3/26/2014
In light of the financial difficulties sustained by the company during the course of 2013, it was necessary to interrupt and review the expansion project of Serra Azul Unit. Accordingly, a series of measures was adopted, the business plan review being submitted to and approved by the company’s Board of Directors. The scope of these measures comprises the search for a new strategic partner that will enable the Company to continue its project to expand the Serra Azul Unit, no longer geared towards producing 29 million tons of iron ore per year but rather 15 million tons. As a consequence of this decision, MMX recognized the loss corresponding to the recoverable value of the assets at Serra Azul in the amount of approximately R$913 million.
Financial advisors were engaged to evaluate business opportunities, either the sale of shares held by the controlling shareholder in the Company, as well as an investment in the Serra Azul mining unit in isolation, both for national and foreign investors. This process is underway and management expects it will be concluded swiftly, seeking a format that results in the most added value for the company and its shareholders.
The Company’s general restructuring referred to above includes the Corumbá unit and investments in Chile also underwent strategic review. In concluding these studies, management submitted to the Board of Directors and gained approval for the sale of both assets as well as accounting recognition of a loss relating to the recovery thereof in the approximate amounts of R$224 million for the investments in Chile and R$154 million for the Corumbá unit. Both transactions negatively impacted the Company’s financial statements and the results, but are part of a greater reorganization process at MMX designed to create a more streamlined company with a more realist and healthier equity structure. All the shares of the Chile Unit were sold to Inversiones Cooper Mining S.A. and the sales process of the Corumbá unit is at an advanced stage.
Accordingly, the context of the strategies is thus resumed for most of the assets, both the iron ore, and the logistics, belonging to the Company. In parallel thereto, measures have been and continue to be adopted seeking adjustment of fixed costs and operating expenses for the new business plan approved for MMX. Some of these actions, like the reduction in the number of collaborators, stoppage of operations in Corumbá and paralyzation of the expansion work at the Serra Azul Unit, are necessary and unavoidable initiatives to achieve an operationally more efficient and financially suitable corporate model, focused on cash generation, net profits and sustainable organic growth. It is also appropriate to mention that the negative impact on the company’s EBITDA, derived from recognizing the accrual for the “delivery or pay” penalty in the agreement entered into by MMX Porto Sudeste do Brasil S.A. and Usiminas, will no longer occur, since as of 2014 this obligation becomes the full responsibility of that company, along with the effects of the financial expenses inherent to the Variable Interest-Bearing Securities Based on Royalties – MMXM11.
“For MMX, 2013 will be remembered as the year of its restructuring, when all the collaborators excelled as professionals, believing in the continuity of the company, no longer envisaging major projects, but rather an operational company, streamlined and one that needs to achieve positive results for survival. Contaminated by the crisis of the EBX Group, credits lines already approved were suspended, and renewals were rejected, which seriously compromised the company’s financial health. Faced with this scenario, we were forced to make a swift review of strategies and adopt measures, often harsh, seeking to preserve the company’s cash and financial solvency. Laying off a number of employees, selling assets and paralyzing the implementation of the expansion project at the Serra Azul Unit are examples of some such measures. We are aware that important strides have been taken, but there are still challenges ahead which will require from this team the same capacity to excel, as demonstrated in 2013. Yet having concluded the sale of 65% of the investment in the port, free of bank debt and confident of the quality of the assets preserved, we believe that 2014 will further test our strength, but also portends major possibilities for conquests and achievements.” affirmed Carlos Gonzalez – CEO and Investor Relations Officer.
