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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION, D.C. 20549


FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF1934

For the month of February 2003

Valley of the Doce River Company
(Translation of Registrant's name into English)

Avenida Graca Aranha, No. 26
20005-900 Rio de Janeiro, RJ, Brazil

(Address of principal executive office)


(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

(Check One) Form 20-F      Form 40-F

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

(Check One) Yes      No

(If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b). 82-__)



Table of Contents:

 
 
US GAAP Financial Statements
 
 
Brazilian GAAP Financial Statements


COMPANHIA VALE DO RIO DOCE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

    Page  
   
 
  F-2  
  F-3  
  F-5  
  F-6  
  F-7  
  F-8  

 

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Companhia Vale do Rio Doce

In our opinion, based upon our audits and the reports of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in stockholders' equity, present fairly, in all material respects, the financial position of Companhia Vale do Rio Doce and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain affiliates, the investments in which total US$343 million and US$441 million at December 31, 2002 and 2001, respectively, and equity in earnings of US$60 million, US$53 million and US$213 million for 2002, 2001 and 2000, respectively. Also, we did not audit the financial statements of certain majority-owned subsidiaries as at and for the years ended December 31, 2002, 2001 and 2000, which statements reflect total assets of US$969 million and US$500 million at December 31, 2002 and 2001, respectively, and total revenues of US$426 million, US$407 million and US$480 million for 2002, 2001 and 2000, respectively. The financial statements of these affiliates and subsidiaries were audited by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts for these affiliates and subsidiaries, is based solely on the reports of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers
Auditores Independentes

Rio de Janeiro, Brazil
February 21, 2003

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Consolidated Balance Sheets
Expressed in millions of United States dollars

  As of December 31  
 
 
  2002   2001  
 
 
 
Assets        
         
Current assets        
      Cash and cash equivalents 1,091   1,117  
      Accounts receivable        
         Related parties 121   106  
         Unrelated parties 539   443  
      Loans and advances to related parties 49   160  
      Inventories 292   323  
      Deferred income tax 211   265  
      Others 286   224  
 
 
 
  2,589   2,638  
 
 
 
         
Property, plant and equipment, net 3,297   3,813  
         
Investments in affiliated companies and joint ventures and other        
   investments and provision for losses on equity investments 732   1,218  
Other assets        
      Goodwill on acquisition of consolidated subsidiaries 412   540  
      Loans and advances        
         Related parties 89   555  
         Unrelated parties 73   100  
      Prepaid pension cost 79   99  
      Deferred income tax 358   227  
      Judicial deposits 239   235  
      Unrealized gain on derivative instruments 3   7  
      Others 84   76  
 
 
 
  1,337   1,839  
 
 
 
TOTAL 7,955   9,508  
 
 
 

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Consolidated Balance Sheets
Expressed in millions of United States dollars (Continued)

  As of December 31  
 
 
  2002   2001  
 
 
 
Liabilities and stockholders' equity        
Current liabilities        
      Suppliers 365   296  
      Payroll and related charges 76   85  
      Interest attributed to stockholders 3   340  
      Current portion of long-term debt        
         Related parties -   22  
         Unrelated parties 717   274  
      Short-term debt 184   589  
      Loans from related parties 64   168  
      Others 99   147  
 
 
 
  1,508   1,921  
 
 
 
Long-term liabilities        
      Employees postretirement benefits 141   173  
      Long-term debt        
         Related parties -   156  
         Unrelated parties 2,359   2,014  
      Loans from related parties 7   21  
      Provisions for contingencies (Note 15) 428   452  
   Unrealized loss on derivative instruments 76   40  
 
 
 
   Others 122   86  
  3,133   2,942  
 
 
 
Minority interests 27   5  
 
 
 
         
Stockholders' equity        
      Preferred class A stock - 600,000,000        
         no-par-value shares authorized and 138,575,913 issued 904   820  
      Common stock - 300,000,000 no-par-value        
         shares authorized and 249,983,143 issued 1,630   1,479  
      Treasury stock - 4,481 (2001 - 91) preferred and 4,715,170 common shares (88 ) (88 )
      Additional paid-in capital 498   498  
      Other cumulative comprehensive income (5,175 ) (3,465 )
      Appropriated retained earnings 2,230   3,212  
      Unappropriated retained earnings 3,288   2,184  
 
 
 
  3,287   4,640  
 
 
 
TOTAL 7,955   9,508  
 
 
 

See notes to consolidated financial statements.

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Consolidated Statements of Income
Expressed in millions of United States dollars
(except number of shares and per-share amounts)

  Year ended December 31  
 
 
  2002   2001   2000  
 
 
 
 
Operating revenues, net of discounts, returns and allowances            
      Sales of ores and metals            
            Iron ore and pellets 2,820   2,600   2,177  
            Gold 103   139   156  
            Manganese and ferrous-alloys 283   259   285  
            Potash 91   71   85  
            Others 35   41   42  
 
 
 
 
  3,332   3,110   2,745  
      Revenues from logistic services 458   608   760  
      Aluminum products 462   284   362  
      Other products and services 20   75   202  
 
 
 
 
  4,272   4,077   4,069  
      Value-added tax (159 ) (142 ) (134 )
 
 
 
 
      Net operating revenues 4,113   3,935   3,935  
 
 
 
 
Operating costs and expenses            
      Cost of ores and metals sold (1,569 ) (1,550 ) (1,423 )
      Cost of transportation services (252 ) (378 ) (481 )
      Cost of aluminum products (412 ) (269 ) (334 )
      Others (20 ) (75 ) (191 )
 
 
 
 
  (2,253 ) (2,272 ) (2,429 )
      Selling, general and administrative expenses (224 ) (241 ) (225 )
      Research and development (50 ) (43 ) (48 )
      Employee profit sharing plan (38 ) (38 ) (29 )
      Others (119 ) (379 ) (180 )
 
 
 
 
  (2,684 ) (2,973 ) (2,911 )
 
 
 
 
Operating income 1,429   962   1,024  
 
 
 
 
Non-operating income (expenses)            
      Financial income 127   135   208  
      Financial expenses (375 ) (335 ) (315 )
      Foreign exchange and monetary losses, net (580 ) (426 ) (240 )
      Gain on sale of investments   784   54  
 
 
 
 
  (828 ) 158   (293 )
 
 
 
 
Income before income taxes, equity results and minority interests 601   1,120   731  
 
 
 
 
Income taxes            
   Current (12 ) 46   (10 )
   Deferred 161   172   42  
 
 
 
 
  149   218   32  
 
 
 
 
Equity in results of affiliates and joint ventures and change in provision for
losses on equity investments
(87
)
(53 ) 322  
Minority interests 17   2   1  
 
 
 
 
Net income 680   1,287   1,086  
 
 
 
 
Basic earnings per Common and Preferred Class A Share 1.77   3.34   2.82  
 
 
 
 
Weighted average number of shares outstanding (thousands of shares)            
      Common shares 249,864   249,864   249,983  
      Preferred Class A shares 135,042   135,042   134,917  

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows
Expressed in millions of United States dollars

      Year ended December 31  
 
 
  2002   2001   2000  
 
 
 
 
Cash flows from operating activities:            
   Net income 680   1,287   1,086  
   Adjustments to reconcile net income with cash provided by operating activities:
           
      Depreciation, depletion and amortization 214   212   195  
      Dividends received 91   132   133  
      Equity in results of affiliates and joint ventures and change in provision for losses on equity investments
 87     53     (322  )
      Deferred income taxes (161 ) (172 ) (42 )
      Provisions for contingencies 53   79   101  
      Loss on disposals of property, plant and equipment 62   79   47  
      Gain on sale of investments -   (784 ) (54 )
      Pension plan 11   32   41  
      Foreign exchange and monetary losses 1,031   460   208  
      Net unrealized derivative losses 28   38    
      Others 84   129   118  
   Decrease (increase) in assets:            
      Accounts receivable (123 ) (49 ) (63 )
      Inventories (69 ) (40 ) (50 )
      Others (105 ) 17   (103 )
   Increase (decrease) in liabilities:            
      Suppliers 102   21   84  
      Payroll and related charges 23   42   (1 )
      Others 94   (18 ) 46  
 
 
 
 
   Net cash provided by operating activities 2,102   1,518   1,424  
 
 
 
 
Cash flows from investing activities:            
   Loans and advances receivable            
         Related parties            
                  Additions (101 ) (75 ) (168 )
                  Repayments 75   79   32  
         Others 20   7   8  
   Guarantees and deposits (78 ) (85 ) (98 )
   Additions to investments (1 ) (338 ) (538 )
   Additions to property, plant and equipment (766 ) (595 ) (447 )
   Proceeds from disposals of property, plant and equipment 7   3   1  
   Proceeds from disposal of investments   989   44  
   Net cash used to acquire subsidiaries (45 ) (516 ) (323 )
 
 
 
 
   Net cash used in investing activities (889 ) (531 ) (1,489 )
 
 
 
 
Cash flows from financing activities:            
   Short-term debt, net issuances (345 ) (28 ) (278 )
   Loans            
         Related parties            
                  Additions 54   145   8  
                  Repayments (75 ) (44 ) (42 )
   Perpetual notes     120  
   Long-term debt            
         Related parties 17   66   62  
         Others 698   317   750  
   Repayments of long-term debt            
         Related parties (15 ) (40 ) (25 )
         Others (330 ) (310 ) (419 )
   Interest attributed to stockholders (602 ) (1,066 ) (246 )
   Treasury stock   (27 )  
 
 
 
 
   Net cash used in financing activities (598 ) (987 ) (70 )
 
 
 
 
   Increase (decrease) in cash and cash equivalents 615     (135 )
   Effect of exchange rate changes on cash and cash equivalents (641 ) (94 ) (107 )
   Cash and cash equivalents, beginning of period 1,117   1,211   1,453  
 
 
 
 
   Cash and cash equivalents, end of period 1,091   1,117   1,211  
 
 
 
 
   Cash paid during the period for:            
            Interest on short-term debt (46 ) (45 ) (48 )
            Interest on long-term debt, net of interest capitalized of $ 15 in 2002,
            $11 in 2001, $12 in 2000
(142 ) (153 ) (128 )
            Income tax (12 ) (46 ) (6 )
   Non-cash transactions            
            Special pension plan contribution in shares of CSN   249    
            Exchange of loans receivable for investments 55   35   7  

See notes to consolidated financial statements.

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Consolidated Statements of Changes in Stockholders' Equity

Expressed in millions of United States dollars (except number of shares and per-share amounts)

      Year ended December 31  
 


 
  Shares   2002   2001   2000  
 
 
 
 
 
Preferred class A stock (including one special share)                
      Balance January 1   138,575,913   820   709   709  
      Transfer from appropriated retained earnings    84   111    
  
 
 
 
 
      Balance December 31   138,575,913   904   820   709  
   
 
 
 
 
Common stock                  
      Balance January 1   249,983,143   1,479   1,279   1,279  
      Transfer from appropriated retained earnings    151   200    
  
 
 
 
 
      Balance December 31   249,983,143   1,630   1,479   1,279  
   
 
 
 
 
Treasury stock                  
      Balance January 1   (3,666,611 ) (88 ) (61 ) (61 )
      Acquisitions in 2001   (1,048,650 )   (27 )  
      Acquisitions in 2002   (4,390 )      
   
 
 
 
 
      Balance December 31   (4,719,651 ) (88 ) (88 ) (61 )
   
 
 
 
 
Additional paid-in capital                  
      Balance January 1 and December 31      498   498   498  
      
 
 
 
Other cumulative comprehensive income                 
      Amounts not recognized as net periodic pension cost                
      Balance January 1         (100 )  
         Excess of additional minimum liability        151   (151 )
         Tax effect on above         (51 ) 51  
       
 
 
 
      Balance December 31           (100 )
       
 
 
 
Cumulative translation adjustments                 
      Balance January 1       (3,475 ) (2,972 ) (2,535 )
         Change in the year       (1,710 ) (503 ) (437 )
       
 
 
 
      Balance December 31       (5,185 ) (3,475 ) (2,972 )
       
 
 
 
Unrealized gain on available-for-sale security                 
      Balance January 1         24   54  
      Change in the year         (24 ) (30 )
       
 
 
 
      Balance December 31           24  
       
 
 
 
Adjustments relating to investments in affiliates                 
      Balance January 1       10   8   (6 )
      Change in the year         2   14  
       
 
 
 
      Balance December 31       10   10   8  
       
 
 
 
Total other cumulative comprehensive income      (5,175 ) (3,465 ) (3,040 )
      
 
 
 
Appropriated retained earnings                  
      Balance January 1       3,212   3,537   3,567  
      Transfer to retained earnings       (747 ) (14 ) (30 )
      Transfer to capital stock       (235 ) (311 )  
       
 
 
 
      Balance December 31       2,230   3,212   3,537  
       
 
 
 
Retained earnings                  
      Balance January 1       2,184   1,647   1,186  
            Net income       680   1,287   1,086  
            Interest attributed to stockholders                 
Preferred class A stock ($0.84, $1.99 and $1.70 per share in 2002, 2001 and 2000)
    (117 ) (276 ) (230 )
Common stock ($0.84, $1.99 and $1.70 per share in 2002, 2001 and 2000)
    (206 ) (488 ) (425 )
            Appropriation from reserves      747   14   30  
      
 
 
 
      Balance December 31       3,288   2,184   1,647  
   
 
 
 
 
Total stockholders' equity   383,839,405   3,287   4,640   4,569  
   
 
 
 
 
Comprehensive income is comprised as follows:                 
Net income
    680   1,287   1,086  
Amounts not recognized as net periodic pension cost
      100   (100 )
Cumulative translation adjustments
    (1,710 ) (503 ) (437 )
Unrealized gain on available-for-sale security 
      (24 ) (30 )
Adjustments relating to investments in affiliates
      2   14  
     
 
 
 
Total comprehensive income (loss)      (1,030 ) 862   533  
     
 
 
 

See notes to consolidated financial statements.

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Notes to the Consolidated Financial Statements
Expressed in millions of United States dollars, unless otherwise stated


1    The Company and its operations

Companhia Vale do Rio Doce (CVRD) is a limited liability company, duly organized and existing under the laws of the Federative Republic of Brazil. Our operations are carried out through CVRD and its subsidiary companies, joint ventures and affiliates, and mainly consist of mining, non-ferrous metal production and logistics, as well as energy, aluminum and steel activities. We disposed of most of our investments in pulp and paper during 2001. Further details of our operations and those of our joint ventures and affiliates are described in Note 16.

