CSN Mineracao SA

BOVESPA:CMIN3

Earnings Call Transcript

[Operator]

Gentlemen, and thank you for holding. We would like to welcome everybody to CSN Mineração conference call to present the results for the quarter 2024 and full year. Joining us today are the company's executive officers. We would like to inform you that this event is being recorded. [Operator Instructions] Before proceeding, we would like to say that some of the forward-looking statements or expectations are trends based on current assumptions and opinions of the company management, they could differ materially from those expressed herein as they do not constitute projections. In fact, actual results, performance or events may differ materially from those expressed or implied by forward-looking statements as a result of general and economic conditions in Brazil and other countries, interest rate and exchange rate levels, future rescheduling and prepayment of debt pegged in foreign currencies, protectionist measures in the U.S., Brazil and other countries, changes in laws and regulations and general competitive factors at a global, regional or national level. We would now like to turn the floor over to Mr. Pedro Oliva, Investor Relations Executive Officer and the CFO to present the company's operating and financial highlights for the period. Mr. Oliva, you may proceed.

[Pedro Barros Oliva, executive]

Well, good morning, everybody. I would like to begin by thanking you all for your attendance at the CSN Mineração. We begin with the highlights for the fourth quarter and full year of 2024. We had the highest own production since 2019. We delivered annual growth of 3.7 million tonnes, quite higher than the 2.5 million tonnes that we had expected throughout the CSN Day 2023, which was a forecast for '24. This allowed us to comply with the guidance of purchases of 42,000 tonnes, although we had an increase in the number of tonnes, we decided to prioritize margins instead of volume and helped us in a better dilution of fixed costs along with the exchange rate devaluation and everything else we did to offset price. We reached that ceiling of $21 below the guidance that was $21.5 to $23 per tonne. The record of shipments at company port reached a volume of 38.5 million tonnes exported. A 100% of the exports of cement were done through our own port, generating savings of BRL 235 million compared to the previous year.

Now the strong performance with a volume of 42.5 million tonnes sold is how we ended the year. Regarding the fourth quarter, the company reached BRL 2 million (sic) [ BRL 2 billion ] in EBITDA with a margin higher than 50%, 51.6% of EBITDA margin during the period. I conclude the highlights speaking of the growth of 352% in the company's profit that reached BRL 2 billion in the fourth quarter '24.

In this next slide, we have data on production and the iron ore purchase. We had a slight drop recorded in the period compared to the previous quarter, explained by seasonality with the beginning of the rainfall. In 2024, the company adopted the strategy of prioritizing margin in detriment of volume. And this reduction in purchase volume was offset with a strong level of production, allowing the company to reach its guidance of 42 million to 43 million tonnes.

Throughout the year, the company made the most of the Chinese demand for low-grade iron ore, reducing its inventory 17.1%, [ 3.4 tonnes ]. When it comes to the sales in the fourth quarter, we sold 10,700 tonnes, and for the year, 42.5 million tonnes, 100% of the exports totaled -- what came from our ore production and reached a record volume shipped out. Unit net revenue in the fourth quarter grew 31% from BRL 2.9 billion to BRL 3.1 billion because of the prices realized and the positive effect of shipments for futures would help us offset the volume that dropped because of the rainfall period.

Now revenues was 29.3, had a drop because of the drop of iron ore during the year and because we were working with low-grade ore. But this, of course, did not stop us from reaching higher levels during the year. In terms of price realization between the third quarter and fourth quarter of '24, we had a unit cost of $61.7 with a growth of $15.8 compared to the price that we had in the past quarter. Now these prices are explained partially by the growth of Platts, as Platts grew only $3.7 during the period and a lower adjustment in terms of quality of $15.4 compared to $16.8 in the previous quarter, $2.4 less in terms of adjustment, freight of $21, $2.3 less than in the previous quarter. And when it comes to shipments for futures, we had a positive impact of $4.55 vis-a-vis the negative impact of minus $2 in the previous quarter. So the difference was $6.6. This allowed us the growth of $15.8 in the price realization for the company.