Highlights of 2013 and subsequent events:
· Investment operation by Trafigura and Mubadala in Porto Sudeste do Brasil S.A. (formerly MMX Porto Sudeste Ltda.) concluded;
· Approval by the Board of Directors for the revised business plan;
· Financial advisors engaged to evaluate business opportunities;
· Review of figures and strategy for the Corumbá unit culminating in recognition of losses relating to realization of assets at this Unit, in the amount of R$153.8 million;
· Agreement signed to sell totality of Chile Unit shares to Inversiones Cooper Mining S.A;
· Renewal of mining rights leasing agreements with Companhia de Mineração da Serra da Farofa (CEFAR), extending validity terms from 2021 to 2034;
· New certification of mineral resources amounting to 3.6 billion tons considering Serra Azul Unit, Pau de Vinho and Bom Sucesso Mines;
· Conclusion of the capital increase process at MMX in the amount of R$1.4 billion, by way of private subscription of new ordinary shares;
· Arrival of two ship loaders at Superporto Sudeste, manufactured in China.
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Operating Performance and Financial Statements
Iron Ore Production
In 2013, MMX produced 5.9 million tons of iron ore, a volume 20% below that reported in 2012. The result was influenced by lower ore production at the MMX Corumbá unit in the first quarter followed by its total paralyzation in the second quarter, generating for this Unit an annual result 65% lower than the prior year. At MMX Sudeste, production for 2013 was 8% lower than that of the prior year, mainly due to the low availability of run-of-the-mine, operating adjustments and repositioning at the Tico-Tico plant, releasing new mining fronts and ore processing for 2014.
In 4Q13, the production of MMX Corumbá remained paralyzed just as in 3Q13. At MMX Sudeste, the drop of 22% compared to 3Q13 was basically due to the reallocation/repowering, as mentioned previously.
Sales
In 2013, MMX sold 6.6 million tons of iron ore, a volume 4% below that reported in 2012. In the year, exports represented 52% of sales, a significantly higher participation than that reported in 2012 where 29% of the material sold was destined to the external market.
The main factors for the drop in sales over 2012 were (i) at MMX Corumbá, sales fell due to the slowdown of the local market and the low level of the waterway and (ii) at MMX Sudeste, a lower production volume due to mining restrictions and adjustments at the Tico Tico plant.
Exports accounted for 45% of sales at MMX Sudeste and 93% at the Corumbá unit. In 4Q13, company sales amounted to 1.4 million tons, a volume 34% below that of 3Q13. At MMX Corumbá, the drop in level of the waterway has negatively affected the continuity of shipments to Siderar since October, coupled with a poor performance of shipments to Vetorial with just 7.5% of the scheduled amount. At MMX Sudeste, the sales volume to the domestic market in 4Q13 was in line with the prior quarter, but there was a drop in exports during this period, since the shipment schedule negotiated with Vale (CPBS) and CSN (TECAR) considered a lower concentration in the last quarter of the year.
Commercial Expenses
In 2013, commercial expenses amounted to $518.7 million, a rise of 110% over 2012. The main factor which influenced the increase was the change in sales mix per market, where exports where prioritized, representing 52% of total sales in 2013 compared to 29% in 2012. This movement led to a greater disbursement with railroad freight, port and railroad terminals, and maritime freight, on account of the spot sale in the CFR (cost and freight) modality.
Commercial expenses in 4Q13 amounted to R$129 million. In comparison with the prior quarter, there was a reduction of 25% in these expenses due to a drop in sales, and smaller proportion of exports in this quarter over the prior quarter (4Q13: 29% versus 3Q13: 51%).
General and Administrative Expenses (G&A)
In 2013, MMX recorded consolidated General and Administrative Expenses of R$174.5 million, a hike of 2% compared to the prior year. The main effects that impacted the G&A of the operations were: (i) the non-capitalization of the Serra Azul Project expenses as of 3Q13 at MMX Sudeste representing approximately R$15 million, (ii) accrual for non-realization of ICMS in the amount of R$7.3 million and ISS payment in the amount of R$4.5 million at MMX Corumbá and (iii) write-off of PIS and COFINS credits at MMX Metálicos in the amount of R$11.2 million.
In 4Q13, MMX recorded Consolidated General and Administrative Expenses of R$49 million, an increase of 8% compared to the prior quarter and 12% lower than in 4Q12. The main effect that impacted the G&A of the operations was the write-off of PIS and COFINS credits at MMX Metálicos in the amount of R$11.2 million.
