CSN Mineracao SA
BOVESPA:CMIN3
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CSN Mineracao SA
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[Interpreted] Good morning, ladies and gentlemen, and thank you for holding. At this time, we would like to welcome everyone to CSN Mineração Conference Call for the Second Quarter 2023. Today, we have with us the company executive officers. We would like to inform you that this event is being recorded [Operator Instructions]. Once again, at the website, you have the presentation available. The replay of this event will be available for one week. Now once again, you can flip through the slides at your own convenience. This event is also being broadcast simultaneously through internet and once again, can be accessed at the website, ri.csnmineracao.com.br, where the presentation is also available.
Before proceeding, we would like to state that some of the forward-looking statements herein are mere expectations or trends and are based on the current assumptions and opinions of the company management. And future results, performance and events may differ materially from those expressed herein, which do not constitute projections. In fact, actual results, performance and events may differ materially from those expressed or implied by the forward-looking statements. As a result of several factors such as overall and economic conditions in Brazil and other countries, interest rates and exchange rate levels, future rescheduling or prepayment of debt denominated in foreign currencies. Protections measures in the U.S., Brazil and other countries changes in laws and regulations and general competitive factors at global, regional and national basis.
I would now like to turn the conference over to Mr. Pedro Oliva, CFO and Investor Relations Officer, who will present the company's operating and financial highlights for the period. Mr. Oliva, you may proceed, sir.
[Interpreted] Good morning, everybody, and I would like to begin by thanking you for joining us to hear the results. We're going to speak about the highlights of the period, and we had an all-time record in production volume since 2013 this quarter. Once again, this includes 11.1 million tons and a record in sales with 11.3 million tons, respectively. We had solid cash generation despite the negative events of price realization in the quarter, and we celebrated new prepayment agreements for $500 million, an addendum with Glencore for $300 million for the second half of the year, and this was disembursed in July. And with Cargill, a new trader coming in, in this format with a payment of 200 million, and this amount will be disbursed in the second half of this year.
In the next slide, we have the production volume and inventories. We had a growth of 25% vis-a-vis the previous period and a growth of 34% vis-a-vis the same period last year. Now our stocks had a drop of 3% to -- because of the normalization of the MRV railway and because of the operating and commercial situation during the period.
In the next slide, we show you the evolution of our sales, which reached 11.3 million tons, a growth of 31% compared to the previous quarter and an increase of 49% vis-a-vis the same period in the year 2022. In terms of FOB net revenue, it is 30% lower than the first quarter at $66 per ton, showing the lower cost of iron ore during the period. And because of the impact of pre-quotation periods, and we will give you more periods. Regarding this, we had a drop of 12% in slabs with an adjustment in quality of $11.60 a freight that was more expensive than in the first quarter of the year. And here, we have the effect of previous periods compared with a positive impact of $7.9 of other periods. And the impact of this represents 14.4%. And thus, we concluded the period with $65.7 for unitary prices and a loss of $60.9 million impacting, of course, our EBITDA for this quarter.
When it comes to COGS, we have an increase of 20%. And this is the result of the increase of volumes, considering that the unit price has dropped compared to previous periods and also regarding the same period last year, adjusted EBITDA reached BRL 1.1 million, a margin of 30.4% for the second quarter of '23 as a result of this lower price realization. The adjusted EBITDA had a very strong impact in the reduction of slabs. And because of the COGS that we had in previous periods and the impact was BRL 1.1 million. In essence, this is the impact that explains the lower results for the period because of the strong increase in volumes that enabled us to have an improvement of EBITDA during the period. And a lower share of third-party products in this process.
In the next slide, we would like to present to you the investment data, adding up to BRL 344 million for the quarter, especially invested in P15 project and for operational continuity. When it comes to our net working capital, we observed a strong reduction of BRL 1.6 billion to BRL 858 million, once again impacted by the price drop during the period.
In the next slide, we show you that this is another quarter where the company ends with a strong reduction with $8.5 million in cash. And of course, we have maturities for the next 14 years. Now because of the strong drop in prices, we had a drop in free cash flow. And this ended up with adjusted free cash flow of BRL 1.161 million. And this was offset with the hedging that we had for the period for iron ore, which helped to reduce the negative impact of the financial impact. When it comes to our ESG performance, we would like to highlight 3 aspects.
One, the biodiversity index for the operations in the company. We have a set of indicators that will help us to standardize what we do in diversity. And secondly, the conclusion of the climate adaption plan. A plan that has been carried out complying fully with what well done, and this will grant the company a greater climate resilience going forward. Of course, this is very important because we do have significant impact on the nature in general. And all of these measures should mitigate these impacts.
With this, we would like to conclude the presentation, and we will now go on to the Q&A session.
[Interpreted] [Operator Instructions] Our first question will be in English and comes from Carlos De Alba from Morgan Stanley.
