VALLEY OF THE RIO DOCE COMPANY
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United States
Securities and Exchange Commission

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the
Securities Exchange Act of 1934

For the month of

August 2004

Valley of the Rio Doce Company

(Translation of Registrant’s name into English)

Avenida Graça 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 þ Form 40-F o

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1))

(Check One) Yes o No þ

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7))

(Check One) Yes o No þ

(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 o No þ

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



 


COMPANHIA VALE DO RIO DOCE
Report on Form 6-K

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BR GAAP   (BR GAAP LOGO)

BOVESPA: VALE3, VALE5
NYSE: RIO, RIOPR
LATIBEX: XVALO, XVALP

 

 

 

 

www.cvrd.com.br
rio@cvrd.com.br

Investor Relations
Department

Roberto Castello Branco
Rafael Campos
Barbara Geluda
Daniela Tinoco
Eduardo Mello Franco
Rafael Azevedo
Phone: (5521) 3814-4540























(2q 04)

PERFORMANCE OF COMPANHIA VALE DO
RIO DOCE IN THE SECOND QUARTER 2004

The financial and operational information contained in this press release, except otherwise indicated, refers to the Parent Company and was calculated in accordance with Brazilian generally accepted accounting principles (Brazilian GAAP). This information, with the exception of that which refers to investment and market behaviour, is based on the quarterly financial statements, which have been reviewed by independent auditors.

AN EXTRAORDINARY PERFORMANCE

Rio de Janeiro, August 11, 2004 – Companhia Vale do Rio Doce (CVRD) reported exceptional results in the second quarter of 2004 (2Q04), with record sales, exports, cash generation and profits.

The performance of the company is due to good strategic execution, discipline in the allocation of capital and management of its operations, and strong global demand for minerals and metals.

In 2Q04, the following new records were set:

     
o
  Gross operating revenues amounted to R$ 3.578 billion, an increase of 62.2% in relation to the same quarter in 2003 and up 31.0% compared to 1Q04.
 
   
o
  Consolidated exports amounted to US$1.524 billion, which represents an increase of 60.9% in relation to 2Q03 and 50.6% compared to 1Q04. Net exports (exports minus imports) amounted to US$1.246 billion and corresponded to 14.0% of Brazil’s trade surplus accumulated in the second quarter of the year.
 
   
o
  For the first half of the year, consolidated exports amounted to US$2.536 billion with net exports at US$2.110 billion, also amounting to 14.0% of Brazil’s trade surplus in this period.
 
   
o
  Cash generation as measured by EBITDA (earnings before interest, tax, depreciation and amortisation) amounted to R$ 1.729 billion in the quarter, up 75.9% compared to 2Q03 and up 28.8% compared to the first quarter of this year.
 
   
o
  Shipments of iron ore and pellets totalled 45.894 million tons, an increase of 26.0% compared to 2Q03 and up 6.1% on 1Q04.
 
   
o
  General cargo volume (all freight except for iron ore and pellets) transported for clients by our railroad network (Vitória a Minas — EFVM
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  and Carajás — EFC) amounted to 4.9 billion net ton kilometres (ntk), an increase of 13.5% on 2Q03 and up 23.2% on 1Q04 .
 
   
o
  Net earnings reported in the quarter amounted to R$ 1.683 billion, corresponding to R$ 4.39 per share, up 76.4% on 1Q04 and an increase of 32.0% on 2Q03. For the first half of the year, CVRD reported net earnings of R$ 2.637 billion.

Return on equity (ROE) for the 12-month period ending June 2004, amounted to 28.2%.

The month of June saw the first shipments of copper concentrate produced by Sossego, the mine located in the mineral province of Carajás, in the state of Pará. Revenues from the sale of this product amounted to R$ 72 million.

In 2Q04, the Company’s capital expenditure amounted to US$ 481 million, bringing the total for the first half year to US$ 787 million. These investments continue to position the company for profitable growth and the generation of value for shareholders, already creating thousands of new jobs in the execution phase of the projects.



SELECTED FINANCIAL INDICATORS

                         
US$ million
    2Q03
  1Q04
  2Q04
Gross Operating Revenues
    2,206       2,731       3,578  
Gross Margin (%)
    42.9       43.4       47.5  
Operating Income
    600       692       1,304  
Operating Margin (%)
    28.3       26.5       38.5  
EBITDA
    983       1,342       1,729  
Net Earnings
    1,275       954       1,683  
ROE (annualized) (%)
    26.5       27.9       28.2  
Investments (US$ million) *
    389.7       306.0       481.0  

*including acquisitions
ROE = return on equity = net earnings / equity

BUSINESS OUTLOOK

Global economic growth has shown itself to be resilient to the negative impact of higher nominal oil prices. The influence of expansionist monetary and fiscal policies and the improvement in corporate profitability has allowed a solid and synchronized global recovery to take place. Leading indicators of global economic activity continued to signal expansion over the next few months.

The growth gap between the US economy and other industrialized economies appears to be narrowing, in contrast to what happened in the most recent cycles. Japan is likely to register GDP growth rates at least equal to those of the US. Its economy is emitting excellent signs of vitality, expressed, for example, in the good domestic consumption performance and the level of private investment.

Companies’ improved performance, with better earnings and liquidity, is stimulating investment in capital goods. This means that in the US and Europe, investment will tend to substitute consumption as the principal source of GDP growth in the short term. In Japan, consumer spending behaviour appears, for the first time in many years, to be the most important element in determining the behaviour of its economy.

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Restrictive measures put into practice by the Chinese economic authorities appear, up to now, to be having the desired result. Although it is premature to make a more fundamental diagnosis, data available thus far is pointing towards a soft landing for the Chinese economy. June was the fourth month running to show a reduction in the industrial production growth rate, which amounted to 16.2%, compared to 23.2% in February, 19.4% in March, 19.1% in April and 17.5% in May.

In the iron ore market these measures had an impact on imports through the spot market, with a strong drop in prices and total volumes imported. In May and June, China’s imports of iron ore averaged 14.7 million tons a month, compared to 18.5 million for the previous three months, a drop of 20.5%. External Chinese purchases of iron ore in the first half of 2004 amounted to 97.8 million tons, an increase of 34.9% compared to the same period a year earlier, while steel production, of 124.7 million tons, increased by 21.1%.

CVRD does not participate in transactions on the iron ore spot market — it gives priority to commercial relationships based on medium and long-term contracts.

The spot alumina price fell to 17.5% of the aluminum price on the LME, still much higher than the price prevailing up to the middle of 2003, reflecting restrictions on credit and the rise in the cost of electricity for the Chinese aluminum industry. However, the spot price represents a quote of marginal volumes in an alumina market which is dominated by inter company product transfers and long-term contracts. Alumina imported by China during the first half of the year amounted to 2.85 million tons, an increase of 11.1% on the same period in 2003.

One of the aims of the Chinese government in implementing a selective tightening approach to slow down its rate of economic growth, is to seek higher levels of efficiency and productivity. In the case of steel, this involves the consolidation of an industry which is extremely fragmented, with some 1,000 players, into a small group of companies with competitive operations. If successfully achieved, in our opinion, this would result in greater demand for imported iron ore and increasingly sophisticated purchasing policies, with the increasingly frequent use of long-term contracts and joint ventures with suppliers, which will tend to benefit CVRD.

In contrast to that which occurred in the period 2001/2003, the synchronized recovery in the global economy has made demand for ores and metals less dependent on Chinese expansion. For example, there are forecasts that Japanese steel production for the fiscal year 2004/2005 will be the highest since 1973/1974. In the case of copper and particularly aluminum, the premium of Comex prices relative to those on the LME, reflect strengthening demand in North America, compared to the rest of the world.

We consider that the slowdown in the growth rate of Chinese demand for ores and metals, and the fall seen in spot market prices, to be healthy trends which will help to preserve sustainable growth in global markets for these products. World demand for metals and their respective ores continues strong, exceeding current levels of production. And no reversal in this picture is expected over the short term.

RECENT MATERIAL EVENTS

In 2Q04, a number of events occurred which were of significant importance for the future performance of the Company. Of particular note were: the start-up of operations at Sossego; the celebration of contracts for the forming of joint ventures with Chinese companies for the production of aluminum, metallurgical coal and coke; the sale of the Company’s stake in CST and the signing of new long-term contracts for the supply of iron ore.

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    Inauguration of Sossego copper mine

The Sossego mine, CVRD’s first copper project, began shipments of copper concentrate on June 3, constituting a new value creation platform.

Sossego, the only greenfield project in the world to begin operations in 2004, has proven and probable reserves of 244.7 million tons of copper ore – not including the reserves contained in satellite mines with copper content estimated at 1%, and approximately 0.26 grams of gold per ton as a by-product. The ore is processed by a plant which has an annual average production capacity of 467,000 tons of copper concentrate, equivalent to 140,000 tons of copper.

CVRD has invested US$ 413 million in the Sossego project, which once again demonstrates the Company’s discipline in the allocation of capital. Only six years have passed since the initial discovery of the ore deposits up to the start of operations, which can be considered a record development time for the copper industry.

    Joint ventures with Chinese companies strengthen CVRD’s position in global ore and metals markets

At the end of May, CVRD signed contracts with a number of Chinese companies for joint investment in the alumina industry, as well as that of metallurgical coal and coke.

In association with Chalco – Aluminum Corporation of China Limited , CVRD is planning to build an alumina refinery (ABC Refinery) in Barcarena, sate of Pará, as a greenfield project, with an initial nominal production capacity of 1.8 million tons a year. It is expected to begin operations by 2007, supplied with bauxite from the Paragominas mine, currently being developed by CVRD, which will also supply stages 4 and 5 at Alunorte.

The estimated investment cost of the refinery is US$ 810 million, equivalent to US$ 450 per ton, extremely competitive for an alumina greenfield project.

CVRD has signed a joint venture agreement with the Shanghai Baosteel Group Corporation and Yongcheng Coal & Electricity Group, for the production of anthracite and metallurgical coal in China. CVRD’s stake in this project will amount to 25%, involving an investment of US$ 60 million.

The Company has also entered into an agreement with the Yankuang Group, of China, and the Japanese trading company, Itochu Corporation, for the creation of Shandong Yankuang International Coking Co. Ltd, for the production of coke. The industrial plant will be located in China, with an annual production capacity of 2 million tons of coke and 200,000 tons of methanol as a by-product. Operational start-up is planned for 2006, with investment by CVRD of around US$ 27 million, guaranteeing a 25% stake in the joint venture.

A contract has also been signed between CVRD and the Yankuang Group for the development of coking coal mine at Zhaolou, in China, with production capacity estimated at 3 million tons a year.

These agreements strengthen CVRD’s relationship with important players in the aluminum, steel and coal industries, the Company’s presence in the Chinese economy, while also heralding the Company’s entry into the coal market, complementing its portfolio of products and services for the steel industry.

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    Divestment of CST

CVRD has signed a contract with Arcelor for the total divestment of its 28.02% stake in Companhia Siderúrgica de Tubarão (CST) for US$ 578.5 million, corresponding to US$ 40.50 per share.

This transaction is consistent with CVRD’s strategy of focusing efforts on exploiting profitable growth opportunities in global metals and mining markets.

    Iron ore – additional long-term supply contracts

CVRD’s long-term contracts with its clients provide support for investment in expanding iron ore production capacity while, at the same time, eliminating risks attached to the future supply of raw material to the steel industry.

Two contracts were signed in July. The first of these was with the Nippon Steel Corporation, Japan’s largest steel producer, for the supply of 70 million tons of iron ore for over 10 years, from 2005. The second contract signed was with COSIPA — Companhia Siderúrgica Paulista for the annual supply of 1.1 million tons of iron ore, over a period of three years.

INDEPENDENT AUDITORS

In attention to CVM (Brazilian’s Securities Commission) instruction 308/99, CVRD announces the replacement of its independent auditors. From now on the Company ´s Brazilian GAAP financial statements will be audited by Deloitte Touche Tohmatsu.

REVENUE AND SALES VOLUME

CVRD’s total gross revenues in 2Q04, of R$ 3.578 billion, constituted a record, beating the previous record, of R$ 2.877 billion, set in 4Q03, by a large margin. The revenues in 2Q04 were 62.2% higher than those in 2Q03. The result achieved was substantially influenced by the sales performance of iron ore and pellets, which amounted to 83% of total revenues.

Revenues from the sale of iron ore and pellets amounted to R$ 2.935 billion, an increase of 69.7% compared to 2Q03, and 28.1% higher than the first quarter of the year. Discounting the effect of the consolidation of Ferteco, which contributed R$ 361 million to revenues in 2Q04, this increase drops to 48.8%.

The good revenue performance from the sale of iron ore and pellets was due to the greater part of the new price increases negotiated with clients for the period 2004/2005, coming into effect from April, and the growth in volume shipped, made possible by expansion to production capacity.

CVRD continues to encounter a situation of excess demand, despite the significant increase in its production and the purchase of iron ore from third parties: 4.372 million tons in 2Q04, compared to 3.314 million in 1Q04. 38.663 million tons of iron ore and 7.231 million tons of pellets were shipped in the quarter, a new sales record for both products. Previously the highest shipment volume achieved was in 4Q03, with 38.134 million tons of iron ore and 6.663 million tons of pellets.

The total volume of iron ore and pellets sold amounted to 45.894 million tons, an increase of 26.0% on the same period in the previous year and up 6.1% on 1Q04. Part of the increase seen between 2Q03 and 2Q04 is related to the consolidation of

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Ferteco, which took place in September 2003, and was responsible for the sale of 5.3 million tons of iron ore and pellets in 2Q04.

Of the Company’s iron ore and pellet sales, 74.8% consisted of ore fines, 9.5% lump ore and 15.7% pellets.

