. American Depositary Shares are represented by American depositary receipts (ADRs) issued by JPMorgan Chase Bank, as depositary.

 

The estimates of proven and probable ore reserves at our mines and projects and the estimates of mine life, as of December 31, 2005 and 2006, included in this annual report have been calculated according to the technical definitions required by the U.S. Securities and Exchange Commission, or the SEC. Our staff of experienced geologists and engineers prepares our reserve estimates. We derived estimates of mine life described in this annual report from such reserve estimates. For manganese ore and bauxite deposits, we have adjusted ore reserve estimates for extraction losses and metallurgical recoveries during extraction. For iron ore, kaolin, copper, potash, nickel, PGMs and cobalt, our reserve estimates are of in-place material after adjustments for mining depletion and mining losses (or screening and drying in the cases of PT International Nickel Indonesia Tbk, or PT Inco, and Goro) and recoveries, with no adjustments made for metal losses due to processing. See Item 3. Key information — Risk factors — Risks relating to our business for a description of risks relating to reserves and reserve estimates.

 

As part of our mineral reserves reporting strategy, we periodically engage independent mining and geological consultants to review estimates of our mineral reserves for all operations and new projects. Mineral reserves are subjected to outside review when significant changes in the reserve model occur due to the inclusion of new geological information, changes in production schedules, or changes in economic assumptions such as costs or product prices.

 

This annual report contains statements that may constitute forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Many of those forward-looking statements can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others. Those statements appear in a number of places and include statements regarding our intent, belief or current expectations with respect to:

 

 

We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors. These risks and uncertainties include factors relating to the Brazilian and Canadian economies and securities markets, factors relating to the iron ore and nickel businesses and their dependence on the global steel industry, which is cyclical in nature, and factors relating to the highly competitive industries in which we operate. For additional information on factors that could cause our actual results to differ from expectations reflected in forward-looking statements, see Item 3. Key information — Risk factors. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments. All forward-looking statements attributed to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement, and you should not place undue reliance on any forward-looking statement.

 

Not applicable.

 

Not applicable.

 

 

The table below presents selected consolidated financial information as of and for the periods indicated. You should read this information together with our consolidated financial statements appearing in this annual report.

 

Statement of income data

 

 

 

 

Per share data — earnings and dividends

 

 

 

 

Balance sheet data

 

 

 

 

Risks relating to our business

 

Due to our dependence on the global steel industry, fluctuations in demand for steel could adversely affect our business.

 

Sales prices and volumes in the global iron ore market depend on the prevailing and expected levels of demand and supply for iron ore, and global iron ore demand depends on the global steel industry. In addition, the stainless steel sector is the largest global consumer of primary nickel. Primary nickel use in stainless steel production accounts for over 60% of total primary nickel demand. Global demand for steel is cyclical. A number of factors, the most significant of which is the prevailing level of global demand for steel products, influence the performance of the global steel industry. During periods of sluggish or declining regional or world economic growth, demand for steel products generally decreases, which usually leads to corresponding reductions in demand for iron ore and nickel.

 

Driven primarily by strong demand from Chinese steelmakers, together with a modest expansion in other markets, the global iron ore market experienced high demand and rising iron ore and pellet prices from 2003 to 2005. In 2006, the price of iron ore increased further, due to a continued imbalance between global demand and supply that was driven by a significant expansion in demand. However, in 2006 there was a reduction in the price of blast furnace and direct reduction pellets. For 2007, iron ore prices increased by 9.5%, while blast furnace and direct reduction pellet prices increased by 5.28%. Since 2001, global demand for iron ore has grown at an average annual rate of 9.8%. We cannot guarantee that iron ore demand will remain at its current high level or the direction of future prices. Sustained declines in world contract prices or sales volumes for iron ore could have a material adverse effect on our revenues. Consolidation in the steelmaking industry may also lead to backward integration, which might reduce global demand for iron ore.

 

Driven by strong global economic activity and customers’ need to replenish inventories, global stainless steel production grew 15.8% in 2006, with a significant portion of the increased production coming from China, which led the way in stainless steel capacity expansion in 2006. This expansion has driven an increase in global demand for nickel, which exceeds supply and has led to higher prices for nickel. We cannot guarantee that demand for nickel will remain at its current high level or the direction of future prices for nickel. Sustained declines in stainless steel production could have a material adverse effect on our revenues from nickel.

 

Increased substitution for nickel applications could adversely affect our nickel business.

 

Nickel prices and demand may be negatively impacted by an increase in scrap nickel usage and by the substitution of materials other than nickel in current applications. Scrap nickel competes directly with primary nickel as a source of nickel for use in the production of stainless steel, and the choice between them is largely driven by their relative prices and availability. In 2006, the stainless steel scrap ratio was 48%, compared to 49% in 2005. Recently, Chinese steelmakers have developed a pig-iron product containing low grades of nickel that competes with both primary and scrap nickel in the production of stainless steel.

 

A reduction of global demand for Brazilian steel and/or agriculture products could reduce the demand for our logistics services.

 

The Brazilian agriculture and steel industries are currently the primary drivers of demand for our logistics services to customers. The percentage of our logistics revenues attributable to these industries was approximately 78.6% in 2005, and 71.9% in 2006. A reduction in world demand for Brazilian steel and/or agriculture products could reduce demand for our logistics services and harm the profitability of our logistics business.

 

Adverse economic developments in our principal markets, especially China, could reduce demand for our products, leading to lower revenues and profitability.

 

The global economy is the primary driver of demand in the global market for iron ore and pellets. In recent years, China has been the main driver of our sales increases. The percentage of our total gross revenues attributable to sales to customers in China was 15.0% in 2005 and 16.7% in 2006 (including CVRD Inco sales as though we had acquired Inco on January 1, 2006). The percentage of our gross revenues attributable to sales to customers from Asian countries other than China was 14.9% in 2005 and 22.7% in 2006 (on the same basis). The percentage of our gross revenues attributable to sales to European customers was 28.5% in 2005 and 23.0% in 2006 (on the same basis). A weakened global economy or a weakened economy in specific markets where we sell our products, such as China, could reduce demand for our products, leading to lower revenues and profitability.

 

Nickel, aluminum and copper are actively traded on world commodity exchanges and their prices are subject to significant fluctuations.