The main operating subsidiaries we consolidate during the three years ended December 31, 2002 are as follows:

   Subsidiary % ownership
Head office
location
Principal
activity

Ferteco Mineração S.A. - FERTECO 100
Brazil
Iron ore and pellets
Pará Pigmentos S.A. 76
Brazil
Kaolin
SIBRA - Eletrosiderúrgica Brasileira S.A. 100
Brazil
Manganese and Ferrous alloys
Navegação Vale do Rio Doce S.A. - DOCENAVE 100
Brazil
Shipping
Vale do Rio Doce Alumínio S.A. - ALUVALE 100
Brazil
Aluminum
Itabira Rio Doce Company Ltd. - ITACO 100
Cayman Island
Trading
Rio Doce International Finance Ltd. - RDIF 100
Bahamas
International finance
CELMAR S.A. - Indústria de Celulose e Papel 85
Brazil
Forestry
Florestas Rio Doce S.A. 100
Brazil
Forestry
Rio Doce Manganèse Europe - RDME 100
France
Ferrous alloys
Urucum Mineração S.A. 100
Brazil
Iron ore and Ferrous alloys
Alumina do Norte do Brasil S.A - Alunorte (as from June, 2002) 57
Brazil
Aluminum
Salobo Metais S.A. (as from June, 2002) 100
Brazil
Copper
Mineração Serra do Sossego S.A 100
Brazil
Copper

2     Summary of significant accounting policies

In preparing the consolidated financial information, we are required to use estimates to account for certain assets, liabilities, revenues and expenses. Our consolidated financial information therefore includes various estimates concerning the selection of useful lives of property, plant and equipment, provisions necessary for contingent liabilities, fair values assigned to assets and liabilities acquired in business combinations, income tax valuation allowances, employee post-retirement benefits and other similar evaluations; actual results may vary from our estimates.

(a)    Basis of presentation

We have prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which differ in certain respects from the Brazilian accounting principles that we use in preparing our statutory financial information.

The U.S. dollar amounts for the period presented have been remeasured (translated) from the Brazilian currency amounts in accordance with the criteria set forth in Statement of Financial Accounting Standards 52 – “Foreign Currency Translation” ( SFAS 52).

Prior to July 1, 1997, Brazil was considered under SFAS 52 to have a highly inflationary economy and accordingly, up to June 30, 1997, we adopted the U.S. dollar as both our functional currency and reporting currency.

As from July 1, 1997, we concluded that the Brazilian economy had ceased to be highly inflationary and changed our functional currency from the reporting currency (U.S. dollars) to the local currency (Brazilian reais), for Brazilian operations and extentions thereof. Accordingly, we translated the U.S. dollar amounts of non-monetary assets and liabilities into reais at the current exchange rate, and those amounts became the new accounting bases for such assets and liabilities.

We have remeasured all assets and liabilities into U.S. dollars at the current exchange rate at each balance sheet date (R$3.5333 and R$2.3204 to US$1.00 at December 31, 2002 and 2001, respectively),

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and all accounts in the statements of income (including amounts relative to local currency indexation and exchange variances on assets and liabilities denominated in foreign currency) at the average rates prevailing during the period. The translation gain or loss resulting from this remeasurement process is included in the cumulative translation adjustments account in stockholders’ equity.

The net exchange transaction loss included in our statement of income was $515, $410 and $115 in 2002, 2001 and 2000, respectively, included within the line “Foreign exchange and monetary losses, net”.

(b)    Basis of consolidation

All majority-owned subsidiaries where we have both share and management control are consolidated, with elimination of all significant intercompany accounts and transactions. Investments in unconsolidated affiliates and joint ventures are reported at cost less amortized goodwill plus our equity in undistributed earnings or losses. Included in this category are certain joint ventures in which we have majority ownership but, by force of shareholders’ agreements, do not have effective management control. We provide for losses on equity investments with negative stockholders’ equity where applicable (see Note 10).

We evaluate the carrying value of our listed investments relative to publicly available quoted market prices. If the quoted market price is below book value, and such decline is considered other than temporary, we write-down our equity investments to quoted market value.

We define joint ventures as businesses in which we and a small group of other partners each participate actively in the overall entity management, based on a shareholders agreement. We define affiliates as businesses in which we participate as a minority stockholder but with significant influence over the operating and financial policies of the investee.

(c)    Business combinations

We adopt the procedures determined by SFAS 141 – “Business Combinations” to recognize acquisitions of interests in other companies. The method of accounting used in our business combination transactions is the “purchase method”, which requires that acquirers reasonably determine the fair value of the identifiable assets and liabilities of acquired companies, individually, in order to determine the goodwill paid in the purchase to be recognized as an intangible asset. On the acquisition of assets which include the rights to mine reserves of natural resources, the establishment of values for these assets includes the placing of fair values on purchased reserves, which are classified in the balance sheet as property, plant and equipment.

Goodwill was amortized in a systematic manner over the periods estimated to be benefited through December 31, 2001. As required by SFAS 142 – “Goodwill and Other Intangible Assets” from January 1, 2002 goodwill resulting from the acquisitions is not amortized, but is tested for impairment at least annually and reduced to fair value to the extent any such impairment is identified.

(d)    Inventories

Inventories are stated at the average cost of purchase or production, lower than replacement or realizable values. We record allowances for slow-moving or obsolete inventories when considered appropriate, reflecting our periodic assessment of recoverability. A write-down of inventory utilizing the allowance establishes a new cost basis for the related inventory.

Finished goods inventories include all related materials, labor and direct production expenditures, and exclude general and administrative expenses.

(e)    Property, plant and equipment

Property, plant and equipment are recorded at cost, including interest cost incurred during the construction of major new facilities. We compute depreciation on the straight-line basis at rates which take into consideration the useful lives of the items, principally an average of 80 years for the railroads, 20 years for ships, 25 years for buildings and improvements and between 10 to 20 years for mining and other equipment. Expenditures for maintenance and repairs are charged to operating costs and expenses as incurred.

We capitalize the costs of developing major new ore bodies or expanding the capacity of operating mines and amortize these to operations on the unit-of-production method based on the total probable and proven quantity of ore to be recovered. Exploration costs are expensed until viability of mining activities is established; subsequently such costs are capitalized together with further exploration costs. We capitalize mine development costs as from the time we actually begin such development.

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(f)  Available-for-sale equity securities
   
  Equity securities classified as “available-for-sale” are recorded in accordance with SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities”. Accordingly, we exclude unrealized holding gains and losses, net of taxes, if applicable, from income and recognize them as a separate component of stockholders’ equity until realized.
   
(g)  Revenues and expenses
   
  Revenues are recognized when title has transferred to the customer or services are rendered. Expenses and costs are recognized on the accrual basis. Revenue from exported products is recognized when such products are loaded on board the ship. Revenue from products sold in the domestic market is recognized when delivery is made to the customer. Revenue from transportation services, other than shipping operations, is recognized when the service order has been fulfilled. Shipping operations are recorded on the completed voyage basis and net revenue, costs and expenses of voyages not completed at period-end are deferred. Anticipated losses on voyages are provided when probable and can be reasonably estimated.
   
(h)  Environmental and site reclamation and restoration costs
   
  Expenditures relating to ongoing compliance with environmental regulations are charged against earnings or capitalized as appropriate. These ongoing programs are designed to minimize the environmental impact of our activities. With respect to our two major iron ore mines at Itabira and Carajás, which have extensive remaining reserves, liabilities for final site reclamation and restoration costs will be recorded when the respective reclamation and restoration strategies can be reasonably determined and the related costs can be reasonably estimated.
   
(i) Compensated absences
   
  We fully accrue the future employees compensation liability for vacations vested during the year.
   
(j) Income taxes
   
  In accordance with SFAS 109 - “Accounting for Income Taxes”, the deferred tax effects of temporary differences have been recognized in the consolidated financial statements. A valuation allowance is made when we believe that it is more likely than not that tax assets will not be fully recoverable in the future.
   
(k) Statement of cash flows
   
  Cash flows relating to overnight financing and investment are reported net. Short-term investments that have a ready market and maturity to us, when purchased, of 90 days or less are considered cash equivalents.
   
(l) Earnings per share
   
  Earnings per share are computed by dividing net income by the weighted average number of common and preferred shares outstanding during the period.
   
(m) Interest attributed to stockholders
   
  As from January 1, 1996 Brazilian corporations are permitted to attribute interest on stockholders’ equity. The calculation is based on the stockholders’ equity amounts as stated in the statutory accounting records and the interest rate applied may not exceed the long-term interest rate (TJLP) determined by the Brazilian Central Bank. Also, such interest may not exceed the greater of 50% of net income for the year or 50% of retained earnings plus revenue reserves.
   
  The amount of interest attributed to stockholders is deductible for income tax purposes. Accordingly, the benefit to us, as opposed to making a dividend payment, is a reduction in our income tax charge equivalent to the statutory tax rate applied to such amount. Income tax is withheld from the stockholders relative to interest at the rate of 15%, except for interest due to the Brazilian Government which is exempt from tax withholdings.
   
  We have opted to pay such tax-deductible interest to our stockholders and have therefore accrued the amounts due as of December 31, 2002 , 2001 and 2000, with a direct charge to stockholders' equity.
   
  Under Brazilian law interest attributable to stockholders is considered as part of the annual minimum dividend (See Note 13). Accordingly such distributions are treated as dividends for accounting purposes.
   

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(n) Derivatives and hedging activities
   
  As of January 1, 2001 we adopted SFAS 133 - "Accounting for Derivative Financial Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138. Those standards require that we recognize all derivative financial instruments as either assets or liabilities on our balance sheet and measure such instruments at fair value. Changes in the fair value of derivatives are recorded in each period in current earnings or in other comprehensive income, in the later case depending on whether a transaction is designated as an effective hedge.
   
  The transition adjustment relating to the fair value of derivatives existing as of December 31, 2000 is recorded as a charge of $8 in our statement of income for the year ended December 31, 2001. In view of the immateriality of this effect of a change in accounting principle the corresponding amount was included with other non-operating expenses. Certain of our affiliated companies and joint ventures also recorded similar charges, of which our portion of $4 is included in the caption "Equity in results of affiliates and joint ventures" in the statement of income.
   
  Further information about our derivatives and hedging activities is included in Note 19.
   
(o) Comprehensive income
   
  We have disclosed comprehensive income as part of the Statement of Changes in Stockholders’ Equity, in compliance with SFAS 130 – “Reporting Comprehensive Income”.
   
(p) Recently-issued accounting pronouncements
   
  In June 2001 and August 2001, respectively, the FASB issued SFAS 143 - "Accounting for Asset Retirement Obligations" and SFAS 144 - "Accounting for the Impairment or Disposal of Long-Lived Assets" . SFAS 143 is effective for us as from January 1, 2003 and we are still studying the potential effects that adoption may have on our financial statements.
   
  In June 2002, FASB has issued SFAS 146 - "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We believe that the adoption of SFAS 146, will not have significant impact on our financial position or results of operations.
   
  In November 2002 the FASB issued FIN 45 - "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosure requirements in the Interpretation, applicable at December 31, 2002 are disclosed in Note 15. We are studying the effect that adoption of the accounting requirements of FIN 45 will have on our financial statements.
   
(q) Reclassification
   
  Certain reclassifications have been made to the financial statements for 2001 and 2000 to make them comparable with the 2002 presentation.
   

 

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3     Our privatization
 
In May 1997, we were privatized by the Brazilian Government, which transferred voting control to Valepar S.A. (“Valepar”). The Brazilian Government has retained certain rights with respect to our future decisions and those of Valepar and has also caused us to enter into agreements which may affect our activities and results of operations in the future. These rights and agreements are:
     
     Preferred Special Share. The Brazilian Government holds a preferred special share of CVRD which confers upon it permanent veto rights over changes in our (i) name, (ii) headquarters location, (iii) corporate purpose with respect to mineral exploration, (iv) continued operation of our integrated iron ore mining systems and (v) certain other matters. 
     
     Preferred Class A Share of Valepar. The Brazilian Government holds a preferred class A share of Valepar which confers upon it approval rights for a period of five years in respect of (i) concentration of ownership of Valepar by particular types of investors in excess of prescribed limitations and (ii) changes in the Valepar holding company structure relating to ownership of our common shares.
     
     Shareholder revenue interests. On July 7, 1997, we issued to shareholders of record on April 18, 1997 (including the Brazilian Government) revenue interests providing holders thereof with the right to receive semi-annual payments based on a percentage of our net revenues above threshold production volumes from identified mining resources. These instruments are not secured by the corresponding mineral reserves and deposits.
 
In addition to the preferred special share mentioned above, the National Treasury and the Banco Nacional de Desenvolvimento Econômico e Social – BNDES, the Government – owned development bank, together held 32% of our common shares and 4% of our preferred shares, which in aggregate represented 22% of our total capital at December 31, 2001. These common shares were sold through a public offering in Brazil and abroad which was completed on March 27, 2002.
 
4     Major acquisitions and disposals during the years presented
 
We made the following acquisitions during the periods presented. Pro forma information with respect to results of operations is not presented since the effects are not considered material to an understanding of our consolidated financial statements, except with respect to our acquisition of the control of Alunorte in June 2002 (see Note 4 (h)).
 
(a) On May 11, 2000, we acquired the entire capital of Mineração SOCOIMEX S.A., a non-public company whose main activity is production and commercialization of iron ore, for the total price of $55, being an initial cash payment of $47 and two further cash payments of $3 and $5, in 2001 and 2002, respectively. The increment of the fair value over the book value of SOCOIMEX at the date of purchase was entirely attributable to its mineral reserves, which are included in the property, plant and equipment. In August 2000 SOCOIMEX was merged into CVRD.
 
(b) On May 30, 2000, we became the controlling shareholder of S.A. Mineração Trinidad – SAMITRI, through the acquisition of 79.27% of the voting capital and 63.06% of the total capital for $520 in cash. At the date of the purchase, SAMITRI was a publicly listed Brazilian iron ore mining company, which also owned a 51% interest in the voting capital of SAMARCO Mineração S.A., a large iron ore pellets producer (see Note 10). On June 29, 2000, we sold 1% of the voting capital of SAMARCO to BHP Brasil Ltda. (BHP), a subsidiary of The Broken Hill Proprietary Company Limited of Australia, for $8, to equalize our shareholdings in the joint venture.

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(c) The assets and liabilities acquired as a result of the above transactions and corresponding goodwill were as follows:

 

      Consolidated Subsidiaries  
     
 
  Unconsolidated          
  joint venture          
  SAMARCO   SAMITRI   SOCOIMEX  
 
 
 
 
Fair value of assets 1,006   293   77  
Fair value of liabilities (450 ) (144 ) (22 )
 
 
 
 
Net assets at fair value 556   149   55  
 
 
 
 
Interest acquired 50.00 % 63.06 % 100.00 %
Fair value of net assets acquired 278   94   55  
Attributable to minority stockholders of SAMITRI (36.94%) (103 )    
Tax benefits 31      
 
 
 
 
Effective interest acquired 206   94   55  
Purchase price 252   268   55  
 
 
 
 
Goodwill 46   174    
 
 
 
 

  The main assets for which fair values differ from book values are inventories and property, plant and equipment. We determined the fair values of inventories based on the current replacement costs for raw materials and the estimated selling prices for finished goods, net of disposal costs and a selling margin. The fair values of property, plant and equipment were determined based on current replacement costs for similar capacity and the estimated market value of purchased reserves. Deferred taxes were recorded for the differences between fair values and tax bases.
   