About 74.3% of iron ore shipments and pellets in 2Q04 went directly to export markets. China gained more importance in CVRD’s buyers’ market, accounting for 20.8% of iron ore exports — buying 7.1 million tons — compared to 18.1% in the previous quarter. In second place was Germany, which bought 5.7 million tons, followed by Japan with 4.1 million, France with 2.9 million and South Korea with 1.4 million. Of the 11.8 million tons sold in the domestic market, 4.8 million went to pelletization affiliates at Tubarão, whose production is almost entirely exported.

CVRD carried out its first copper shipment on June 3, 2004. In this quarter 34,000 tons of copper concentrate were sold, generating revenues of R$72 million.

Sales of potash, which were down in the previous quarter as a result of capacity expansion works being carried out at the Taquari-Vassouras mine, returned to normal in this quarter, amounting to 166,000 tons. In annualized terms, this volume represents sales of 664,000 tons, much higher than the nominal production capacity of 600,000 tons. The volume sold in the quarter represented an increase of 11.4% compared to the same period in the previous year, and up 20.3% on 1Q04.

As a result of higher prices and volumes, revenues obtained through the sales of potash amounted to R$ 96 million, representing an increase of 52.4% on 2Q03 and up 47.7% on 1Q04.

The volume of general cargo (all freight except for iron ore and pellets) transported for clients on our railroads (Vitória a Minas and Carajás) amounted to 4.9 billion ntk, exceeding the previous record of 4.6 billion ntk recorded in 3Q03, an increase of 13.5% on 2Q03 and up 23.2% on 1Q04. Most of the cargo transported consisted of steel industry inputs and products (43.8%), agricultural products (37.1%) and fuel (9.0%).

The Company’s two railroads reported improved productivity indicators compared to the previous quarter. The Vitória a Minas Railroad (EFVM) carried 8.53 ntk per HP (horse power), a productivity indicator for locomotives, compared to 8.15 in 1Q04. The Carajás Railroad (EFC) transported 15.18 ntk per HP, compared to 14.97 in the previous quarter. In energy efficiency terms, the EFVM consumed 2.28 litres of fuel oil per thousand gross ton kilometre transported (kgtk), and the EFC, 1.40 litres per kgtk. Both in terms of productivity as well as fuel consumption, EFVM and EFC are among the most efficient railroads in the world.

Revenues generated by logistics services, of R$ 410 million, showed an increase of 15.8% and 23.5% in relation to 2Q03 and 1Q04, representing 11.5% of the Company’s total revenues. Of this total, R$ 319 million derived from railroad transport services and R$ 91 million from port services.

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SALES VOLUME

                         
    thousand tons
    2Q03
  1Q04
  2Q04
Iron Ore and Pellets
    36,428       43,256       45,894  
Iron Ore
    32,102       36,901       38,663  
Fines
    29,001       32,610       34,321  
Lumps
    3,101       4,291       4,342  
Pellets
    4,326       6,355       7,231  
Potash
    149       138       166  
Copper Concentrate
                34  
Port Services
    7,411       5,635       6,896  

RAILROAD TRANSPORTATION OF GENERAL CARGO

                         
    ntk million
    2Q03
  1Q04
  2Q04
Vitória a Minas Railroad
    3,311       3,062       3,563  
Carajás Railroad
    987       897       1,316  
 
   
 
     
 
     
 
 
Total
    4,298       3,959       4,879  

IRON ORE AND PELLET SALES BY DESTINATION

                         
    million tons
FOREIGN MARKET
  2Q03
  1Q04
  2Q04
ASIA
                       
China
    4.8       5.8       7.1  
South Korea
    1.7       1.7       1.4  
Philippines
    0.6       0.8       1.0  
Japan
    4.1       4.0       4.1  
Taiwan
    0.5       0.7       0.5  
Others
    0.0       0.4       0.5  
 
   
 
     
 
     
 
 
Total
    11.7       13.4       14.6  
EUROPE
                       
Germany
    2.8       4.6       5.7  
Spain
    0.9       0.9       1.1  
France
    2.3       2.3       2.9  
Italy
    1.2       1.5       1.1  
United Kingdom
    0.6       0.5       0.4  
Others
    2.8       3.5       3.9  
 
   
 
     
 
     
 
 
Total
    10.6       13.3       15.1  
THE AMERICAS
                       
Argentina
    0.8       0.9       0.8  
United States
    0.8       1.0       0.9  
Other
    0.6       1.3       0.8  
 
   
 
     
 
     
 
 
Total
    2.2       3.2       2.5  
Others
Bahrein
    0.4       1.0       0.6  
Others
    2.0       1.1       1.3  
 
   
 
     
 
     
 
 
Total
    2.4       2.1       1.9  
 
   
 
     
 
     
 
 
TOTAL
    26.9       32.0       34.1  
                         
DOMESTIC MARKET   2Q03   1Q04   2Q04
Steel Mills
    4.6       6.3       7.0  
Pelletizing Joint Ventures
    4.8       4.9       4.8  
 
   
 
     
 
     
 
 
Total
    9.4       11.2       11.8  
 
   
 
     
 
     
 
 
TOTAL
    36.3       43.2       45.9  

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GROSS REVENUES BY PRODUCT

                                                 
    R$ million
    2Q03
  %
  1Q04
  %
  2Q04
  %
Iron Ore
    1,355       61.4       1,697       62.1       2,072       58.0  
Domestic Market
    364       16.5       428       15.7       524       14.7  
Export Market
    991       44.9       1,269       46.5       1,548       43.3  
Pellets
    375       17.0       595       21.8       863       24.1  
Domestic Market
    64       2.9       115       4.2       158       4.4  
Export Market
    311       14.1       480       17.6       705       19.7  
Pelletizing Plants Operation Services
    32       1.4       36       1.3       47       1.3  
Railroad Transport
    270       12.2       261       9.6       319       8.9  
Port Services
    84       3.8       71       2.6       91       2.5  
Potash
    63       2.9       65       2.4       96       2.7  
Copper Concentrate
                            72       2.0  
Others
    28       1.3       6       0.2       18       0.5  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
    2,206       100.0       2,731       100.0       3,578       100.0  

NET PROFIT OF R$ 1.683 BILLION, AN ALL TIME HIGH

Net earnings in 2Q04 amounted to R$ 1.683 billion, the highest quarterly profit in the Company’s history, 76.5% higher than in previous quarter and 32.1% higher than in 2Q03. Up to that time, the net earnings reported in 4Q02, of R$ 1.541 billion, was the previous quarterly record.

The principal factors that contributed to this earnings growth compared to 2Q03 were: the increase of R$ 1.265 billion net revenues and the R$ 985 million equity income result.

Iron ore and pellet affiliates and subsidiaries contributed with R$ 436 million in equity income, thanks to the improved result by Caemi, which contributed with R$ 66 million towards CVRD’s net earnings and the impact of the appreciation of the US dollar against the Brazilian Real, on the Company’s assets abroad, of approximately R$ 102 million.

Manganese and ferro-alloy producing companies contributed with R$ 144 million, a result which was dominated by foreign subsidiaries. RDME contributed with earnings of R$ 14 million (compared to a loss of R$ 37 million in 2Q03) and RDM, with R$ 74 million. Stakes in steel companies added a further R$ 302 million to the overall equity income result, CST being the most notable, with a contribution of R$ 175 million, and CSI, with R$ 88 million.

Companies in the aluminum production chain added R$ 228 million to CVRD’s net earnings: Albrás with R$ 99 million, Alunorte with R$ 73 million and MRN with R$ 43 million.

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RESULT FROM SHAREHOLDINGS BY BUSINESS AREA

                         
    R$ million
Business Area
  2Q03
  1Q04
  2Q04
Ferrous Minerals
    8       274       580  
Iron Ore and Pellets
    (3 )     216       436  
Manganese and Ferro-Alloys
    11       58       144  
Non-Ferrous Minerals
    27       6       (2 )
Logistics
    (178 )     20       33  
Steel
    15       118       302  
Aluminum
    267       90       228  
Others
    12       2       (5 )
 
   
 
     
 
     
 
 
Total
    151       510       1,136  

On the other hand, we saw an increase of R$ 1.455 billion in monetary variation, COGS up by R$ 564 million and expenditure on research and development, up by R$ 40 million.

The impact of the 6.8% depreciation in the Real against the US dollar between March 31, 2004 and June 30, 2004 on CVRD’s external net foreign currency-denominated liabilities is reflected in the figure for monetary variation. Despite the fact that this figure directly affects the Company’s profits, it does not generate financial effects in the short term. On the other hand, the depreciation of 5.3% in the average Real/US dollar exchange rate between 1Q04 and 2Q04 had a positive effect on the Company’s cash generation, seeing that 87% of its revenues are indexed to the US dollar, while only approximately 30% of its costs are so linked.

The increase in COGS can be largely explained by: the consolidation of Ferteco, which added R$ 217 million in 2Q04, the increase in the consumption of oil products as a result of the expansion to the Company’s fleet of locomotives and wagons; the increase of R$ 10 million in demurrage expenses, which increased from R$ 37 million in 2Q03 to R$ 47 million in this quarter; and by the growth seen in CVRD’s own activities.

COGS BREAKDOWN

                                                 
    R$ million
    2Q03
  %
  1Q04
  %
  2Q04
  %
Personnel
    124       10.2       150       10.2       165       9.3  
Material
    206       17.0       231       15.6       336       18.9  
Fuel Oil and Gases
    156       12.9       160       10.8       195       11.0  
Contracted Services
    180       14.9       288       19.5       340       19.2  
Energy
    33       2.7       44       3.0       54       3.0  
Acquisition of products
    263       21.7       283       19.2       341       19.2  
Depreciation and Amortization
    155       12.8       245       16.6       222       12.5  
Others
    94       7.8       75       5.1       122       6.9  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
    1,211       100.0       1,476       100.0       1,775       100.0  

The increase in research and development expenses is explained by the intensification of mineral prospecting efforts, which have been carried out both in Brazil and abroad .

RECORD CASH GENERATION: R$ 1.729 BILLION

9

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BR GAPP

CVRD set a new cash generation record this quarter, with EBITDA of R$ 1.729 billion, exceeding the previous record of R$ 1.506 billion achieved in 3Q03. EBITDA in 2Q04 was 75.8% up in relation to 2Q03, and 28.8% higher than in 1Q04.

The principal factor behind the increase of R$ 746 million in EBITDA in 2Q04, compared to 2Q03, was the rise of R$ 1.265 billion in net revenues. Other items also contributed to the cash generation figure:

    The increase of R$ 71 million in depreciation/goodwill, basically as a function of the incorporation of Ferteco in September 2003 and by the speeding up, from 1Q04, of the amortization of the goodwill paid in the acquisition of Samitri.
 
    The reduction of R$ 43 million at the other operational expenses line, seeing that in 2Q03 more contingency provisions were accounted for, as well as the pre-operational expenses for the São Luis pelletizing plant.

On the other hand, we saw an increase of R$ 564 million in COGS, of R$ 40 million in research and development and R$ 38 million in administrative expenses, due to expansion in the workforce and a salary increase of 17% awarded in July 2003.

EBITDA CALCULATION

                         
                    R$ million
    2Q03
  1Q04
  2Q04
Net Operating Revenues
    2,119       2,608       3,384  
COGS
    (1,211 )     (1,476 )     (1,775 )
Sales Expenses
    (45 )     (5 )     (7 )
Administrative Expenses
    (96 )     (104 )     (134 )
Research & Development
    (36 )     (63 )     (76 )
Other Operational Expenses
    (131 )     (268 )     (88 )
 
EBIT
    600       692       1,304  
 
Depreciation and Amortization
    162       256       233  
Dividends Received
    185       211       192  
Adjustments for Non-Recurring Items (asset write-off)
    36       183        
 
EBITDA
    983       1,342       1,729  

DEBT: LEVERAGE AND COVERAGE INDICATORS AT EXCELLENT LEVELS

Our discussion of debt is in accordance with generally accepted accounting principles in the Unites States of America (US GAAP).

CVRD’s total debt on June 30, 2004 was US$ 4.514 billion, a small reduction from the position at March 31, 2004, of US$ 4.526 billion. The consolidation of Albras added US$ 295 million to the total debt in 2Q04. Without the consolidation, the total debt would have been US$ 4.219 billion at the end of June 2004.

Short-term debt was reduced by US$ 40 million from the end of March 2004, while long-term debt increased by US$ 28 million. The debt average life rose to 6.43 years at the end of 2Q04, more than double the level at the end of 2002. The

(2q 04)

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BR GAAP

lengthening of the maturity profile of the debt was achieved without any significant increase in average cost, which remains below 7% per year.

Net debt increased slightly, from US$ 3.442 billion at the end of March 2004, to US$ 3.455 billion at the end of June 2004.

The value of guarantees given to non-consolidated affiliates and joint ventures totaled only US$ 8 million (Samarco, US$ 7 million and Valesul, US$ 1 million), given that out of the US$ 260 million in guarantees existing at March 31, 2004, US$ 252 million was related to Albras, now consolidated.

Reflecting the strong expansion of LTM EBITDA, to US$ 2.912 billion, total debt/LTM EBITDA fell to 1.55x. Also, it is important to consider that this ratio is still artificially inflated, since its numerator takes into account all the debt of Albras, Caemi and FCA, while the denominator includes only the EBITDA generated by these companies from their respective consolidation dates (September 2003 for Caemi and FCA, January 2004 for Albras). Total debt/enterprise value at the end of 2Q04 was 21.7%.

There was a strong improvement in interest coverage, as measured by LTM EBITDA/LTM interest payments, which increased from 11.51x at the end of 2003 to 13.24x at the end of 2Q04.

At the end of July 2004, Alunorte obtained a syndicated loan of US$ 310 million, with total tenor of 10 years, average duration of 7.3 years, at a cost of six-month Libor plus 2% p.a. This cost will be changed to six-month Libor plus 3% p.a. upon completion of construction of stages 4 and 5 of the refinery which the loan was obtained to finance.