The first question has to do with the record level that you achieved on production, congratulations on that. Can you perhaps give us details as to the composition of that record level of volume between produce at CSN minerals on mines as well and as well as third-party purchases? And how that has changed so that we can better understand the strong result that you had.
And then Pedro, the other question I have, it has to do with the new prepayment agreements that you are achieving and maybe revisit the rationale as to why you're doing this and maybe share some of the terms on prices, in particular, and the cost of financial -- implicit financial cost of prepayment agreements because the company has a very strong balance sheet. It has been paying good dividends, but you generate cash, it has a solid cash balance, very little debt. So I wonder if there is still a need for you to do this so you could maybe revisit the rationale behind this, that would be great.
[Interpreted] Carlos, thank you for your 2 questions. Now when it comes to our own production and third-party purchases, we had a share over sold volume of 36% in the quarter and a drop of 40% vis-a-vis the former quarter, and we hope that this volume will drop further during the year. This strong increase in volumes can mainly be explained because of our own production.
Now when it comes to the rationale for the prepayment, we do have that policy of paying out strong dividends. And since 2021, and now we have already distributed BRL 1.2 billion. And there is a commercial rationale as well that we have maintained in these negotiations, and this reflects in premiums for the company and discounts regarding the freight rate as well. So these are the reasons while we are able to pay out strong dividends. And we have a very ambitious plan for growth ahead of us, and this motivates us to have a very high position of liquidity, and it will maintain a very high payout of dividends once again and will aid in a bit our growth plan.
Just coming back to the first one. Of the 11.1 million tons of production this quarter, how much was third-party purchases? And how much was it last year of the 8.3 million tons?
[Interpreted] The volume that we have of purchases was 4 million tons for this quarter. And in the previous quarter, it was 3.5 million tons.
Okay. I appreciate that. Any chance you can give us the number for the second quarter last year?
[Interpreted] In the second quarter of last year, it was approximately 2.5 million tons. So we did have a growth regarding this. There was a greater availability of the product. We had a situation of detriment in the mines and because of the fixed cost, we try to make the most of what this allowed us to do it shields us and, of course, helps us enhance quality.
[Interpreted] Our next question comes from Guilherme Rosito from Bank of America.
[Interpreted] I have 2 questions. First, referring to OpEx. When we look at OpEx per ton in the quarter, we get to a figure that is quite low. I would like to know if there was a one-off situation. And my second question refers to capital. your leverage at present. Well, you have a strong CapEx, you have a very solid payout. And what is going to happen with the payout of dividends going forward? Is this going to impact your leverage? And what is going to happen with this equation going forward?
[Interpreted] Now when it comes to OpEx, Guilherme, we did have an improvement of $1.3 associated the price due to the lower volumes sold. And also, we had a leasing due to the drop of prices in the period. In the second quarter, we reduced the purchases from third parties because of our significant volumes. And from the viewpoint of OpEx, what will help us in terms of C1 is the volume of purchases that will tend to drop compared to the own production in the coming 6 months. Now when it comes from capital allocation, what we communicated to the market will be maintained from the viewpoint of growth. This will take us to an update in the coming Investor Day and the dividend policy, of course, will also be maintained with a very high payout, and this will enable us to continue on with the 2 strategies of the company accelerated growth and a very strong payout of dividends.
Now with this is represent a very small percentage of the volumes we have sold. It represents only 6.6 million tons, and this will continue to be reduced in the coming years. So we are quite comfortable with this commercial strategy, and this will help us to reinforce the cash of the company and the commercial ratios, the premium on iron ore and much more.
[Interpreted] The next question comes from Gabriel Simoes from Goldman Sachs. You may proceed, sir.
[Interpreted] I have 2. First, regarding the price realization. We see an increase in the discount of quality vis-a-vis the first quarter. If you could give us more details about this drop. It refers to the question of Carlos. How does this convert with your own production and the drop of purchases vis-a-vis the first quarter, it would be interesting to understand where this difference comes from. And how are you thinking about this premium for the coming quarters? Can we expect an improvement in this line item? The second question refers to CapEx. We see a somewhat lower CapEx realization than expected. Now the projects continue to make sense. How can we equate this to the reduction in CapEx? Shouldn't you have a more relevant acceleration of CapEx in the coming quarters simply so that we can think about a time line for this realization? Thank you.
[Interpreted] Well, thank you for the question. Regarding the price realization, we have this quality adjustment. It's a strategy of the company to make the most of this to monetize our low-grade products that we have in inventory. And of course, this relates to our commercial strategy. And -- in China, the compressed margins of the sector have led us to having a higher share of low-grade iron ore once again because of the Chinese situation -- we increased the share of this as part of our commercial strategy and as a window to the market. Now for us, we still have some inventory. We will continue to make the most of this, but the volumes of production and the quality will continue to improve. And this will depend on the products we take to the market, and it will depend, of course, on our strategy, which is the best strategy for us. But yes, the strategy is to have an enhancement in the quality of production, even though we will not sell this immediately. And I'm referring to the low-grade iron ore.