Regarding the cost of goods sold, we had a cost of BRL 1.8 million (sic) [ BRL 1.8 billion ] in the fourth quarter '24. And for the year, BRL 6.8 billion. Now this represents a drop of 21.9% when compared to the previous year, once again, due to the strategy that we mentioned of reducing the purchase volume and impacted by the drop in Platts. That is why we had lower prices in purchases from third parties. EBITDA margin, reaching BRL 2 billion during the period and BRL 5.9 billion in 2024 as a whole. The growth in the quarter can be explained by a price recovery but also because of the sound operating results.

Now regarding the variation of adjusted EBITDA in the quarter, it was from BRL 1.5 billion to BRL 2 billion, thanks to the combination of several factors: an increase in iron ore price, a lower pressure of freight, a positive impact because of the depreciation of exchange rate and the shipments that were exposed to future periods with an impact of BRL 35 million. Now when it comes to our investments, the company ended the quarter with BRL 659 million. I highlight the growth of expansion CapEx that grew BRL 100 million quarter-on-quarter, and we reached a total CapEx of BRL 1.8 million (sic) [ BRL 1.8 billion ] representing a growth of 20.7%. This growth of CapEx helps us to explain how we attained our operating goals and also the advance of the works of P15 and of course, the advances in the site infrastructure.

In the following slides, we speak about working capital, net working capital with a growth quarter-on-quarter. We ended up at BRL 194 million negative explained by the increase in accounts receivable because of the price increase. We went to BRL 1.5 million which will, of course, aid and a bit the results of the coming quarters. Regarding our indebtedness profile, we have a long amortization period of 61 months. We ended 2024 with BRL 15.2 billion in availability. Significant advances vis-a-vis the previous quarter despite the payment of BRL 3 billion of dividends at the end of 2024. This is thanks to the strong operational EBITDA of BRL 2 billion and the -- a depreciation of exchange rate, new contracts and payments.

Here, we see a positive adjusted cash of BRL 2 billion despite the increase in net working capital and the increase in investments. Now all of this was supported by a very strong EBITDA of BRL 2 billion for the year 2024. Regarding net income, we had a growth of BRL 446 million in the previous quarter to BRL 2 million (sic) [ BRL 2 billion ]. This represents an increase of 352%. And for the year, it was a growth of 27% from BRL 3.5 million to BRL 4.5 million (sic) [ BRL 3.5 billion to BRL 4.5 billion ]. The recovery of the iron ore price is at the base of this enhancement besides our operational improvement. And we also had record volumes exported a reduction of costs and the exchange rate devaluation.

Now to conclude, we would like to point out the main ESG factors in our governance agenda. We were placed 8th in 100-and-some companies assessed by ESG globally. And for the first time, we were listed in the FTSE for good portfolio. On the diversity front, we had a growth of 100% in terms of female representation. In 2024, we reached the goal that we had set forth for 2024. In the environmental agenda, we had 10% in the CO2 emissions per tonne of iron ore produced, all of this based on data from 2020 and a reduction of 73% and the intensity of use of water per tonne of iron ore produced.

With this, we would like to conclude the presentation. We do have Mr. Benjamin Steinbruch, the Chairman from the company; and Carlos Mello, Director Superintendent of CEMIG. We can now go on to the question-and-answer session.

[Operator]

We will now go on to the question-and-answer session for investors and analysts. [Operator Instructions] Our first question comes from Mr. Ricardo Monegaglia from Safra.

[Ricardo Monegaglia Neto, analyst]

Pedro, Benjamin, I begin with the outlook of the company for price demand and supply of iron ore. We seem to have more enthusiastic news coming from China. We would like to know if this is the company vision as well? If you have a short-term concern that could cause a slump in iron ore? And if you have carried out an assessment, we know it is difficult. But if you have made an assessment of this war on tariffs on the quality of products of iron ore? Another question that refers to prepayment. I would like to better understand if the company is very close to that limit where it would feel comfortable having in terms of future production, in terms of those contracts?