FINANCIAL EXPENSES

                 
 
Financial Expenses on:     1Q04
      US$ million
2Q04

 
Local Debt
    (13 )     (12 )
External Debt
    (43 )     (67 )
Debt with Related Parties
    (2 )     (5 )
Total Debt-related Financial Expenses
    (58 )     (84 )
 
Gross Interest on:
    1Q04       2Q04  
 
   
     
 
Tax and Labour Contingencies
    (6 )     (9 )
Tax on Financial Transactions (CPMF)
    (4 )     (14 )
Derivatives
    (59 )     23  
Others
    (15 )     (22 )
Total Gross Interest
    (84 )     (22 )
 
Total
    (142 )     (106 )

DEBT INDICATORS

                         
                    US$ million
    2Q03
  1Q04
  2Q04
Gross Debt
    3,282       4,526       4,514  
Net Debt
    2,316       3,442       3,455  
Gross Debt/LTM EBITDA (x)
    1.74       1.86       1.55  
LTM EBITDA/LTM Interest Expenses (x)
    9.36       11.98       13.24  
Gross Debt/EV (x)
    0.24       0.19       0.22  

Enterprise Value = market capitalization + net debt

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BR GAAP

CONTINUING TO POSITION THE COMPANY FOR PROFITABLE GROWTH: INVESTMENT OF US$ 481 MILLION

    During the second quarter of 2004, CVRD carried out investment of approximately US$ 481 million, accumulating a total of US$ 787 million in the first half of the year.
 
    In 2Q04, investment in organic growth (growth capex) amounted to US$ 350 million, while investment in the maintenance of existing operations (stay-in-business capex) amounted to US$ 131 million.
 
    Of the amount invested in growth, US$ 22 million was spent on mineral exploration: 84% in Brazil and 16% in other countries, mainly Chile, Peru, Gabão, Angola and Mongólia. Mineral exploration involved the search for copper, nickel, gold, kaolin, bauxite, manganese and metals of the platinum group.
 
    US$ 328 million was invested in brownfield and greenfield projects, which are in different phases of development. All projects are within budget and running according to schedule.

Investment in main ongoing projects

                                 
        Amount invested    
Area
  Project
  US$ million
  Status
        1Q04
  2Q04
  1H04
   
Ferrous Minerals
  Expansion of iron ore mines in Carajás to 85 Mtpa -Northern System     2       24       26     This project will add 15 million tons a year to CVRD’s production capacity and is scheduled for completion by 2006. The conclusion of the works of Phase II of Pier III at the Ponta da Madeira Maritime Terminal is scheduled for July 2005. Work on the beneficiation plant is already ongoing.
 
                               
  Iron ore mine of Brucutu Phase I -Southern System     2       10       12     Brucutu is not a modular project and is likely to produce 4 million tons this year. Phase I will be concluded in 2006, when it will reach nominal production capacity of 12 million tons a year. The terracing phase of the work is already complete and building construction is underway. Around 90% of the equipment purchasing and service contracting has already been completed, or is in the process of being carried out.
 
                               
  Iron ore mine at
Fábrica Nova
-Southern System
    3       7       10     First phase scheduled for completion for 2005, when the mine will have a nominal production capacity of 10 million tons a year. The start-up of the second phase is scheduled for 2007, when the mine is expected to reach production of 15 million tons a year. The project is in the electro-mechanical assembly stage in its installations and equipment.
 
                               
  Expansion of the iron ore mines at Itabira -Southern System     4       4       8     Expansion to production capacity of 3 million tons a year and modernization of the operations in the mines at Itabira , raising nominal production capacity to 46 million tons a year. Completion scheduled for 2006.
 
                               
Non-ferrous minerals
  Expansion of Taquari-Vassouras potash mine     16       5       21     About 72% of the expansion works have already been carried out. Operational start-up for the expansion is scheduled for the second half of 2005.
 
                               
Aluminum
  Paragominas I     2       2       4     Environmental licences have been obtained for the development of the mine and the construction of an ore pipeline, 230km in length, which will transport the bauxite to the Alunorte refinery. Operation is scheduled to begin at the end of 2006, with annual production capacity of 9.0 million tons of bauxite. The basic project for the plant and for the ore pipeline have already been completed and the pilot plant has already seen its start-up. The total cost of the project is US$353 million.

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BR GAAP

                                 
Logistics
  Purchase of locomotives and wagons -EFVM/EFC     75       78       153     In 1H04, delivery was taken of 2,109 wagons - 1,531 for the transportation of iron ore and 578 for general cargo — and 16 locomotives.
 
                               
Power Generation
  Aimorés
Hydroelectric Power
Plant
    11       5       16     The plant is located on the Rio Doce, in the state of Minas Gerais, and will have a generation capacity of 330MW, with start-up scheduled for July 2005.
 
                               
  Candonga
Hydroelectric Power
Plant
    2       1       3     The plant is in the commissioning phase with commercial operations scheduled to begin in August this year. The plant’s generation capacity is 140MW.
 
                               
  Capim Branco I & II
Hydroelectric Power
Plants
    6       9       15     Both plants are located on the Rio Araguari, in the state of Minas Gerais, and will have a generation capacity of 240MW and 210MW respectively. Operational start-up for both projects is scheduled for 2006.

In 2Q04, US$ 27 million was injected into Alunorte, totalling US$ 47 million for the first half of the year. This investment refers to the first instalment payment by CVRD as part of Alunorte’s first capital increase tranche, destined for the financing of investment in the construction of modules 4 and 5 of the alumina refinery, which will increase production capacity by 1.8 million tons, and which is expected to be in operation by 2006. A total capital increase for this company is envisaged of US$ 233 million, the company providing 57% of this amount, in proportion to the size of its equity stake.

SELECTED FINANCIAL INDICATORS FOR THE MAIN SUBSIDIARIES AND AFFILIATES

Selected financial indicators for the Company’s main subsidiaries and affiliates are available on CVRD’s ITR (quarterly financial report as filed with the CVM), on the Company website, www.cvrd.com.br, investor relations.

CONFERENCE CALL/WEBCAST

On Friday 13 August, CVRD will be holding a conference call and webcast at 12.00 noon: the time in Rio de Janeiro in Brazil, 11:00 am United States Eastern Standard Time and 4 pm British Standard Time. Instructions to take part in these events are available on CVRD’s web site, www.cvrd.com.br, investor relations. A recording of CVRD’s conference call/webcast will be available for a period of 90 days after August 13, 2004.

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BR GAAP

FINANCIAL STATEMENTS

                         
                    R$ million
    2Q03
  1Q04
  2Q04
Gross Operating Revenues
    2,206       2,731       3,578  
Taxes
    (87 )     (123 )     (194 )
Net Operating Revenues
    2,119       2,608       3,384  
Cost of Goods Sold
    (1,211 )     (1,476 )     (1,775 )
Gross Earnings
    908       1,132       1,609  
Gross Margin (%)
    42.9       43.4       47.5  
Result from Shareholdings
    151       510       1,136  
Equity Income
    370       595       1,247  
Goodwill Amortization
    (185 )     (57 )     (80 )
Provision for Losses
    (35 )     (28 )     (31 )
Operational Expenses
    (308 )     (440 )     (305 )
Sales
    (45 )     (5 )     (7 )
Administrative
    (97 )     (104 )     (134 )
Research and Development
    (36 )     (63 )     (76 )
Other Operational Expenses
    (131 )     (85 )     (88 )
Non recurring Item — Goodwill Amortization of Samitri
          (183 )      
Financial Result
    783       (205 )     (703 )
Financial Expenses
    (164 )     (165 )     (153 )
Financial Revenues
    61       29       20  
Monetary Variation
    885       (69 )     (570 )
Operating Profit
    1,534       997       1,737  
Income Tax and Social Contribution
    (259 )     (43 )     (54 )
Net Earnings
    1,275       954       1,683  
Earnings per share (R$)
    3.32       2.48       4.39  

BALANCE SHEET

                         
                    R$ million
    06/30/03
  03/31/04
  06/30/04
Asset
                       
Current
    4,127       3,827       3,924  
Long Term
    2,894       2,679       2,783  
Fixed
    20,774       24,495       26,417  
Total
    27,796       31,001       33,124  
Liabilities
                       
Current
    5,297       5,036       4,453  
Long Term
    8,310       10,543       11,993  
Shareholders’ Equity
    14,188       15,422       16,678  
Paid-up Capital
    6,300       6,300       7,300  
Reserves
    7,888       9,122       9,378  
Total
    27,796       31,001       33,124  


“This communication may include declarations which represent the expectations of the Company’s Management about future results or events. All such declarations, when based on future expectations and not on historical facts, involve various risks and uncertainties. The Company cannot guarantee that such declarations turn out to be correct. Such risks and uncertainties include factors relative to the Brazilian economy and capital markets, which are volatile and may be affected by developments in other countries; factors relative to the iron ore business and its dependence on the steel industry, which is cyclical in nature; and factors relative to the high degree of competitiveness in industries in which CVRD operates. To obtain additional information on factors which could cause results to be different from those estimated by the Company, please consult the reports filed with the Comissão de Valores Mobiliários (CVM — Brazilian stock exchange regulatory authority) and the U.S. Securities and Exchange Commission — SEC, including the most recent Annual Report — CVRD Form 20F.”

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Table of Contents

CONTENTS

         
Part I
    3  
1 – Operating Results for the First Semester of 2004 Compared with the First Semester of 2003
    3  
1.1 – General Aspects
    3  
1.2 – Comments on the Company Results
    4  
1.2.1 – Gross Revenue
    4  
1.2.2 – Cost of Products and Services
    5  
1.2.3 – Results of Equity Investments by Business Area
    6  
1.2.4 – Operating Expenses
    7  
1.2.5 – Net Financial Results
    8  
1.2.6 – Income Tax and Social Contribution
    8  
1.2.7 – Cash Generation
    8  
1.2.8 – Non recurring Item – Samitri’s goodwill amortization
    8  
1.2.9 – Interest on Stockholders’ Equity
    8  
1.2.10 – Relationship with Independent Auditors
    8  
Part II
    9  
Quarterly Information and Notes to the Quarterly Information
    9  
2 – Balance Sheet
    9  
3 – Statement of Income
    10  
4 – Statement of Changes in Stockholders’ Equity (Additional Information)
    11  
5 – Statement of Cash Flows (Additional Information)
    12  
6 – Notes to the Quarterly Information at June 30, 2004 and June 30, 2003
    13  
6.1 – Operations
    13  
6.2 – Presentation of Quarterly Information
    13  
6.3 – Significant Accounting Policies
    13  
6.4 – Cash and Cash Equivalents
    13  
6.5 – Related Parties
    14  
6.6 – Inventories
    14  
6.7 – Deferred Income Tax and Social Contribution
    15  
6.8 – Taxes to recover or offset
    16  
6.9 – Investments
    17  
6.10 – Property, Plant and Equipment
    18  
6.11 – Loans and Financing
    20  
6.12 – Contingent Liabilities
    21  
6.13 – Environmental and Site Reclamation and Restoration Costs
    22  
6.14 – Paid-up Capital
    22  
6.15 – Treasury Stock
    22  
6.16 – Financial Result
    23  
6.17 – Financial Instruments — Derivatives
    25  
6.18 – Exchange Rate Exposure
    28  
6.19 – Administrative and Other Operating Expenses
    28  
6.20 – Subsequent Event
    29  
Part III
    30  
7 – Other Information the Company Deems Relevant
    30  
7.1 – Iron Ore and Pellet Sales (Main Markets) (Unaudited)
    30  
7.2 – Business Performance Ratios (Unaudited)
    31  
         
    CVRD   1

 


Table of Contents

         
Part IV
    32  
8- Attachment I — Equity Investee Information
    32  
8.1- CAEMI (Adjusted and Unaudited)
    32  
8.2- Aluminum Area — Albras (Adjusted and Unaudited)
    33  
8.3- Aluminum Area — Alunorte (Adjusted and Unaudited)
    34  
8.4- Aluminum Area — MRN (Adjusted and Unaudited)
    35  
8.5- Aluminum Area — Valesul (Adjusted and Unaudited)
    36  
8.6- Pellets Area — Hispanobras (Adjusted and Unaudited)
    37  
8.7- Pellets Area — Itabrasco (Adjusted and Unaudited)
    38  
8.8- Pellets Area — Kobrasco (Adjusted and Unaudited)
    39  
8.9- Pellets Area — Nibrasco (Adjusted and Unaudited)
    40  
8.10- Pellets Area — Samarco (Adjusted and Unaudited)
    41  
(*) The 2Q/03 was adjusted. 8.11- Pellets Area — GIIC (Adjusted and Unaudited)
    41  
8.11- Pellets Area — GIIC (Adjusted and Unaudited)
    42  
8.12- Manganese and Ferroalloys Area — RDM (Adjusted and Unaudited)
    43  
8.13- Manganese and Ferroalloys Area — Urucum (Adjusted and Unaudited)
    44  
8.14- Manganese and Ferrolloys Area — RDME (Adjusted and Unaudited)
    45  
8.15- Steel Area — CST (Adjusted and Unaudited)
    46  
8.16- Steel Area — CSI (Adjusted and Unaudited)
    47  
8.17- Logistics Area — Docenave (Adjusted and Unaudited)
    48  
8.18- Logistics Area — FCA (Adjusted and Unaudited)
    49  
8.19- Non ferrous minerals area — PPSA (Adjusted and Unaudited)
    50  
9- Report of the Independent Accountants
    51  
10- Members of the Board of Directors, Advisory Committees of the Board of Directors, Fiscal Council, and Executive Officers and Responsible Technicians
    52  
         
2   CVRD    

 


Table of Contents

PART I

Expressed In thousands of reais

1- OPERATING RESULTS FOR THE FIRST SEMESTER OF 2004 COMPARED WITH THE FIRST SEMESTER OF 2003

1.1- General Aspects

(a)   Companhia Vale do Rio Doce’s segments of business are as follows:

  Ferrous minerals: iron ore and pellets as well as manganese and ferroalloys;
 
  Non-ferrous minerals: potash, kaolin and copper;
 
  Logistics: railroads, ports and maritime terminals and shipping;
 
  Energy: electric power generation; and
 
  Holdings: equity holdings in producers of aluminum and steel.

