Companhia Siderurgica Nacional SA
BOVESPA:CSNA3
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Companhia Siderurgica Nacional SA
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Good afternoon, and thank you for remaining on the line. Welcome to the CSN conference call for the presentation of the results of the second quarter of 2018. We have with us today the company's executive officers. We would like to inform you that this event is being recorded. [Operator Instructions] We have simultaneous webcast that may be accessed through CSN's Investor Relations website at www.csn.com.br/ir, where the presentation is also available. The slide presentation will be downloaded from the website. Please feel free to flip through the slides during the conference call. There will be a replay service for this call on the website.
Before proceeding, we would like to declare that some of the statements herein are mere expectations or trends and are based on the current assumptions and opinions of the company's management, and the future results, performance and events may differ materially from those expressed herein, which do not constitute a projection. In fact, actual results, performances or events may differ materially from those expressed or implied by forward-looking statements as a result of several factors as the general economic conditions in Brazil and other countries, interest rate and exchange rate levels, future rescheduling or repayment of debt denominated in foreign currencies, protectionist measures in the U.S., Brazil and other countries, changes in laws and regulations and general competitive factors on a global, regional or national basis.
Now we will turn the conference over to Mr. Marcelo Cunha Ribeiro, Investor Relations Executive Officer, who will give the present highlights for the period. Please, Mr. Marcelo Ribeiro, you can begin your conference.
Good afternoon to all. Thank you for your interest, and welcome to the earnings presentation call of the second quarter 2018. We will follow the presentation, which is on the site and made available through webchat (sic) [ webcast ]. I would like to give the floor to our executive, CEO, Mr. Benjamin Steinbruch, who will talk about the highlights during the period.
Well, good afternoon to all. Thank you. I would say that following what we've been saying and presenting every quarter, we have had a significant operating improvement working to reduce costs and improving the results. And we have seen this since the first quarter of this year, and we will continue improving. So we are presenting the adjusted EBITDA of 58% over year-over-year and 14% quarter-over-quarter, which shows an improvement in EBITDA and that we always worked with differentiated EBITDA margin from that on a market. And we are working to increase this margin and increase the differentiation. And you will see further, along the presentation, that there's a reduction in cost and improvement in the price, especially, in mining area, especially, with quality. We have been able to offer better iron ore. We also had an amount that was higher than expected. And we are working strongly to increase this quantity and have a better quality ore so that we achieve this premium. In our opinion, this will be very important.
So mining, we had an EBITDA, which was very good. And I believe that for the third quarter, it will be even better. In the steel sector, we had a price improvement, which we have seen improve every month within what we had proposed to do at the beginning of the year. The quarterly increase of price and we've had the opportunity of seeing this price -- see this price improvement and also trying to reduce the cost. And what we can do within the operating sector, so that we can improve our margin, which was better in this quarter, and we hope it will be also better in the third quarter.
Cement, we also had good results in the second quarter in relation to cost and also in terms of quantity. And we increased our market share, and we also had a better price and so a better margin. So I think in operating terms of the market outlook that we had planned to do at the beginning of the year and that we informed you, we are delivering what we had planned.
With regards to the financial aspect, we finalized this morning the extension about -- with Caixa Econômica Federal. We had already done that with Banco do Brasil and Caixa. They are the main banks that we work with at CSN. So we had good conditions for CSN in terms of the extension of the debt that they -- this will also be presented to you and discuss with you. But according to what we had planned with cash on Banco do Brasil, we have to live it on that too. And with the private banks, we are very close of informing you of an extension, so that we are -- come to in terms of the financial side of CSN.
We were able to finalize the LLC operations at the end of the quarter. And we were -- even with a payment, we were able to finalize the sale and payment of the plant in the USA. And it was an appropriate business at the time and it brought good results for CSN. And with the improvement of the operating results from the extension of -- and also the sale of assets, which is what we are working towards and that we had said we would deliver to the market. And my objective and the company's objective that by October, we will be able to finalize the sale of some other assets and also streaming operation in the mining sector, which will allow us to reduce $1.5 million deleverage of the company. $2 billion (sic) [ $2 million ], which would be the $500 million that will be LLC and plus this $1.5 million from the sale of assets and streaming operations will allow us to be in a different position.
My personal challenge and not the company's, because probably Marcelo will afterwards explain this and would be -- that we would have reached the 4x of debt to EBITDA. My personal challenge is that by the end of the year, we'll reach 3.5x EBITDA. And that next year, we are 2.5x. So my challenge and this is a personal challenge is to reach 3.5x the debt EBITDA ratio by end of the year.