  For SAMARCO, SAMITRI and SOCOIMEX inventories were valued at $36, $38 and $9, respectively, property, plant and equipment were valued at $830, $161 and $58, respectively, and the deferred tax liability was $60, $49 and $15, respectively.
   
  We had adopted a policy to amortize the goodwill on the SAMITRI and SAMARCO purchases on the straight-line basis over a period of 6 years, starting on the date of acquisition. However, as explained in Note 2 (c), upon adoption of SFAS 142 on January 1, 2002 such straight-line amortization ceased.
   
(d) On September 22, 2000 we increased our ownership of SAMITRI, via public tender to 99.25% of the voting capital and 99.19% of the total capital. The cash cost of this purchase was $180 and resulted in additional goodwill of $27, all attributed to SAMARCO.
   
(e) In October 2000, we acquired 50% of Gulf Industrial Investment Company (GIIC), a pelletizing company located in Bahrain, for $91, including goodwill of $20, now totally amortized.
   
(f) On April 27, 2001 we acquired 100% of Ferteco Mineração S.A. - FERTECO, a non-public company whose main activity is production and commercialization of iron ore and pellets, for $523 in cash.
   
  The assets and liabilities acquired and corresponding goodwill were as follows:
   

 

Fair value of assets 401  
Fair value of liabilities (251 )
 
 
Net assets at fair value 150  
Purchase price 523  
 
 
Goodwill 373  
 
 

For FERTECO inventories were valued at $57, property, plant and equipment were valued at $178, and the deferred tax liability was $24.

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(g)  In December 2001, acting through our wholly-owned foreign subsidiary Itabira Rio Doce Company Ltd. - ITACO, we acquired 659,375,000 common shares of Caemi Mineração e Metalurgia S.A. (Caemi), corresponding to 16.82% of its total capital and 50% of its voting capital from Cayman Iron Ore Investment Co., Ltd., a wholly-owned subsidiary of Mitsui & Co., Ltd. (MITSUI) for US$ 279. Caemi is a Brazilian company headquartered in Rio de Janeiro, which operates in the iron ore, kaolin, refractory bauxite and railroad sectors and is accounted for as an equity investee.

This acquisition was approved by the European Commission subject to the commitment for Caemi to sell its equity investment in Quebec Cartier Mining Company (QCM), a Canadian producer of iron ore and pellets.

CVRD and Mitsui, each of which holds 50% of Caemi's common shares, entered into a shareholder agreement requiring both shareholders to approve all major decisions affecting Caemi.

The estimated net assets and corresponding goodwill were as follows:

  December 31, 2001  
 
 
Estimated fair value of assets 1,127  
Estimated fair value of liabilities (734 )
 
 
Net assets at fair value 393  
Interest in total capital acquired 16.82 %
Estimated fair value of net assets acquired 66  
Purchase price 279  
 
 
Goodwill 213  
 
 

 

(h)  On June 27, 2002 we acquired a further 12.62% of the capital of ALUNORTE for $42, increasing our participation to 57.03% (represented by 62.09% of total common stock and 19.05% of total preferred stock). ALUNORTE has been consolidated as from this date.

Unaudited pro forma information with respect to the effect on our consolidated statement of income, reflecting the consolidation of ALUNORTE as if control has been acquired as at January 1, 2001 is as follows:

          2002           2001  
 
 
 
   CVRD
Consolidated
   Pre-
acquisition
ALUNORTE
    Pro Forma
(unaudited)
    CVRD
Consolidated
     ALUNORTE    Pro Forma
(unaudited)
 
 
 
 
 
 
 
Net operating revenues 4,113   138   4,251   3,935   294   4,229  
Operating costs and expenses (2,684 ) (151 ) (2,835 ) (2,973 ) (219 ) (3,192 )
 
 
 
 
 
 
 
Operating income 1,429   (13 ) 1,416   962   75   1,037  
Non-operating income (expenses) (828 ) (38 ) (866 ) 158   (83 ) 75  
 
 
 
 
 
 
 
Income before income taxes, equity results
and minority interests
 601     (51  )  550     1,120     (8  )  1,112   
Income taxes 149     149   218   (5 ) 213  
Equity in results of affiliates and joint ventures
(28 ) 23   (5 ) (49 ) 7   (42 )
Change in provision for losses on equity investments
(59 )   (59 ) (4 )   (4 )
Minority interests 17   28   45   2     2  
 
 
 
 
 
 
 
Net income 680     680   1,287   (6 ) 1,281  
 
 
 
 
 
 
 
   
(i)  On January 14, 2000 we sold 20.81% of the capital of Alumina do Norte do Brasil S.A.- ALUNORTE and a beneficial interest in 8% of the capital of Mineração Rio do Norte S.A. - MRN owned by us for an aggregate of $164, resulting in a gain of $54. The total consideration of $164 was received in cash; however, $120 was received through the issue and sale of Perpetual Notes with a fair value of $55 and this fair value continues to be reported as a liability and periodically adjusted based on an early termination formula reflecting the underlying profitability of MRN.
   
(j) On March 9, 2001 we transferred our 10.33% interest in Companhia Siderúrgica Nacional - CSN to VALIA, as a special pension plan contribution, for $249 (fair market value determined based on the weighted average price of the last thirty trading sessions at the São Paulo stock exchange in the period ended on March 9, 2001). This transfer resulted in a gain of $107. We have provided VALIA with a guarantee that we will make additional contributions to the pension plan if the market value of the CSN shares falls below threshold levels prior to the sale thereof by VALIA. At December 31, 2002 we have provided $5 in respect of this commitment.

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(k) On April 27, 2001 we concluded the sale of our 32.00% interest in Bahia Sul Celulose S.A. - BSC for $318, received in cash on May 7, 2001. This operation resulted in a gain of $170.
   
(l)  On June 6, 2001 we concluded the sale of our 51.48% interest in Celulose Nipo-Brasileira S.A. - CENIBRA for $671, received in cash on September 14, 2001. This operation resulted in a gain of $507.
   
5 Income taxes
   
  Income taxes in Brazil comprise federal income tax and social contribution, which is an additional federal tax. The statutory enacted tax rates applicable in the periods presented are as follows:
       
  Year ended December 31 - %  
   
 
    2002   2001   2000  
   
 
 
 
Federal income tax   25   25   25  
Social contribution   9   9   12 to 9  
   
 
 
 
Composite tax rate   34   34   37 to 34  
   
 
 
 
               

The amount reported as income tax benefit in our consolidated financial statements is reconciled to the statutory rates as follows:

    Year ended December 31  
   
 
    2002   2001   2000  
   
 
 
 
Income before income taxes, equity results and minority interests   601   1,120   731  
   
 
 
 
Federal income tax and social contribution expense at statutory enacted rates   (204 ) (381 ) (249 )
Adjustments to derive effective tax rate:              
   Tax benefit on interest attributed to stockholders   99   260   222  
   Exempt foreign income   196   226   69  
   Tax-deductible goodwill in business combination   20   58   -  
   Tax effect related to provision for losses and write-downs   29   59   -  
   Tax incentives   4   26   31  
   Valuation allowance reversal (provision)   (12 ) (44 ) (51 )
   Other non-taxable gains   17   14   10  
   
 
 
 
Federal income tax and social contribution benefit in consolidated
statements of income
. 149   218   32  
   
 
 
 

We have certain tax incentives relative to our iron ore and manganese operations in Carajás and others from gold and potash operations. The incentives comprise full income tax exemption on defined production levels up to 2005 and partial exemption up to 2013. An amount equal to the tax saving must be appropriated to a reserve account within stockholders’ equity (Note 13) and may not be distributed in the form of cash dividends.

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The major components of the deferred tax accounts in the balance sheet are as follows:

 
As of December 31
 
 
 
  2002   2001  
 
 
 
Net current deferred tax assets        
Accrued expenses deductible only when disbursed 211   265  
 
 
 
  211   265  
 
 
 
Long-term deferred tax assets and liabilities        
Assets        
Deferred tax relative to temporary differences 5   18  
Tax-deductible goodwill in business combinations 66   134  
Related to provision for losses and write-downs of investments 158   120  
Additional retirement benefits provision 47   58  
Tax loss carryforwards 187   220  
Other temporary differences (in 2002 including $94 of Alunorte) 211   21  
 
 
 
  674   571  
 
 
 
Liabilities        
Inflationary income (21 ) (25 )
Prepaid retirement benefit (27 ) (34 )
Fair value adjustments in business combinations (38 ) (72 )
 
 
 
  (86 ) (131 )
 
 
 
Valuation allowance        
Beginning balance (213 ) (201 )
Translation adjustments 73   32  
Additions (in 2002 including $92 of Alunorte) (118 ) (44 )
Reversals 28   -  
 
 
 
Ending balance (230 ) (213 )
 
 
 
Net long-term deferred tax assets 358   227  
 
 
 

6     Cash and cash equivalents

  As of December 31  
 
 
  2002   2001  
 
 
 
         
Cash 51   22  
Deposits in local currency 220   76  
Deposits in United States dollars 820   1,019  
 
 
 
  1,091   1,117  
 
 
 

7     Accounts receivable

  As of December 31  
 
 
  2002   2001  
 
 
 
Customers        
   Domestic 189   170  
   Export, all denominated in United States dollars 525   408  
 
 
 
  714   578  
Allowance for doubtful accounts (26 ) (21 )
Allowance for ore weight credits (28 ) (8 )
Total 660   549  
 
 
 

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Accounts receivable from customers in the steel industry amount to 28.3% and 16.3% of domestic receivables (export receivables – 91.5% and 78.8%) at December 31, 2002 and 2001, respectively.

No single customer accounted for more than 10% of total revenues in any of the years presented.

8     Inventories

  As of December 31  
 
 
  2002   2001  
 
 
 
Finished products        
   Iron ore 86   110  
   Gold 2   5  
   Manganese 24   27  
   Ferrous alloys 27   28  
   Alumina 15      
   Others 10   16  
Spare parts and maintenance supplies 128   137  
 
 
 
  292   323  
 
 
 

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9  Property, plant and equipment
   
a)  Per business area:
   
      As of December 31, 2002       As of December 31, 2001  
 
 
 
  Cost   Accumulated
depreciation
  Net   Cost   Accumulated
depreciation
  Net  
 
 
 
 
 
 
 
                         
Ferrous                        
   Ferrous - Southern System                        
      Mining 728   318   410   1,000   460   540  
      Railroads 646   308   338   935   463   472  
      Marine terminals 99   60   39   194   92   102  
 
 
 
 
 
 
 
  1,473   686   787   2,129   1,015   1,114  
   Ferrous - Northern System                        
      Mining 483   208   275   733   308   425  
      Railroads 727   292   435   1,075   408   667  
      Marine terminals 139   65   74   202   97   105  
 
 
 
 
 
 
 
  1,349   565   784   2,010   813   1,197  
                         
      Pelletizing 283   76   207   198   108   90  
      Ferrous-alloys 171   96   75   206   106   100  
      Energy 58   6   52   82   6   76  
      Construction in progress 406     406   569     569  
 
 
 
 
 
 
 
  3,740   1,429   2,311   5,194   2,048   3,146  
 
 
 
 
 
 
 
Non-Ferrous                        
      Potash 39   15   24   50   17   33  
      Gold 119   100   19   256   167   89  
      Kaolin 71   17   54   96   21   75  
      Research and projects 63   48   15   17   9   8  
      Construction in progress 288     288   35     35  
 
 
 
 
 
 
 
  580   180   400   454   214   240  
 
 
 
 
 
 
 
Logistics                        
      General cargo 232   109   123   353   179   174  
      Maritime transportation 10   8   2   238   130   108  
      Construction in progress 19       19   23     23  
 
 
 
 
 
 
 
  261   117   144   614   309   305  
 
 
 
 
 
 
 
Holdings                        
      Aluminium 248   55   193        
      Others 12   2   10   72   20   52  
      Construction in progress 204     204   45     45  
 
 
 
 
 
 
 
  464   57   407   117   20   97  
 
 
 
 
 
 
 
Corporate Center                        
      Corporate 35   13   22   40   17   23  
      Construction in progress 13     13   2     2  
 
 
 
 
 
 
 
  48   13   35   42   17   25  
 
 
 
 
 
 
 
Total 5,093   1,796   3,297   6,421   2,608   3,813  
 
 
 
 
 
 
 
   
b) Per type of assets:
   
      As of December 31, 2002       As of December 31, 2001  
     
     
 
    Cost    Accumulated
depreciation
    Net     Cost    Accumulated
depreciation
    Net   
 
 
 
 
 
 
 
Land and buildings 489   188   301   678   255   423  
Installations 1,448   590   858   1,470   775   695  
Equipment 391   196   195   673   306   367  
Ships 8   5   3   235   127   108  
Railroads 1,258   568   690   1,675   729   946  
Mine development costs 193   53   140   302   77   225  
Others 376   196   180   714   339   375  
 
 
 
 
 
 
 
  4,163   1,796   2,367   5,747   2,608   3,139  
Construction in progress 930     930   674     674  
 
 
 
 
 
 
 
Total 5,093   1,796   3,297   6,421   2,608   3,813  
 
 
 
 
 
 
 
                         

Losses on disposals of property, plant and equipment totaled $62, $79 and $47 in 2002, 2001 and 2000, respectively. Disposals mainly relate to impairment of gold mines, sales of ships and trucks, locomotives and other equipment which were replaced in the normal course of business.

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In 2002 we sold certain forestry assets of our subsidiary Florestas Rio Doce S.A. for $59 and recorded a gain on this sale of $49.
   
(c)   Hydroelectric projectsWe participate in several jointly-owned hydroelectric plants, already in operation or under construction. We have an undivided interest in these plants and are responsible for our proportionate share of the costs of construction and operation and are entitled to our proportionate share of the energy produced.
 
  The situation of these projects at December 31, 2002 is as follows:
 
Project
Date of
completion /
expected
completion
Our
interest
%
    
Plant in
service
    
Our
share of
plant in
service
    
Accumulated
depreciation
    
Plant under
construction
Our share
of plant
under
construction
 



 
 
 
 
 
 
                           
Igarapava September, 1999 38.1   110   42   5      
Porto Estrela November, 2001 33.3   48   16   1      
Funil January, 2003 51.0         65   33  
Candonga November, 2003 50.0         38   19  
Aimorés December, 2003 51.0         94   48  
Capim Branco I February, 2006 48.4         2   1  
Capim Branco II June, 2006 48.4         4   2  
Foz do Chapecó July, 2007 40.0         3   1  
Santa Isabel August, 2007 43.9            
Estreito July, 2007 30.0            

Income and expenses relating to operating plants are not material.