(b)   The variations of the main currencies and indices in terms of percentages in relation to the real, which impacted the results of the Company and its subsidiaries, jointly-controlled companies and affiliates, were as follows:
                                                         
    Δ%
  Parity
    U.S.                                           US$ x
Currencies / Indices
  DOLLAR
  YEN
  GOLD
  IGP-M
  TJLP
  US$ x R$
  Yen
Period
                           
1S/04 (from 01/01/04 to 06/30/04)
    7.6       5.8       (4.9 )     6.8       4.8       3.1075       108.89  
2Q/04 (from 04/01/04 to 06/30/04)
    6.8       2.5       (6.6 )     4.0       2.4       3.1075       108.89  
1Q/04 (from 01/01/04 to 03/31/04)
    0.7       3.3       1.8       2.7       2.4       2.9086       104.48  
2003 (from 01/01/03 to 12/31/03)
    (18.2 )     (9.3 )     19.9       8.7       11.5       2.8892       107.17  
1S/03 (from 01/01/03 to 06/30/03)
    (18.7 )     (19.4 )     (0.4 )     5.9       5.6       2.8720       119.94  
2Q/03 (from 04/01/04 to 06/30/04)
    (14.3 )     (15.6 )     3.3       (0.4 )     2.9       2.8720       119.94  

    About 65% of the Company’s gross revenue for the six months ended June 30, 2004 is derived from exports and part of domestic sales is linked to the U.S. dollar. About 30% of total costs are linked to the U.S. dollar. Consequently, fluctuations in the exchange rate between the two currencies have a significant impact on the operating cash flows.
 
    Approximately 96% of the short-term and long-term loans of the Company at 06/30/04 are denominated in U.S. dollars. As a result, exchange rate fluctuations have a significant impact on the financial expenses (Note 6.16).
 
(c)   On the first semester of 2004, the consolidated trade balance of US$ 2,110 million was generated as follows:
                                         
    Consolidated (in US$ million)
    2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
Exports
    1,524       1,012       947       2,536       1,747  
Imports
    (278 )     (148 )     (80 )     (426 )     (196 )
 
   
 
     
 
     
 
     
 
     
 
 
 
    1,246       864       867       2,110       1,551  
 
   
 
     
 
     
 
     
 
     
 
 

Consolidated Trade Balance — US$ Million

(LINE GRAPHS)

 

         
    CVRD   3


Table of Contents

1.2- Comments on the Company Results

The net income of the Company on the first semester of 2004 was R$ 2,636,855 (net income of R$ 1,683,141 in the second quarter and net income of R$ 953,714 in the first quarter) compared with net income of R$ 2,438,555 in the first semester of 2003 (the earnings per share correspond to R$ 6.87 in the first half of 2004 compared to R$ 6.35 in the first half of 2003).

1.2.1- Gross Revenue

The 34% increase in gross revenue (R$ 6,309,165 on the first semester of 2004 against R$ 4,724,031 in the first semester of 2003) is the result of the 22% higher volume sold of iron ore and pellets, considering the merger of Ferteco in September 2003 and for the operation at full capacity of the pelletizing plant of São Luis in the second semester of 2003, as shown in the table below compensated in part of the average valuation of the real against the United States Dollar by 8.3%, incident on 87% of the revenue of the Company. The increase in iron ore and pellets sales was due to growth in Europe, Asia and steel companies of 34%, 20% and 37% respectively. The revenue for the includes the first transportation of Copper (34 thousands of tons — R$ 72,350).

                                                                                                 
    In thousands of metric tons (except gold)
  In thousands of reais
    Quarter
  Accumulated
  Quarter
  Accumulated
    2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
  Δ%
  2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
  Δ%
External market
                                                                                               
Iron ore — fines
    26,294       24,757       21,761       51,051       42,309       21       1,431,912       1,159,327       918,844       2,591,239       1,972,746       31  
Iron ore — lump ore
    1,856       2,087       1,599       3,943       3,203       23       115,684       109,027       72,067       224,711       159,870       41  
Pellets
    5,910       5,214       3,618       11,124       7,789       43       705,071       479,596       311,399       1,184,667       717,460       65  
 
   
 
     
 
     
 
     
 
     
 
             
 
     
 
     
 
     
 
     
 
         
 
    34,060       32,058       26,978       66,118       53,301       24       2,252,667       1,747,950       1,302,310       4,000,617       2,850,076       40  
 
   
 
     
 
     
 
     
 
     
 
             
 
     
 
     
 
     
 
     
 
         
Internal market
                                                                                               
Iron ore — fines
    8,027       7,853       7,240       15,880       14,849       7       405,745       331,256       308,698       737,001       666,367       11  
Iron ore — lump ore
    2,486       2,204       1,502       4,690       3,048       54       118,722       97,225       55,104       215,947       108,832       98  
Pellets (*)
    1,321       1,141       708       2,462       1,621       52       204,549       151,278       95,683       355,827       214,312       66  
 
   
 
     
 
     
 
     
 
     
 
             
 
     
 
     
 
     
 
     
 
         
 
    11,834       11,198       9,450       23,032       19,518       18       729,016       579,759       459,485       1,308,775       989,511       32  
 
   
 
     
 
     
 
     
 
     
 
             
 
     
 
     
 
     
 
     
 
         
Total
                                                                                               
Iron ore — fines
    34,321       32,610       29,001       66,931       57,158       17       1,837,657       1,490,583       1,227,542       3,328,240       2,639,113       26  
Iron ore — lump ore
    4,342       4,291       3,101       8,633       6,251       38       234,406       206,252       127,171       440,658       268,702       64  
Pellets
    7,231       6,355       4,326       13,586       9,410       44       909,620       630,874       407,082       1,540,494       931,772       65  
 
   
 
     
 
     
 
     
 
     
 
             
 
     
 
     
 
     
 
     
 
         
 
    45,894       43,256       36,428       89,150       72,819       22       2,981,683       2,327,709       1,761,795       5,309,392       3,839,587       38  
 
   
 
     
 
     
 
     
 
     
 
             
 
     
 
     
 
     
 
     
 
         
Railroad transportation
    12,524       12,165       13,564       24,689       25,716       (4 )     318,831       261,142       270,018       579,973       528,884       10  
Port services
    6,896       5,635       7,411       12,531       13,035       (4 )     90,957       71,485       83,519       162,442       151,817       7  
Gold (kg)
                615             1,416                         20,085             52,383        
Potash
    166       138       149       304       307       (1 )     96,176       65,272       63,343       161,448       135,873       19  
Copper
    34                   34                   72,350                   72,350              
Other products and services
                                        18,021       5,539       7,653       23,560       15,487       52  
 
                                                   
 
     
 
     
 
     
 
     
 
         
 
                                                    3,578,018       2,731,147       2,206,413       6,309,165       4,724,031       34  
 
                                                   
 
     
 
     
 
     
 
     
 
         


(*)   Revenues derived from services provided to pelletizing joint ventures in the amount of R$ 46,985, R$ 35,777, R$ 31,749, R$ 60,511 and R$ 82,762 in 2Q/04, 1Q/04, 2Q/03, 06/30/03 and 06/30/04, respectively.

Summary of volumes sold of iron ore and pellets by geographical area (see 7.1 item).

                                         
    (Millions of tons)
    Quarter
  Accumulated
    2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
Foreign Market
                                       
Asia
    14.6       13.4       11.7       28.0       23.4  
Europe
    15.1       13.3       10.6       28.4       21.2  
Americas
    2.5       3.2       2.2       5.7       4.8  
Africa / Middle East / Australia
    1.9       2.1       2.4       4.0       3.9  
 
   
 
     
 
     
 
     
 
     
 
 
 
    34.1       32.0       26.9       66.1       53.3  
 
   
 
     
 
     
 
     
 
     
 
 
Domestic Market
    11.8       11.2       9.4       23.0       19.5  
 
   
 
     
 
     
 
     
 
     
 
 
Total
    45.9       43.2       36.3       89.1       72.8  
 
   
 
     
 
     
 
     
 
     
 
 
         
4   CVRD    

 


Table of Contents

(PIE CHARTS)

1.2.2- Cost of Products and Services

By Nature

                                                                                                         
    2003
  Quarter
  Accumulated
    Denominated
                                           
    R$
  US$
  2Q/04
  %
  1Q/04
  %
  2Q/03
  %
  06/30/04
  %
  06/30/03
  %
  Δ%
Personnel
    315,247             165,305       9       149,942       10       123,609       10       315,247       10       243,871       10       29  
Material
    382,685       184,255       336,038       19       230,902       16       206,016       17       566,940       17       417,119       17       36  
Oil and gas
    355,076             195,051       11       160,025       11       155,642       13       355,076       11       294,818       13       20  
Outsourced services
    474,173             268,963       16       205,210       14       169,105       14       474,173       15       292,448       12       62  
Outsourced transportation
    154,759             71,478       4       83,281       6       10,600       1       154,759       5       16,992       1       811  
Energy
    97,841             53,970       3       43,871       3       32,792       3       97,841       3       56,959       2       72  
Acquisition of iron ore and pellets
          589,869       321,647       18       268,222       18       258,570       21       589,869       18       645,038       26       (9 )
Tolling industrialization
          33,738       18,747       1       14,991       1       4,268             33,738       1       4,268             690  
Depreciation and depletion
    274,179             125,646       7       148,533       10       129,510       11       274,179       8       256,130       10       7  
Amortization of goodwill
    192,191             96,095       5       96,096       7       24,419       2       192,191       6       48,838       2       294  
Others
    42,720       154,924       122,788       7       74,856       4       96,318       8       197,644       6       182,251       7       8  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
Total
    2,288,871       962,786       1,775,728       100       1,475,929       100       1,210,849       100       3,251,657       100       2,458,732       100       32  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
   
 
    70 %     30 %                                                                                        
 
   
 
     
 
                                                                                         

The increase of 32% (R$ 792,925) in the cost of products and services (R$ 3,251,657 as of June 30, 2004 compared to R$ 2,458,732 as of June 30, 2003) is mainly due to the following major factors:

  Ferteco’s merger in September 2003, adding costs of R$ 425,578 from sales of 10,143 thousand tons of iron ore and pellets, besides the impact of R$ 102,738 goodwill amortization;
 
  Acceleration of goodwill amortization period of Samitri as a result of the revision of its projection of rentability, increasing costs in this quarter in R$ 40,619;
 
  Start up operations of the São Luís Pellets Plant (UPSL), adding costs of R$ 91,208 to sales of 179,366 thousand tons in 2004 as compared to 1,206 thousand tons in the same period of the prior year; and
 
  R$ 235,520 due to the increase in sales growth, the increase in maintenance costs of goods and equipment and price adjustments to contracts of services and oil-derived products.
         
    CVRD   5

 


Table of Contents

(PIE CHARTS)

1.2.3- Results of Equity Investments by Business Area

The numbers below do not necessarily reflect the individual results of each company, but rather the amounts effectively applicable to the business area.

                                                 
Business Area
  2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
  %
Ferrous Minerals
                                               
. Iron ore and pellets
    372,043       249,911       382,470       621,954       615,822       1  
. Manganese and ferroalloys
    150,497       76,537       56,800       227,034       102,372       122  
Non-Ferrous Minerals
    (1,721 )     5,635       (100 )     3,914       (104 )     3,863  
Logistics
    82,595       45,502       22,359       128,097       20,220       534  
Holdings
                                               
. Steel
    257,775       115,481       125,310       373,256       218,499       71  
. Aluminum
    227,858       89,613       266,945       317,471       487,929       (35 )
Others
    (2,797 )     3,697       12,249       900       27,142       (97 )
 
   
 
     
 
     
 
     
 
     
 
 
Equity
    1,086,250       586,376       866,033       1,672,626       1,471,880       14  
 
   
 
     
 
     
 
     
 
     
 
 
Provision for losses
    (30,525 )     (28,402 )     (34,866 )     (58,927 )     (25,234 )     (134 )
Amortization of goodwill
    (80,013 )     (57,270 )     (184,639 )     (137,283 )     (277,811 )     51  
Exchange variation on Stockholders’ Equity
    160,745       8,855       (495,536 )     169,600       (682,763 )     125  
 
   
 
     
 
     
 
     
 
     
 
 
Results of investment participations
    1,136,457       509,559       150,992       1,646,016       486,072       239  
 
   
 
     
 
     
 
     
 
     
 
 

The detail information of main companies is presented in attachment I.

Ferrous Minerals

(a) Iron Ore and Pellets

Equity in the results of investees is stable (R$ 621,954 in the first half of 2004 against R$ 615,822 in the first half of 2003). There were increases in sales volume of iron ore and pellets as well as of average prices, partially offset by the Real appreciation of 9% (the average exchange rate floated from R$ 3.2382 in the first half of 2003 to R$ 2.9710 in the first half of 2004). The effects of exchange rate variation on debt generated a sharp negative variation, due to the Real devaluation against the US dollar, of 8% in the first half of 2004 as compared to 19% in the first half of 2003.

In September 2003, CVRD increased its ownership in Caemi Mineração e Metalurgia S.A. (60.23% in the first half of 2004 against 16.86% in the first half of 2003), having a positive impact on equity in the results of investees. As opposed, due to the incorporation of Ferteco Mineração S.A. in September 2003, equity in the results of Ferteco is no longer applicable as from the first half of 2004.

         
6   CVRD    

 


Table of Contents

(b) Manganese and Ferroalloys

Equity in the results of investees had an increase of 122% (R$ 227,034 in the first half of 2004 as compared to R$ 102,372 in the first half of 2003), mainly due to the increases in sales volume and selling average prices of manganese and ferroalloys, partially offset by the effects of the Real appreciation of 9% (average exchange rate floated from R$ 3.2382 in the first half of 2003 to R$ 2.9710 in the first half of 2004).

The net financial results increased mainly due to the of financial income arising from cash investments.