In 2013, MMX recorded consolidated General and Administrative Expenses of R$174.5 million, a hike of 2% compared to the prior year. The main effects that impacted the G&A of the operations were: (i) the non-capitalization of the Serra Azul Project expenses as of 3Q13 at MMX Sudeste representing approximately R$15 million, (ii) accrual for non-realization of ICMS in the amount of R$7.3 million and ISS payment in the amount of R$4.5 million at MMX Corumbá and (iii) write-off of PIS and COFINS credits at MMX Metálicos in the amount of R$11.2 million.
In 4Q13, MMX recorded Consolidated General and Administrative Expenses of R$49 million, an increase of 8% compared to the prior quarter and 12% lower than in 4Q12. The main effect that impacted the G&A of the operations was the write-off of PIS and COFINS credits at MMX Metálicos in the amount of R$11.2 million.
The EBITDA report and the explanations deriving from the variations will be made considering the Adjusted EBITDA. The EBITDA, as per the CVM Instruction, and the reconciliation of the Adjusted EBITDA are indicated at the end of this report.
In 2013, MMX recorded a negative Consolidated Adjusted EBITDA of R$156.6 million. The main impacts were the accrual for delivery or pay on the port services agreement between MMX Porto Sudeste and Mineração Usiminas S/A in the amount of R$185.3 million, as well as the accrual for take or pay on the railway freight services agreement between MMX Sudeste and MRS Logística in the amount of R$45.4 million. Adjusting for these two effects, the EBITDA of 2013 would amount to R$74.1 million, 53% higher than in the prior year.
The Consolidated Adjusted EBITDA posted by MMX in 4Q13 was a negative R$131.4 million, 88% higher than 3Q13, mainly due to posting the accruals mentioned above, of which R$72 million was from the agreement with Mineração Usiminas S/A at MMX Porto Sudeste and the full accrual of the take or pay on the agreement entered into by MRS Logística and MMX Sudeste. In operating terms, the lower sales volume in the period also contributed to reduce the EBITDA in this period.
Financial Results
The Net Financial Results of MMX, a negative R$746.7 million, grew 34% in 2013, primarily influenced by the appreciation of the US dollar over the Brazilian real and owing to the adjustment of long-term liabilities represented by the present value of expected payment flow of royalties to the holders of variable interest-bearing securities (MMXM11).
In 4Q13, the Company reported negative net financial results of R$239.6 million, of which the following are highlighted: (i) R$4.2 million in financial income, (ii) R$104.1 million in financial expenses, and (iii) R$139.7 million in negative exchange variation, mainly due to the long-term liabilities represented by the royalties.
Net Results
In the year 2013, MMX posted net losses of R$2,068.5 million compared to net losses of R$795.7 million in 2012. A significant portion of the negative impact on the Company’s annual net results was the recognition of asset impairment at Serra Azul and mining rights at Bom Sucesso in the total amount of R$913 million, presented in 3Q13. Moreover, in 4Q13 MMX recorded net losses of R$354.6 million, principally due to the effect of recognizing the “delivery or pay” fine with Usiminas and a portion of the “take or pay” with MRS Logística.
Cash, Debt and Acquisitions
Cash
Net Position:
The cash position at the end of the fourth quarter of 2013 was R$39 million, distributed as follows: (i) R$9 million in short-term, high-liquidity marketable securities, remunerated at market rates, indexed to the CDI and (ii) R$30 million in cash. The Company’s cash changed over the period, mainly due to: (i) investments in the current operating plant (Sustaining Capex) in the amount of R$6 million; (ii) investments in civil work for Serra Azul Project and for Porto Sudeste in the amount of R$14 million; (iii) Settlement of financing lines of approximately R$34 million.
Indebtedness:
In the fourth quarter, MMX posted total financial debts of R$2.7 billion, of which R$1.3 billion was short-term and R$1.4 billion was long-term debt.