For this, everyone has always questioned me saying that I wouldn't deleverage the company, but at the moment, I now am saying that I am asking Marcello to do this. And we have discussed this with a bank and we have a foreign bank to sell the assets abroad. And we are talking with 2 or 3 banks in relation of the streaming operation. And the -- this communication is well advanced, and I believe that we will be able to finalize this by the end of October.
And once this is done, I think the company will change completely in terms of capital structure. The operating side, we have been working and delivering good results. We have big challenge ahead of us in terms of sales and EBITDA.
In sales, we are almost in line with what was budgeted. We have a 5% difference, which will be recovered in the second half of the year. And as a consequence, I believe that we will also be able to deliver the EBITDA that we had set to do. I would say that we are very optimistic for the third quarter in terms of mining, steel and cement. We believe that we have the product, we have the client diversification, and we are working strongly on each client at the national market level. And our challenge is to continue to grow in the international market.
We believe in the reaction of price and we plan to have a new increase in price as from next month. We will have to discuss this with Martinez as well, but we believe that we can have an increase in price. And we believe that this third quarter in relation to what happened in June and the results that we have in August, we believe that the third quarter will be even better than the second quarter. September is almost [indiscernible] all our segments. So we hope to deliver a better third quarter than the second quarter, which was already very good.
So basically, that's what I had to say to you. We fulfilled what we had set out to do. And above all, our vision now and our priority in terms of deleveraging is that this will happen in a very short time because we're already in August and we only have September and October. And if the negotiations continue as they are, we hope that we will be able to deliver this deleverage by the end of October.
Basically, that's what I had to say. And after our colleagues, other officers will have the opportunity of answering any questions that you may have, but that's what I had to say. Thank you very much. And I hope that you like what you see and which will be explained and the results achieved. Thank you very much.
Thank you, Mr. Steinbruch. We will now continue with the rest of the presentation. We're on page 4 now with the operating results. I will mention this very quickly because afterwards, it will be discussed in greater detail.
We had BRL 1.4 million EBITDA. It was the best EBITDA since 2014, an increase in relation of last year was 58% and the first quarter was 14%. We had a problem with the truck driver strike in May, and that caused some impact in the steel sector. But despite all this, the steel sector also evolved. So we avoided the effect that we had in the other quarters where an improvement in business opportunity was roughened in another sector. And we had a positive EBITDA, where I would like to highlight the mining sector in terms of quality of iron ore and greater growth.
So we had an EBITDA margin of 23.9%, which is higher than what we had delivered before. And so it was important to mention that we continue reducing expenses and reducing our fixed costs.
On Page 5, we continue with the other financial indicators. They also had a good evolution. Starting with CapEx, which continues within our annual expectation of BRL 1 billion to BRL 1.1 billion. This CapEx at the moment was going through -- the company's going through is dedicated to sustaining and maintenance projects, which are extremely important for payback. And this way, privileging cash generation further deleveraging the financial cycle, we are being very efficient in relation to previous years. When we focus on the foreign market, we want to increase our working capital from the last year.
To date, we have been able to negotiate better terms with the suppliers. In this quarter, we had some delays because of the truckers' strike and also increase of cost of raw material. We had 400 million stocks above than the previous quarter. If this were the case, we would have had a constant working capital. Financial expenses, ex variation, we've had a good development with the low -- interest rates are low, so our flow -- cash flow continues positive.
If it weren't for these specific points that I've just mentioned, we would have been -- had a higher cash flow than the first quarter, a BRL 1.4 billion in the first semester. The $400 million from the sale of the plant in the U.S., we've had $1.6 billion of positive free cash flow in the quarter. We have a greater liquidity. The cash was $4.4 million. Well, obviously, this had an impact in relative leveraging, which was a priority that we wanted to reduce. And then we reached 5.3x debt net EBITDA. If it was for the strong exchange variation, this indicator would have been below the 5x. It would be around 4x. CSN had halved its revenue in dollars, so this exchange rate variation doesn't really offset the deleveraging target. We want to reach the end of the year with 4x EBITDA, which is a challenge established by Mr. Steinbruch, which will be 3.5x by the end of the year.
In Slide #7, least -- last but not less important, we have our amortization schedule with our efforts of extending our debt. Since the beginning of the year, we had BRL 6 billion of amortization at the beginning of 2018. And after the implementation of the negotiations with Banco do Brasil and the recent agreement with Caixa, and the issue of bonds, we were able to reduce in almost BRL 4 billion of the amount to be amortized at this year. And we removed BRL 7 billion of the short-term pressure by 2019 and '20. So we have a challenge for 2019 and 2020, which will be fulfilled with a better cash generation.
So these are the comments of the financial aspect and I will give the floor to my colleagues and starting with Luis Martinez, who will talk about the steel performance.