Non-Ferrous Minerals

Equity in the results of PPSA was a gain of R$ 3,914 in the first half of 2004 as compared to a loss of R$ 104 in the first half of 2003. PPSA had negative stockholders’ equity in the first half of 2003 and, accordingly, equity in its results was not recognized.

Operating income was stable despite the increase in sales volume and stability in average prices in US dollar, due to the negative effects of the 9% Real appreciation.

The effects of exchange rate variations on debt had a strong negative impact due to the Real devaluation against the US dollar of 8% in the first half of 2004 as compared to an appreciation of 19% in the first half of 2003.

Logistic

Equity in the results of investees increased substantially (a gain of R$ 128,097 in the first half of 2004 as compared to a loss of R$ 20,220 in the first half of 2003), due to the increase in volume transported through the railroads and shipments, partially offset by the reduction in the volume of bulk transportation as a result of the divestitures program in the shipping business. Selling average prices increased mainly due to the strong demand for transportation services, especially from the exporters.

Holdings

(a) Steel

Equity in the results of investees had an increase of 71% (R$ 373,256 in the first half of 2004 as compared to R$ 218,499 in the first half of 2003) mainly due to the increases in sales volume and selling average prices, partially offset by the effects of the Real appreciation against the US dollar (average exchange rate floated from R$ 3.2382 in the first half of 2003 to R$ 2.9710 in the first half of 2004).

The exchange rate variation on debt had a strong adverse impact due to the effects of the Real devaluation against the US dollar.

Additionally, in the second quarter of 2004 CST had a favorable decision in Court and, accordingly, recognized R$ 73,533 of income tax credits related to the “Plano Verão” and reversal of provision for contingencies.

(b) Aluminum

Equity in the results of investees decreased by 35% (R$ 317,471 in the first half of 2004 as compared to R$ 487,929 in the first half of 2003).

There were increases in sales volume, mainly of alumina and bauxite, due to the increase in the capacity production of the plants and increase in the selling average prices partially offset by the effects of the Real appreciation against the US dollar (average exchange rate floated from R$ 3.2382 in the first half of 2003 to R$ 2.9710 in the first half of 2004). The aluminum production costs of Valesul significantly increased as a result of the increase in energy costs.

The financial negative effects in the results totally offset the operating gains and generated a reduction of equity in the results of investees as an impact on debt of the Real devaluation against the US dollar of 8% in the first half of 2004 as compared to an appreciation of 19% in the first half of 2003 as well as a devaluation of 6% against the Japanese Yen (which indexes a portion of the ALBRAS’ debt) in the first half of 2004 as compared to an appreciation of 19% in the first half of 2003.

Additionally, as a result of the increase in metal prices, the marking of the market price derivative instruments for metal prices generated losses in the first half of 2004.

1.2.4- Operating Expenses

The operating expenses increased by R$ 151,858 (R$ 744,906 on 06/30/04 compared to R$ 593,048 on 06/30/03), basically because of non- recurring-goodwill amortization of Samitri (note 1.2.8).

         
    CVRD   7

 


Table of Contents

1.2.5- Net Financial Results

The net financial result in 2Q04 had a negative impact of R$ 1,836,231 (expense of R$ 908,192 on 06/30/04 compared to revenue of R$ 928,039 on 06/30/03), mainly due to exchange rate effects arising from the valuation of the dollar against the real of 7.6% in, 2004 and devaluation of the dollar against the real of 18.7% in 2003. (Note 6.16)

1.2.6- Income Tax and Social Contribution

Income tax and social contribution reflect an expense of R$ 97,065 on 06/30/04 compared with an expense of R$ 459,560 on 06/30/03, mainly caused by the decrease in the tax basis (income before income tax and social contribution less the equity method result, goodwill and provisions for non-deductible losses) to R$ 1,001,514 on 06/30/04 compared to R$ 2,233,551 on 06/30/03, partially reduced by the benefit of interest on stockholders’ equity of R$ 306,170 on 06/30/04 (R$ 340,376 on 06/30/03). (Note 6.7)

1.2.7- Cash Generation

The operating cash generation measured by EBITDA (earnings before interest, income tax and depreciation, amortization and depletion) was R$ 3,071,220 on 06/30/04, against R$ 2,131,209 on 06/30/03, an increase of 44.1%.

EBITDA

                                         
    2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
Net operating revenue
    3,384,461       2,608,198       2,119,013       5,992,659       4,535,784  
Cost of products and services
    (1,775,728 )     (1,475,929 )     (1,210,849 )     (3,251,657 )     (2,458,732 )
Operating expenses
    (304,927 )     (439,979 )     (308,491 )     (744,906 )     (593,048 )
 
   
 
     
 
     
 
     
 
     
 
 
Operating profit
    1,303,806       692,290       599,673       1,996,096       1,484,004  
Depreciation / amortization of goodwill
    233,322       256,023       162,565       489,345       323,961  
 
   
 
     
 
     
 
     
 
     
 
 
 
    1,537,128       948,313       762,238       2,485,441       1,807,965  
Write-off of assets
                35,597             35,597  
Non recurring item — goodwill Samitri
          182,796             182,796        
Dividends received
    192,192       210,791       185,260       402,983       287,647  
 
   
 
     
 
     
 
     
 
     
 
 
EBITDA R$
    1,729,320       1,341,900       983,095       3,071,220       2,131,209  
 
   
 
     
 
     
 
     
 
     
 
 
US$ average
    3.0474       2.8945       2.9854       2.9710       3.2382  
 
   
 
     
 
     
 
     
 
     
 
 
EBITDA US$ 
    567,474       463,603       329,301       1,033,733       658,146  
 
   
 
     
 
     
 
     
 
     
 
 

1.2.8- Non recurring Item — Samitri’s goodwill amortization

According to instruction CVM 247, we reviewed the terms of goodwill originated from Samitri acquisition. After reviewing the projections of future results we adopted 5 (five) years of amortization, mainly due to the increase of dividends received from Samarco. Consequently we recorded an expense of R$ 182,796.

1.2.9- Interest on Stockholders’ Equity

During 2003, CVRD declared total remuneration of R$ 2,254 as interest on stockholders’ equity, as follows:

                         
    R$ million
  US$ million
            Amount at the   Amount at the
Payment date
  Amount
  declaration date
  payment date
04/30/03
    622       200       215  
10/31/03
    745       250       261  
10/31/03
    568       200       199  
From 04/30/04 (referring to 2003)
    319       111       108  
 
   
 
     
 
     
 
 
 
    2,254       761       783  
 
   
 
     
 
     
 
 

1.2.10- Relationship with Independet Auditors

According to Instruction CVM 308/99, the Board of Directors of CVRD appointed Deloitte Touche Tohmatsu — Auditores Independentes as independent auditors.

         
8   CVRD    

 


Table of Contents

PART II

QUARTERLY INFORMATION AND NOTES TO THE QUARTERLY INFORMATION

(A free translation of the original in Portuguese relating to the Quarterly Information prepared in accordance with the requirements of
Accounting Practices Generally Accepted in Brazil)

       
2- BALANCE SHEET       In thousands of reais
                         
    Notes
  06/30/04
  03/31/04
Assets
                       
Current assets
                       
Cash and cash equivalents
    6.4       227,780       381,834  
Accounts receivable from customers
          1,361,910       1,099,867  
Related parties
    6.5       316,284       317,190  
Inventories
    6.6       697,934       596,719  
Taxes to recover or offset
    6.8       576,771       536,825  
Deferred income tax and social contribution
    6.7       479,478       603,044  
Others
          264,138       291,712  
 
           
 
     
 
 
 
            3,924,295       3,827,191  
 
           
 
     
 
 
Long-term receivables
                       
Related parties
    6.5       705,575       688,883  
Loans and financing
          147,042       144,035  
Deferred income tax and social contribution
    6.7       822,548       784,563  
Judicial deposits
    6.12       1,081,034       1,033,064  
Others
          27,139       28,476  
 
           
 
     
 
 
 
            2,783,338       2,679,021  
 
           
 
     
 
 
Permanent assets
                       
Investments
    6.9       12,502,669       11,402,819  
Property, plant and equipment
    6.10       13,913,741       13,092,074  
 
           
 
     
 
 
 
            26,416,410       24,494,893  
 
           
 
     
 
 
 
            33,124,043       31,001,105  
 
           
 
     
 
 
Liabilities and stockholders’ equity
                       
Current liabilities
                       
Current portion of long-term debt
    6.11       1,001,290       959,781  
Payable to suppliers and contractors
          870,532       1,022,863  
Related parties
    6.5       1,395,001       1,483,965  
Payroll and related charges
          189,452       200,658  
Pension Plan — Valia
          96,158       93,110  
Provisioned interest on stockholders’ equity
          427,281       790,710  
Others
          473,416       484,287  
 
           
 
     
 
 
 
            4,453,130       5,035,374  
 
           
 
     
 
 
Long-term liabilities
                       
Long-term debt
    6.11       3,699,186       3,002,365  
Related parties
    6.5       5,138,937       4,484,432  
Deferred income tax and social contribution
    6.7       97,461       99,451  
Provisions for contingencies
    6.12       1,603,557       1,493,551  
Pension Plan — Valia
          593,403       574,685  
Others
          860,058       888,796  
 
           
 
     
 
 
 
            11,992,602       10,543,280  
 
           
 
     
 
 
Stockholders’ equity
                       
Paid-up capital
    6.14       7,300,000       6,300,000  
Revenue reserves
          9,378,311       9,122,451  
 
           
 
     
 
 
 
            16,678,311       15,422,451  
 
           
 
     
 
 
 
            33,124,043       31,001,105  
 
           
 
     
 
 

The additional information, notes and attachment I are an integral part of these statements.

         
    CVRD   9

 


Table of Contents

(A free translation of the original in Portuguese relating to the Quarterly Information prepared in accordance with the requirements of
Accounting Practices Generally Accepted in Brazil)

       
3- STATEMENT OF INCOME        
                                                 
            In thousands of reais
            Quarter
  Accumulated
    Notes
  2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
Operating revenues
    1.2.1                                          
Sales of ore and metals
                                               
Iron ore and pellets
            2,981,683       2,327,709       1,761,795       5,309,392       3,839,587  
Copper
            72,350                   72,350        
Gold
                        20,085             52,383  
Potash
            96,176       65,272       63,343       161,448       135,873  
 
           
 
     
 
     
 
     
 
     
 
 
 
            3,150,209       2,392,981       1,845,223       5,543,190       4,027,843  
Railroad and port services
            409,788       332,627       353,537       742,415       680,701  
Others
            18,021       5,539       7,653       23,560       15,487  
 
           
 
     
 
     
 
     
 
     
 
 
 
            3,578,018       2,731,147       2,206,413       6,309,165       4,724,031  
Value Added taxes
            (193,557 )     (122,949 )     (87,400 )     (316,506 )     (188,247 )
 
           
 
     
 
     
 
     
 
     
 
 
Net operating revenues
            3,384,461       2,608,198       2,119,013       5,992,659       4,535,784  
 
           
 
     
 
     
 
     
 
     
 
 
Cost of products and services
    1.2.2                                          
Ores and metals
            (1,657,604 )     (1,374,289 )     (1,091,310 )     (3,031,893 )     (2,234,197 )
Railroad and port services
            (114,853 )     (98,616 )     (117,544 )     (213,469 )     (219,058 )
Others
            (3,271 )     (3,024 )     (1,995 )     (6,295 )     (5,477 )
 
           
 
     
 
     
 
     
 
     
 
 
 
            (1,775,728 )     (1,475,929 )     (1,210,849 )     (3,251,657 )     (2,458,732 )
 
           
 
     
 
     
 
     
 
     
 
 
Gross profit
            1,608,733       1,132,269       908,164       2,741,002       2,077,052  
Gross margin
            47.5 %     43.4 %     42.9 %     45.7 %     45.8 %
Operating expenses
                                               
Selling
            (6,729 )     (4,655 )     (45,319 )     (11,384 )     (96,999 )
Administrative
    6.19       (133,817 )     (104,589 )     (96,577 )     (238,406 )     (185,335 )
Research and development
            (75,717 )     (63,339 )     (35,890 )     (139,056 )     (74,145 )
Other operating expenses
    6.19       (88,664 )     (84,600 )     (130,705 )     (173,264 )     (236,569 )
Non recurring item — goodwill Samitri
    1.2.8             (182,796 )           (182,796 )      
 
           
 
     
 
     
 
     
 
     
 
 
 
            (304,927 )     (439,979 )     (308,491 )     (744,906 )     (593,048 )
 
           
 
     
 
     
 
     
 
     
 
 
Operating results
            1,303,806       692,290       599,673       1,996,096       1,484,004  
Operating margin
            38.5 %     26.5 %     28.3 %     33.3 %     32.7 %
Results of equity investments
                                               
Gain on investments accounted for by the equity method
    6.9       1,086,250       586,376       866,033       1,672,626       1,471,880  
Provision for losses
    6.9       (30,525 )     (28,402 )     (34,866 )     (58,927 )     (25,234 )
Amortization of goodwill
    6.9       (80,013 )     (57,270 )     (184,639 )     (137,283 )     (277,811 )
Exchange variation from foreign investees
    6.9       160,745       8,855       (495,536 )     169,600       (682,763 )
 
           
 
     
 
     
 
     
 
     
 
 
 
            1,136,457       509,559       150,992       1,646,016       486,072  
Financial results
                                               
Financial expenses, net
    6.16       (187,309 )     (101,347 )     (76,187 )     (288,656 )     (185,249 )
Monetary and exchange rate variation, net
    6.16       (556,373 )     (68,046 )     846,622       (624,419 )     1,111,655  
Derivatives
    6.16       40,401       (35,518 )     12,709       4,883       1,633  
 
           
 
     
 
     
 
     
 
     
 
 
 
            (703,281 )     (204,911 )     783,144       (908,192 )     928,039  
 
           
 
     
 
     
 
     
 
     
 
 
Income before income tax and social contribution
            1,736,982       996,938       1,533,809       2,733,920       2,898,115  
Income tax and social contribution
    6.7                                          
Current
            29,751       (192,438 )     (157,004 )     (162,687 )     (157,004 )
Deferred
            (83,592 )     149,214       (102,078 )     65,622       (302,556 )
 
           
 
     
 
     
 
     
 
     
 
 
 
            (53,841 )     (43,224 )     (259,082 )     (97,065 )     (459,560 )
 
           
 
     
 
     
 
     
 
     
 
 
Net income for the period
            1,683,141       953,714       1,274,727       2,636,855       2,438,555  
 
           
 
     
 
     
 
     
 
     
 
 
Number (thousands) of shares outstanding at the end of the period
            383,840       383,840       383,839       383,840       383,839  
 
           
 
     
 
     
 
     
 
     
 
 
Net earnings per share outstanding at the end of the period (R$)
            4.39       2.48       3.32       6.87       6.35  
 
           
 
     
 
     
 
     
 
     
 
 
EBITDA
    1.2.7       1,729,320       1,341,900       983,095       3,071,220       2,131,209  
EBITDA margin
            51.1 %     51.4 %     46.4 %     51.2 %     47.0 %

The additional information, notes and attachment I are an integral part of these statements.