I would like to confirm a figure. We have an estimate that you have 52 million tonnes approximately in contracts for delivery, depending on the term of the contract. It would be interesting to hear about this. And at the end of that question, I see that the balance of delivery this year in a period of less than 1 year is BRL 3 million. Perhaps this will impact your cash at CSN Mineração. Is there a scenario where the delivery could be postponed? Is it something that could happen? Or are those values clearly defined, and this is what we will see in 2025?

[Pedro Barros Oliva, executive]

Ricardo, thank you for the questions. Now regarding the market, we have a very constructive view. There have been rumors regarding the potential of a reduction of 50 million tonnes of reduction coming from China. The state government has denied these plans and they are presenting a plan to review capacity to close at a more efficient capacity. But in practice, we haven't seen anything so far. The use of furnaces was 85.2% up to date compared for 3.1% last year, and we had used furnaces at 2.1%. Now we are at 86.2%, which we understand to be a very healthy level. Now the use of electric furnaces in China dropped to 32.8% from 34.4%. And perhaps or despite the use of these furnaces, we see a reduction in the steel inventories of China. A year ago, they were at 135-some tonnes. They are now at 107. There was a drop of 9.8 tonnes. And along with that strong use of the furnaces, we see a reduction of inventories at the Chinese ports.

They now have 145.8 million with a drop in the last few weeks, explained by the impact in supply due to the typhoon that we had in Australia at the beginning of the year, an expectation of loss of 6 million tonnes. Now in this context, where the Chinese government has a goal to grow 5% and the growth of deficit of 4%, we see, therefore, that the state is trying to stimulate the economy, create new areas of consumption, and they want to foster a healthy development of the real estate market by reducing the inventory. So they have taken very good initiatives for affordable housing in China. And we see a scenario that they will maintain their production of steel, but there will be a reduction in exports because of the tariffs once again. Now this expectation is based on the fact that some companies are going to opt for Chinese steel. But what we see is a healthy, balanced market, sustaining that level of $100 to $110 per tonne.

Now to answer your second question, referring prepayments. If I'm not mistaken, we are at 49.2 million tonnes. We have a maturity of 3 million tonnes this year that represents BRL 560 million. Now our mindset is not that we're close to the limit. We deemed this level to be adequate, and we're going to roll the maturities this year. We're going to do what we have to do to comply with the contracts for prepayment and work with new amounts equivalent to the maturity so that this will not have an impact on the company's cash generation.

[Operator]

The next question comes from Barbara Soares from Itau BBA.

[Barbara Soares, analyst]

There are two questions. the first referring to third-party purchases. In the last call, you mentioned you could increase the volume purchase from third parties because of the rainfall, which is the proportion for this half of -- which was the proportion? And what can we imagine for the first half of 2025? And which is your view of the volume? In January, we had very good data. But when we look at February, there is a significant drop of 10%?

[Pedro Barros Oliva, executive]

Barbara, thank you for the question. Now regarding the purchase volumes in the fourth quarter, we purchased 3.4 million as we had mentioned, more than the 2.4 million we had purchased the previous quarter. And this was expected because of the impact of our own production. The proportion of purchases compared to sales reached 34% compared with an average of 23%. For 2025, we believe we will have a level of 25% the total of purchases vis-a-vis sales. Regarding the production projected for the first half were in mid-March, we still have another fortnight. It will depend on what we have realized, but the outlook is that this will be a positive half of the year with slightly higher volumes of our own production compared to the same period last year.

[Operator]

Our next question comes from Guilherme from XP.

[Unknown Analyst]

We have two questions at our end. For the first, I would like to hear about the advance of the works in P15. In the last quarter, you mentioned that you would begin the civil work. If you could give us more detail in terms of the advance of those civil works? My second question is a follow-up regarding your mix of own production and that of third parties. The iron ore inventories had a drop during the last year and throughout the last quarter, partially explained by the impact of seasonality and a reduction in the purchase of inventory of third parties. Is your inventory level at present normalized? And how we will -- how will we see a recomposition if it has not been normalized throughout 2025? These are my questions.