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10     Investments

                              As of December 31  
 














 
              2002   Investments       Equity Adjustments  
 
 
 
 
 
Participation in
capital (%)
 
(1)Net
equity
 
(1)Net
income
(loss) for
the year
  2002   2001   2002   2001   2000  
 
 
 
 
 
 
 
 
 
Investments in affiliated companies and joint ventures
voting   total                              
 
 
                             
Steel                                    
Usinas Siderúrgicas de Minas Gerais S.A - USIMINAS (2)
22.99   11.46   -   (131 ) -   32   (15 ) -   7  
Companhia Siderúrgica Nacional - CSN (3)
                9   13  
Companhia Siderúrgica de Tubarão - CST (4)
20.51   22.85   118   84   27   18   19   (1 ) 22  
California Steel Industries Inc. - CSI
50.00   50.00   213   37   107   98   19   (3 ) 17  
                                     
Paper and pulp
                                   
Celulose Nipo-Brasileira S.A. - CENIBRA (3)
              9   66  
Bahia-Sul Celulose S.A - BSC (3)
              2   42  
                                     
Aluminum and bauxite
                                   
Mineração Rio do Norte S.A. - MRN
40.00   40.00   405   94   162   154   38   32   36  
Valesul Alumínio S.A. -VALESUL
54.51   54.51   72   25   39   51   14   11   12  
Alumina do Norte do Brasil S.A. - ALUNORTE (6)
62.09   57.03     (51 )   89   (23 ) (6 ) 11  
                                     
Iron ore and pellets
                                   
Caemi Mineração e Metalurgia S.A. (7)
50.00   16.85   457   (83 ) 77   289   (100 )    
Companhia Nipo-Brasileira de Pelotização - NIBRASCO
51.11   51.00   23   7   12   16   4   (2 ) 11  
Companhia Hispano-Brasileira de Pelotização - HISPANOBRÁS
51.00   50.89   27   10   14   18   5   5   9  
Companhia Coreano Brasileira de Pelotização - KOBRASCO
50.00   50.00     (31 )   2   (2 ) (8 ) 2  
Companhia Ítalo-Brasileira de Pelotização - ITABRASCO
51.00   50.90   17   9   9   13   5   4   7  
Gulf Industrial Investment Company - GIIC
50.00   50.00   73   10   37   38   5   (17 ) 1  
SAMARCO Mineração S.A.
50.00   50.00   307   56   184   258   28   11   8  
                                     
Others                                    
Fertilizantes Fosfatados S.A. - FOSFERTIL (5)
10.96   11.12   227   73   25   29   8   5   5  
Salobo Metais S.A (6)
100.00   100.00         22        
Ferrovia Centro-Atlântica S.A - FCA
20.00   45.65             (95 ) (30 )
Others (8)
        35   84   (33 ) (5 ) 21  
                 
 
 
 
 
 
                  728   1,211   (28 ) (49 ) 260  
Investments at cost
                                   
SIDERAR (market value $30 in 2002 - $11 in 2001)
4.85   4.85       30   15        
Unrealized holding gains on equity security
          (4 )      
Others
        1   5        
                 
 
 
 
 
 
                  759   1,227   (28 ) (49 ) 260  
                 
 
 
 
 
 
Change in provision for losses on equity investments:
                                   
Alumínio Brasileiro S.A. - ALBRAS
                        10   4   66  
Companhia Ferroviária do Nordeste
                          (3 ) (8 ) (4 )
Companhia Coreano Brasileira de Pelotização - KOBRASCO
                        (14 )    
Ferroban
                        (1 )    
Ferrovia Centro-Atlântica S.A. - FCA
                          (42 )    
MRS Logística S.A
                            (7 )    
CSN Aceros
                            (2 )    
                             
 
 
 
                              (59 ) (4 ) 62  
                             
 
 
 
Total                             (87 ) (53 ) 322  
                             
 
 
 
(1) Based on US GAAP financial information.
(2) Value based on quoted market price at December 31, 2002 is $ 46 compared to net book value of $ 0.
(3) Investments sold in 2001.
(4) Value based on quoted market price at December 31, 2002 is $ 130 compared to net book value of $ 27.
(5) Value based on quoted market price at December 31, 2002 is $ 33 compared to net book value of $ 25.
(6) Alunorte and Salobo Metais S.A. are consolidated at December 31, 2002, after aquisition of control.
(7) Value based on quoted market price at December 31, 2002 is $ 97 compared to net book value of $ 77, equity adjustment for 2002 also includes $ 86 of goodwill writte-off as at September 30, 2002.
(8) Includes losses of MRS Logística in 2002 and related equity adjustments of $ 20.

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Goodwill included in the above investments is as follows:

  As of December 31  
 
 
Investee
2002   2001  


 
 
Alumina do Norte do Brasil S.A. - ALUNORTE   24  
SAMARCO Mineraç ã o S.A 30   41  
Caemi Mineraç ã o e Metalurgia S.A   223  
 
 
 
  30   288  
 
 
 

Based on our revised expectation for profitability and other economic facts, we fully amortized the remaining goodwill relative to FCA and GIIC in 2001. The goodwill relative to Caemi was written-off in September 2002 because the quoted market value for this investment was lower than our acquisition cost over the whole nine-month period to that date.

Information with respect to other major affiliates’ financial position and results of operations is as follows:

  ALUNORTE   ALBRAS       MRN  
 
    
 
            As of December 31  
   June 30,2002          
 
    2001   2002   2001   2002   2001  
 
 
 
 
 
 
 
Balance Sheet                        
   Current assets 85   159   158   158   51   55  
   Noncurrent assets 497   509   370   510   504   425  
   Current liabilities (84 ) (95 ) (197 ) (219 ) (45 ) (35 )
   Noncurrent liabilities (413 ) (431 ) (333 ) (463 ) (105 ) (59 )
 
 
 
 
 
 
 
   Stockholders´ equity 85   142   (2 ) (14 ) 405   386  
 
 
 
 
 
 
 
Our participation 57,58 % 45,58 % 51,00 % 51,00 % 40,00 % 40,00 %
 
 
 
 
 
 
 
Investments 49   65   (1 ) (7 ) 162   154  
 
 
 
 
 
 
 
                              
               Year ended December 31            
      ALUNORTE       ALBRAS           MRN  
     
     
         
 
  2002 (*) 2001   2000   2002   2001   2000   2002   2001   2000  
 
 
 
 
 
 
 
 
 
 
Statement of Operations                                    
   Net sales 138   294   322   529   472   551   173   211   217  
   Costs and expenses (189 ) (302 ) (327 ) (561 ) (429 ) (452 ) (68 ) (121 ) (109 )
   Income (loss) before income taxes (51 ) (8 ) (5 ) (32 ) 43   99   105   90   108  
   Income taxes   (5 ) 28   52   (35 ) 30   (11 ) (9 ) (17 )
 
 
 
 
 
 
 
 
 
 
   Net income (loss) (51 ) (13 ) 23   20   8   129   94   81   91  
 
 
 
 
 
 
 
 
 
 
Our participation 44,96 % 45,58 % 49,29 % 51,00 % 51,00 % 51,00 % 40,00 % 40,00 % 40,00 %
Participation in results (23 ) (6 ) 11   10   4   66   38   32   36  
Change in provision for losses       (10 ) (4 ) (66 )      
 
 
 
 
 
 
 
 
 
 
Equity adjustments (23 ) (6 ) 11         38   32   36  
 
 
 
 
 
 
 
 
 
 

(*) Six months ended June 30.

The financial position and results of operations of our affiliates in the steel sector are no longer significant to our consolidated financial statements.

The provision for losses on equity investments of $27 and $9 at December 31, 2002 and 2001, respectively, relates to our investments in affiliates which have reported negative stockholders’ equity in their financial statements prepared in accordance with US GAAP and in circumstances where we have assumed commitments to fund our share of the accumulated losses, if necessary, through additional capital contributions or other means. Accordingly we (a) first reduce the value of the investment to zero and (b) subsequently provide for our portion of negative equity. The provision is comprised as follows:

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     Cia
Coreano-
Brasileira de
Pelotização
      Ferrovia
Centro-
Atlântica
      Cia
Ferroviária

do Nordeste
        ALBRAS         Others         TOTAL  
 
 
 
 
 
 
 
Provision at January 1, 2001     (6 ) (15 )   (21 )
Change in provision - results     (8 ) 4     (4 )
 
 
 
 
 
 
 
      (14 ) (11 )   (25 )
Payment of capital     10       10  
Translation adjustment     2   4     6  
 
 
 
 
 
 
 
Provision at December 31, 2001     (2 ) (7 )   (9 )
Additional loss provision (14 ) (42 ) (3 ) 10   (10 ) (59 )
 
 
 
 
 
 
 
  (14 ) (42 ) (5 ) 3   (10 ) (68 )
Payment of capital   42   5       47  
Translation adjustment (2 )     (4 )   (6 )
 
 
 
 
 
 
 
Provision at December 31, 2002 (16 )     (1 ) (10 ) (27 )
 
 
 
 
 
 
 
                         
Our participation in ALUNORTE (45.58% at December 31, 2001) changed several times during the periods presented, but we did not consolidate the financial statements of this investee due to the expected temporary nature of our increased holding (until we acquired control in June 2002).
                         
Movements on the investment account and related provision up to June 2002 are as follows:

     Total shares of
ALUNORTE
(in thousands)
     ALUNORTE
shares owned
by CVRD
(in thousands)
        Investment         Goodwill         Provision      Net     
   
 
 
 
 
 
 
Balance December 31, 1999   598,184   443,033   27   78     105  
Sale of participation in January 2000   598,184   (124,491 ) (7 ) (48 )   (55 )
 
Changes in participation-subscriptions by
other shareholders
 
              19              19   
Capital call   673,494   13,437   5       5  
Participation in 2000 net income       11       11  
Translation adjustment       (5 )     (5 )
       
 
 
 
 
 
Balance December 31, 2000   673,494   331,979   50   30     80  
Capital Call . 885,410   71,542   20       20  
 
Changes in participation-subscriptions by
other shareholders
 
              6              6   
Participation in 2001 net income       (6 )     (6 )
Goodwill amortized         (1 )   (1 )
Translation adjustment       (5 ) (5 )   (10 )
       
 
 
 
 
 
Balance December 31, 2001   885,410   403,521   65   24     89  
       
 
 
 
 
 
Capital Call . 933,817   16,342   9       9  
Purchase of additional participation   933,817   117,876   11   24       35  
 
Changes in participation-subscriptions by
other shareholders
 
              9              9   
Participation in 2002 net income (to June 30, 2002)       (32 )     (32 )
Goodwill amortized              
Translation adjustment       (13 ) (4 )   (17 )
       
 
 
 
 
 
Balance June 30, 2002   933,817   537,739   49   44     93  
       
 
 
 
 
 

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On January 14, 2000 we entered into a structured transaction with an unrelated party to sell both 20.81% of the capital of ALUNORTE and a beneficial interest in 8% of the capital of MRN owned by us for a total of $164, resulting in a net gain to us of $54, recorded in other operating income, as follows:

Book value of 124,491 thousand shares of ALUNORTE sold (7 )
Goodwill amortized (48 )
Book value of beneficial interest in 8% of MRN  
 
 
  (55 )
Cash received by us    
   On transfer of ALUNORTE shares 44  
   On issue and sale of Perpetual Notes 120  
Fair value of Perpetual Notes (55 )
 
 
Gain recognized on the transaction 54  
 
 

The Perpetual Notes are exchangeable for 48 billion preferred shares of the affiliate MRN (initially equivalent to 8% of the total number of shares of MRN owned by us). Interest is payable on the Notes in an amount equal to dividends paid on the underlying preferred shares, relative to periods starting as from the 2000 fiscal year. The Notes may be redeemed at our option or the Noteholders at any time by transfer of the underlying preferred shares to the Noteholders, providing the rights of pre-emption of the existing shareholders of MRN have been waived or have expired. Redemption by transfer of the underlying net assets of MRN is compulsory if certain events occur, including the liquidation or merger of MRN or the transfer of MRN’s asset and liabilities to a consortium formed by its shareholders to take over the operations of MRN. In the event of early termination the Notes may be redeemed, at the option the Noteholders, in lieu of transfer of the shares, for a cash sum equal to $48 plus the net present value of average annual earnings declared and paid by MRN for the three years immediately preceding such termination multiplied by 20 and discounted by 10% per year. This latter amount represents a fair value at December 31, 2002 of $63.

11  Short-term debt
   
  Our short-term borrowings are principally from commercial banks and include import and export financing denominated in United States dollars, as follows:
     
  As of December 31  
 
 
  2002   2001  
 
 
 
Export 163   498  
Import   1  
Working Capital 21   90  
 
 
 
  184   589  
 
 
 

Average annual interest rates on short-term borrowings were 3.97%, 4.96% and 8.18% in 2002, 2001 and 2000, respectively.

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12     Long-term debt

          As of December 31  
 




 
  Current liabilities   Long-Term liabilities  
 
 
 
  2002   2001   2002   2001  
 
 
 
 
 
Foreign debt                
Loans and financing contracted in the following currencies:                
         United States dollars 431   192   1,034   1,104  
         Japanese Yen 1   8   29   27  
         Others 1   2   1   2  
Fixed Rate Notes - US$ denominated 200     600   500  
Export Securitization - US$ denominated 25     275   300  
Perpetual notes     63   55  
Accrued charges 20   25      
 
 
 
 
 
  678   227   2,002   1,988  
 
 
 
 
 
                 
Local debt                
Indexed by Long-Term Interest Rate - TJLP 8   28   22   9  
      Indexed by General Price Index-Market (IGPM) 14   21   85   31  
      Basket of currencies 13   15   32   39  
      Shareholders revenue interests (Note 3)     3   3  
      Indexed by U.S. dollars 1   4   215   100  
      Accrued charges 3   1      
 
 
 
 
 
  39   69   357   182  
 
 
 
 
 
Total 717   296   2,359   2,170  
 
 
 
 
 

The long-term portion at December 31, 2002 becomes due in the following years:

   2004 819  
   2005 404  
   2006 299  
   2007 443  
   2008 and thereafter 331  
   No due date (Perpetual notes and shareholders revenue interest) 63  
 
 
  2,359  
 
 
     
At December 31, 2002 annual interest rates on long-term debt were as follows:    
     
   Up to 7% 1,682  
   7.1% to 9% 753  
   9.1% to 11% 517  
   Over 11% 61  
   Variable (Perpetual notes) 63  
 
 
  3,076  
 
 

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The indexes applied to debt and respective percentage variations in each year were as follows:

 
2002
 
2001
 
2000
 
 
 
 
 
TJLP - Long-Term
           
          Interest Rate (effective rate)
3.71
 
3.34
 
4.56
 
IGP-M - General Price Index - Market
25.31
 
10.40
 
9.95
 
United States Dollar
52.27
 
18.70
 
9.30
 

Long-term debt at December 31, 2002 is guaranteed or secured as follows:

 
Amount of debt
 
 
 
Federal Government guarantee (for which we have provided counter-guarantees)
295  
Third party guarantees
28  
Export receivables (securitization)
300  
Ships
2  

On March 8, 2002 our wholly-owned subsidiary, Vale Overseas Limited, issued $300 of 8.625% Enhanced Guaranteed Notes due March 8, 2007, unconditionally guaranteed by us.