         
10   CVRD    

 


Table of Contents

(A free translation of the original in Portuguese relating to the Quarterly Information prepared in accordance with the requirements of
Accounting Practices Generally Accepted in Brazil)

       
4- STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (ADDITIONAL INFORMATION) In thousands of reais
                                                                         
            Revenue reserves
       
    Paid-up   Expansion/           Unrealized           Fiscal   Treasury   Retained    
    capital
  Investments
  Depletion
  income
  Legal
  incentives
  stock
  earnings
  Total
On December 31, 2002
    5,000,000       5,277,582       1,004,166       745,407       854,698             (131,334 )           12,750,519  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Change in accounting practice — environmental provision
                                              (65,386 )     (65,386 )
Capitalization of reserves
    1,300,000       (1,300,000 )                                          
Realization of revenue reserve
                      (188,141 )                       188,141        
Treasury stock
                                        16             16  
Net income for the year
                                              4,508,850       4,508,850  
Proposed appropriations:
                                                                       
Interest on stockholders’ equity
                                              (2,254,425 )     (2,254,425 )
Appropriation to revenue reserves
          2,061,744                   225,443       89,993             (2,377,180 )      
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
On December 31, 2003
    6,300,000       6,039,326       1,004,166       557,266       1,080,141       89,993       (131,318 )           14,939,574  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net income for the year
                                              2,636,855       2,636,855  
Capitalization of reserves
    1,000,000       (910,007 )                       (89,993 )                  
Interest on stockholders’ equity — deliberated
                                              (470,837 )     (470,837 )
Interest on stockholders’ equity — provisioned
                                              (427,281 )     (427,281 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
On June 30, 2004
    7,300,000       5,129,319       1,004,166       557,266       1,080,141             (131,318 )     1,738,737       16,678,311  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 

The additional information, notes and attachment I are an integral part of these statements.

         
    CVRD   11

 


Table of Contents

(A free translation of the original in Portuguese)

       
5- STATEMENT OF CASH FLOWS (ADDITIONAL INFORMATION)   In thousands of reais
                                         
    2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
Cash flows from operating activities:
                                       
Net income for the period
    1,683,141       953,714       1,274,727       2,636,855       2,438,555  
Adjustments to reconcile net income for the period with cash provided by operating activities:
                                       
Result of equity investments
    (1,136,457 )     (509,559 )     (150,992 )     (1,646,016 )     (486,072 )
Depreciation, amortization and depletion
    172,138       164,571       140,447       336,709       275,123  
Deferred income tax and social contribution
    83,592       (149,214 )     102,078       (65,622 )     302,556  
Financial expenses and monetary and exchange rate variations on assets and liabilities, net
    515,144       88,268       (979,908 )     603,412       (1,307,424 )
Loss on disposal of property, plant and equipment
    29,119       1,309       (13,585 )     30,428       22,415  
Amortization of goodwill in the cost of products sold
    96,095       96,096       24,419       192,191       48,838  
Non recurring item — goodwill Samitri
          182,796             182,796        
Net (gains) losses on derivatives
    (53,891 )     33,944       26,146       (19,947 )     52,113  
Dividends/interest on stockholders’ equity received
    192,192       210,791       185,260       402,983       287,647  
Others
    22,120       (17,925 )     8,091       4,195       12,674  
 
   
 
     
 
     
 
     
 
     
 
 
 
    1,603,193       1,054,791       616,683       2,657,984       1,646,425  
 
   
 
     
 
     
 
     
 
     
 
 
Decrease (increase) in assets:
                                       
Accounts receivable
    (262,043 )     87,003       248,170       (175,040 )     340,473  
Inventories
    (101,215 )     (43,291 )     (29,571 )     (144,506 )     (30,068 )
Others
    (7,731 )     (19,103 )     (70,777 )     (26,834 )     (64,154 )
 
   
 
     
 
     
 
     
 
     
 
 
 
    (370,989 )     24,609       147,822       (346,380 )     246,251  
 
   
 
     
 
     
 
     
 
     
 
 
Increase (decrease) in liabilities:
                                       
Suppliers and contractors
    (152,331 )     63,410       142,660       (88,921 )     120,659  
Payroll and related charges and others
    (11,206 )     (21,523 )     34,918       (32,729 )     8,084  
Income tax and social contribution to recover
    (11,711 )     192,438             180,727        
Others
    43,353       19,732       72,018       63,085       105,902  
 
   
 
     
 
     
 
     
 
     
 
 
 
    (131,895 )     254,057       249,596       122,162       234,645  
 
   
 
     
 
     
 
     
 
     
 
 
 
    1,100,309       1,333,457       1,014,101       2,433,766       2,127,321  
 
   
 
     
 
     
 
     
 
     
 
 
Cash flows from investing activities:
                                       
Loans and advances receivable
    (66,038 )     352,072       153,830       286,034       (33,877 )
Guarantees and deposits
    (46,421 )     (48,456 )     (400,912 )     (94,877 )     (435,607 )
Additions to investments
    (342,010 )     (73,626 )     (315,618 )     (415,636 )     (316,090 )
Additions to property, plant and equipment
    (910,437 )     (873,446 )     (574,115 )     (1,783,883 )     (959,528 )
Proceeds from disposal of property, plant and equipment/investments
    2,654       306       105,337       2,960       105,774  
 
   
 
     
 
     
 
     
 
     
 
 
 
    (1,362,252 )     (643,150 )     (1,031,478 )     (2,005,402 )     (1,639,328 )
 
   
 
     
 
     
 
     
 
     
 
 
Cash flows from financing activities:
                                       
Short-term debt
    (263,228 )     (471,792 )     (29,017 )     (735,020 )     (361,268 )
Long-term debt
    1,376,658       991,498       330,249       2,368,156       907,446  
Repayments to financial institutions
    (214,831 )     (1,170,187 )     (264,950 )     (1,385,018 )     (409,405 )
Interest on stockholders’ equity paid
    (790,710 )           (619,921 )     (790,710 )     (620,125 )
Treasury stock
                13             13  
 
   
 
     
 
     
 
     
 
     
 
 
 
    107,889       (650,481 )     (583,626 )     (542,592 )     (483,339 )
 
   
 
     
 
     
 
     
 
     
 
 
Increase (decrease) in cash and cash equivalents
    (154,054 )     39,826       (601,003 )     (114,228 )     4,654  
Cash and cash equivalents, beginning of the period
    381,834       342,008       864,949       342,008       259,292  
 
   
 
     
 
     
 
     
 
     
 
 
Cash and cash equivalents, end of the period
    227,780       381,834       263,946       227,780       263,946  
Cash paid during the period for:
                                       
 
   
 
     
 
     
 
     
 
     
 
 
Short-term interest
          (4,016 )           (4,016 )     (16,428 )
Long-term interest
    (95,930 )     (105,368 )     (74,255 )     (201,298 )     (166,456 )
Income tax and social contribution paid
                (46,704 )           (46,704 )
Non-cash transactions:
                                       
Additions to property, plant and equipment — mergers
    (115,141 )     (22,461 )     91,605       (137,602 )     116,704  
         
12   CVRD    

 


Table of Contents

(A free translation of the original in Portuguese relating to the Quarterly Information prepared in accordance with the requirements of
Accounting Practices Generally Accepted in Brazil)

6- NOTES TO THE QUARTERLY INFORMATION AT JUNE 30, 2004 AND JUNE 30, 2003

Expressed In thousands of reais

6.1- Operations

Companhia Vale do Rio Doce is a publicly traded corporation whose predominant activities are mining, processing and sale of iron ore, pellets and potash, as well as port and railroad transportation services, power generation and mineral research and development. In addition, through its direct and indirect subsidiaries and jointly-controlled companies, CVRD operates in manganese and ferroalloys, steel, aluminum and kaolin.

6.2- Presentation of Quarterly Information

The quarterly information have been prepared in conformity with accounting practices adopted in Brazil, based on corporate legislation, as well as the rules and guidelines issued by the Comissão de Valores Mobiliários — CVM (Brazilian Securities Commission) and Instituto dos Auditores Independentes do Brasil — IBRACON (Brazilian Independent Auditors Institute).

In order to provide better information to the market, the Company is presenting the Statement of Cash Flows (according rule NPC 20 — Ibracon).

6.3- Significant Accounting Policies

(a)   The Company follows the accrual basis of accounting;
 
(b)   Assets and liabilities that are realizable or due more than twelve months after the quarterly information date are classified as long-term;
 
(c)   Marketable securities, classified as cash and cash equivalents, are stated at cost plus accrued income earned to the Quarterly Information date;
 
(d)   Inventories are stated at average purchase or production cost, and imports in transit at the cost of each item, not exceeding market or realizable value;
 
(e)   Assets and liabilities in foreign currencies are translated at exchange rates in effect at the quarterly information date, and those in local currency, when applicable, are restated based on contractual indices;
 
(f)   Investments in subsidiaries, jointly-controlled companies and affiliated companies are accounted for by the equity method, based on the stockholders’ equity of the investees, and when applicable increased/decreased by goodwill and negative goodwill to be amortized and provision for losses. Other investments are recorded at cost, less provision for unrealized losses when applicable; and
 
(g)   Property, plant and equipment, including interest incurred during the construction period of large-scale projects, are recorded at historic cost (increased by monetary restatement up to 1995) and depreciated on the straight-line method, based on the useful lives of the assets. Depletion of mineral reserves is based on the ratio between production and estimated capacity.

6.4- Cash and Cash Equivalents

                 
    06/30/04
  03/31/04
Marketable securities linked to the interbank deposit certificate rate (*)
    211,804       376,595  
Government securities (NBC-E, NTN-D, LFT)
    5,132       4,949  
Others
    10,844       290  
 
   
 
     
 
 
 
    227,780       381,834  
 
   
 
     
 
 


(*)   For part of these investments the Company contracted interest rate and/or currency swap operations with financial institutions.
         
    CVRD   13

 


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6.5- Related Parties

Derived from sales and purchases of products and services or from loans under normal market conditions, with maturities up to the year 2013, as follows:

                                 
    Assets
  Liabilities
    06/30/04
  03/31/04
  06/30/04
  03/31/04
Subsidiaries
                               
ALUNORTE — Alumina do Norte do Brasil S.A.
    437,367       407,692       13,155       469  
Alumínio Brasileiro S.A. — ALBRAS
    1,667       2,208       11,692       107,308  
CVRD Overseas Ltd.
    71,876       75,809       1,639,610       1,722,197  
Ferrovia Centro-Atlântica S.A.
    1,691       89,813       1,028       142  
Itabira Rio Doce Company Limited — ITACO
    742,116       569,913       2,384,751       1,822,332  
Mineração Andirá Ltda.
    2,320       1,820       2,121       2,037  
Pará Pigmentos S.A.
    23,201       23,201              
Rio Doce International Finance Ltd.
    7,155       6,670       2,043,758       2,002,028  
Rio Doce Manganês S.A. — RDM
    11,187       7,388       36,755       24,108  
Salobo Metais S.A.
    232,179       232,098              
Others
    177,248       138,620       506,377       413,427  
 
   
 
     
 
     
 
     
 
 
 
    1,708,007       1,555,232       6,639,247       6,094,048  
 
   
 
     
 
     
 
     
 
 
Jointly controlled companies
                               
Baovale Mineração S.A.
    109       1,370       26,404       30,836  
Companhia Coreano-Brasileira de Pelotização — KOBRASCO
    139,211       141,698       50,238       72,980  
Companhia Hispano-Brasileira de Pelotização — HISPANOBRÁS
    81,269       47,149       122,346       72,792  
Companhia Ítalo-Brasileira de Pelotização — ITABRASCO
    63,783       46,486       36,653       27,491  
Companhia Nipo-Brasileira de Pelotização — NIBRASCO
    82,314       58,109       84,201       71,210  
Companhia Siderúrgica de Tubarão — CST
    98,596       59,369       29       4  
Mineração Serra Geral S. A.
    427       3,580       9,781       28,786  
Samarco Mineração S.A.
    4,818       4,424              
Others
    12,969       14,955       18,860       21,825  
 
   
 
     
 
     
 
     
 
 
 
    483,496       377,140       348,512       325,924  
 
   
 
     
 
     
 
     
 
 
Affiliates
                               
Ferroban — Ferrovias Bandeirantes S. A.
    25,327       24,632              
Usinas Siderúrgicas de Minas Gerais S. A. — USIMINAS
    21,268       19,033             57  
Others
    13       11       2,492       2,102  
 
   
 
     
 
     
 
     
 
 
 
    46,608       43,676       2,492       2,159  
 
   
 
     
 
     
 
     
 
 
 
    2,238,111       1,976,048       6,990,251       6,422,131  
 
   
 
     
 
     
 
     
 
 
Represented by:
                               
Trade balances (sales and purchases of products and services) (*)
    1,216,252       969,975       456,313       453,734  
Short-term financial balances
    316,284       317,190       1,395,001       1,483,965  
Long-term financial balances
    705,575       688,883       5,138,937       4,484,432  
 
   
 
     
 
     
 
     
 
 
 
    2,238,111       1,976,048       6,990,251       6,422,131  
 
   
 
     
 
     
 
     
 
 


(*)   Included in “Accounts receivable from customers” and “Payable to suppliers and contractors”.