 

Nickel, aluminum and copper are sold in an active global market and traded on commodity exchanges, such as the London Metal Exchange (LME) and the New York Mercantile Exchange (NYMEX). Prices for these metals are subject to wide fluctuations and are affected by many factors, including actual and expected global economic and political conditions, levels of supply and demand, the availability and cost of substitutes, inventory, investments by commodity funds and others and actions of participants in the commodity markets. Prices for these metals are more volatile than iron ore and pellet prices because they respond more quickly to actual and expected changes in market conditions.

 

The mining industry is an intensely competitive industry, and we may have difficulty effectively competing with other mining companies in the future.

 

Intense competition characterizes the global iron ore and nickel industries. We compete with a number of large mining companies. Some of these competitors possess substantial iron ore and nickel deposits at locations closer to our principal Asian and European customers. Competition from iron ore and nickel producers may result in our loss of market share and revenues. Our aluminum, ferroalloys, copper and other businesses are also subject to intense competition and to similar risks.

 

Demand for our products in peak periods may outstrip our production capacity, rendering us unable to satisfy customer demand.

 

Our ability to rapidly increase production capacity to satisfy increases in demand for our products is limited. In periods when customer demand exceeds our production capacity, we generally meet excess customer demand by reselling iron ore, iron ore pellets or nickel purchased from joint ventures or third parties. If we are unable to satisfy excess customer demand by purchasing from joint ventures or third parties, we may lose customers. Similarly, because it takes time to increase production capacity, we may fail to complete expansion projects and greenfield projects in time to take advantage of the current high levels of worldwide demand for iron ore and nickel. In addition, operating at or above full capacity may expose us to higher costs, including demurrage fees due to capacity restraints in our mines, railroads and ports.

 

Political, economic, regulatory and social conditions in the countries in which we operate or have projects could adversely impact our business and the market price of our securities.

 

Our financial performance may be negatively affected by general economic, political, regulatory and social conditions in countries in which we have significant operations or projects, particularly Brazil, Canada, New Caledonia and Indonesia. Actual or potential political changes and changes in economic policy may undermine investor confidence, result in economic slowdowns and otherwise adversely affect the economic and other conditions under which we operate in ways that could have a material adverse effect on our business. Governments in emerging economies such as Brazil, New Caledonia and Indonesia frequently intervene in the economy and occasionally make substantial changes in policy that could adversely affect

exchange rates, inflation, interest rates, rates of taxes or royalties and the economic and regulatory environment in which we operate. In New Caledonia, a planned referendum in 2014 may result in New Caledonia becoming fully independent from France, which could result in significant political and economic changes in New Caledonia and may adversely affect our Goro project. In addition, actions by non-governmental organizations or community activist groups may disrupt our operations or projects.

 

Acts by protestors may hamper our mining and logistics operations and projects.

 

Protestors, including protestors from indigenous communities living near areas where we operate, have taken actions to disrupt our operations and projects, and they may continue to do so in the future. Although we vigorously defend ourselves against illegal acts, while continuing to support the communities living near our operations, future attempts by protestors to harm our operations could adversely affect our business. For more information, see Item 4. Information on the company — Regulatory matters — Environmental matters — Brazil.

 

Our PT Inco operations are subject to significant risks.

 

In addition to political, economic and other risks described separately, our PT Inco nickel operations in Indonesia are subject to significant risks. In particular:

 

 

The requirement to build a nickel processing facility in the Canadian Province of Newfoundland and Labrador by the end of 2011 involves risks.

 

Under definitive agreements with the Canadian Province of Newfoundland and Labrador, we have agreed to build a commercial nickel processing facility in this Province by the end of 2011 to treat all nickel ores or

intermediate products from our Voisey’s Bay operations for the production of finished nickel and cobalt products. This project involves several risks and challenges, including the following:

 

 

Our development projects are subject to risks that may result in increased costs, or delay or prevent their successful implementation.

 

We are investing heavily to further increase our production capacity, logistics capabilities and to expand the scope of minerals we produce. Our expansion and mining projects are subject to a number of risks that may cause them to be less successful than anticipated, including the following:

 

 

If we are unable to successfully manage these risks, our growth prospects and profitability may suffer.

 

Our principal shareholder could have significant influence over our company.

 

At December 31, 2006, Valepar S.A., or Valepar, owned 53.3% of our outstanding common stock and 32.5% of our total outstanding capital. For a description of our ownership structure, see Item 7. Major shareholders and related party transactions — Major shareholders — Principal shareholder. As a result of its share ownership, Valepar can control the outcome of any action requiring shareholder approval, except for

the appointment of certain directors and certain members of our fiscal council. Moreover, the Brazilian government owns six CVRD golden shares that give it limited veto power over certain actions that we could otherwise take. For a detailed description of the Brazilian government’s veto power by virtue of its ownership of these golden shares, see Item 10. Additional information — Common shares and preferred shares — General.

 

Many of our operations depend on joint ventures or consortia, and our business could be adversely affected if our partners fail to observe their commitments.

 

We currently operate important parts of our pelletizing, nickel, bauxite, coal and steel businesses through joint ventures with other companies. Important parts of our electricity business are operated through consortia. Our forecasts and plans for these joint ventures and consortia assume that our partners will observe their obligations to make capital contributions, purchase products and, in some cases, provide managerial personnel. If any of our partners fails to observe its commitments, the affected joint venture or consortium may not be able to operate in accordance with its business plans, or we may have to increase the level of our investment to effectuate these plans. For more information on our joint ventures, see Item 4. Information on the company — Lines of business.

 

Our mining and logistics activities depend on authorizations from regulatory agencies, and changes in regulations could adversely affect our business.

 

Our mining and logistics activities depend on authorizations from and concessions by governmental regulatory agencies of the countries in which we operate. Our exploration, mining, mineral processing and logistics activities are also subject to laws and regulations that can change at any time. If these laws and regulations change in the future, modifications to our technologies and operations could be required, and we could be required to make unexpected capital expenditures. For example, in Indonesia, the pending new mining legislation could have a material adverse effect on our PT Inco operations. For a more detailed description of the authorizations and concessions upon which our mining and logistics activities depend, see Item 4. Information on the company — Regulatory matters.

 

Our mining and energy businesses may be adversely affected by environmental regulation.

 

Our operations often involve using, handling, disposing and discharging hazardous materials into the environment or the use of natural resources, and nearly all aspects of our operations and development projects around the world are subject to environmental regulation. Such regulation requires us to obtain operating licenses, permits and other approvals and to conduct environmental assessments prior to initiating projects or undertaking significant changes to existing operations. Difficulties in obtaining licenses may lead to construction delays or cost increases, and in some cases may lead us to abandon a project. Environmental regulation also imposes standards and controls on activities relating to mining, exploration, development, production, reclamation, closure, and the refining, distribution and marketing of our products. Such regulation may give rise to significant costs and liabilities.