13     Stockholders' equity

Each holder of common and preferred class A stock is entitled to one vote for each share on all matters that come before a stockholders' meeting, except for the election of the Board of Directors, which is restricted to the holders of common stock. As described in Note 3, the Brazilian Government holds a preferred special share which confers on it permanent veto rights over certain matters.

As of December 31, 2002, we had acquired 4,719,651 shares to be held in treasury for subsequent disposal or cancellation at an average weighted unit cost of R$27.80 (minimum cost of R$20.07 and maximum of R$52.09).

Both common and preferred stockholders are entitled to receive a dividend of at least 25% of annual net income, upon approval at the annual stockholders’ meeting. In the case of preferred stockholders, this dividend cannot be less than 6% of the preferred capital as stated in the statutory accounting records. With respect to each of 2002, 2001 and 2000 we distributed dividends to preferred stockholders in excess of this limit. Interest attributed to stockholders as from January 1, 1996 is considered part of the minimum dividend.

Brazilian law permits the payment of cash dividends only from retained earnings as stated in the statutory accounting records and such payments are made in Reais. At December 31, 2002, we had no undistributed retained earnings. In addition, appropriated retained earnings at December 31, 2002 includes $1,705, related to the unrealized income and expansion reserves, which could be freely transferred to retained earnings and paid as dividends, if approved by the stockholders.

No withholding tax is payable on distribution of profits earned as from January 1, 1996, except for distributions in the form of interest attributed to stockholders as explained in Note 2 (m).

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Brazilian laws and our By-laws require that certain appropriations be made from retained earnings to reserve accounts on an annual basis, all determined in accordance with amounts stated in the statutory accounting records, as detailed below:

     
Year ended December 31
 
 
 
 
2002
 
2001
 
2000
 
 
 
 
 
Appropriated retained earnings
           
   Unrealized income reserve
           
         Balance January 1
548   874   1,062  
      Transfer to retained earnings
(337 ) (326 ) (188 )
 
 
 
 
         Balance December 31
211   548   874  
   Expansion reserve
           
         Balance January 1
1,667   1,546   1,367  
      Transfer from (to) capital stock
  (278 )  
      Transfer from (to) retained earnings
(173 ) 399   179  
 
 
 
 
         Balance December 31
1,494   1,667   1,546  
   Legal reserve
           
         Balance January 1
325   307   284  
      Transfer to retained earnings
(84 ) 18   23  
 
 
 
 
         Balance December 31
241   325   307  
   Fiscal incentive depletion reserve
           
         Balance January 1
649   771   842  
      Transfer to capital stock
(212 )    
      Transfer to retained earnings
(153 ) (122 ) (71 )
 
 
 
 
         Balance December 31
284   649   771  
   Fiscal incentive investment reserve
           
         Balance January 1
23   39   12  
      Transfer to capital stock
(23 ) (33 )  
      Transfer (to) from retained earnings
  17   27  
 
 
 
 
         Balance December 31
  23   39  
 
 
 
 
Total appropriated retained earnings
2,230   3,212   3,537  
 
 
 
 

The purpose and basis of appropriation to such reserves is described below :

  Unrealized income reserve - this represents principally our share of the earnings of affiliates and joint ventures, not yet received in the form of cash dividends.
     
  Expansion reserve - this is a general reserve for expansion of our activities.
     
  Legal reserve - this reserve is a requirement for all Brazilian corporations and represents the appropriation of 5% of annual net income under Brazilian GAAP up to a limit of 20% of capital stock under Brazilian GAAP.
     
  Fiscal incentive depletion reserve - this represents an additional amount relative to mineral reserve depletion equivalent to 20% of the sales price of mining production, which is deductible for tax purposes providing an equivalent amount is transferred from retained earnings to the reserve account. This fiscal incentive expired in 1996.
     
  Fiscal incentive investment reserve - this reserve results from an option to designate a portion of income tax otherwise payable for investment in government approved projects and is recorded in the year following that in which the taxable income was earned. As from 2000, this reserve also contemplates the tax incentives described in Note 5.

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14     Pension plans

Since 1973 we have sponsored a defined benefit pension plan (the “Old Plan”) covering substantially all employees, with benefits based on years of service, salary and social security benefits. This plan is administered by Fundaç ã o Vale do Rio Doce de Seguridade Social – VALIA and was funded by monthly contributions made by us and our employees, calculated based on periodic actuarial appraisals.

In May 2000, we implemented a new pension plan, which is primarily a defined contribution plan with a defined benefit feature relative to service prior to May 2000 (the “New Plan”), and offered our active employees the opportunity of transferring to the New Plan. Over 98% of our active employees opted to transfer to the New Plan. The Old Plan will continue in existence, covering almost exclusively retired participants and their beneficiaries.

The following information details the status of the defined benefit elements of our plans in accordance with SFAS 132 - “Employers’ Disclosure about Pensions and Other Post-retirement Benefits”:

(a)     Change in benefit obligation

  As of  December 31  
 
 
  2002   2001  
 
 
 
Benefit obligation at beginning of year 1,388   1,596  
Service cost 2   2  
Interest cost 120   180  
Benefits paid (94 ) (88 )
Effect of exchange rate changes (288 ) (354 )
Actuarial loss 180   52  
 
 
 
Benefit obligation at end of year 1,308   1,388  
 
 
 

(b)    Change in plan assets

  As of December 31  
 
 
  2002   2001  
 
 
 
Fair value of plan assets at beginning of year 1,374   1,189  
Actual return on plan assets 277   220  
Employer contributions 12   266  
Benefits paid (94 ) (88 )
Effect of exchange rate changes (284 ) (213 )
 
 
 
Fair value of plan assets at end of year 1,285   1,374  
 
 
 

Plan assets at December 31, 2002 include $102 of portfolio investments in our own shares ($83 at December 31, 2001) and $8 of shares of related parties ($12 at December 31, 2001), as well as $387 of Federal Government Securities ($551 at December 31, 2001).

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(c)     Accrued pension cost liability (prepaid pension cost)

  As of  December 31  
 
 
  2002   2001  
 
 
 
Funded status, excess of benefit obligation over plan assets 23   14  
Unrecognized net transitory obligation (65 ) (94 )
Unrecognized net actuarial loss (37 ) (19 )
 
 
 
Accrued pension cost liability (prepaid pension cost) (79 ) (99 )
 
 
 

(d)     Assumptions used in each period (expressed in nominal terms)

  2002   2001  
 
 
 
Discount rate 11.30% p.a   11.30% p.a  
Expected return on plan assets 11.30% p.a   11.30% p.a  
Rate of compensation increase - up to 47 years 6.91% p.a   6.82% p.a.  

Net pension cost includes the following components:

  Year ended December 31  
 
 
  2002   2001   2000  
 
 
 
 
Service cost - benefits earned during the period 2   2   10  
Interest cost on projected benefit obligation 120   180   171  
Actual return on assets (277 ) (220 ) (128 )
Amortization of initial transitory obligation 9   12   15  
Net deferral 157   58   (22 )
 
 
 
 
  11   32   46  
Employee contributions     (5 )
 
 
 
 
Net periodic pension cost 11   32   41  
 
 
 
 

In addition to benefits provided under our pension plan, accruals have been made relative to supplementary benefits extended in previous periods as part of early-retirement programs. Such accruals included in long-term liabilities totaled $141 and $173, at December 31, 2002 and 2001, respectively, plus $23 and $28 in current liabilities.

The cost recognized in the years 2002, 2001 and 2000 relative to the defined contribution element of the New Plan was $5, $5 and $3, respectively.

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15     Commitments and contingencies

(a)  At December 31, 2002, we had extended guarantees for borrowings obtained by affiliates and joint ventures in the amount of $516, of which $405 is denominated in United States dollars and the remaining $111 in local currency, as follow:
   
 Affiliate or Joint Venture Amount of
guarantee
Denominated
currency
 Purpose Final
maturity
Counter guarantees






ALBRAS 302 US$ Debt guarantee 2007 None
  44 R$ Debt guarantee 2010 None
FCA 51 US$ Debt guarantee 2009 None
  62 R$ Debt guarantee 2012 None
KOBRASCO 13 US$ Debt guarantee 2003 None
SEPETIBA TECON 19 US$ Debt guarantee 2005 None
  4 R$ Debt guarantee 2012 None
SAMARCO 14 US$ Debt guarantee 2020 None
VALESUL 1 R$ Debt guarantee 2006 None
NIBRASCO 6 US$ Debt guarantee 2004 Collateral Pledge

We expect no losses to arise as a result of the above guarantees. We have made no charges for extending these guarantees.

(b)  CVRD and its subsidiaries are defendants in numerous legal actions in the normal course of business. Based on the advice of our legal counsel, management believes that the provision made against contingent losses is sufficient to cover probable losses in connection with such actions.
   
  The provision for contingencies and the related judicial deposits are composed as follows:
   
          As of December 31  
 




 
    2002     2001  
 


 


 
   Provision for contingencies    Judicial deposits    Provision for contingencies    Judicial deposits   
 
 
 
 
 
Labor claims 109   52   147   50  
Civil claims 95   32   123   53  
Tax - related actions 220   153   177   131  
Others 4   2   5   1  
 
 
 
 
 
  428   239   452   235  
 
 
 
 
 
Long-term 428   239   452   235  
 
 
 
 
 

Labor-related actions principally comprise employee claims for (i) payment of time spent travelling from their residences to the work-place, (ii) additional payments for alleged dangerous or unhealthy working conditions and (iii) various other matters, often in connection with disputes about the amount of indemnities paid upon dismissal.

Civil actions principally relate to claims made against us by contractors in connection with losses alleged to have been incurred by them as a result of various past government economic plans during which full indexation of contracts for inflation was not permitted.

Tax-related actions principally comprise our challenges of changes in basis of calculation and rates of certain revenue taxes and of the tax on financial movements – CPMF.

We continue to vigorously pursue our interests in all the above actions but recognize that probably we will incur some losses in the final instance, for which we have made provisions.

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Our judicial deposits are made as required by the courts for us to be able to enter or continue a legal action. When judgment is favorable to us, we receive the deposits back; when unfavorable, the deposits are delivered to the prevailing party.

Contingencies settled in the years December 31, 2002, 2001 and 2000 aggregated $178, $6 and, $36 respectively, and additional provisions aggregated $53, $79 and $101 in these years, respectively.

(c) We are defendants in two actions seeking substantial compensatory damages brought by the Municipality of Itabira, State of Minas Gerais, which we believe are without merit. Due to the remote likelihood that any loss will arise therefrom no provision has been made in the financial statements with respect to these two actions.
   
(d)  We are committed under a take-or-pay agreement to take delivery of approximately 207,660 metric tons per year of aluminum from ALBRAS at market prices. This estimate is based on 51% of ALBRAS expected production and, at a market price of $1,348.00 per metric ton at December 31, 2002, represents an annual commitment of $279. Actual take from Albras was $257, $220 and $242 in 2002, 2001 and 2000, respectively.
   
(e) We and BNDES entered into a contract, known as the Mineral Risk Contract, in March 1997, relating to prospecting authorizations for mining regions where drilling and exploration are still in their early stages. The Mineral Risk Contract provides for the joint development of certain unexplored mineral deposits in approximately two million identified hectares of land in the Carajás region, as well as proportional participation in any financial benefits earned from the development of such resources. Iron ore and manganese deposits already identified and subject to development are specifically excluded from the Mineral Risk Contract.

Pursuant to the Mineral Risk Contract, we and BNDES each agreed to provide $205, which represents half of the $410 in expenditures estimated as necessary to complete geological exploration and mineral resource development projects in the region over a period of five years. Under certain circumstances, this period may be extended for an additional two years. We oversee these projects and BNDES advances us half of our costs on a quarterly basis. Under the Mineral Risk Contract, as of December 31, 2002, each of us and BNDES had remaining commitments to contribute an additional $54 toward exploration and development activities. In the event that either of us wishes to conduct further exploration and development after having spent such $205, the contract provides that each party may either choose to match the other party’s contributions, or may choose to have its financial interest proportionally diluted. If a party’s participation in the project is diluted to an amount lower than 40% of the amount invested in connection with exploration and development projects, then the Mineral Risk Contract provides that the diluted party will lose (1) all the rights and benefits provided for in the Mineral Risk Contract and (2) any amount previously contributed to the project.

Under the Mineral Risk Contract, BNDES has agreed to compensate us for our contribution of existing development and ownership rights in the Carajás region through a finder’s fee production royalty on mineral resources that are discovered and placed into production. This finder’s fee is equal to 3.5% of the revenues derived from the sale of gold, silver and platinum group metals and 1.5% of the revenues derived from the sale of other minerals, including copper, except for gold and other minerals discovered at Serra Leste, for which the finder’s fee is equal to 6.5% of revenues.

(f)  At the time of our privatization in 1997, we issued shareholder revenue interests known in Brazil as “debentures” to our then-existing shareholders, including the Brazilian Government. The terms of the “debentures”, which are described below, were set to ensure that our pre-privatization shareholders, including the Brazilian Government, would participate alongside us in potential future financial benefits that we are able to derive from exploiting our mineral resources.

In preparation for the issuance of the debentures, we issued series B preferred shares on a one-for-one basis to all holders of our common shares and series A preferred shares. We then exchanged all of the series B shares for the debentures at par value. The debentures are not redeemable or convertible, and do not trade on a stapled basis or otherwise with our common or preferred shares. During 2002 we registered the debentures with the CVM in order to permit trading.

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Under Brazilian Central Bank regulations, pre-privatization shareholders that held their shares through our preferred share American Depositary Receipt, or ADR, program were not permitted to receive the debentures or any financial benefits relating to the debentures. We sought approval from the Central Bank to distribute the debentures to the ADR holders, but the Central Bank rejected our request. We intend to renew our request to the Central Bank, but we cannot be sure that we will succeed. If the Central Bank does not approve our request, the ADR depositary will not be able to distribute the debentures to the ADR holders and will not be able to sell the debentures. Therefore, unless the Central Bank approves our request, the debentures will not have any value for ADR holders.

Under the terms of the debentures, holders will have the right to receive semi-annual payments equal to an agreed percentage of our net revenues (revenues less value added tax) from certain identified mineral resources that we owned as of May 1997, to the extent that we exceed defined threshold production volumes of these resources, and from the sale of mineral rights that we owned as of May 1997. Our obligation to make payments to the holders will cease when the relevant mineral resources are exhausted at which time we are required to repay the original par value plus accrued interest. Based on current production levels, and estimates for new projects, we expect to start payments referring to copper resources in 2004, to iron ore resources in approximately 2012, and payments related to other mineral resources in later years.

