Companhia Siderurgica Nacional SID, a leading Brazilian steel producer, reported a solid improvement in third-quarter results thanks to higher sales volume, margin expansion, and gains on investments. Exports were the biggest volume driver in the quarter--while domestic steel sales volume increased 10% from second-quarter levels, steel export volume tripled and iron ore export volume almost doubled. Average selling prices declined sequentially. It appears that CSN was chasing volume to increase capacity utilization and liquidate steel inventory to generate cash. The firm raised additional debt in the quarter, increasing its debt balance 35% from June levels. In 2008, CSN formed the Namisa joint venture with a consortium of Asian steel companies (Posco PKX, Itochu, JFE Steel, Sumitomo, Kobe Steel, Nisshin Steel and Nippon Steel), under which CSN is committed to significantly expand Namisa's iron ore output and build pelletizing facilities over the next five years. We believe CSN is focusing on increasing operating cash, and we expect capital expenditure to go up substantially in the next few years. The Brazilian domestic economy is steadily recovering, and low inventory levels and recovering demand are supporting steel consumption. The international market also saw mild volume growth in the quarter because of supply-chain restocking. We think Brazilian steel companies are relatively better positioned thanks to a stable domestic demand outlook and a consolidated domestic steel industry. CSN in particular will see substantial iron ore sales volume growth as the firm expands mining operations. CSN's current annual iron ore sales volume is roughly 20 million tons, while the firm has 1.6 billion tons of reserves. We anticipate slightly raising our fair value estimate to reflect appreciation of the Brazilian real.
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Analyst Notes
06-24-09 | 10:19AM Raising FVEs on U.S. Steel Producers
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