I hope you can all hear me properly. I'm not in the same area. First of all, I would like to say that we had the best quarter of the last 3 years despite the truckers' strike. And we had about 90,000 - 100,000 tons loss with that strike. We had an excellent quarter and we focused on the domestic market. And this, as Benjamin has mentioned how resilient CSN is. They used its product's portfolio and we have a diversified number of clients. And we say that we sell steel per meter and kilo. We sell steel all in all ways. So we've been doing this for a long time already.
In terms of sales volume, in the second quarter -- in relation to the second quarter in 2017, we had an increase of 22%. And the -- comparing the first semester of 2018 with 2017, we had a 28% increase. If we have a look at -- compare the semester to semester, we had a 45% growth. So this shows what I've mentioned before at the last call, we want to come back to the domestic market, we have to increase the volume of prepainted and that's what we are doing. And we hope to continue in the domestic market. We can see a growth in revenue and we can also see increase of 20% on the unit cost per ton.
At the bottom, we see the profitability of our market and what's happening in the last quarter. I'd like to highlight that the EBITDA that we're generating per ton in the domestic market is around BRL 850 per ton. Just to give you an idea of what we're doing at the moment in the market.
With regard to the other sectors, Long Steel, that's doing very well. We increased the price about 16%. In Europe, we've got some protectionists. And the price in Portugal is improving. And Germany is working at completely -- it generates cash and results for CSN.
And in the United States, as I mentioned in the last call, we continue with our strategy of being a local player, say, selling our quota in the U.S., which was about 250 tons and working as if we were a trading company and working as a local player.
So in the steel sector, in general terms, we had an alignment, which was a very favorable for us in this quarter.
Next slide. And here, I show you what happened in the steel sector. The market, in fact, should end the year according to the IPR with 11, 12 million tons. Imports today are dropping. But in the semester, it represented a 13%, which is quite a high number. And I don't want to consider what's happening in the market. I want to have 3.4 million tons in the domestic market. And we still have to sell about 1.8, 1.9 million tons for the second semester. We are working towards this, and I'm sure we will be able to reach this by the end of the year.
You've been following the market. The automotive market continues around the -- we hope to have about 13% of the truck sales, as everyone is wanting to buy trucks, it's amazing. So there's been an increase of 36%. The distribution dropped from 4.7% to 3%, and the machinery area is improving.
With regards to civil construction, we have a positive result. Because the first time an index that we follow, which is the index of civil construction has stopped falling, which shows that the curve has reverted. And another sector that I would like to mention, which is appliances and packaging, they've increased between 2% and 3%. So I say that CSN strategy for the second half of the year is focused on the domestic market, participating in the market, focusing on products, sell and work, diversified, not putting all the eggs in the same basket.
During the Q&A, I will speak about the prices and the new galvanization line. I will give the floor now to Pedro Gutemberg.
Good afternoon to all. I would like to comment the highlights in the production area. You can see on the left, we had a lower slab production volume. We had to have some maintenance in our production lines but always aligned with the volumes that we have of inventories of products of raw material and finalized products. We want to maintain the commercial area well supplied, as Martinez said so that we can increase our volume in the domestic market.
When we look on the right, we can see that we have had an increase for this quarter. We had exchange issues, which were not favorable and also the cost of raw material, especially, coal and coke. And that impacted us more this quarter than the previous quarter. But although we have had this price pressure, what we can see here is that we were able to maintain the EBITDA per ton within a high threshold about -- up to BRL 540, BRL 536 per ton.
Other highlights, as Martinez mentioned, is our better mix, which increases our cost, but is offset by a better product margin, which has a greater added value. The domestic and -- were very good this quarter with increased volume.
In this slide that we can see now, we see our pool of slabs. We had an exchange variation and a raw materials variation, which affected the price of the slabs during this quarter. On the right, you can see the variation of the raw material prices. So there's a lag when the prices go up in the foreign market and when we account for this cost within our metrics and when we effectively use the material that we have on the stock. So this was the main motivating factor. We believe that we're in a more favorable situation in terms of cost, and we have the good omen for the next quarter.
I will give the floor now to René to talk about this mining performance.
Good afternoon to all. It's a great pleasure to be here with you again at the CSN conference call for the second quarter of 2018. We have Gustavo, in charge of the commercial area, Daniel Bueno in the area of production. We would like to tell you a overview of the iron ore market and how we can see it at CSN.
Now we have seen a great -- a tight supply and demand market. What we have -- we had a 7% growth rate at an annualized rate in Europe, Japan, Korea. They are also resuming their growth with 2% of steel production during the same period. During the supply, it's still controlled by the main steel mills. And this increased current size with accumulated reduction of 38% of the production of iron ore in China due to environmental reasons. So within this context, we believe that the Platts should be about $75 at the second half of 2018. But the greater supply of iron ore from Australia, which has higher alumina and there will be a greater demand for Brazilian ore. With regard to CSN, the mining department, I would like to stress the pillars of our business, which guide our projects. We work with an outlet of having a gradual increase of production every quarter associated to a differentiated quality of products, not depending on the -- dependency on dams so we are maximizing our margins.