The table below summarizes the amounts we will be required to pay under the debentures based on the net revenues we earn from the identified mineral resources and the sale of mineral rights.

Area   Mineral   Required Payments by CVRD

Southern System   Iron ore   1.8% of net revenue, after total production from May 1997 exceeds 1.7 billion tons.
         
Northern System   Iron ore   1.8% of net revenue, after total production from May 1997 exceeds 1.2 billion tons.
         
Pojuca, Andorinhas, Liberdade and Sossego   Gold and copper   2.5% of net revenue from the beginning of commercial production.
         
Igarapé Bahia and Alemão   Gold and copper   2.5% of net revenue, after total production from the beginning of commercial production exceeds 70 tons of gold.
         
Fazenda Brasileiro   Gold   2.5% of net revenue after total production from the beginning of commercial production exceeds 26 tons.
         
Other areas, excluding Carajás/ Serra Leste   Gold   2.5% of net revenue.
         
Other areas owned as of May 1997   Other minerals   1% of net revenue, 4 years after the beginning of commercial production.
         
All areas   Sale of mineral rights owned as of May 1997   1% of the sales price.
   
(g) At December 31, 2002 we have provided $15 for environmental liabilities. Such provisions relate to site restoration at mines already closed or which are expected to be closed in the next two years.
   
  We use various judgments and assumptions when measuring our environmental liabilities. Changes in circumstances, law or technology may affect our estimates and we periodically review the amounts accrued and adjust them as necessary. Our accruals do not reflect unasserted claims because we are currently not aware of any such issues. Also the amounts provided are not reduced by any potential recoveries under cost sharing, insurance or indemnification arrangements because such recoveries are considered uncertain .

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16 Segment and geographical information
   
  In 1999 we adopted SFAS 131 “Disclosures about Segments of an Enterprise and Related Information” with respect to the information we present about our operating segments. SFAS 131 introduced a “management approach” concept for reporting segment information, whereby financial information is required to be reported on the basis that the top decision-maker uses such information internally for evaluating segment performance and deciding how to allocate resources to segments. Our business segments are currently organized as follows:
   
  Ferrous products comprises iron ore mining and pellet production, as well as the Northern and Southern transportation systems, including railroads, ports and terminals, as they pertain to mining operations. Manganese mining and ferrous alloys are also included in this segment.
   
    Non-ferrous products – comprises the production of gold and other non-ferrous minerals.
   
  Logistics – comprises our transportation systems as they pertain to operation of our ships, ports and railroads for third-party cargoes.
   
    Holdings – divided into the following sub-groups:
     
  Pulp and paper - up to 2001 comprises our forestation activities and investments in joint ventures and affiliates engaged in the manufacture of pulp and paper products. In 2001 we disposed of most of our investments in pulp and paper and no longer consider this as a major business activity.
     
  Aluminum - comprises aluminum trading activities and investments in subsidiaries, joint ventures and affiliates engaged in bauxite mining, alumina refining and aluminum metal smelting.
     
  Steel - comprises our investments in joint ventures and affiliates operating in the steel industry.
     
  Others - comprises our investments in joint ventures and affiliates engaged in other businesses.
   
  In 2002 we started to allocate our Corporate Center costs to segments. Information for 2001 and 2000 has been reclassifed to reflect this same treatment on a comparative basis.
   
  Information presented to top management with respect to the performance of each segment is generally derived directly from the accounting records maintained in accordance with Brazilian corporate law together with certain minor inter-segment allocations.

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Consolidated net income and principal assets are reconciled as follows:

  2002  
 
 
              Holdings          
             
         
  Ferrous   Non
ferrous
  Logistics   (2
Aluminum (1
)
)
Steel   Others   Eliminations   Consolidated  
 
 
 
 
 
 
 
 
 
RESULTS                                
Revenues - Export 4,200   134   41   461   -   -   (1,843 ) 2,993  
Revenues - Domestic 996   95   374   1   -   3   (190 ) 1,279  
Cost and expenses (3,773 ) (215 ) (244 ) (426 ) (22 ) 29   2,033   (2,618 )
Depreciation, depletion and
amortization
(170 ) (25 ) (14 ) (4 ) -   (1 ) -   (214 )
Pension plan (9 ) (1 ) (1 ) -   -   -   -   (11 )
 
 
 
 
 
 
 
 
 
Operating profit 1,244   (12 ) 156   32   (22 ) 31   -   1,429  
Interest revenue 193   1   11   11   3   1   (93 ) 127  
Interest expense (433 ) (6 ) (5 ) (15 ) (9 ) -   93   (375 )
Foreign exchange and
monetary losses, net
(442 ) (36 ) (18 ) (85 ) -   1   -   (580 )
Equity (65 ) -   (83 ) 39   22   -   -   (87 )
Income taxes 145   -   (8 ) 22   -   (10 ) -   149  
Minority interests 2   (6 ) -   21   -   -   -   17  
 
 
 
 
 
 
 
 
 
Net income 644   (59 ) 53   25   (6 ) 23   -   680  
 
 
 
 
 
 
 
 
 
                                 
Sales classified by geographic
destination:
                               
Export market                                
Latin America 392   -   25   95   -   -   (207 ) 305  
United States 340   35   3   78   -   -   (190 ) 266  
Europe 1,800   93   9   276   -   -   (734 ) 1,444  
Middle East 239   -   -   -   -   -   (46 ) 193  
Japan 488   5   1   -   -   -   (228 ) 266  
Asia, other than Japan 941   1   3   12   -   -   (438 ) 519  
 
 
 
 
 
 
 
 
 
  4,200   134   41   461   -   -   (1,843 ) 2,993  
Domestic market 996   95   374   1   -   3   (190 ) 1,279  
 
 
 
 
 
 
 
 
 
  5,196   229   415   462   -   3   (2,033 ) 4,272  
 
 
 
 
 
 
 
 
 
Assets :                                
Property, plant and
equipment, net
2,346   400   144   383   -   24   -   3,297  
Capital expenditures 556   132   1   63   -   14   -   766  
Investments in affiliated companies and joint ventures and other investments, net provision for losses
 395     -     (27  )  201     133     30     -     732   
 
 
 
 
 
 
 
 
 
Capital employed 2,394   119   161   209   21   3   (30 ) 2,877  
                                 
(1) Control of ALUNORTE was acquired in June 2002 and it was consolidated from then.
(2) All operating profit relates to alumina.

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Operating profit by product – after eliminations (unaudited)

     
                2002  
 
 
                                   Asset write-offs,
depreciation, 
depletion and
amortization
                 
   Revenues                
  
   Cost and
expenses
    Net Pension
plan
   Operating
profit
  
 Export   Domestic    Total  
 
 
 
 
 
 
 
 
 
Ferrous                                
Iron ore 1,642   505   2,147   (1,003 ) 1,144   (92 ) (7 ) 1,045  
Pellets 530   143   673   (570 ) 103   (5 ) (2 ) 96  
Manganese 24   12   36   (49 ) (13 ) (6 ) -   (19 )
Ferrous-alloys 176   71   247   (159 ) 88   (5 ) -   83  
 
 
 
 
 
 
 
 
 
  2,372   731   3,103   (1,781 ) 1,322   (108 ) (9 ) 1,205  
Non ferrous                                
Gold 103   -   103   (63 ) 40   (72 ) (1 ) (33 )
Potash -   91   91   (56 ) 35   (4 ) -   31  
Kaolin 31   4   35   (19 ) 16   (2 ) -   14  
 
 
 
 
 
 
 
 
 
  134   95   229   (138 ) 91   (78 ) (1 ) 12  
Aluminum                                
Alumina 159   -   159   (123 ) 36   (4 ) -   32  
Aluminum 279   1   280   (254 ) 26   -   -   26  
Bauxite 23   -   23   (22 ) 1   -   -   1  
 
 
 
 
 
 
 
 
 
  461   1   462   (399 ) 63   (4 ) -   59  
Logistics                                
Railroads -   286   286   (94 ) 192   (67 ) (1 ) 124  
Ports -   107   107   (79 ) 28   (7 ) -   21  
Ships 26   39   65   (79 ) (14 ) (6 ) -   (20 )
 
 
 
 
 
 
 
 
 
  26   432   458   (252 ) 206   (80 ) (1 ) 125  
Others     20   20   (41 ) (21 ) 49       28  
 
 
 
 
 
 
 
 
 
  2,993   1,279   4,272   (2,611 ) 1,661   (221 ) (11 ) 1,429  
 
 
 
 
 
 
 
 
 

OBS.: Cost and expenses include contingency provisions of $53.

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                                  2001  
 
 
                                     
              Holdings          
             


         
  Ferrous   Non
ferrous
  Logistics   Pulp and
paper
  Aluminum   Steel   Others   Eliminations   Consolidated  
 
 
 
 
 
 
 
 
 
 
RESULTS                                    
Revenues - Export 3,558   173   147   47   283   -   -   (1,414 ) 2,794  
Revenues - Domestic 1,083   78   344   8   1   -   -   (231 ) 1,283  
Cost and expenses (3,632 ) (176 ) (412 ) (50 ) (259 ) 13   -   1,645   (2,871 )
Depreciation, depletion and amortization
(167 ) (17 ) (26 ) (2 ) -   -   -   -   (212 )
Pension plan (27 ) (3 ) (2 ) -   -   -   -   -   (32 )
 
 
 
 
 
 
 
 
 
 
Operating profit 815   55   51   3   25   13   -   -   962  
Interest revenue 169   1   11   3   7   3   -   (59 ) 135  
Interest expense (368 ) (10 ) (11 ) -   (1 ) (4 ) -   59   (335 )
Foreign exchange and monetary losses, net
(396 ) (21 ) (10 ) 1   -   -   -   -   (426 )
Gains on sale of investments
-   -   -   677   -   107   -   -   784  
Equity and provision for losses
(3 ) 1   (114 ) 13   41   5   4   -   (53 )
Minority interests 2   -   -   -   0   -   -   -   2  
Income taxes 220   -   (3 ) -   1   -   -   -   218  
 
 
 
 
 
 
 
 
 
 
Net income 439   26   (76 ) 697   73   124   4   -   1,287  
 
 
 
 
 
 
 
 
 
 
                                     
Sales classified by geographic destination:
                                   
Export market                                    
Latin America 238   -   65   -   9   -   -   (118 ) 194  
United States 247   139   21   47   73   -   -   (112 ) 415  
Europe 1,469   33   44   -   173   -   -   (635 ) 1,084  
Middle East 216   -   4   -   -   -   -   (20 ) 200  
Japan 525   -   10   -   12   -   -   (155 ) 392  
Asia, other than Japan 863   1   3   -   16   -   -   (374 ) 509  
 
 
 
 
 
 
 
 
 
 
  3,558   173   147   47   283   -   -   (1,414 ) 2,794  
Domestic market 1,083   78   344   8   1   -   -   (231 ) 1,283  
 
 
 
 
 
 
 
 
 
 
  4,641   251   491   55   284   -   -   (1,645 ) 4,077  
 
 
 
 
 
 
 
 
 
 
                                     
Assets :                                    
                                     
Property, plant and equipment, net
3,171   240   305   90   -   -   7   -   3,813  
Capital expenditures 508   40   25   22   -   -   -   -   595  
Investments in affiliated companies and joint ventures and other investments, net provision for losses
673   29   34   -   287   159   36   -   1,218  
 
 
 
 
 
 
 
 
 
 
Capital employed 2,976   249   313   50   18   13   7   4   3,630  

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Operating profit by product - after eliminations (unaudited)

                          2001  
 
 
      Revenues   Cost and
expenses
  Net   Asset write-offs,
depreciation,
depletion and

amortization
  Pension
plan
  Operating
profit
 

Export   Domestic   Total
 
 
 
 
 
 
 
 
 
Ferrous                                
Iron ore 1.529   474   2.003   (923 ) 1.080   (286 ) (17 ) 777  
Pellets 474   123   597   (451 ) 146   (102 ) (10 ) 34  
Manganese 50   7   57   (49 ) 8   (1 ) -   7  
Ferrous-alloys 131   71   202   (137 ) 65   -   -   65  
Others ferrous -   -   -   2   2   (2 ) -   -  
 
 
 
 
 
 
 
 
 
  2.184   675   2.859   (1.558 ) 1.301   (391 ) (27 ) 883  
Non ferrous                                
Gold 139   -   139   (68 ) 71   (55 ) (2 ) 14  
Potash -   71   71   (48 ) 23   (4 ) (1 ) 18  
Kaolin 34   7   41   3   44   (30 ) -   14  
 
 
 
 
 
 
 
 
 
  173   78   251   (113 ) 138   (89 ) (3 ) 46  
Aluminum                                
Alumina 32   -   32   (32 ) -   -   -   -  
Aluminum 230   1   231   (207 ) 24   -   -   24  
Bauxite 21   -   21   (19 ) 2   -   -   2  
 
 
 
 
 
 
 
 
 
  283   1   284   (258 ) 26   -   -   26  
Logistics                                
Railroads -   299   299   (276 ) 23   (10 ) (2 ) 11  
Ports -   104   104   (73 ) 31   (3 ) -   28  
Ships 105   100   205   (160 ) 45   (47 ) -   (2 )
 
 
 
 
 
 
 
 
 
  105   503   608   (509 ) 99   (60 ) (2 ) 37  
Others 49   26   75   (103 ) (28 ) (2 ) -   (30 )
 
 
 
 
 
 
 
 
 
  2.794   1.283   4.077   (2.541 ) 1.536   (542 ) (32 ) 962  
 
 
 
 
 
 
 
 
 

OBS.: Cost and expenses include contingency provisions of $79 and sundry provisions of $25.