6.6- Inventories

                 
    06/30/04
  03/31/04
Finished products
               
. Iron ore
    237,817       218,751  
. Pellets
    26,839       29,918  
. Copper
    30,714        
. Others
    5,313       4,732  
 
   
 
     
 
 
 
    300,683       253,401  
Spare parts and maintenance supplies
    397,251       343,318  
 
   
 
     
 
 
 
    697,934       596,719  
 
   
 
     
 
 
         
14   CVRD    

 


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6.7- Deferred Income Tax and Social Contribution

                                 
    Deferred assets
  Deferred liabilities
    06/30/04
  03/31/04
  06/30/04
  03/31/04
Tax loss carryforw ard
    145,276       268,840              
 
   
 
     
 
     
 
     
 
 
Temporary differences:
                               
. Pension Plan
    245,188       238,080              
. Contingent liabilities
    417,684       384,126              
. Provision for losses on assets
    437,222       409,009              
. Provision for losses on derivative financial instruments
    56,656       87,552              
 
   
 
     
 
     
 
     
 
 
 
    1,156,750       1,118,767              
 
   
 
     
 
     
 
     
 
 
Accelerated depreciation
                8,538       8,699  
Long-term sales
                74,003       72,800  
Others
                15,537       18,569  
 
   
 
     
 
     
 
     
 
 
Total
    1,302,026       1,387,607       98,078       100,068  
 
   
 
     
 
     
 
     
 
 
Short-term
    479,478       603,044       617       617  
Long-term
    822,548       784,563       97,461       99,451  
 
   
 
     
 
     
 
     
 
 
 
    1,302,026       1,387,607       98,078       100,068  
 
   
 
     
 
     
 
     
 
 

The deferred assets and liabilities regarding income tax and social contribution are recognized from an accounting standpoint considering an analysis of likely future results, based on economic and financial projections prepared in light of internal assumptions and macroeconomic, commercial and fiscal scenarios. These projections can change in the future. These temporary differences will be realized upon the occurrence of the corresponding taxable events, expected to be as follows:

         
    Net amount of
Years
  credits
2005
    478,861  
2006
    242,176  
2007
    160,504  
2008
    66,912  
2009
    69,793  
2010
    60,761  
2011
    22,823  
2012 to 2014
    102,117  
 
   
 
 
 
    1,203,947  
 
   
 
 

In addition to the credits recorded, the Company has a lawsuit claiming an additional 51.8% monetary restatement for tax purposes applied to the months of January and February 1989 (“Plano Verão” monetary plan). A favorable ruling has already been obtained for compensation of credits corresponding to 42.7% instead of the 51.8% requested (however, not yet fully utilized). The amount of these credits covered by the ruling aggregates approximately R$ 309,000 and the accounting effects have not yet been recognized in the quarterly information.

         
    CVRD   15

 


Table of Contents

The amounts reported as income tax and social contribution, which affected the results for the period are as follows:

                                         
    Quarter
  Accumulated
    2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
Income before income tax and social contribution
    1,736,982       996,938       1,533,809       2,733,920       2,898,115  
Equity in results of subsidiaries and affiliated companies
    (1,086,250 )     (586,376 )     (866,033 )     (1,672,626 )     (1,471,880 )
Exchange rate variation on equity
    (160,745 )     (8,855 )     495,536       (169,600 )     682,763  
Non-deductible goodwill and provisions for losses
    54,911       54,909       52,920       109,820       124,553  
 
   
 
     
 
     
 
     
 
     
 
 
 
    544,898       456,616       1,216,232       1,001,514       2,233,551  
Statutory rates — income tax (25%) and social contribution (9%) = 34%
    (185,266 )     (155,249 )     (413,519 )     (340,515 )     (759,407 )
Adjustments to net income which modify the effect on the result for the period:
                                       
Income tax benefit from interest on stockholders’ equity
    145,329       160,841       128,958       306,170       340,376  
Fiscal incentives
                52,150             52,150  
Stockholders’ equity received
    (19,267 )     (44,171 )     (2,930 )     (63,438 )     (18,676 )
Others
    5,363       (4,645 )     (23,741 )     718       (74,003 )
 
   
 
     
 
     
 
     
 
     
 
 
Income tax and social contribution
    (53,841 )     (43,224 )     (259,082 )     (97,065 )     (459,560 )
 
   
 
     
 
     
 
     
 
     
 
 

6.8- Taxes to recover or offset

                 
    06/30/04
  03/31/04
Withholding income tax on marketable securities
    122,095       105,145  
Withholding income tax on interest on own capital received
    28,203       19,607  
Income tax of merged companies
    14,033       14,033  
Value-Added Tax (a)
    336,266       330,121  
PIS (b)
    12,402       13,897  
COFINS (b)
    26,249       15,703  
Other PIS/COFINS credits
    31,091       35,073  
IAPAS
    2,918       2,724  
Others
    3,514       522  
 
   
 
     
 
 
 
    576,771       536,825  
 
   
 
     
 
 


(a)   Due to export activity, CVRD has accumulated significant ICMS credits that integral recuperation is considered improbable, therefore the value is shown net of provision for losses in the amount of R$ 328,128.
 
(b)   Tax credit generated by the non-cumulative basis of PIS, in force since December 2002 and that was extended to COFINS since February 2004; tax credits related to PIS/COFINS/CSLL retention effected by third practices for the services rendered for CVRD since February, 2004.
         
16   CVRD    

 


Table of Contents

6.9- Investments

                                                                                                 
                            Investment participations
   
                                            Advance     Result of investment participations
                    Adjusted                   for future   Goodwill and  
            Adjusted   net income   Investments   capital increase   negative goodwill   Equity / Others
    Partici-   stockholders’   (loss) for  
 
 
 
    pation %
  equity
  the period
  06/30/04
  03/31/04
  06/30/04
  03/31/04
  06/30/04
  03/31/04
  2Q/04
  1Q/04
  2Q/03
Iron ore and pellets
                                                                                               
Caemi Mineração e Metalurgia S.A. (f, g, j)
    60.23       1,264,784       280,194       703,064       608,364                   1,218,356       1,253,936       101,112       67,648       17,526  
KOBRASCO (g)
    50.00       15,341       9,264       7,671       7,317                               354       4,278        
HISPANOBRÁS (g)
    50.89       113,301       22,842       57,659       48,192                               10,600       1,024       4,071  
ITABRASCO (g)
    50.90       79,100       16,563       40,263       33,428                               7,864       567       2,922  
NIBRASCO (b)
    51.00       128,711       43,134       65,643       59,070                               14,506       7,492       (2,559 )
CVRD Overseas Ltd. (a, b)
    100.00       544,501       93,368       544,501       462,517                               56,019       37,349       37,009  
Ferteco Mineração S.A. (i)
    100.00                                           565,023       616,388                   102,738  
Gulf Industrial Investment Co. — GIIC (a, b)
    50.00       239,629       34,746       119,803       110,679                               5,785       11,587       10,259  
ITACO/ RDE (a, b)
    100.00       1,352,474       218,331       1,352,474       1,178,393                               190,536       27,795       (218,050 )
Minas da Serra Geral S.A. — MSG (b)
    50.00       101,578       (2,849 )     50,789       51,640                               (3,827 )     (673 )     2,910  
Samarco Mineração S.A. (g)
    50.00       557,528       279,443       278,764       312,817                               63,540       76,182       71,117  
Incorporated companies (d, i, l)
                                                  384,763       429,494                    
Others (b)
                          254,034       243,620                   23,607       25,967       27,824       22,062       969  
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
                            3,474,665       3,116,037                   2,191,749       2,325,785       474,313       255,311       28,912  
Manganese and ferroalloys
                                                                                               
Rio Doce Manganèse Europe — RDME (a, b)
    100.00       206,895       26,053       206,895       194,179                               14,606       11,447       (37,055 )
Rio Doce Manganês S.A. (g)
    100.00       751,433       132,487       751,433       657,722                   109,775       129,104       93,711       38,776       26,375  
Urucum Mineração S.A. (g)
    100.00       43,735       9,286       43,735       60,621                               6,190       3,096       6,759  
Others (b)
                          76,794       40,115                               48,893       24,477       36,928  
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
                            1,078,857       952,637                   109,775       129,104       163,400       77,796       33,007  
Non-ferrous
                                                                                               
Pará Pigmentos S.A. (g)
    82.04       95,466       5,206       78,320       79,749                               (1,429 )     5,699        
Ferro-Gusa Carajás (b, h)
    87.92       121,467             106,794       106,794                                            
Salobo Metais S.A. (b, h)
    100.00       233,285             233,285       209,751       10,809       23,493                                
Others (b)
                          100,772       91,210                               (292 )     (64 )     (100 )
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
                            519,171       487,504       10,809       23,493                   (1,721 )     5,635       (100 )
Logistics
                                                                                               
Companhia Ferroviária do Nordeste (m)
                                                                       
Ferrovia Centro-Atlântica S.A. (g)
    100.00       299,688       (52,173 )     299,688       94,961                               129       169        
MRS Logística S.A. (c, g)
    29.35       349,494       93,243       102,577       87,236                               15,341       12,025        
DOCENAVE (g)
    100.00       297,633       66,205       297,633       258,815                               46,538       19,667       21,183  
Sepetiba Tecon S.A. (m)
    50.00                                                                   (937 )
TVV — Terminal de Vila Velha S.A. (g)
    99.89       65,034       7,635       64,962       62,733                               4,130       3,497       2,113  
Companhia Portuária da Baía de Sepetiba (b)
    100.00       187,631       26,899       187,631       171,045                               16,586       10,313        
CPP Participações (g)
    100.00       (15,122 )     (269 )     (15,122 )                                                
Others (b)
                          2,859       2,859                               (129 )     (169 )      
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
                            940,228       677,649                               82,595       45,502       22,359  
Steel
                                                                                               
California Steel Industries, Inc — CSI (a, b)
    50.00       754,072       181,008       377,036       314,653                               88,063       2,441       (101,999 )
CST (e, f, g)
    28.02       4,261,994       895,815       1,182,188       1,052,685                   (128,694 )     (128,694 )     175,416       70,150       72,124  
DOCEPAR S.A. (g)
    100.00       26,634                                                              
Rio Doce Limited (a, b)
    100.00       344,866             344,866       313,879                                            
USIMINAS (b, f)
    11.46       4,725,555       732,984       541,549       502,549                               39,000       45,000       37,000  
Others (b)
                          (400 )     (400 )                                          
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
                            2,445,239       2,183,366                   (128,694 )     (128,694 )     302,479       117,591       7,125  
Aluminum
                                                                                               
ALBRAS — Alumínio Brasileiro S.A. (b)
    51.00       1,028,215       188,355       521,988       423,290                               98,698       (2,637 )     125,818  
ALUNORTE (b)
    57.03       1,243,699       165,351       709,284       553,373                               73,174       21,126       83,871  
Itabira Rio Doce (ITACO) (a, b)
                                                            1,922       28,115       20,583  
Mineração Rio do Norte S.A. (g)
    40.00       728,781       190,403       291,512       310,634                               42,651       33,511       30,092  
ALUVALE — own operations (i)
                                                                        4,951  
Valesul Alumínio S.A. (g)
    54.51       253,713       38,362       138,299       148,690                               11,413       9,498       1,630  
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
                            1,661,083       1,435,987                               227,858       89,613       266,945  
Others
                                                                                               
DOCEPAR S.A. (g)
    100.00       26,634       902       26,634       26,053                               581       321       16,280  
FOSFERTIL (m)
                                                                        6,598  
Florestas Rio Doce S.A. (g)
    99.85       159,446       1,469       159,207       161,709                               (2,502 )     3,969       (10,977 )
Others (b)
                        (959 )     (2,701 )     14,905       14,890                   (8 )     (507 )     348  
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
                            184,882       185,061       14,905       14,890                   (1,929 )     3,783       12,249  
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
                            10,304,125       9,038,241       25,714       38,383       2,172,830       2,326,195       1,246,995       595,231       370,497  
                             
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Effects of exchange variation from foreign investees
                                                                160,745       8,855       (495,536 )

     

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                                                                                                         
    Result of investment participations    
   
   
    Provision for losses   Amortization of goodwill   Total   Total   Dividends received   Market
   
 
 
 
 
  Value
    2Q/04
  1Q/04
  2Q/03
  2Q/04
  1Q/04
  2Q/03
  2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
  2Q/04
  1Q/04
  2Q/03
  2Q/04
Iron ore and pellets
                                                                                                                       
Caemi Mineração e Metalurgia S.A. (f, g, j)
                      (35,580 )     (35,580 )     (12,930 )     65,532       32,068       4,596       97,600       1,149                         2,785,724  
KOBRASCO (g)
                17,671                         354       4,278       17,671       4,632       26,766                          
HISPANOBRÁS (g)
                                        10,600       1,024       4,071       11,624       6,356       1,133       1,789       1,140        
ITABRASCO (g)
                                        7,864       567       2,922       8,431       4,659       1,096       3,200       2,815        
NIBRASCO (b)
                                        14,506       7,492       (2,559 )     21,998       (944 )                        
CVRD Overseas Ltd. (a, b)
                                        56,019       37,349       37,009       93,368       66,463                          
Ferteco Mineração S.A. (i)
                                  (34,656 )                 68,082             118,473                          
Gulf Industrial Investment Co. — GIIC (a, b)
                                        5,785       11,587       10,259       17,372       16,515                          
ITACO/ RDE (a, b)
                                        190,536       27,795       (218,050 )     218,331       (357,854 )                        
Minas da Serra Geral S.A. — MSG (b)
                                        (3,827 )     (673 )     2,910       (4,500 )     6,706       198             2,868        
Samarco Mineração S.A. (g)
                                        63,540       76,182       71,117       139,722       140,844       97,593       55,043       64,166        
Incorporated companies (d, i, l)
                                                                                         