 

Environmental regulation in many countries in which we operate has become stricter in recent years, and it is possible that more regulation or more aggressive enforcement of existing regulations will adversely affect us by imposing restrictions on our activities, creating new requirements for the issuance or renewal of environmental licenses, raising our costs or requiring us to engage in expensive reclamation efforts. Some of the significant environmental risks that could affect our business are summarized below. For more information on environmental regulation applicable to our operations, see Item 4. Information on the company — Regulatory matters — Environmental matters and Item 8. Financial information — Legal proceedings.

 

 

 

We are involved in ongoing antitrust proceedings that could result in divestitures, fines or other restrictions that could harm our business.

 

Nearly all of our acquisitions and joint ventures are subject to post-transaction review by the Brazilian antitrust regulator (the Conselho Administrativo de Defesa Econômica), or CADE. We are currently involved in five proceedings before CADE, three of which involve post-transaction review of acquisitions (including the acquisition of Inco) or joint venture transactions. The other two are administrative proceedings involving claims that we have violated antitrust laws in connection with our logistics business. If CADE were to rule against us, it could order us to cease the conduct in question and/or to pay fines. We intend to defend these claims vigorously, but we cannot predict their outcome.

 

We are appealing a CADE decision from August 2005 regarding various transactions completed by us. The CADE decision conditions approval of these transactions on our acceptance of one of the following

alternatives: we must either (i) waive certain rights obtained from CSN (Companhia Siderúrgica Nacional) with respect to a particular iron ore mine (Casa de Pedra) and restructure our equity stake in the railway company MRS Logística S.A., or (ii) sell all the assets we obtained through our 2001 acquisition of Ferteco Mineração S.A. We are in the process of requesting an injunction to suspend the implementation of the CADE decision, but if we were ultimately required to comply with this decision our iron ore and logistics operations could be adversely affected. For more information, see Item 8. Financial information — Legal proceedings.

 

Our reserve estimates may materially differ from mineral quantities that we may be able to actually recover; our estimates of mine life may prove inaccurate; and market price fluctuations and changes in operating and capital costs may render certain ore reserves or mineral deposits uneconomical to mine.

 

Our reported ore reserves and mineral deposits are estimated quantities of ore and minerals that have the potential to be economically mined and processed under present and anticipated conditions to extract their mineral content. There are numerous uncertainties inherent in estimating quantities of reserves and in projecting potential future rates of mineral production, including many factors beyond our control. Reserve engineering is a subjective process of estimating underground deposits of minerals that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. As a result, no assurance can be given that the indicated amount of ore will be recovered or that it will be recovered at the rates we anticipate. Estimates of different engineers may vary, and results of our mining and production subsequent to the date of an estimate may lead to revision of estimates. Reserve estimates and estimates of mine life may require revision based on actual production experience and other factors. For example, fluctuations in the market prices of ores and metals, reduced recovery rates or increased operating and capital costs due to inflation, exchange rates or other factors may render proven and probable reserves uneconomic to exploit and may ultimately result in a restatement of reserves.

 

We may not be able to replenish our reserves, which could adversely affect our mining prospects.

 

We engage in mineral exploration, which is highly speculative in nature, involves many risks and frequently is nonproductive. Our exploration programs, which involve significant capital expenditures, may fail to result in the expansion or replacement of reserves depleted by current production. If we do not develop new reserves, we will not be able to sustain our current level of production beyond the remaining lives of our existing mines.

 

Even if we discover mineral deposits, we remain subject to drilling and production risks, which could adversely affect the mining process.

 

Once mineral deposits are discovered, it can take a number of years from the initial phases of drilling until production is possible, during which the economic feasibility of production may change. Substantial time and expenditures are required to:

 

 

If a project proves not to be economically feasible by the time we are able to exploit it, we may incur substantial write-offs. In addition, potential changes or complications involving metallurgical and other technological processes arising during the life of a project may result in cost overruns that may render the project not economically feasible.

 

We face rising extraction costs over time as reserves deplete.

 

Reserves are gradually depleted in the ordinary course of a given mining operation. As mining progresses, distances to the primary crusher and to waste deposits become longer, pits become steeper and underground operations become deeper. As a result, over time, we usually experience rising unit extraction costs with respect to each mine. Several of our mines have been operating for long periods, and we will likely experience rising extraction costs per unit in the future at these operations.

 

We may face a shortage in our supply of mining equipment due to increased consumption by mining companies that exceeds suppliers’ capacity.

 

Since early 2004, the global mining industry has experienced shortages of off-the-road (“OTR”) tires, and we do not expect an improvement in this situation in the short term. There are only five radial tire factories worldwide, and each is working at maximum capacity. Although the three major suppliers have announced investments to increase capacity over the next three years, these capacity increases are not expected to meaningfully reduce the risk of shortages before 2009. In response to the risk of shortages, mining industry participants are exploring alternatives, such as bias ply tires, which have lower performance ratings than radial tires. If we are unable to secure sufficient OTR tires or alternative tires to maintain our operations, we may suffer temporary reductions in our production capacity.

 

We have experienced labor disputes that have disrupted operations, and such disputes could recur.

 

A substantial number of our employees and some of the employees of our subcontractors are represented by labor unions and are covered by collective bargaining or other labor agreements, which are subject to periodic renegotiation. Strikes or work stoppages have occurred recently in Canada and could reoccur in connection with negotiations of new labor agreements or during other periods for other reasons. Moreover, we could be adversely affected by labor disruptions involving third parties who may provide us with goods or services. Strikes and other labor disruptions at any of our operations could adversely affect the operation of facilities, or the timing of completion and the cost of our capital projects.

 

An increase in fuel costs may adversely affect our business.

 

Our operations rely in part on oil by-products and gas, which represented 9.0% of our cost of goods sold in 2006. Fuel costs are a major component of our total costs in our logistics, pellets and nickel businesses and indirectly affect numerous other areas of our business, including our mining and aluminum businesses. An increase in oil and gas prices adversely affects margins in our logistics, mining, pellets, nickel and aluminum businesses.

 

If we are unable to maintain reliable access to electricity at acceptable prices, our operations may be adversely affected.

 

Electricity costs are a significant component of the cost of our production, representing 6.1% of our total cost of goods sold in 2006. If we are unable to secure reliable access to electric energy at acceptable prices, we may be forced to curtail production or may experience higher production costs, either of which would adversely affect our results of operations.