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                                  2000  
 






 
                          Holdings          
             
         
 
Ferrous
Non ferrous
Logistics
Pulp and paper
Aluminum
Steel
Others
Eliminations
Consolidated
 
 
 
 
 
 
 
 
 
 
 
RESULTS                                    
Revenues - Export 2,850   198   195   121   350   -   -   (1,068 ) 2,646  
Revenues - Domestic 1,000   90   403   21   12   1   -   (104 ) 1,423  
Cost and expenses (2,891 ) (202 ) (416 ) (157 ) (324 ) (7 ) -   1,188   (2,809 )
Depreciation, depletion and amortization
(121 ) (30 ) (22 ) (22 ) -   -   -   -   (195 )
Pension plan (33 ) (8 ) -   -   -   -   -   -   (41 )
 
 
 
 
 
 
 
 
 
 
Operating profit 805   48   160   (37 ) 38   (6 ) -   16   1,024  
Interest revenue 225   1   1   7   25   5   -   (56 ) 208  
Interest expense (321 ) (12 ) (6 ) -   (2 ) (6 ) -   32   (315 )
Foreign exchange and monetary losses, net
(242 ) (10 ) (2 ) -   9   (3 ) -   8   (240 )
Gains on sale of investments
-   -   -   -   54   -   -   -   54  
Equity and provision for losses
45   -   (22 ) 108   126   60   5   -   322  
Minority interests 1   -   -   -   -   -   -   -   1  
Income taxes 87   -   5   (7 ) (5 ) (48 ) -   -   32  
 
 
 
 
 
 
 
 
 
 
Net income 600   27   136   71   245   2   5   -   1,086  
 
 
 
 
 
 
 
 
 
 
                                     
Sales classified by geographic destination:
                                   
Export market                                    
Latin America 224   -   30   -   23   -   -   (91 ) 186  
United States 252   156   64   73   39   -   -   (108 ) 476  
Europe 969   35   75   48   237   -   -   (222 ) 1,142  
Middle East 209   -   6   -   16   -   -   (19 ) 212  
Japan 544   4   15   -   34   -   -   (308 ) 289  
Asia, other than Japan
652   3   5   -   1   -   -   (320 ) 341  
 
 
 
 
 
 
 
 
 
 
  2,850   198   195   121   350   -   -   (1,068 ) 2,646  
Domestic market 1,000   90   403   21   12   1   -   (104 ) 1,423  
 
 
 
 
 
 
 
 
 
 
  3,850   288   598   142   362   1   -   (1,172 ) 4,069  
 
 
 
 
 
 
 
 
 
 
Assets :                                    
Property, plant and equipment, net
3,107   325   374   149   -   -   -   -   3,955  
Capital expenditures
383   50   14   -   -   -   -   -   447  
Investments in affiliated companies and joint ventures and other investments, net
provision for losses
519   31   151   372   262   423   37   -   1,795  
 
 
 
 
 
 
 
 
 
 
Capital employed 3,058   316   390   135   (10 ) 1   14   8   3,912  

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Operating profit by product - after eliminations (unaudited)

2000  
 
  Revenues   Cost and
expenses
  Net   Asset write-offs,
depreciation,
depletion and amortization
   Pension
plan
   Operating
profit 
 
 
  Export   Domestic   Total  
 
 
 
 
 
 
 
 

Ferrous                                
Iron ore 1,143   495   1,638   (744 ) 894   (115 ) (18 ) 761  
Pellets 436   103   539   (492 ) 47   (4 ) (14 ) 29  
Manganese 20   14   34   (57 ) (23 ) -   -   (23 )
Ferrous-alloys 158   93   251   (162 ) 89   (11 ) -   78  
 
 
 
 
 
 
 
 

  1,757   705   2,462   (1,455 ) 1,007   (130 ) (32 ) 845  
Non ferrous                                
Gold 156   -   156   (109 ) 47   (25 ) (5 ) 17  
Potash -   85   85   (51 ) 34   -   (4 ) 30  
Kaolin 37   5   42   (31 ) 11   (10 ) -   1  
 
 
 
 
 
 
 
 

  193   90   283   (191 ) 92   (35 ) (9 ) 48  
Aluminum                                
Alumina 54   -   54   (46 ) 8   -   -   8  
Aluminum 278   12   290   (218 ) 72   (48 ) -   24  
Bauxite 18   -   18   (17 ) 1   -   -   1  
 
 
 
 
 
 
 
 

  350   12   362   (281 ) 81   (48 ) -   33  
Logistics                                
Railroads -   385   385   (174 ) 211   (52 ) -   159  
Ports -   105   105   (60 ) 45   (10 ) -   35  
Ships 181   89   270   (308 ) (38 ) (12 ) -   (50 )
 
 
 
 
 
 
 
 

  181   579   760   (542 ) 218   (74 ) -   144  
Others 165   37   202   (226 ) (24 ) (22 ) -   (46 )
 
 
 
 
 
 
 
 

  2,646   1,423   4,069   (2,695 ) 1,374   (309 ) (41 ) 1,024  
 
 
 
 
 
 
 
 

OBS.: Cost and expenses include contingencies provisions of $101 and sundry provisions of $40.

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17 Related party transactions
   
  Transactions with major related parties (including agencies of the Brazilian Federal Government) resulted in the following balances:

 

    As of December 31
   
    2002   2001
   
 
    Assets   Liabilities   Assets   Liabilities
   
 
 
 
AFFILIATED COMPANIES AND JOINT VENTURES                
   FCA   70   1   154   2
   HISPANOBRAS   18   25   21   28
   ITABRASCO   19   25   18   17
   NIBRASCO   26   17   20   5
   KOBRASCO   40   8   35   25
   CST   23   -   -   -
   USIMINAS   5   -   23   -
   ALBRAS   10   58   1   15
   ALUNORTE (1)   -   -   321   76
   Salobo Metais S.A(1)   -   -   70   -
   Others   48   53   154   107
                 
BRAZILIAN FEDERAL GOVERNMENT(2)                
   Banco do Brasil S.A   -   -   83   -
   Rede Ferroviária Federal S.A   -   -   11   32
   BNDES   -   -   6   163
   
 
 
 
    259   187   917   470
   
 
 
 
Current   170   180   350   293
   
 
 
 
Long-term   89   7   567   177
   
 
 
 
   
(1) Alunorte and Salobo Metais S.A. are consolidated at December 31, 2002, after acquisition of control during 2002.
(2) The Brazilian Federal Government ceased to be a related party upon the sale of its shares in May 2002 as mentioned in Note 3.

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  These balances are included in the following balance sheet classifications:
   
     As of December 31 
 
    2002     2001
 
 
  Assets   Liabilities   Assets   Liabilities
 
 
 
 
Current assets              
   Cash and cash equivalents -   -   83   -
   Accounts receivable 121   -   106   -
   Loans and advances to related parties 49   -   160   -
   Others -   -   1   -
               
Other assets              
   Loans and advances to related parties 89   -   555   -
   Others -   -   12   -
               
Current liabilities              
   Suppliers -   116   -   101
   Current portion of long-term debt -   -   -   22
               
   Loans from related parties -   64   -   168
   Others -   -   -   2
               
Long-term liabilities              
   Long-term debt -   -   -   156
   Others -   7   -   21
 
 
 
 
  259   187   917   470
 
 
 
 
               
  The principal amounts of business and financial operations carried out with major related parties are as follows:
   
              Year ended December 31
 
      2002       2001       2000
 
 
 
  Income   Expense   Income   Expense   Income   Expense
 
 
 
 
 
 
AFFILIATED COMPANIES AND JOINT VENTURES                      
   CST 152   -   146   -   166   -
   NIBRASCO 146   150   135   132   172   205
   ALUNORTE (to June 2002) 6   -   84   38   42   93
   SIDERAR -   -   30   -   18   -
   ITABRASCO 74   53   67   33   66   24
   HISPANOBRAS 77   77   74   74   75   77
   KOBRASCO 84   46   75   63   76   18
   CENIBRA (to May 2001) -   -   30   46   33   123
   USIMINAS 76   -   59   -   47   -
   ALBRAS 73   265   5   208   6   216
   VALESUL 7   1   -   -   4   -
   MRN -   56   -   17   1   17
   Others 79   94   99   142   89   75
                       
BRAZILIAN FEDERAL GOVERNMENT (to May 2002                      
                       
   Banco do Brasil S.A 3   -   27   -   46   24
   Petróleo Brasileiro S.A. - PETROBRAS -   -   2   18   6   11
   Centrais Elétricas Brasileiras S.A -   -   1   -   -   -
   BNDES -   2   1   19   1   18
 
 
 
 
 
 
  777   744   835   790   848   901
 
 
 
 
 
 

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  These amounts are included in the following statement of income classifications:
   
        Year ended December 31
 
    2002     2001     2000
 
 
 
  Income   Expense   Income   Expense   Income   Expense
 
 
 
 
 
 
Sales of iron ore and pellets 564

 

380   518   349   494   313
Revenues from transportation services 66   -   85   -   133   -
Sales / Cost of aluminum products 74   314   -   254   -   327
Financial income/expenses 15   18   180   59   117   79
Others 58   32   52   128   104   182
 
 
 
 
 
 
  777   744   835   790   848   901
 
 
 
 
 
 
                       
18 Fair value of financial instruments
   
  The carrying amount of our current financial instruments generally approximates fair market value because of the short-term maturity or frequent repricing of these instruments.

The market value of long-term investments, where available, is disclosed in Note 10 to these financial statements.

Based on borrowing rates currently available to us for bank loans with similar terms and average maturities, the fair market value of long-term debt at December 31, 2002 and 2001 is estimated as follows:
   
  As of December 31
 
  2002   2001
 
 
Fair market value 2,134   2,102
Carrying value 2,359   2,170
   
  Fair market value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. Changes in assumptions could significantly affect the estimates.
   
19 Derivative financial instruments
   
  Volatility of interest rates, exchange rates and commodity prices are the main market risks to which we are exposed - all three are managed through derivative operations. These have the exclusive aim of reducing exposure to risk. We do not use derivatives for speculation purposes.

We monitor and evaluate our derivative positions on a regular basis and adjust our strategy in response to market conditions. We also periodically review the credit limits and credit worthiness of our counter-parties in these transactions. In view of the policies and practices established for operations with derivatives, management considers the occurrence of non-measurable risk situations as unlikely.


As from January 1, 2001 we adopted SFAS 133 - “Accounting for Derivative Financial Instruments and Hedging Activities”, as amended by SFAS 137 and SFAS 138, and began to recognize all derivatives on our balance sheet at fair value. Accordingly we recognized an initial transition adjustment of $12 as a charge in our statement of income relative to net unrealized losses on contracts open as of December 31, 2000. Subsequently to January 1, 2001 all derivatives have been adjusted to fair market value at each balance sheet date and the change included in current earnings.  

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    For the years ended December 31, 2002 and 2001 the movement of unrealized and realized gains or losses on derivative financial instruments is as follows:
     
              Net Gains (losses)  
 






 
  Gold   Interest
rates (libor)
  Currencies   Alumina   Total  
 
 
 
 
 
 
Initial unrealized gains and losses at January 1, 2001 9   (8 ) (4 ) -   (3 )
Change in the period 2   (36 ) (4 ) -   (38 )
(Gains) and losses realized in the period (4 ) 8   4   -   8  
 
 
 
 
 
 
Unrealized gains and (losses) at December 31, 2001 7   (36 ) (4 ) -   (33 )
 
 
 
 
 
 
Gain recognized upon consolidation of Alunorte -   -   -   2   2  
Change in the period (2 ) 24   3   1   26  
(Gains) and losses realized in the period (22 ) (68 ) (2 ) -   (92 )
Effect of exchange rate changes 2   20   2   -   24  
 
 
 
 
 
 
Unrealized gains and (losses) at December 31, 2002 (15 ) (60 ) (1 ) 3   (73 )
 
 
 
 
 
 
     
    Realized and unrealized gains and losses are included in our income statement under the following captions:
     
    Gold – operating costs and expenses;
    Interest rates – financial expenses;
    Currencies – foreign exchange and monetary losses, net.
     
    Final maturity dates for the above instruments are as follows:
     
Gold December 2006
Interest rates (libor) May 2007
Currencies May 2005
     
  (a) Interest Rate and Exchange Rate Risk
     
    Interest rate risks mainly relate to that part of the debt borrowed at floating rates. The foreign currency debt is largely subject to fluctuations in the London Interbank Offered Rate - LIBOR. That portion of local currency denominated debt that is subject to floating rates is linked to the Long Term Interest Rate - TJLP, fixed quarterly by the Brazilian Central Bank. Since May 1998, we have used derivative instruments to protect overselves against fluctuations in the LIBOR rate.
     
    There is an exchange rate risk associated with our foreign currency denominated debt. On the other hand, a substantial proportion of our revenues are denominated in, or automatically indexed to, the U.S. dollar, while the majority of costs are expressed in reais. This provides a natural hedge against any devaluation of the Brazilian real against the U.S. dollar. When events of this nature occur, the immediate negative impact on foreign currency denominated debt is offset over time by the positive effect of devaluation on future cash flows.
     
    With the advent of a floating exchange rate regime in Brazil in January 1999, we adopted a strategy of monitoring market fluctuations, using derivatives to protect against specific risks from exchange rate variation.
     
    From time to time we enter into foreign exchange derivative swap transactions seeking to change the characteristics of our real-denominated cash investments to US dollar-indexed instruments. The extent of such transactions depends on our perception of market and currency risk, but is never speculative in nature. All such operations are marked-to-market at each balance sheet  date and the effect included in financial income or expense. During the years ended December 31, 2002 and 2001 our use of such instruments was not significant. 

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(b) Commodity Price Risk
     
    We also use derivative instruments to manage exposure to changing gold prices. Derivatives allow the fixing of an average minimum profit level for future gold production. However, they may also have the effect of eliminating potential gains on certain price increases in the spot market for gold. We manage our contract positions actively, and the results are reviewed at least monthly, allowing adjustments to targets and strategy to be made in response to changing market conditions.
     
    In the case of gold derivatives, our policy has been to settle all contracts through cash payments or receipts, without physical delivery of product.
     
  Our affiliate Albras manages the risk of fluctuating aluminum prices using derivatives, allowing an average minimum profit level for future production and ensuring stable cash generation. However, they may also have the effect of eliminating potential gains on certain price increases in the spot market for aluminum. We account for Albras using the equity method.
     
20 Information about independent accountants
     
  Our consolidated financial statements are audited by PricewaterhouseCoopers Auditores Independentes. The financial statements of certain of our subsidiaries and affiliates have been audited by independent accountants other than PricewaterhouseCoopers Auditores Independentes and, as mentioned in their report, PricewaterhouseCoopers Auditores Independentes has relied on such audits when expressing their opinion on our consolidated financial statements.
 