CSN, I mean [indiscernible] once again presented solid results in the second quarter, and we would like to highlight the following. An increase of 9% in sales, which was influenced by an increase of production about 600,000 tons despite the restrictions caused by the truckers' strike. A negative net revenue of the limits of about 365 tons. The net revenue registered reached BRL 1.3 billion, 16% increase during the quarter. The adjusted EBITDA had a 21% increase in relation to the first quarter. Apart from the great sales volume, we would also had a CFR+FOB sales performance, as we can see on our next slide.
With an increase of our exports that increased 2%, although there was a 12% fall in the Platts. With the average index, which we had in each quarter, the dry basis, and with the quotational period and the conditions, which were negotiated and removing the freight and the humidity, so with the Platts in the first and second quarter, we see a gain of $5 per ton.
CSN Mineração has about 20% of its export sent to the Japanese, Taiwanese markets. As a Platts Index of 56 was about $9 per ton, the opposite occurred in the second quarter. And this led that the difference represent 2/3 of gain in the quotational period.
The remaining tranche is related to the spot sales and also the positive price, which were obtained in the first quarter of the year. We understand that these quotation of periods are improved over time. We emphasize, however, the quarterly gain of almost $3 per ton in relation to the quality and commercial conditions. In response to new market demands, we reviewed the quality of the products for the market in the quarter of 2017 when we reduced silica and alumina. In one side, we have the stability of stratification that has a significant impact and allows that to date, we have product, which is strongly sought after in the market. And the production of silica and the reducing -- and the limping of the Australian market since then we had a discount in the second quarter of 2018. As we believe this scenario will continue, so we're in a privileged condition for the price at short and medium, long term.
So let's see the effects of this on the quality in terms of dams. The first tailing dam started its operations at the last week in June. It will allow a reduction in the tailing and lower dependency in dams. So we can increase the rhythm of the main plant of 30 million tons here in the second half. And with regard to sales, they will achieve about 35 million by the second half. We would like to highlight the good level of the progression of this second magnetic concentration, which will be possibly the central plot in improving the production and increase it by 1 million ton.
The second magnetic CMA will start operations in the third quarter of this year. We would like to update the projects for this year. We want to reduce the use of dams and the positive impact. The first one, we would like to mention, is a spiral project, which is the central plant. It will have a greater quality and the use of itabirite. And the second one is filtering Phase 2, basically which is now dependency on tailing dams. The filtering Phase 2 dam and spiral project should be in operation in the first quarter of 2019.
And finally, the dry production plant will reduce in 55%, the cost of 8 million tons a year. And they have already received the authorization by the environmental agency. I would also like to mention the work that CSN has done in the mining sector, which -- increasing the quality, reducing costs and reducing the dams. We believe that the results that we've had are the results of this. So next quarters, we will have even a better result with the advanced and getting more awards with our products in the market.
I would like to thank you for your attention and hope to see you next time.
On Slide 17, we have the cement performance, which will be presented by Martinez.
What's interesting in terms of cement is that this quarter using the World Cup event, we launched CSN in the media -- the CSN cement in the media. And when the buyer goes out to buy the cement, they remember the CSN cement. If people think that CSN doesn't have a name in the market, but we are very strong in the Southeast region. We -- the plant in Volta Redonda is working at full capacity. And I would say that our cement here is extremely strong and that, still have a 28% of the EBITDA margin in the quarter really is a very interesting result for a market that is very slow and CSN is a new player in this market. So talking about this quarter result, the trimestrales, so I'd like to highlight that our sales are around 3.54 million a year, which is a very good number. We have a 4.2, 4.3 as set margin. We haven't reached our limit yet, we hope to by the end of this year. And I think, we've got this equation of price and volume and freight. So with cement, this effect of freight is a direct impact. You can't separate cement and freight. The two things go together. I think not only the impact of the freight, we will have to increase the price of the cement in 1%, 2.5% per sack because of the increase of the freight. And that's something very big for the cement market. What's very important that we're learning with this campaign that we started during the World Cup is that our brand name is bringing some results. And our long products, especially in the civil construction. On the right here, we can see that we have recovered the 34% in the last year, and the margin reached 28%. So obviously, it's not only a price recovery, but there is a great and concentrated effort in synergy with raw materials and other things that he will detail.
So I will give the floor to Edvaldo and he will talk about our trimestrales, our results of the quarter.