Now when it comes to our execution of CapEx, there will be an update in the time line, most certainly, but there also will be a strong growth in the expenditures of CapEx until the end of the year. We do have the supply of equipment for Package 1 at 1.58%. And we have projects for the reallocation of fuels, ports and much more, and they're all doing very well. And we have $1.4 billion of financing that will begin to be disperse beginning in the third quarter.
[Interpreted] Our next question will once again be in English and comes from Mr. Carlos De Alba from Morgan Stanley. You may proceed, sir.
Just on CapEx, Pedro, if you can give us -- remind us of the overall CapEx budget for this year and maybe next year. That will be one question. The other is, again, if you can talk about the guidance or comments on C1 cash costs for the year? And if you have already a little bit of a view on next year? And finally, if I may squeeze another one is what is the current situation with your hedges regarding your iron ore hedges, just we have seen a lot of volatility. But if you can tell us how much of your volumes are hedged or have a predetermined price for the second half of the year or anything in 2024? That would be great. Thank you.
[Interpreted] Carlos, thank you for the questions. Regarding the CapEx budget for this year, we have BRL 2 billion. And of course, we are expecting an acceleration in the second half of the year. When it comes to the guidance and for the coming year, we will be probably working with BRL 3 billion or something above this because of the P15. When it comes with guidance, we have worked with $22.5 for the C1 cash costs. And at the end of the year, we should be working very close to $20 -- well, because of the exchange rate as well. Now the challenge, of course, remains and there will be an increase in volume and a reduction of fixed costs in the long term.
Now when it comes to the hedging Carlos, we have only 1.17 tons that are still open for the rest of the year at an average cost of $124.16. The market this morning was positive in $20 million, I believe.
Sorry, maybe the translation, I didn't get the total volumes better. Could you repeat them, please?
[Interpreted] 1,160,000 tons of volume that has been hedged until the end of the year concentrated in the third quarter.
[Interpreted] Our next question comes from Matheus Moreira from Bradesco BBI.
[Interpreted] Can you hear me?
[Interpreted] Yes, we can here you, Matheus.
[Interpreted] My question refers more to demand. And you have said that the margins are quite tight, but that you have been able to recover them during this last week. Now the production for China should decrease in the second half of the year compared to this first half. Therefore, I would like to know what you're forecasting in terms of demand for China, the demand for the second half of the year. And regarding the question made by Carlos, once again, if you could further clarify this, I was not able to capture what you said.
[Interpreted] Matheus, thank you for the questions. Now regarding C1, in the second quarter, we had $21.7 and the average for the year was of $22.5 for the first half of the year. So there was a drop in the price, and we believe that there is room for a further reduction for the rest of the year. We have a Chinese real estate sector with a drop of sales of approximately 20% when compared with the same period last year, but with a very high capacity still.
There are some steam mills that have mentioned. They have received the guidelines from the government to maintain the volumes that they had last year, although there will be a reduction until the end of the year of 10%. And I believe that the government, because of the high unemployment among young people and because they're just coming out of the shutdown of Covid are thinking perhaps enhancing the part of real estate. Now this new market has had several fluctuations, and they are going to try to stimulate domestic demand in China.
Now when we speak about inventories, the steel inventories are relatively low. The iron ore inventories at the ports are also relatively low -- and the iron ore inventory at steel mills was for a few days. And yesterday, it hit a record once again. So there is room for increasing inventories, and this should help us to increase the demand for iron ore.
[Interpreted] Our next question comes from Edgar Sosa from Itau BBA.
[Interpreted] It's simply a follow-up in terms of the payment. Can you give us more color in terms of terms and volume of these new contracts simply so that we can have a better grip of this?
[Interpreted] Yes, of course. And thank you for the question. In the agreement with Glencore of $300 million. We have 6.6 million tons beginning in 2024 and in the Cargill payment, 4 million and some tons once again divided in 4 years and beginning in 2024, 1.80 billion for Cargill and more for Glencore. And if we add this to the payments that are still in effect, we get to 6.6 million tons for 20-- or beginning in 2024.
[Interpreted] Could you repeat the figures for Glencore, BRL 300 million for a 4-year term is that it?
[Interpreted] 6.6 million tons divided in 4 years.
[Interpreted] Thank you. As we have no further questions, I would like to return the floor to Mr. Pedro Oliva, CFO and IRO, for the closing remarks.
[Interpreted] I would like to end by thanking all of you for your attendance at our earnings release call. We had a strong impact in price realization. Our results are down somewhat. But in terms of operational results, the company is delivering something that is quite expressive when it comes to production volumes and sales volume were, of course, above our previous results. We're highly confident, and we believe in a perspective of improvement in the coming quarters because of an improvement in the economy and the enhancements in production. Once again, thank you very much. Thank you. The CSN Mineração conference call has come to an end. You can now disconnect and have a good day.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]