 

Electricity shortages have occurred in Brazil in the past and could reoccur in the future, and there can be no assurance that Brazilian government policies will succeed in encouraging growth in generation capacity. Future shortages and government policies to respond to or prevent shortages may adversely impact the cost or supply of electricity for our Brazilian aluminum and ferroalloy operations. Changes in the laws, regulations or governmental policies regarding the power sector or concession requirements could reduce our expected returns from our investments in power generation.

 

Through our subsidiary PT Inco in Indonesia, we process lateritic nickel ores, which is energy-intensive. Although PT Inco currently generates a majority of the electricity for its operations from its own hydroelectric facilities, certain hydrological factors, such as low rainfalls or ineffective water management practices, could

adversely affect electricity production at PT Inco’s plants in the future, which could significantly increase PT Inco’s costs or result in lower production. For more information on the regulations governing energy production, see Item 4. Information on the company — Regulatory matters.

 

Price volatility of the currencies in which we conduct operations relative to the U.S. dollar could adversely affect our financial condition and results of operations

 

We are affected by fluctuations in the prices of the currencies in which we conduct operations relative to the U.S. dollar. A substantial portion of our revenues and debt is denominated in U.S. dollars, and changes in exchange rates may result in losses or gains on our net U.S. dollar-denominated indebtedness and accounts payable. In 2006, 2005 and 2004, changes in exchange rates led us to report foreign exchange gains of US$452 million, US$227 million and US$79 million, respectively. In addition, currency fluctuations between the Brazilian real, U.S. dollar, Canadian dollar, Indonesian rupiah and other currencies of our subsidiaries affect our results. Currency fluctuations are expected to continue to affect our financial income, expense and cash flow generation.

 

Major volatility of any such currencies may also result in disruption of the foreign exchange markets and may limit our ability to transfer or to convert such currencies into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our indebtedness. The governments of countries in which we operate could institute restrictive exchange rate policies in the future.

 

Investor perceptions of risk in Brazil and other emerging economies may undermine our ability to finance our operations at an acceptable cost or reduce the trading price of our securities.

 

Although our acquisition of Inco has significantly expanded the proportion of our non-Brazilian operations, our largest operations, corporate headquarters and senior management continue to be located in Brazil. Investors generally consider Brazil to be an emerging market. As a result, economic and market conditions in other emerging market countries, especially those in Latin America, influence the market for securities issued by Brazilian companies. Economic crises in one or more emerging market countries may reduce overall investor appetite for securities of emerging market issuers. Past economic crises in emerging markets, such as in Southeast Asia, Russia and Argentina, have resulted in significant outflows of U.S. dollars from Brazil and caused Brazilian companies to face higher costs for raising funds, both domestically and abroad, and have effectively impeded access to international capital markets for extended periods. We cannot assure you that global capital markets will remain open to Brazilian companies or that prevailing interest rates in these markets will be advantageous to us. In addition, future financial crises in emerging market countries may have a negative impact on the Brazilian markets, which could adversely affect the trading price of our securities.

 

Our market risk management strategy may not be effective.

 

We are exposed to traditional market risks such as fluctuations in interest rates, exchange rates and commodity prices. We earn most of our revenues in U.S. dollars, but incur a substantial portion of our costs and expenses in currencies other than the U.S. dollar. The exchange rates for converting such currencies into U.S. dollars have varied substantially during the last three years. In order to protect ourselves against market volatility, our Board of Directors has approved a risk management policy. See Item 11. Quantitative and qualitative disclosures about market risk. Our strategy may not be successful in minimizing our exposure to these fluctuations, and we may fail to identify correlations between the various market risks to which we are subject. In addition, to the extent we partially hedge our commodity price exposure, we may limit the upside benefits that we would otherwise experience if commodities prices were to increase.

 

We may not have adequate, if any, insurance coverage for some business risks.

 

Our businesses are generally subject to a number of risks and hazards, including:

 

 

 

These occurrences could result in damage to, or destruction of, mineral properties, production facilities, transportation facilities, equipment or vessels. They could also result in personal injury or death, environmental damage, waste of resources or intermediate products, delays or interruption in mining, production or transportation activities, monetary losses and possible legal liability. The insurance we maintain against risks that are typical in our business may not provide adequate coverage. Insurance against some risks (including liabilities for environmental pollution or certain hazards or interruption of certain business activities) may not be available at a reasonable cost, or at all. As a result, accidents or other negative developments involving our mining, production or transportation facilities could have a material adverse effect on our operations.

 

Risks relating to our acquisition of Inco

 

We may experience difficulties integrating CVRD Inco and may fail to achieve the expected benefits from the acquisition.

 

Integrating CVRD Inco with our operations will be a complex, costly and time-consuming process, and may be made more difficult due to the unsolicited, cross-border nature of the acquisition. Risks and challenges that may impair our ability to achieve the benefits of the acquisition include the following:

 

 

If we are unable to successfully respond to these risks and challenges, we may experience higher than expected operating costs or fail to achieve the anticipated benefits of the acquisition.

 

If CVRD Inco’s business does not perform well or we do not integrate it successfully, we may incur significant charges to net income to write down the goodwill recognized as a result of the acquisition.

 

As a result of the acquisition, we recognized, on a preliminary basis, goodwill of US$3,876 million. Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we must test our goodwill annually for impairment and, if we determine that the goodwill has been impaired, we must write down the goodwill by the amount of the impairment, with a corresponding charge to net income. If CVRD Inco’s business does not perform well or if we are unable to successfully integrate it with our operations, we may incur significant charges to net income to write down the goodwill, which could have a material adverse effect on our results of operations and financial condition.

 

We have incurred a substantial amount of indebtedness in connection with the acquisition of CVRD Inco, which could limit our operating flexibility and make it more difficult for us to maintain our investment grade rating.

 

As of December 31, 2006, as a result of the consolidation of CVRD Inco’s indebtedness and the incurrence by CVRD of indebtedness of US$14,600 million to fund the purchase price for 100% of CVRD Inco’s shares, we had US$22,556 million of debt outstanding, compared to US$4,947 million outstanding at December 31, 2005. The substantial increase in our outstanding debt and related covenants could limit our operating flexibility. In particular:

 

 

Commitments made to Canadian government authorities in connection with the acquisition of CVRD Inco may limit our flexibility in managing CVRD Inco’s operations.