Thank you, Martinez. Good afternoon to all. I think Martinez has given a clear overview of the performance in the cement sector. And I would like to talk about the market outlook. Brazil had a market growth in the first months of this year. And this growth dropped slightly with a strike and lack of government investment. But we can perceive that this estimated drop of 1% for this year is a significant result in the drop of sales of the past years.
We already have a threshold and we believe it will remain in this threshold, and grow if we overcome these problems. But it's important to stress that as we present were only in the Southeast, that our main market is in the southeast of Brazil. And Southeast Brazil, the first half of this year grew 1% in relation to last year. It's a very small growth, but very positive that even with the truck driver’s strike, the market as a whole is starting to grow. And CSN also is growing, gaining market share in this market.
Martinez mentioned the cost reduction and what we're doing to reduce costs. since the operation of line 2 at Arcos, we have consistently reduced cost. So despite the substantial increase that we have suffered with increase of fuel because of the cost of fuel, but even with that, we are able to manage cost reduction and have higher competitiveness in the market. Martinez also mentioned that we should expect an impact in relation to the freight, but we have to offset, this might have an increase in the distribution cost. But we're going to try to offset with maybe a distribution cost, and we hope to be able to continue with that. So we are operating with very low production costs. We are probably the most competitive in the market.
I will now give the floor to Marcelo.
Well with this, we end our presentation. And we can now go on to the Q&A session. Thank you.
We will now start a Q&A session to investors and analysts. [Operator Instructions] Our first question comes from Ivano Westin from Crédit Suisse.
Congratulations for the excellent operating result. My first question is for you, Benjamin. You mentioned $1.5 billion of -- in this October with sales of assets. And can you clarify this? Give us more details, which of the assets? You had mentioned some before, but just to confirm where each negotiation is? And also the iron ore streaming, and this would be the first one with CSN. And how much would that involve? And the other details that you can give us. And also you talked about your threshold targets of 3.5x EBITDA by the end of the year and compared to 4x EBITDA, which is the company's target. So why this difference? Do you plan to sell another asset? Would it be a better cash generation of the company? And a second question, if you allow me, is a question to Martinez. Thank you for your comments. And you said that the price -- questions would be asked during the Q&A session. So I'm sure you will be doing a recap of what was announced and what was -- in terms of price. So I believe that you have a range of 10%, 12% now. So maybe if you can give an outlook in terms of quality that would be very good?
Ivano, good afternoon. With regards to deleveraging, as was mentioned previously, the assets that we made available are foreign assets because we consider that at the moment what can be sold of the assets in the strong currency because of the valuation and the better performance of mature markets. So in the United States, Portugal is very strong because of their recovery of the Spanish economy. And we sold -- we sell to Spain most of the production, and the recovery is very strong. So we're having very good results in Portugal. And also, in Germany, we have a good margin at 4%, the market is very strong. So we believe that these assets abroad, they are the assets that can give us a greater premium, and we have a bank already that we're negotiating with. And I wouldn't be surprised if this would happen in the short term because there are many people involved. The asset in Portugal is very easily sold asset. And also Germany, it's very traditional in its performance. So the variations are very small in terms of performance. And when there is an improvement in the market, improvement of price and margin, this reflects directly in the results. So this is a well-known asset abroad, and it has attracted many buyers. So this negotiation is quite advanced. We went to Europe in June. And at that time, we went to negotiate the expansion of our production, and we contacted some interested parties and banks and traders. And I wanted to sell part of the mining sector and part of the equity to any possible buyer because of the improvement of the market in terms of price, the price of iron ore and also the quality award premium, and we're going towards this. So I thought it was -- to talk about taking an interest in the mining sector. And there was a possibility of having the streaming operation, and that wasn't our initial objective. But very briefly and consistent, it has structured itself. And as you know, if you have production, if you have a buyer and you have a trading and a financing agent, that's a close equation. So we're working with this obviously respecting costs. That's the discussion. The operation itself is not complicated. What's complicated is the pricing, but we're very optimistic. So I believe that in this universe of assets, of foreign assets and the participation of the mining sector and the streaming operation, we will be able to comfortably reach $2.5 billion of leverage. So when I say that my challenge was to have -- get to October with 1.5 billion, I think it's feasible. I think Marcelo is negotiating this with banks and other interested parties, and all the negotiations are well-advanced. So I wouldn't be surprised if a significant part of them would materialize by October. And we would have till the end of the year then for any other details. But this has become a priority for us. I have the opportunity of saying that when we went to issue our last bond in February/March, I was surprised by how conservative the market was, talking that -- to consider a AAA company in terms of investors, it had to have an EBIT ratio of 2.5x. And that was a surprise to me because we are used to always working with a higher leveraging. But after talking to many people and thinking a lot about this, we came to conclusions that the market is -- because of the political stability and economic stability. And we believe that it is the moment for a more conservative position. And that's why we decided to reduce this deleveraging in a more aggressive way. So I would say this is our main priority. And we have our normal day-to-day challenges of production at the lower costs and better price. We also have this deleveraging challenge. We had the issue of the extension of the debt. And that's basically finalized also with the private banks. So our main priority is deleveraging. We believe that if by deleveraging the $3 billion, we will be able to double the value of what remains in terms of market share. So in fact, we are giving up good assets. We all -- we believe that we have good assets, but if we deleverage 3 we will gain 6, and that's what we plan to do in the very short term. And I hope that at our next earnings conference call, the third quarter, I can mention this to the market. Thank you very much.