    The following entities prepare financial statements in US GAAP which are audited in accordance with auditing standards generally accept in the United States of America:


  Auditors   Years Audited   City   State   Country
 
 
 
 
 
Alumínio Brasileiro S.A. - ALBRAS DTT   2002, 2001, 2000   RJ   RJ   Brazil
Alumina do Norte do Brasil S.A. - ALUNORTE DTT   2002, 2001, 2000   RJ   RJ   Brazil
Vale do Rio Doce Alumínio S.A. - ALUVALE DTT   2002, 2001, 2000   RJ   RJ   Brazil
Bahia Sul Celulose S.A. (1) KPMG   2000   SP   SP   Brazil
California Steel Industries, Inc. KPMG LLP   2002, 2001, 2000   Orange
County
  CA   USA
Celulose Nipo-Brasileira S.A. - CENIBRA (1) DTT   2000   BH   MG   Brazil
Navegação Vale do Rio Doce S.A. - DOCENAVE DTT   2002, 2001, 2000   RJ   RJ   Brazil
DOCEPAR S.A. DTT   2001, 2000   RJ   RJ   Brazil
Companhia Hispano-Brasileira de Pelotização - HISPANOBRAS AA   2001, 2000   Vitória   ES   Brazil
Companhia Hispano-Brasileira de Pelotização - HISPANOBRAS DTT   2002   Vitória   ES   Brazil
Companhia Ítalo-Brasileira de Pelotização - ITABRASCO AA   2001, 2000   Vitória   ES   Brazil
Companhia Ítalo-Brasileira de Pelotização - ITABRASCO DTT   2002   Vitória   ES   Brazil
Companhia Coreano Brasileira de Pelotização - KOBRASCO DTT   2002, 2001, 2000   RJ   RJ   Brazil
Mineração Rio do Norte S.A. AA   2001, 2000   RJ   RJ   Brazil
Mineração Rio do Norte S.A. DTT   2002   RJ   RJ   Brazil
Companhia Nipo-Brasileira de Pelotização - NIBRASCO DTT   2002, 2001, 2000   RJ   RJ   Brazil
Valesul Alumínio S.A. KPMG   2002, 2001, 2000   RJ   RJ   Brazil
Companhia Siderúrgica Nacional (1) AA   2000   RJ   RJ   Brazil
SIBRA Eletrosiderúrgica Brasileira S.A. DTT   2002, 2001, 2000   Salvador   BA   Brazil
   
  In addition to the above the following entities prepare financial statements in Brazilian GAAP which are audited in accordance with auditing standards generally accepted in Brazil.
     
  PricewaterhouseCoopers Auditores Independentes relies on such audits but is responsible for reviewing the US GAAP translation and, if applicable, US GAAP adjustments.

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  Auditors   Years Audited   City   State   Country
 
 
 
 
 
Terminal Vila Velha S.A. DTT

 

2001, 2000   RJ   RJ   Brazil
Nova Era Silicon S.A. DTT   2001, 2000   BH   MG   Brazil
     
    AA - Arthur Andersen S/C (ceased business in 2002)
DTT - Deloitte Touche Tohmatsu
RJ - Rio de Janeiro
MG - Minas Gerais
BH - Belo Horizonte
SP - São Paulo
ES - Espírito Santo
BA - Bahia

 

(1) Investments sold in 2001

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Consolidated Statements of Income - Aluminum Area (Additional information - Unaudited)  

 
  ALBRAS   ALUNORTE   MRN   VALESUL   ALUVALE   ITACO   ELIMIN   TOTAL  
 
 
 
 
 
 
 
 
 
Net Operating Revenues 529   265   173   139   -   338   (298 ) 1,146  
Cost of Products (316 ) (203 ) (107 ) (98 ) -   (322 ) 298   (748 )
 
 
 
 
 
 
 
 
 
Gross Profit 213   62   66   41   -   16   -   398  
Gross Margin (%) 40 % 23 % 38 % 29 % -   5 % -   35 %
Other Operating Income (Expenses)
(14 ) (1 ) (3 ) (8 ) 2   -   -   (24 )
 
 
 
 
 
 
 
 
 
Operating Income (Loss)
199   61   63   33   2   16   -   374  
 
 
 
 
 
 
 
 
 
Non-Operating Income (Expenses):
                               
Financial Income (Expense), net
(18 ) (14 ) (1 ) -   5   (20 ) -   (48 )
Foreign exchange and monetary losses, net
(213 ) (172 ) 24   -   -   -   -   (361 )
Others -   (2 ) -   (1 ) 23   -   -   20  
 
 
 
 
 
 
 
 
 
  (231 ) (188 ) 23   (1 ) 28   (20 ) -   (389 )
 
 
 
 
 
 
 
 
 
Minority Interest (10 ) 37   (42 ) (11 ) -   -   -   (26 )
                                 
Income Tax 52   40   (16 ) (7 ) 1   -   -   70  
 
 
 
 
 
 
 
 
 
Net Income (Loss) of the Year
10   (50 ) 28   14   31   (4 ) -   29  
 
 
 
 
 
 
 
 
 
EBITDA 219   70   101   38   6   16       450  

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Aluminum Area (Additional information - Unaudited)


 Information       VALESUL     MRN     ALBRAS     ALUNORTE     ALUVALE  

 
      2002   2001   2002   2001   2002   2001   2002   2001   2002   2001  
     
 
                                             
Quantity sold - external market MT (thousand)   42   23   2,616   3,413   393   317   720   819   -   -  
Quantity sold - internal market MT (thousand)   48   53   7,312   7,539   13   15   872   721   -   16  
     
 
Quantity sold - total MT (thousand)   90   76   9,928   10,952   406   332   1,592   1,540   -   16  
     
 
Average sales price - external market US$   1,459.01   1,590.39   19.93   22.27   1,304.70   1,426.64   153.39   179.47   -   -  
Average sales price - internal market US$   1,837.32   1,662.01   19.06   20.36   1,355.55   1,477.68   173.79   192.36   -   1,843.43  
Average sales price - total US$   1,661.77   1,913.54   18.95   20.63   1,306.38   1,428.99   164.56   185.51   -   1,843.43  
                                             
Long-term indebtedness, gross US$   1   2   76   22   466   450   481   425   -   -  
Short-term indebtedness, gross US$   1   1   29   1   20   183   -   46   -   -  
     
 
Total indebtedness, gross US$   2   3   105   23   486   633   481   471   -   -  
     
 
Stockholders' equity US$   72   93   405   386   (3 ) 29   671   643   528   827  
     
 
Net operating revenues US$   139   129   173   211   529   472   265   294   1   1  
Cost of products US$   (99 ) (91 ) (107 ) (111 ) (316 ) (281 ) (203 ) (214 ) -   -  
Other expenses/revenues US$   (7 ) (8 ) (3 ) (4 ) (13 ) (24 ) (1 ) (1 ) 1   4  
Other non-cash itens US$   -   -   -   -   3   10   -   -   -   -  
Depreciation, amortization and depletion US$   5   6   38   35   16   18   9   12   -   -  
     
 
EBITDA US$   38   36   101   131   219   195   70   91   2   5  
Depreciation, amortization and depletion US$   (5 ) (6 ) (38 ) (35 ) (16 ) (18 ) (9 ) (12 ) -   -  
     
 
EBIT US$   33   30   63   96   203   177   61   79   2   5  
Gain on investments accounted for by the equity method US$   -   -   20   (1 ) -   -   -   -   25   46  
Other non-cash itens US$   -   -   -   -   (3 ) (10 ) -   -   -   -  
Translation net effect of new accounting pronouncement -
SFAS 133
US$   -   -   -   -   -   (4 ) -   -   -   -  
Non-operating result US$   -   (1 ) 23   (4 ) -   1   -   -   -   -  
Net financial result US$   (1 ) (4 ) (1 ) (1 ) (231 ) (121 ) (186 ) (86 ) 5   7  
     
 
Income before income tax and social contribution US$   32   25   105   90   (31 ) 43   (125 ) (7 ) 32   58  
Income tax and social contribution US$   (7 ) (6 ) (11 ) (9 ) 52   8   24   11   (2 ) 1  
     
 
Net income US$   25   19   94   81   21   51   (101 ) 4   30   59  

 

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Pelletizing Affiliates (Additional information - Unaudited)  

 
Information      KOBRASCO      HISPANOBRAS   ITABRASCO   NIBRASCO   SAMARCO   GIIC      FERTECO  
   
 
 
 
 
 
 
 
    2002   2001   2002   2001   2002   2001   2002   2001   2002   2001   2002   2001   2002   2001  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantity sold - external market
MT (thousand) 2,894   2,135   1,321   1,218   2,180   2,247   2,166   2,311   14,442   11,201   3,074   3,053   12,027    11,164  
Quantity sold - internal market - CVRD
MT (thousand) 1,140   2.049   2,246   2,390   1,127   1,040   4,949   4,541   -   -   -   -   6,259   1,752  
Quantity sold - internal market - Others
MT (thousand) -   -   -   -   -   -   100   141   -   -   -   -   -   -  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quatity sold - total
MT (thousand) 4,034   4,184   3,567   3,608   3,307   3,287   7,215   6,993   14,442   11,201   3,074   3,053   18,286   12,916  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average sales price- external market
US$ 29.88   30.56   29.71   31.44   29.71   31.63   29.60   30.20   28.60   29.70   40.98   41.66   18.17   17.05  
Average sales price- internal market
US$ 30.51   31.32   30.15   31.41   29.13   31.93   28.77   29.70   -   -   -   -   12.95   9.40  
Average sales price - total
US$ 30.09   30.93   29.77   31.42   29.51   31.72   28.64   29.80   28.60   29.70   40.98   41.66   16.39   16.11  
                                                           
Long-term indebtness, gross
US$ 114   129   -   -   -   -   1   4   66   110   -   -   82   96  
Short-term indebtness, gross
US$ -   -   -   -   -   -   2   2   142   171   -   -   23   53  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total indebtedness, gross
US$ 114   129   -   -   -   -   3   6   208   281   -   -   105   149  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders equity
US$ (31 ) 4   27   30   20   26   23   32   307   433   73   75   359   120  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating revenues
US$ 121   128   110   113   100   100   210   208   392   328   126   127   311   220  
Cost of products
US$ (97 ) (101 ) (94 ) (92 ) (89 ) (81 ) (185 ) (180 ) (184 ) (163 ) (109
)
(111 ) (183 ) (165 )
Other expenses/revenues
US$ (2 ) (2 ) (2 ) (4 ) (6 ) (3 ) (2 ) (7 ) (14 ) (15 ) (7
)
(5 ) (23 ) (22 )
Depreciation, amortization and depletion
US$ 3   3   2   3   -   1   4   5   22   22   6   6   13   9  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA US$ 25   28   16   20   5   17   27   26   216   172   16   17   118   42  
Depreciation, amortization and depletion
US$ (3 ) (3 ) (2 ) (3 ) -   (1 ) (4 ) (5 ) (22 ) (22 ) (6
)
(6 ) (13 ) (9 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT US$ 22   25   14   17   5   16   23   21   194   150   10   11   105   33  
Provision
US$ -   -   -   -   2   -   -   -   -   -   -   -   -   -  
Other expenses/revenues-non cash
US$ (7 ) (15 ) -   -   -   -   (7 ) (18 ) (18 ) (13 ) -   -   (11 ) -  
Non-operating result
US$ -   -   -   -   -   -   -   -   -   -   1   -   (15 ) -  
Gain on investments accounted for by the equity method
US$ -   -   -   -   -   -   -   -   (13 ) (1 ) -   -   (9 ) (2 )
Net financial result
US$ (61 ) (27 ) 1   1   6   1   (3 ) (1 ) (90 ) (90 ) (1 ) 2   (35 ) (27 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax and social contribution
US$ (46 ) (17 ) 15   18   13   17   13   2   73   46   10   13   35   4  
                                                           
Income tax and social contribution
US$ 15   -   (5 ) (8 ) (4 ) (8 ) 6 ) (6 ) (17 ) (10 ) -   -   (17 ) 8  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income US$ (31 ) (17 ) 10   10   9   9   7   (4 ) 56   36   10   13   18   12  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Manganese and Ferrous-Alloys Area (Additional information - Unaudited)

Information   SIBRA
 
RDME
 

    2002
 
2001
 
2002
 
2001
 
   
Quantity sold - external market - Ferroalloys MT (thousand) 160
 
99
 
225
 
213
 
Quantity sold - external market - Ferroalloys MT (thousand) 167
121
-
-
   
Quantity sold - total - Ferrou-Alloys MT (thousand) 327
220
225
213
   
     
 
 
 
Quantity sold - external market - Manganese MT (thousand) 828
1,093
68
85
Quantity sold - internal market - Manganese MT (thousand) 198
72
-
-
   
Quantity sold - total - Manganese MT (thousand) 1,026
1,165
68
85
   
Average sales price - external market - Ferroalloys US$ 479.65
513.30
363.63
370.40
Average sales price - internal market - Ferroalloys US$ 428.31
565.06
-
-
Average sales price - total - Ferrou-Alloys US$ 453.43
541.77
363.63
370.40
     
 
 
 
Average sales price - external market - Manganese US$ 46.96
46.58
86.60
77.68
Average sales price - internal market - Manganese US$ 46.47
58.89
-
-
Average sales price - total - Manganese US$ 46.86
47.35
86.60
77.68
     
 
 
 
Long-term indebtedness, gross US$ 22
27
2
3
Short-term indebtedness, gross US$ 36
32
-
-
   
Total indebtedness, gross US$ 58
59
2
3
   
Stockholders' equity US$ 79
81
47
35
   
Net operating revenues US$ 177
157
111
92
Cost of products US$ (104
)
(98
)
(102
)
(85
)
Other expenses/revenues US$ (24
)
(18
)
(2
)
(1
)
Depreciation, amortization and depletion US$ 5
5
5
3
   
EBITDA US$ 54
46
12
9
Depreciation, amortization and depletion US$ (5
)
(5
)
(5
)
(3
)
   
EBIT US$ 49
41
7
6
Other expenses/revenues - non cash US$ -
-
-
(1
)
Non-operating result US$ (1
)
(1
)
-
-
Gain on investments accounted for by the equity method US$ -
-
-
-
Net financial result US$ (8
)
(8
)
(1
)
(1
)
   
Income before income tax and social contribution US$ 40
32
6
4
Income tax and social contribution US$ (7
)
-
-
-
   
Net income US$ 33
32
6
4
   

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Indexes on Debt (Additional information - Unaudited)        

 
  12/31/02   12/31/01  
 
 
 
Current liabilities        
Current portion of long-term debt - related parties -   22  
Current portion of long-term debt - unrelated parties 717   274  
Short-term debt 184   589  
Loans from related parties 64   168  
 
 
 
  965   1,053  
Long-term liabilities        
Long-term debt - related parties -   156  
Long-term debt - unrelated parties 2,359   2,014  
Loans from related parties 7   21  
 
 
 
  2,366   2,191  
 
 
 
Gross Debt 3,331   3,244  
 
 
 
         
Gross interest 269   242  
EBITDA 1,789   1,772  
Stockholders' equity 3,287    4,640  

 

Financial Result, net            
  12/31/02   12/31/01   12/31/00  
 
 
 
 
Financial expenses            
Local debt (47 ) (64 ) (46 )
Foreign debt (168 ) (140 ) (169 )
Related parties, net (54 ) (38 ) (5 )
 
 
 
 
  (269 ) (242 ) (220 )
Labor and civil claims and tax-related actions (50 ) (28 ) (25 )
Tax on financial transactions CPMF / COFINS (10 ) (38 ) (5 )
Derivatives (42 ) (36 ) (20 )
Valia - Shares CSN x IGP-DI (2 ) -   -  
Others (2 ) (25 ) (45 )
 
 
 
 
  (375 ) (369 ) (315 )
 
 
 
 
Financial income            
Markatable securities 83   105   78  
Others 44   30   130  
 
 
 
 
  127   135   208  
 
 
 
 
Financial expenses, net (248 ) (234 ) (107 )