 

In connection with the approval under the Investment Canada Act of our acquisition of Inco, we made a series of commitments to the Canadian Minister of Industry, in the form of undertakings, including commitments to manage our global nickel business from Canada, to refrain from making layoffs at our Canadian operating facilities for three years and to maintain aggregate employment at these facilities at a specified level for an agreed period. We also committed to increase certain expenditures by specified amounts over previously existing levels and expressed our wish to accelerate the development of our Voisey’s Bay project. See Item 4. Information on the company — Regulatory matters — Investment Canada Act undertakings. These commitments could limit our flexibility in managing our business and responding to changing market conditions, which could adversely affect our results of operations.

 

Risks relating to the American Depositary Shares

 

Restrictions on the movement of capital out of Brazil may hinder your ability to receive dividends and distributions on American Depositary Shares and the proceeds from any sale of American Depositary Shares.

 

The Brazilian government may impose restrictions on capital outflows whenever there is a serious imbalance in Brazil’s balance of payments or reason to foresee a serious imbalance. This would hinder or prevent the custodian who acts on behalf of the depositary for the American Depositary Shares from converting proceeds from the shares underlying the American Depositary Shares into U.S. dollars and remitting those proceeds abroad.

 

The Brazilian government imposed remittance restrictions for approximately six months in 1989 and early 1990. If enacted in the future, similar restrictions would hinder or prevent the conversion of dividends, distributions or the proceeds from any sale of shares from reais into U.S. dollars and the remittance of the U.S. dollars abroad. In that event, the custodian, acting on behalf of the depositary, will hold the reais it cannot convert for the account of the holders of American depositary receipts who have not been paid. The depositary will not invest the reais and will not be liable for interest on those amounts. Furthermore, any reais so held will be subject to devaluation risk.

 

If you exchange American Depositary Shares for the underlying shares, you risk losing the ability to remit foreign currency abroad and Brazilian tax advantages.

 

The Brazilian custodian for the shares underlying our American Depositary Shares will obtain an electronic registration from the Central Bank to entitle it to remit U.S. dollars abroad for payments of dividends and other distributions relating to the shares underlying our American Depositary Shares or upon the disposition of the underlying shares. If you decide to exchange your American Depositary Shares for the underlying shares, you will be entitled to continue to rely, for five business days from the date of exchange, on the custodian’s electronic registration. Thereafter, you may not be able to obtain and remit U.S. dollars abroad upon the disposition of, or distributions relating to, the underlying shares unless you obtain your own electronic registration by registering your investment in the underlying shares under Resolution No. 2,689 of the National Monetary Council, which entitles foreign investors to buy and sell securities on the São Paulo stock exchange, or BOVESPA. For more information regarding these exchange controls, see Item 10. Additional information — Exchange controls and other limitations affecting security holders. If you attempt to obtain your own electronic registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to the underlying shares or the return of your capital in a timely manner. We cannot assure you that the custodian’s electronic registration or any certificate of foreign capital registration obtained by you will not be affected by future legislative changes, or that additional restrictions applicable to you, the disposition of the underlying shares or the repatriation of the proceeds from disposition will not be imposed in the future.

 

Because we are not obligated to file a registration statement with respect to preemptive rights relating to our shares, you may be unable to exercise those preemptive rights.

 

Holders of American depositary receipts that are residents of the United States may not be able to exercise preemptive rights, or exercise other types of rights, with respect to the underlying shares. Your ability to exercise preemptive rights is not assured unless a registration statement is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement relating to preemptive rights with respect to the underlying shares or to undertake steps that may be needed to make exemptions from registration available, and we cannot assure you that we will file any registration statement or take such steps. If a registration statement is not filed and an exemption from registration does not exist, JPMorgan Chase Bank, as depositary for our American Depositary Shares, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of the sale. However, the preemptive rights will expire if the depositary cannot sell them. For a more complete description of preemptive rights with respect to the underlying shares, see Item 10. Additional information — Common shares and preferred shares — Preemptive rights.

 

Holders of our American Depositary Shares may encounter difficulties in the exercise of voting rights.

 

Holders of our common and preferred class A shares are entitled to vote on shareholder matters. You may encounter difficulties in the exercise of some of your rights as a shareholder if you hold our American Depositary Shares rather than the underlying shares. For example, if we fail to provide the depositary with voting materials on a timely basis, you may not be able to vote by giving instructions to the depositary on how to vote for you.

 

Our corporate affairs are governed by our bylaws and Brazilian corporation law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or elsewhere

outside Brazil. Under Brazilian corporation law, holders of our common and preferred class A shares may have fewer and less well-defined rights to protect their interests relative to actions taken by our Board of Directors or by Valepar than under the laws of some jurisdictions outside Brazil.

 

Although Brazilian law imposes restrictions on insider trading and price manipulation, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or markets in certain other jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of minority shareholder interests may be less well-developed and enforced in Brazil than in the United States, which could potentially disadvantage you as a holder of the underlying shares and American Depositary Shares. For example, when compared to Delaware general corporation law, Brazilian corporate law and practice has less detailed and well-established rules and judicial precedents relating to the review of management decisions against duty of care and duty of loyalty standards in the context of corporate restructurings, transactions with related parties, and sale-of- business transactions. In addition, shareholders in Brazilian companies ordinarily do not have standing to bring a class action.

 

In addition, as a foreign private issuer, we are not required to follow many of the corporate governance rules that apply to U.S. domestic issuers with securities listed on the New York Stock Exchange, or the NYSE. For more information concerning our corporate governance policies, see Item 6. Directors, senior management and employees.

 

Depreciation of the Brazilian real against the U.S. dollar reduces the U.S. dollar value of dividends paid to holders of our American Depositary Shares.

 

Depreciation of the Brazilian real against the U.S. dollar reduces the U.S. dollar value of dividends paid to holders of our American Depositary Shares. We attempt to mitigate this risk by setting our dividends in U.S. dollars. However, shareholders are still exposed to currency volatility risk for a period of at least two weeks, as the U.S. dollar value of dividends is converted into reais at least two weeks prior to its distribution, due to operational requirements to process dividend payments.

 

General

 

We are the second-largest diversified metals and mining company in the world, the largest metals and mining company in the Americas, and one of the largest private-sector companies in Latin America by market capitalization. We are the world’s largest producer and exporter of iron ore and pellets and one of the world’s largest producers of nickel. We also produce copper, manganese, ferroalloys, bauxite, precious metals, cobalt, kaolin, potash and other products. To support our growth strategy, we are actively engaged in mineral exploration efforts in 19 countries around the globe. We operate large logistics systems in Brazil, including railroads, maritime terminals and ports that are integrated with our mining operations. Directly and through affiliates and joint ventures, we have major investments in the aluminum, coal, energy and steel businesses.