You mentioned 2 figures, just to confirm the amount -- total amount that you expect by October, and what is the amount of the annual stream?
We're talking about $1.5 billion by October, I would say that it can be half-and-half.
Can you explain the price dynamics?
An important concept that we have noticed that occurred in the past, we can't separate an increase of distribution industries. Distribution is the market, it's just a channel. So if there's a big distortion when you have a very strong jet lag between the increase of the price in the distribution and the industry. I think what brings a great benefit to CSN is the increase of price in distribution and production at very similar levels. I would say that assembly lines, we -- in January, we increased it by 18%, 22% to all assembly, car assemblies. These are contracts that we review every 6 months. In February, we had a slight increase for distribution because they had to realign it in about 6%. So in June, we had another increase for the distribution. And during this period, we are including the increase to the industry. And basically, there is no difference between industry and distribution. And now in August, Benjamin has mentioned that next month, but in fact, it's now in August we are implementing in the distribution sector a 12.25% in the cold and hot-rolled and in the galvanized 10 and 25. And the industry, we're going to mix and we'll be included in this mix on the [ fifteenth ]. So you can't have different policies if the materials are going to the same client or a smaller client, but within the same production chain. Now if there's space for this increase, yes, there is because when we consider the price of the imported material, for example, the Chinese hot-roll has a very unstable price in China. It remains around 580, 590 throughout the year. It only reached 610 in March. So considering this price of 580, 509 (sic) [ 590 ], this premium today is negative. It would be minus 3, minus 6 in the hot and the cold-roll. So if we talk about the 12% increase, it isn't a problem because you will have a relatively positive premium. What's more delicate, I would say, is for the [ electric ] material, that's why CSN suffers more. It's products which are imported into to Brazil, material which is not for the automotive sector and we have to be more careful. And there, the premiums are more favorable to imports, and we have to be more careful here. So I would say that today, there isn't a great secret here. And another important point is the cost, never mentioned this issue. When we talk about raw material, for example, coal and coke, it's the price in the market. So if we get coal, it goes from 20 ton, 50 ton, 60; coke, 280 to 350. Freight, freight affected the steel industry. It affected -- at CSN, we increased freight 100%. We have to pass this increase onto the freight because it's inbound and outbound because that's also a very important point. So this is the price dynamics that is in the market today. So that you have a model we can consider in the third quarter, that CSN -- an average increase of price of about 8%, 9% on what we have today. That's it.
Our next question comes from Leonardo Correa, BTG Pactual.
I will start by mentioning some points. I have some doubts. I'm confused with some figures. But Martinez, you're talking about a second increase, which would be after the June increase. A second increase in August, which is underway for distribution and the industry, but you wouldn't have a third increase for September. So you only have 2 increases, is that it? Can you confirm it? The second one right to Benjamin. I would like to confirm a point. In your initial presentation, you mentioned a streaming of BRL 1.5 billion. And now you said half-and-half till October, which would be streaming and sale of assets. I would just like to confirm if the streaming is really BRL 1.5 billion or not? And also, if Marcello could help, I understand that this streaming are structured transactions, if -- debt that you have that will have a funding cost. It's a low cost, but I would like to know how it compares with the cost of issuing bonds to CSN. CSN will get -- obtain money at a lower cost in the 6%, 7%. And I know that the result was outstanding in terms of price reservation, the assets are performing very well, but I would like to hear from you what's the breakeven level for China and the trend for the future? And also you commented growth in the volume of iron ore. So can you tell us how this growth in production of iron ore will occur? I can start with Martinez.
Now I'm going to answer you. I wasn't able to hear the end very well. Basically, it's what you can see in the report, the price is due to the report and the improvement in the mix. Apart from the increase what we did, we also increased the number of galvanized materials. So we grew the nation to the second -- first half, in relation to the first half of last year, 45% in the galvanized products. So that justifies the increase of the average price. What Benjamin mentioned is that we are implementing this already in August this increase, so there is no other increase. It's the one for August. That's the one we are talking about.
I don't know was there any other question? You asked something else, I don't hear it properly.
No. I think that was the only question I had asked you, Martinez. And it's very clear. Thank you.