[Pedro Barros Oliva, executive]

Thank you for the questions, Guilherme. Regarding the P15 works, luckily, they're advancing well in Mineração. The advance was good. We're working with drainage, the infrastructure, and we're completing the pipes for the feeding of the plant. In terms of infrastructure, we have advanced negotiations. They will be contracted still in 2025 and begun in 2025. The P15 schedule will be maintained. Now regarding the mix, we understand that some inventory is necessary for operations, and we deem this level to be normal. We don't expect relevant variations during the year.

[Operator]

Our next question comes from Rafael Barcellos from Itau BBI.

[Unknown Analyst]

Many of these questions have been answered, but I would like to have more dynamic on -- more details on the price dynamic, what you expect in this first half of the year and capital allocation and CapEx? Could you update us on other projects besides P15 that you will put into practice this year? And which will be your CapEx needs, not only for this year but for coming years as well?

[Pedro Barros Oliva, executive]

Well, thank you for the questions. Now regarding cost. Naturally, in the first quarter, we have lower volumes because of the rainfall. But for the reasons that I already remarked on, we expect to have a volume that will be marginally better than the previous quarter. This will help us with fixed costs. We have important initiatives in terms of costs, the cost at the mine, we have a polymer that we're now using. And all of this should help us to further seek a cost reduction. We expect to have a C1 somewhat lower vis-a-vis the same period last year. Regarding the CapEx, the P15, of course, remains our main project, but we do have others. The expansion of the port is important to outflow the volumes of Casa de Pedra. We have an advance in the contracting of the offshore part of that expansion for 60 million tonnes. This plant, we mentioned in the last quarter that we had a possible partnership. So this means a third person will develop the plant, and we will share the results generated. Another project that is important, is called B4, I believe, to -- for processing. And we're doing well in the technical part. The engineering part, we're now carrying out a review of the French engineering, which is top quality, and we have to work on other supplier alternatives. We should have further news during the year. And of course, this will be shared with the market.

Now regarding CapEx for the coming years, naturally, the amount of CapEx will grow. We have BRL 3.2 billion for the execution in the next 5 years with an average CapEx of BRL 2.6 million per year for expansion. And naturally, we are going to carry out a higher level of investments in the coming years. We had BRL 1.8 billion total for CapEx last year. This year, we should be closer to BRL 2 billion, BRL 2.5 billion. And this will increase steadily until the year 2027.

[Operator]

The next question is from Marcelo Arazi from BTG Pascal.

[Marcelo Arazi, analyst]

I would like to go back to the market discussion. As you mentioned, we see an increase in the iron ore price. At the beginning of the year, it was closer to $100. And perhaps you could give us a view of what you expect for the rest of the year and the entrance of Simandou there should be a volume from this project this year. So which is your vision on this?

[Pedro Barros Oliva, executive]

Marcelo, thank you for the question. And we will try to give you more detail in terms of our market vision. The margins of this Chinese steel plant continue to be negative by $20 per tonne. But there is an interesting evolution, another indicator, the percentage of Chinese steel plants in 2024, it was 1.3%. The percentage today is 53%. Almost half of the sector, therefore, is losing money, but we have to acknowledge there is a significant advance, and this generates a positive dynamic in the market. Regarding Simandou, the volume this year will continue to be symbolic. We don't think we will have symbolic volumes and the ramp-up of the project, along with other factors, a reduction in the iron ore demand in China, offset by India, the Middle East and some Asian countries shows us a market that is convergent.

Now this long term should not be very different from where we are at present, very close to those $100. The coming year perhaps $92, which will be the price for the long term. So the entrance of Simandou should make the prices converge, cause balance. Therefore, a point that I did not touch upon that is relevant, the issue of freights. Freight dropped $7.3 per tonne. Naturally for iron ore, but this has a direct impact on our FOB price. This is very positive. We have already closed a volume of 9.5 million tonnes at an average price of $21. So this is something that should help us in realizing price and margins for the company throughout 2025.

Now in terms of price, we are working with hedging once again. Taking advantage of the price, we had some weeks ago 2.4 million tonnes sold at $107.7. This was the first quartile of the range we foresaw last year. That was $110. Now this represents more than BRL 70 million this open position.