 

The table below presents the breakdown of our total gross revenues attributable to each of our main lines of business, each of which is described following the table.

 

 

 

 

 

 

CVRD’s legal and commercial name is Companhia Vale do Rio Doce. CVRD is a stock corporation, or sociedade por ações, duly organized on January 11, 1943, and existing under the laws of the Federative Republic of Brazil. CVRD was privatized in three stages between 1997 and 2002, beginning with the sale by the Brazilian government of a controlling stake in CVRD to Valepar in 1997. The last stage of the privatization took place in 2002, when the Brazilian government sold a remaining minority stake of common shares through a global equity offering. CVRD is organized for an unlimited period of time. Its head offices are located at Avenida Graça Aranha, No. 26, 20030-900 Rio de Janeiro, RJ, Brazil, and its telephone number is 55-21-3814-4477.

 

Business strategy

 

Our goal is to strengthen our position as one of the world’s leading diversified metals and mining companies by building on our strengths in iron ore and nickel and increasing our geographical and product diversification and logistics capabilities. Over the past several years, we have developed a robust long-term strategic planning process. Although we may pursue strategic acquisitions, following the Inco acquisition we are focused on organic growth in our core businesses. We are pursuing disciplined capital management in order to maximize return on invested capital and total return to shareholders. Below we highlight our major strategies.

 

Maintaining our leadership position in the global iron ore market

 

We continue to consolidate our leadership in the global iron ore market, having an estimated market share of 33% of the total volume traded in the seaborne market in 2006. We are committed to maintaining our position in the global iron ore market by strengthening relationships with clients, focusing our product line to capture industry trends, increasing our production capacity in line with demand growth and controlling costs. We believe that our strong relationships with major customers, reinforced through long-term contracts, high quality products and a strong technical marketing strategy, will help us achieve this goal. We are also taking steps to encourage several steel makers to develop steel slab plants in Brazil in order to create additional demand for our iron ore.

 

Achieving leadership in the nickel business

 

Following the acquisition of Inco in October 2006, we have become one of the world’s largest nickel producers, with large-scale, long-life, low-cost operations, a substantial resource base, and a robust growth profile. We believe our greenfield projects at Vermelho and Onça Puma in Brazil and Goro in New Caledonia will further support our leadership position in the nickel market.

 

Increasing our aluminum activities

 

We are developing and increasing production capacity in our aluminum operations, focusing on the upstream portion of the production chain and developing low-cost bauxite and alumina projects. We have large, undeveloped high-quality bauxite reserves and opportunities for low-cost expansions in our alumina refinery. We are working on the development of these opportunities. We are also investing in mineral exploration to increase our bauxite resources.

 

Improvements in our manganese ore and ferroalloys operations

 

We have been taking steps to improve our competitive position and reduce operating costs at our manganese ore and ferroalloys operations through divestments, reduction of personnel, and streamlining of the management structure.

 

Developing our copper resources

 

We believe that our Brazilian copper projects, which are all situated in the Carajás region, in the Brazilian state of Pará, could be among the most competitive in the world in terms of investment cost per metric ton of ore. We expect these copper mines to benefit from our infrastructure facilities serving the Northern System.

 

Investing in coal

 

We are pursuing various opportunities to become a large global player in coal businesses. In April 2007, we acquired AMCI Holdings Australia Pty (AMCI HA), which has coal operating assets and reserves in Australia. In the past several years, we have invested in two joint ventures in China, and we intend to continue pursuing organic growth in the coal business through development of the Moatize project in Mozambique and the Belvedere coal deposit in Australia.

 

Enhancing our logistics capacity

 

We believe that the quality of our railway assets and our many years of experience as a railroad and port operator, together with the lack of efficient transportation for general cargo in Brazil, position us as a leader in the logistics business in Brazil. We are expanding the capacity of our railroads through the purchase of additional locomotives and wagons to serve the increasing needs of our own businesses and those of our customers.

 

Global exploration efforts

 

We are engaged in an active mineral exploration program, with efforts in 19 countries around the globe. We are mainly seeking new deposits of copper, manganese ore, iron ore, nickel, kaolin, bauxite, phosphate, potash, coal, uranium and platinum group metals. Mineral exploration is an important part of our organic growth strategy.

 

Developing power generation projects

 

Energy management and efficient supply have become a priority for us. As a large consumer of electricity, we believe that investing in power projects to support our operations will help protect us against volatility in the price of energy, regulatory uncertainties and the risk of energy shortages. Accordingly, we have developed hydroelectric power generation plants in Brazil and in Indonesia, and we are using the electricity from these projects to supply our internal needs.

 

Recent acquisitions and significant changes

 

We describe below significant acquisitions and other changes in our business in 2006 and 2007 to date.

 

Acquisition of Inco

 

In October 2006, we acquired 75.66% of the outstanding common shares of Inco, then the world’s second-largest producer of nickel, in an unsolicited cash tender offer. Following a subsequent offering period and additional purchases, we increased our stake to 87.73% by December 31, 2006. In January 2007, the amalgamation of Inco with our subsidiary Itabira Canada Inc. resulted in our acquisition of 100% of the shares of Inco, and we formally changed Inco’s name to “CVRD Inco Limited” (“CVRD Inco”). CVRD Inco subsequently ceased to be a reporting issuer under both U.S. and Canadian securities laws. The total acquisition cost for Inco was US$18,931 million, which represents the purchase price of US$17,744 million plus net debt of US$1,187 million. US$15,691 million was paid to Inco shareholders due to stock acquisitions in 2006, and US$2,053 million was disbursed in 2007. Of the US$17,744 million paid, US$593 million is attributable to convertible debt and US$17,151 million to the acquisition of outstanding shares.

 

Stock merger with Caemi

 

In May 2006, we completed a stock merger with our controlled company CAEMI. Pursuant to the stock merger, all preferred shares of CAEMI owned by its public shareholders were exchanged for new preferred shares issued by us, and CAEMI became our wholly owned subsidiary. The exchange ratio was one CAEMI share per 0.04115 CVRD preferred class A share. In December 2006, we merged CAEMI into CVRD.