Leonardo, I mentioned the increase wrongly. No, it's an increase in August, not September. So there are two increases. One, we had already and one that's implementing now in August.
With regards to your streaming question, we plan to obtain BRL 1 billion in streaming and [ 1 ] in assets -- BRL 1 billion in assets. And together, with the sale of the USA, we would have BRL 3 billion of leverage. And we believe that, that is what is necessary ideal for the company. Within this and as I mentioned before, if we are able to have the BRL 3 million deleverage, the company today has BRL 3.5 billion or something like that. And I believe that with that we will be able to double that value of the company with this deleverage. I mentioned BRL 1.5 for streaming and BRL 1 billion of assets. The streaming operation isn't a closed package now. It's the first one is being done in terms of the mining sector. So we believe that we will have 2 or 3 operations -- 2 or 3 streaming operations. When I mentioned BRL 1.5 billion deleverage till October, I'm considering 1 or 2. And I'm also considering the sale of assets. I decided to say half-and-half in this amount of 1.5 billion because the assets in Germany and Portugal or -- one interest in mining or it can be there half-and-half. And the streaming operations, I think that if we can do half by October and the other half by the end of the year, I think that's quite feasible. So that's why I mentioned BRL 1.5 billion of leverage by October plus BRL 1 billion to the end of the year. And that way, we will have less than 4x. And my objective is 3.5x. And in relation to the streaming operation itself, Marcelo can clarify it. And obviously, we are also hoping a greater valuation, but also reduction in our financial costs. We are reacting but there is a big difference with our competitors. So we really hope that this value drops, and the streaming operations would be at a lower value than what you see on the slide. So I believe it will be at a lower cost, but Marcelo is negotiating this daily and he can go into greater details.
I think it's important to mention that what you described is like a prepayment and streaming, because streaming involves more risks in operations and volume and that wouldn't be -- it would be an operation of a non-debt or near equity. So the capital costs that can't be comparable. So the capital costs of the streaming would be very low. It's about 5%. So we believe that we can have a very interesting operation and also sharing the risk. But we're still in the initial stages, as Benjamin has mentioned. There is still a long way ahead of us. Leonardo, as you know, we are working with the expectation of a gradual increase production every quarter, but always associate a different quality product. 26% in the first -- the rhythm for the first semester was 26.3%. And the second semester, we plan to reach 36 million. With regards to the cash cost, the price of the iron ore in China was 40 tons (sic) [ dollars ] per ton. The cash cost was 44.
Our next question comes from Thiago Lofiego, Bradesco BBI.
My question is on mining and also the dams. How the production today independent of dams? And what is the target for 2020, for example? And also the discount of the -- do you think this scenario will remain in relation to the current market? What do you see for the premiums for better quality iron ore? And also the level of silica and alumina that you have today in the iron ore?
Thiago, 2/3 of our production depends on dams. And we have started this filtering 1, and we're starting filtering 2 project for the filtering of tailings. We hope to be independent of filtering dams in 1 year, 1.5 years. With regard to quality of fine centers in China and/or for 2018 from January 2, our average quality was 65% of iron, 5.7% of silica, 1.6% of alumina, but the average quality sold to China is 62% iron; 6.5% silica; and 0.7% alumina.
Can you go back to the dams?
2/3 to 0 in 1.5 years. And also CapEx associated to from [ going ] to 0 use of dam for the total CapEx of BRL 200 million.
Our next question is from Marcos Assumpção from Itaú BBA.
First of all, I would like to understand more about the quality of the iron ore. What's changed recently? I know you mentioned the quality of the iron ore and alumina, which is becoming more important. But what's the specific difference from May and June to give a discount and a premium and looking into the future? And also considering the freight, what is the company's strategy in relation to the iron ore freight? We see that freights are increasing and what's the impact? And if Pedro could add, what is the level of the cost of a slab that CSN can have after the impact of the strike has finished?
Well, Marcos, the market has changed a lot. We used to focus on production. And then with the Carajás project in the Chinese market with their quality, we had to change. So now we have a different mining sector. We have a -- our plan is to have a gradual increase in production and stay in the market with a greater added value. Our Casa de Pedra asset is of great potential. It's the best [ silica ] that we have in this region in Brazil. If you don't consider Carajás. So we believe that if we maintain the status of premium, we will continue with the same operating situation and that's very important to get for silica. Freight is increasing and expectation is about $20 per ton from now onwards.
And just to add then, in the graph there is a scale. But it seems that in May, you had a discount which was slightly above $1 dollar per ton. And in June, you had a premium of $2 per ton.
That's alumina, but alumina -- basically, it's alumina, but now we're very strong in alumina as well. And we will also consolidate it had become very strong in iron ore alumina, but I'm saying that in the future, volume and quality and cost is very important. The slide where you show the commercial conditions where there was a $3 discount and then it was flat in the second and in the third, it would be about $2 premium. So if you consider the quarter, you will see that it will be extremely positive.