[Operator]

The next question comes from Yuri Pereira from Santander.

[Yuri Pereira, analyst]

Congratulations for your results that are very good. Still speaking about the market, I would like to get a whiff of the demand, the low-grade demand in China, if you see this for the first quarter? And if you have a commercial strategy for this, we will see an improvement in the price realized because of this situation.

[Pedro Barros Oliva, executive]

Yuri, thank you for the question. Now the demand for low grade in China is not very strong, and demand at the beginning of the year was not strong. This allowed the company to negotiate other levels for what we want to bring to the market better levels than those we negotiated last year. And this should help us in price realization during the year. In terms of the share of these opportunity volumes, as this window is open in the Chinese market. Although it is very attractive, we have adopted measures for an enhancement of quality and the low-grade percentage should drop consecutively because of this.

[Operator]

The next question comes from Eugenia Cavalheiro from Morgan Stanley.

[Eugenia Cavalheiro, analyst]

I would like to gain an understanding of what is happening with your dividends, especially because of the CapEx you have for your projects and the working capital dynamic for the year if we should expect any relevant change?

[Pedro Barros Oliva, executive]

Thank you for the question. In terms of the share buyback, we have a buyback program of BRL 100 million that extends to December 19 this year. We have already sold 53.2 million. This is our mandate to continue buying, something we haven't done in the last few months. It is a possibility that is still open. Regarding the working capital, we had the assessment in the third quarter because of the price increase, and it generates the volume of purchases and the volumes of iron ore. As the price is relatively flat, we don't expect great fluctuations in working capital. On the dividend front, we had BRL 3 billion in December of last year. Our distribution policy is 80% to 100% of net profit. And because of the comfortable cash position of more than BRL 15 billion, the company has a negative leverage of 0.79x EBITDA. So we're comfortable in maintaining this payout policy. And of course, all of this will depend on the results we attain this year, but we have cost control, operational enhancements and reasonably stable prices in the market.

[Operator]

The next question comes from Barbara Soares from Itau BBA.

[Barbara Soares, analyst]

Simply a follow-up. In terms of prepayment, you have 49.2 million tonnes open for this year, 13 million equivalent to 560. I don't know if you remarked on this, which is the size of the new contracts that you signed in the last quarter?

[Pedro Barros Oliva, executive]

Barbara, I think you have the data correctly. We still had not mentioned the amount for a prepayment, $356 million of new prepayment amortization, somewhat above $50 million and $350 million net positive for cash from this -- the contracts. So we can consider the $350 million as the new prepayment. We had two prepayments jointly that totaled $355 million.

[Operator]

Our next question is in writing from Mr. Igor Silva, an investor. He says, how has the company prepared for the tariff war both by the United States and the entire world at this point?

[Pedro Barros Oliva, executive]

Igor, thank you for the question. Of course, this is a very relevant topic, especially in the steel sector. The movements in the United States are not isolated. We see the Chinese market, which was a relevant destination introducing new tariffs. The same holds true for Korea with their anti-dumping law. So we see the market closing down. Now the American market imports steel, historically has done so, and it does not import iron ore. So when we speak about the iron ore market, we're mostly referring to China. And the trend is for the market to close in terms of Chinese steel, and there's a projection in a reduction in the export volumes. Now the estimate that we have now is something close to 100 million tonnes, an indirect impact, of course, but we also have the impacts of Australia where the demand and supply of iron ore has led to lower inventories of iron ore and steel. Now in China, there is a healthy dynamic that should sustain the level of prices at $100 per ton.

[Operator]

As we have no further questions, I will now return the floor to Mr. Pedro Oliva, the CFO and the IRO for CSN Mining.

[Pedro Barros Oliva, executive]

Once again, I would like to thank all of you for your attendance at this earnings call. We celebrate the results we attained this year with an expressive growth in net revenue, a reduction of cost, increases of our own production above what we had planned. I would like to thank all of our associates who jointly have made these new levels of delivery possible. Have a good day.

[Operator]

Thank you, the conference call for CSN Mining ends here. Have a very good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]