 

Iron ore and pellets

 

Acquisition and usufruct agreement for MBR shares.  In May 2007, we entered into a transaction by which we have effectively obtained 100% control of MBR during the next thirty years, allowing us to maximize our exposure to MBR, which we consider one of the best iron ore assets in the world and to exploit synergies between the companies. Prior to this transaction, we owned 89.9% of MBR, directly and through our 80% stake in Empreendimentos Brasileiros de Mineração S.A. (EBM), whose main asset is a 51% stake in MBR. We acquired a further 6.25% of EBM for US$231 million, and we simultaneously entered into a usufruct agreement with respect to the 13.75% of EBM’s total capital that we do not own. This agreement grants us during the next 30 years all rights and obligations with respect to these EBM shares, including the right to dividends. In exchange, CVRD will pay a total of US$61 million and an annual fee of US$48 million.

 

Development of a dedicated Brazil-China shuttle service.  In May 2007, CVRD entered into long-term freight contracts to develop dedicated shuttle service from Brazil to China. We expect this service to enhance in the future our ability to offer our products in the Chinese market at competitive prices and to increase our market share in China and the global seaborne market.

 

Start-up of Brucutu mine.  Our new Brucutu mine started operations in September 2006. When Brucutu reaches full capacity in 2008, it is expected to produce 30 million metric tons of iron ore. In 2007, we expect production to amount to 23 million metric tons.

 

Carajás expansion.  In January 2007, we completed the expansion of iron ore production capacity at Carajás to 100 million metric tons per year, after completing an expansion to 85 million metric tons per year in the third quarter of 2006. We are conducting studies for a possible further expansion to 130 million metric tons of iron ore per year by 2009.

 

Reclassification of operations in the Southern System.  In the third quarter of 2006, in order to maximize existing synergies and to continue to achieve efficiency gains, we divided the management of our former Southern System for producing and distributing iron ore into two departments: the Southeastern System and the Southern System, and we have begun reporting production separately for each system.

 

The Southeastern System consists of:

 

 

 

The new Southern System consists of:

 

 

Samarco expansion.  We are increasing pellet production capacity at Samarco, our 50% joint venture with BHP Billiton, located in the Brazilian state of Espírito Santo. The expansion at Samarco is expected to add 7.6 million metric tons per year of capacity. In 2006, the engineering and ground-leveling projects were completed. In 2007, construction works and the assembly of electrical and mechanical components will be undertaken, with operational start-up planned for the first half of 2008. Samarco obtained its own financing for the project.

 

Itabiritos project.  We are building a pellet plant, located in the Brazilian state of Minas Gerais, with a capacity of 7 million metric tons per year, an iron ore concentration plant, and a short iron ore slurry pipeline. The development of Itabiritos began in 2006, with the basic engineering project and the commencement of civil engineering works. Itabiritos’ operations are scheduled to begin in the second half of 2008.

 

Joint venture in China.  In September 2006, our subsidiary MBR acquired a 25% stake in a joint venture, Zhuhai YPM, to build a new pelletizing plant in Zhuhai, Guandong, China. Our expected investment in this project will be US$4 million and we will supply at least 70% of the iron ore used to feed the plant, pursuant to a 30-year contract. The plant is expected to become operational in 2008. The other partners in this joint venture are Zhuhai Yueyufeng Iron and Steel Co. Ltd. (with a 40% stake) and Pioneer Iron & Steel Group Co. Ltd. (with a 35% stake).

 

Acquisition of Rio Verde Mineração assets.  In January 2006, we acquired certain mineral resources, land and mining equipment of Rio Verde Mineração for US$47 million. Rio Verde Mineração is located in the Iron Quadrangle region of the Brazilian state of Minas Gerais, near the operations of MBR in the municipality of Nova Lima.

 

Nickel

 

Onça Puma.  In the third quarter of 2006, our Board of Directors approved our investment in the Onça Puma nickel project, in the Brazilian state of Pará, which is expected to have a nominal capacity of 58,000 metric tons per year of nickel in the form of ferro-nickel, its final product. Construction at the project site began in July 2006. We currently estimate that the total investment in the project will amount to US$1,437 million, and are targeting start-up of operations for the fourth quarter of 2008.

 

Goro.  Following the acquisition of Inco, we reviewed the Goro project and planned the implementation of measures to reduce environmental, operational and technology risks. The total cost of Goro is estimated to be US$3,212 million, of which US$1,435 million was spent from 2001 to 2006. The commissioning of Goro is scheduled for the end of 2008.

 

Aluminum

 

Acquisition of remaining interest in Valesul.  In July 2006, we exercised our right of first refusal under the Valesul Aluminio S.A. (“Valesul”) shareholders’ agreement and acquired BHP Billiton Metais S.A.’s 45.5% indirect interest in Valesul for US$28 million, as a result of which we now own 100% of Valesul’s shares. We began consolidating Valesul in our financial statements in the third quarter of 2006.

 

Paragominas project.  We are developing a bauxite mine in Paragominas, in the Brazilian state of Pará, which was commissioned in the first quarter 2007, with an initial capacity of 5.4 million metric tons per year.

We have completed the first bauxite pipeline in the world, for the transport of bauxite slurry from the Paragominas mine to the alumina refinery in Barcarena, state of Pará. By 2008, Paragominas’ capacity is expected to reach 9.9 million metric tons per year, which will require further investment of US$196 million. The bauxite produced at Paragominas will be used to supply Alunorte’s expansion needs.

 

Alunorte expansion.  In 2006 we completed our alumina production capacity expansion at our Alunorte refinery to 4.4 million metric tons per year, and we expect to increase capacity further to 6.26 million metric tons per year, at an estimated investment of US$846 million. Expected startup for this project is in 2008.

 

New refinery project.  We are studying a potential investment in a greenfield alumina refinery in the Brazilian state of Pará, near the existing facilities of Alunorte in Brazil, expected to have an initial capacity of 1.8 million metric tons per year. Bauxite for the project would be supplied from our Paragominas bauxite mine. If the terms of the project are agreed, the first stage of the refinery is expected to be completed and operational within three years. The project is subject to the approval from our Board of Directors.

 

Copper

 

Salobo.  The Salobo project is located in Brazil, in the Carajás region of the Brazilian state of Pará. The environmental license was obtained in December 2006 and our Board of Directors approved the development of this project in January 2007. However, the start-up of the development of the project is contingent on an appropriate tax structure, which is currently being discussed with government authorities. In its first stage, Salobo is expected to produce 100,000 metric tons of copper in concentrate per year.