Marcos, Pedro Gutemberg. You asked about the slabs. Well, it will depend on the exchange variation. And we had a drop of 5% in dollar terms in June. And we believe that by the end of the year, as we show the lag of the cost of raw material, we might have 5% in dollar terms as well. And we hope that there will be a drop as well in the next following quarters.
Our next question comes from Rodolfo De Angele from JPMorgan.
I would ask Martinez, if I'm not mistaken, talk about a new project, a new line?
Just adding in the second half, we exhaust our capacity of producing galvanized products in Brazil. Just to give an idea, our annualized number of galvanized should end the year in about 1.3 million tons, and this is a total volume per year. The Brazilian market for galvanized products -- hot dipped galvanized is 3.2. So this is a surgical account, really. We have to be very precise because it's got many specifics to choose in terms of the auto industry, civil construction, appliances, Galvalume Prepainted. So what has CSN done? They decided to do something different to what the market is doing. So today, we have total leadership in this market. So the leaders have just to do something innovative. And something that will bring a direct benefit to the market. So what have we decided to do? We have Pedro for this year. He has set an total annualized capacity of 50 million, 60 million tons of coated material to be sold. So this volume will be available as from October/November. That's one point, a very short term. The short term, which I may next year, we are converting a line, which was stopped in the mill, which was for a chrome coating, which has no interest here in Brazil. And it's used a lot in the U.S., so we're going to convert this line to produce a hot-dipped galvanized product. This is going to be an extremely fine product. So then we will have an extra 150 million tons as from next year. I think in the annualized as from April/May. So it all depends on the process for approval of the product. And we have a third option, which isn't an option, it was an option until 2 weeks ago, in fact, when we were in doubt if we would have another galvanized line. So now we will have 3 lines in Getulio Vargas one at GalvaSud and one at [indiscernible]. And we decided then to invest in another line for coated materials with a capacity of 350,000 to 400,000. And at the moment, we are defining exactly which is the portfolio of the products. It can be a streamline, it can be worked with materials focused more on the auto industry or it can focus on more standard products, first of all civil construction, for example. So we can see that this idea has very well considered and we believe that this project will be self-funded. Marcello is working towards this. We can dedicate more time about this funding, but we're also working with some clients, so that we have a back to back cushion
[Audio Gap]
to know exactly, which is the CapEx for this line and the output of the line. In Brazil, it's very important because we have a complete portfolio. So I also have a prepainting line, which is complete. So I can include something more productive at the end of this line. So that is, in fact, the final detail that we're analyzing at the moment.
Please wait while we connect the questions. Our next question comes from Carlos De Alba of Morgan Stanley.
The question on clarification on the [indiscernible] concluded as we implemented that we implemented. So I wondering you can give us more detail conditions? And when can we expect them to be [indiscernible]? And also on the streaming
Carlos?
We can continue the answer. I'll take the first part of the question, which is the implementation of the extension of [Indiscernible] We find this extension with Caixa, and it has amendments what we have in terms of -- with of the extension, we will issue debentures, which will be headed by Caixa in terms of efficiencies and cash extension. And this -- the issue of the debentures will be done in the next 60 days, and that has been approved already by us and by them. So there's no additional negotiation or risk. I think it's safe to say that there is an implementation with Caixa. And that it has been finalized. We will continue with Carlos' question.
The second question I had was on the streaming deal in the mining business. If you could share some details so that I can better understand that would be great. Is it sort of a forward sale, where the company will [ refuse ] money up front and be committed to basic material for the following years. Or is she going sell a by-product of the mining operation? What exactly does the company need in assuming a deal in iron ore?
As Benjamin has mentioned, this streaming of a core product for basic material, which is iron ore, isn't a very common streaming. So ones that have been made were with other parts. So we're doing something that really is a pioneering with a high volume, 1 billion, 1.5 billion as it was mentioned. And as the classic streaming, we then talk about the fixed volume production, but a percentage of the production of the life of the mine. So each streaming has a characteristic. There isn't something that you can get off the wall and it fits all. For CSN it is important that it is very efficient in terms of capital and something that deleverages, it cannot have a debt characteristic and should reach the volumes expected within these conditions. We are trying to find the best option available.
As there are no further questions, I would like to give the floor to Mr. Marcelo Ribeiro for his final comments, Investor Relations Executive Officer for his final comments.
Well, thanks a lot. We have been here for over 1.5 hours. Thank you for the questions. And we were able to cover many of the important issues of the quarter. We thank you all for your interest. And I wish you all a good day. Thank you very much.
We end the CSN conference call. Have a good day.