 

Project 118.  The 118 copper project is scheduled to begin operations in the first half of 2009, but we are still awaiting the grant of a license without which construction cannot begin. Therefore, the timing of start-up could be revised. A preliminary license was obtained in April 2006, and key equipment was ordered at the end of 2006. Basic engineering for the project has been concluded.

 

Coal and coke

 

We are pursuing several efforts to become a large global player in the coal business.

 

 

Steel and metallics

 

We are taking steps to encourage steel makers to develop steel slab plants in Brazil, in order to create value and additional demand for our iron ore.

 

 

Divestitures and asset sales

 

In line with our strategy, we have continued to reduce our holdings of non-strategic assets. We summarize below our key dispositions and asset sales since the beginning of 2006.

 

 

 

Our principal lines of business consist of mining and logistics. We also invest in energy to supply part of our consumption. The following map shows the locations of our current operations worldwide.

Ferrous minerals

 

Our ferrous minerals business segment includes:

 

 

Iron ore operations

 

We conduct our iron ore business primarily at the parent company level and through our subsidiaries MBR and Urucum Mineração S.A., or Urucum. Our iron ore mining and related operations are concentrated in three systems in Brazil, the Southeastern System, the Southern System and the Northern System, further described below. The operation of these separate systems, each with its own transportation capability, enhances the reliability of the service we provide our customers.

 

Southeastern System

 

The Southeastern System, carved out of our former Southern System, recently became a separately managed department. Located in the southeastern Brazilian state of Minas Gerais, in a region known as the Iron Quadrangle, the iron ore mines of the Southeastern System are divided into three mining areas: Itabira, Centrais Mines, and Mariana. Our railroad, the Vitória a Minas railroad, connects the mines in these areas to the Tubarão port in Vitória, in the Brazilian state of Espírito Santo.

 

Iron ore in the Southeastern System is mined by open-pit methods. These ore reserves have high ratios of itabirite ore relative to hematite ore. Itabirite is a quartz-hematite rock with an average iron content ranging from 35-60%, requiring concentration to achieve shipping grade, which is above a 64% average iron content. Hematite is a high-grade ore with an average iron content of approximately 66%.

 

Mines in the Southeastern System generally process their run-of-mine by means of standard crushing, classification and concentration steps, producing sinter feed, lump ore and pellet feed in the beneficiation plants located at the mining sites.

 

In 2006, we produced 100% of the electric energy consumed in the Southeastern System at our Igarapava, Porto Estrela, Funil, Candonga, Aimorés and Capim Branco I hydroelectric power plants. The Southeastern System is accessible by road or by spur tracks of the Vitória a Minas railroad.

 

Southern System

 

The new Southern System, located in the Brazilian states of Minas Gerais and Rio de Janeiro, consists of the Oeste mines and the mines of MBR. MBR presently operates three major mining complexes:

 

 

Wet beneficiation processes are used to convert run-of-mine obtained from open-pit mining operations into lump ore, sinter feed fines and pellet feed fines, in addition to hematitinha, a product used primarily by Brazilian pig-iron producers.

 

The iron ore produced in our Southern System is transported by MRS Logística S.A. (“MRS”), a railway company in which we hold, directly and indirectly, 37.2% of the voting capital and 40.5% of the total capital,

to the Guaíba Island and Itaguaí maritime terminals, both located in the Brazilian state of Rio de Janeiro. In 2006, we produced 22% of the electric energy consumed in the Southern System at our Igarapava, Porto Estrela, Funil, Candonga, Aimorés and Capim Branco I hydroelectric power plants.

 

Northern System

 

The Northern System is comprised of open-pit iron ore mines and an ore-processing complex in the Carajás region of the Brazilian state of Pará. The mines are located in the north of Brazil on public lands for which we hold mining concessions. The Northern System’s reserves are among the largest iron ore deposits in the world. These reserves are divided into two main ranges (north and south), situated approximately 35 kilometers apart. Iron ore mining activities in the Northern System are currently being conducted in the northern range, which is divided into five main mining bodies (N4E, N4W, N5W, N5E and N5EN).

 

Because of the high iron content (66.8% on average) in the Northern System deposits, we do not have to operate a concentration plant at Carajás. The beneficiation process consists simply of sizing operations, including screening, hydrocycloning, crushing and filtration. This allows us to produce marketable iron ore in the Northern System at a lower cost than in the Southern and Southeastern Systems. Output from the beneficiation process consists of sinter feed, pellet feed, special fines for direct reduction processes and lump ore. After completion of the beneficiation process, our Carajás railroad transports Northern System iron ore to the Ponta da Madeira maritime terminal in the Brazilian state of Maranhão.

 

Our complex in Carajás is accessible by road, air and rail. It obtains electrical power at market rates from regional utilities. To support our Carajás operations, we have housing and other facilities in a nearby township.

 

Casa de Pedra

 

In March 2001, we acquired certain rights of first refusal with respect to the Casa de Pedra iron ore mine of CSN (Companhia Siderúrgica Nacional): the right, for thirty years, to purchase at market prices any excess iron ore as defined in the agreement; the right, for thirty years, to purchase or lease the mine if CSN decides to sell or lease it; and the right, for thirty years, to become a joint venture partner if CSN decides to form a pelletizing joint venture with a third party using iron ore produced by the mine. On August 10, 2005, CADE issued a decision approving certain of our acquisitions, which imposed certain conditions on us, including a full waiver of our preemptive rights relating to the Casa de Pedra iron ore mine. See Item 3. Key information — Risk factors — We are involved in ongoing antitrust proceedings that could result in divestitures, fines or other restrictions that could harm our business.

 

Iron ore projects

 

We are developing the following iron ore projects in Brazil:

 

 

Iron ore production and reserves

 

The table on the next page sets forth information regarding our proven and probable iron ore reserves and projected exhaustion dates for the periods indicated. The projected exhaustion dates are estimated based on our estimates of future production levels.

 

 

 

 

 

Changes in iron ore reserves: 2005 versus 2006

 

Our 2006 iron ore reserve estimates reflect mining depletion in 2006 and the build-up of intermediate and buffer ore stocks, which are composed of ore that has been mined out of “in situ” reserves but has not been fed to the plants. These stocks may be partially reclaimed during operations. Our 2006 reserve estimates also reflect revisions to estimates in light of differences identified in reconciliation testing between estimated ore tonnages predicted by our reserves model and actual run-of-mine. We describe changes in reserves at our individual mines below.

 

 

 

Iron ore pellets

 

We produce iron ore pellets in our own plants and through joint ventures. The table below sets forth information regarding our iron ore pellet business as of April 30, 2007.