Others (b)
    (439 )     (775 )           (2,361 )     (2,361 )     (2,361 )     25,024       18,926       (1,392 )     43,950       1,884       875       1,054       1,603        
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
 
    (439 )     (775 )     17,671       (37,941 )     (37,941 )     (49,947 )     435,933       216,595       (3,364 )     652,528       31,017       100,895       61,086       72,592          
Manganese and ferroalloys
                                                                                                                       
Rio Doce Manganèse Europe — RDME (a, b)
                                        14,606       11,447       (37,055 )     26,053       (29,048 )                        
Rio Doce Manganês S.A. (g)
                      (19,329 )     (19,329 )     (20,129 )     74,382       19,447       6,246       93,829       3,986                          
Urucum Mineração S.A. (g)
                                        6,190       3,096       6,759       9,286       13,652                   14,493        
Others (b)
    (20 )     (77 )     (2,596 )                       48,873       24,400       34,332       73,273       38,142                   1,543        
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
 
    (20 )     (77 )     (2,596 )     (19,329 )     (19,329 )     (20,129 )     144,051       58,390       10,282       202,441       26,732                   16,036          
Non-ferrous
                                                                                                                       
Pará Pigmentos S.A. (g)
                27,292                         (1,429 )     5,699       27,292       4,270       51,272                          
Ferro-Gusa Carajás (b, h)
                                                                                         
Salobo Metais S.A. (b, h)
                                                                                         
Others (b)
                                        (292 )     (64 )     (100 )     (356 )     (104 )                        
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
 
                27,292                         (1,721 )     5,635       27,192       3,914       51,168                            
Logistics
                                                                                                                       
Companhia Ferroviária do Nordeste (m)
                (3,012 )                                   (3,012 )           (4,941 )                        
Ferrovia Centro-Atlântica S.A. (g)
    (26,302 )     (25,871 )     (96,225 )                 (114,563 )     (26,173 )     (25,702 )     (210,788 )     (51,875 )     (253,282 )                        
MRS Logística S.A. (c, g)
                13,898                         15,341       12,025       13,898       27,366       19,970                          
DOCENAVE (g)
                                        46,538       19,667       21,183       66,205       19,462       7,720             26,420        
Sepetiba Tecon S.A. (m)
                                                    (937 )           (3,371 )                        
TVV — Terminal de Vila Velha S.A. (g)
                                        4,130       3,497       2,113       7,627       4,129                          
Companhia Portuária da Baía de Sepetiba (b)
                                        16,586       10,313             26,899                                
CPP Participações (g)
    (269 )                 (22,743 )                 (23,012 )                 (23,012 )                              
Others (b)
                                        (129 )     (169 )           (298 )                              
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
 
    (26,571 )     (25,871 )     (85,339 )     (22,743 )           (114,563 )     33,281       19,631       (177,543 )     52,912       (218,033 )     7,720             26,420          
Steel
                                                                                                                       
California Steel Industries, Inc — CSI (a, b)
                                        88,063       2,441       (101,999 )     90,504       (130,648 )                        
CST (e, f, g)
                                        175,416       70,150       72,124       245,566       136,765             46,326             1,262,907  
DOCEPAR S.A. (g)
                8,106                                     8,106                                      
Rio Doce Limited (a, b)
                                                                                         
USIMINAS (b, f)
                                        39,000       45,000       37,000       84,000       74,000             36,063             671,079  
Others (b)
                                                                                         
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
 
                8,106                         302,479       117,591       15,231       420,070       80,117             82,389                
Aluminum
                                                                                                                       
ALBRAS — Alumínio Brasileiro S.A. (b)
                                        98,698       (2,637 )     125,818       96,061       239,638                          
ALUNORTE (b)
                                        73,174       21,126       83,871       94,300       142,009                          
Itabira Rio Doce (ITACO) (a, b)
                                        1,922       28,115       20,583       30,037       14,565                          
Mineração Rio do Norte S.A. (g)
                                        42,651       33,511       30,092       76,162       53,891       61,773       61,773              
ALUVALE — own operations (i)
                                                    4,951             21,390                   26,327        
Valesul Alumínio S.A. (g)
                                        11,413       9,498       1,630       20,911       16,436       21,804       5,543              
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
 
                                        227,858       89,613       266,945       317,471       487,929       83,577       67,316       26,327          
Others
                                                                                                                       
DOCEPAR S.A. (g)
                                        581       321       16,280       902       16,280                          
FOSFERTIL (m)
                                                    6,598             17,569                   5,644        
Florestas Rio Doce S.A. (g)
                                        (2,502 )     3,969       (10,977 )     1,467       (6,741 )                 38,241        
Others (b)
    (3,495 )     (1,679 )                             (3,503 )     (2,186 )     348       (5,689 )     34                          
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
 
    (3,495 )     (1,679 )                             (5,424 )     2,104       12,249       (3,320 )     27,142                   43,885          
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
 
    (30,525 )     (28,402 )     (34,866 )     (80,013 )     (57,270 )     (184,639 )     1,136,457       509,559       150,992       1,646,016       486,072       192,192       210,791       185,260          
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
         
Effects of exchange variation from foreign investees
                                        160,745       8,855       (495,536 )     169,600       (682,763 )                        


(a)   The net equity of companies located abroad is converted into local currency at rates in effect on the quarterly information date. The equity method adjustment comprises the difference due to exchange rate variations as well as participation in results;
 
(b)   Companies audited by other independent accountants;
 
(c)   CVRD ´s interest in MRS Logística S.A. is held directly through Ferteco Mineração and indirectly through Caemi Mineração e Metalurgia S.A.;
 
(d)   Merged companies (Socoimex and Samitri) — amortization of goodwill recorded in the cost of products sold of the Parent Company;
 
(e)   On 04/24/03, CVRD acquired from Acesita S.A. 1,765,470 preferred shares and 869,046 common shares of Companhia Siderúrgica de Tubarão (CST), representing 5.17% of the total capital. After conclusion of the transaction, CVRD holds 24.93% of the common shares and 29.96% of the preferred shares of CST, totaling 28.02% of its total capital;
 
(f)   Investments in companies that were listed on stock exchanges on 06/30/04. The market value of these investments does not necessarily reflect the value that could be realized from selling a representative group of shares;
 
(g)   Companies audited by our independent accountants;
 
(h)   Companies in pre-operating phase;
 
(i)   Companies merged;
 
(j)   Acquisition on 09/02/03 from Mitsi & Co., Ltd. of 659,375,000 common shares and 1,040,671,032 preferred shares (43.37% of the total capital of Caemi), totaling 100% of the common shares and 40.06% of the preferred shares of Caemi (60.23% of the total capital);
 
(l)   Amortization of Samitri goodwill was reduced by 10 (ten) years to 5 (five) years after the review of feature results projections (note 1.2.10); and
 
(m)   Companies sold.

      

    CVRD   17

 


Table of Contents

6.10- Property, Plant and Equipment

(a)   By business area:
                                                 
    06/30/04
  03/31/04
            Accumulated                   Accumulated    
    Cost
  depreciation
  Net
  Cost
  depreciation
  Net
Ferrous — Northern System
                                               
Mining
    2,016,667       (841,436 )     1,175,231       2,014,180       (827,090 )     1,187,090  
Railroads
    2,914,488       (1,184,067 )     1,730,421       2,863,775       (1,157,037 )     1,706,738  
Ports
    750,385       (265,529 )     484,856       749,334       (261,136 )     488,198  
Construction in progress
    1,171,276             1,171,276       784,100             784,100  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    6,852,816       (2,291,032 )     4,561,784       6,411,389       (2,245,263 )     4,166,126  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Ferrous — Southern System
                                               
Mining
    3,315,487       (1,705,472 )     1,610,015       3,221,112       (1,743,456 )     1,477,656  
Railroads
    3,561,401       (1,860,398 )     1,701,003       3,387,570       (1,879,045 )     1,508,525  
Ports
    597,451       (439,583 )     157,868       588,812       (445,863 )     142,949  
Construction in progress
    890,900             890,900       1,159,072             1,159,072  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    8,365,239       (4,005,453 )     4,359,786       8,356,566       (4,068,364 )     4,288,202  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Pelletizing
                                               
South
    777,505       (556,135 )     221,370       747,707       (548,540 )     199,167  
North
    522,466       (30,125 )     492,341       522,474       (25,964 )     496,510  
Construction in progress
    201,986             201,986       210,038             210,038  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    1,501,957       (586,260 )     915,697       1,480,219       (574,504 )     905,715  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Non-Ferrous
                                               
Potash
    155,060       (66,316 )     88,744       154,386       (63,056 )     91,330  
Gold
    10,167       (5,015 )     5,152       82,222       (76,205 )     6,017  
Copper
    1,391,786       (21,348 )     1,370,438                    
Research and projects
    251,582       (208,920 )     42,662       257,626       (186,686 )     70,940  
Construction in progress
    490,127             490,127       1,694,273             1,694,273  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    2,298,722       (301,599 )     1,997,123       2,188,507       (325,947 )     1,862,560  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Logistics
                                               
In operation
    1,310,115       (588,441 )     721,674       1,255,908       (579,793 )     676,115  
Construction in progress
    88,810             88,810       67,430             67,430  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    1,398,925       (588,441 )     810,484       1,323,338       (579,793 )     743,545  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Energy
                                               
In operation
    379,958       (37,916 )     342,042       379,741       (34,792 )     344,949  
Construction in progress
    629,167             629,167       537,450             537,450  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    1,009,125       (37,916 )     971,209       917,191       (34,792 )     882,399  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Corporate
                                               
In operation
    188,319       (94,555 )     93,764       189,917       (86,957 )     102,960  
Construction in progress
    203,894             203,894       140,567             140,567  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    392,213       (94,555 )     297,658       330,484       (86,957 )     243,527  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
    21,818,997       (7,905,256 )     13,913,741       21,007,694       (7,915,620 )     13,092,074  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

(b)   By type of asset:
                                                         
    Average   06/30/04
  03/31/04
    deprecia-           Accumulated                   Accumulated    
    tion rates
  Cost
  depreciation
  Net
  Cost
  depreciation
  Net
Buildings
    2.63 %     1,776,866       (693,505 )     1,083,361       1,704,532       (730,070 )     974,462  
Installations
    3.51 %     6,126,753       (2,728,179 )     3,398,574       5,375,362       (2,717,716 )     2,657,646  
Equipment
    10.00 %     1,515,099       (750,016 )     765,083       1,436,369       (741,247 )     695,122  
Railroads
    3.61 %     6,043,124       (2,875,067 )     3,168,057       5,794,435       (2,870,485 )     2,923,950  
Mineral rights (*)
    2.12 %     1,019,234       (80,233 )     939,001       474,874       (102,307 )     372,567  
Others
    14.66 %     1,661,761       (778,256 )     883,505       1,629,192       (753,795 )     875,397  
 
           
 
     
 
     
 
     
 
     
 
     
 
 
 
            18,142,837       (7,905,256 )     10,237,581       16,414,764       (7,915,620 )     8,499,144  
Construction in progress
            3,676,160             3,676,160       4,592,930             4,592,930  
 
           
 
     
 
     
 
     
 
     
 
     
 
 
Total
            21,818,997       (7,905,256 )     13,913,741       21,007,694       (7,915,620 )     13,092,074  
 
           
 
     
 
     
 
     
 
     
 
     
 
 

(*)   Calculated based on the volume of ore extracted in relation to the proven and probable reserves.

      

18   CVRD    

 


Table of Contents

Summary of Property, Plant and Equipment movements:

         
Balance as of March 31, 2004
    12,362,353  
Additions / Disposals
    1,750,495  
Interest capitalization (*)
    137,602  
Depreciation
    (336,709 )
 
   
 
 
Balance as of June 30, 2004
    13,913,741  
 
   
 
 

(*)   To attend CVM instruction 193/96, during the year the amount of R$ 137,602 was capitalized, interest of R$31,295 and monetary and exchange rate variation of R$ 106,307.

Depreciation, amortization and depletion have been allocated as follows:

                                         
    Quarter
  Accumulated
    2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
Cost of products and services
    125,646       148,533       128,277       274,179       256,130  
Administrative expenses
    10,746       10,580       9,865       21,326       18,993  
Research and development
    835       814             1,649        
 
   
 
     
 
     
 
     
 
     
 
 
Effect in results
    137,227       159,927       138,142       297,154       275,123  
Allocated to projects
    7,306       982             8,288        
PIS/COFINS credits
    25,329                   25,329        
Inventories of products
    2,276       3,662       2,305       5,938        
 
   
 
     
 
     
 
     
 
     
 
 
 
    172,138       164,571       140,447       336,709       275,123  
 
   
 
     
 
     
 
     
 
     
 
 

Operating Risks

The Company has a wide program of risk management that provides coverage and protection for all its assets, as well as possible loss arising from production interruption, in accordance with an all risks insurance policy. This program includes inspections and in loco training, using various risk committees in the Company’s operating units, and the Company’s subsidiaries and associates.

The Company strikes to keep risk management in line in all areas, providing a uniform treatment, obtaining in the national and international markets the coverage compatible with a company of the size of CVRD. The coverage comprises, besides assets and production, personal injuries, damage to third parties, environmental damages and cargo transported by the Company.

Insurance

In order to obtain the best risk management program, besides using alternatives due to the situation of the international insurance market, the Company created a captive reinsurance company. The intention was to improve the risk management, as well as to provide a more efficient tool for negotiation and penetration in the market, covering risks involving CVRD Group Companies Brazil and overseas.

The Company has also intensified the activities of the risk committees arising at improving risk management on the Company’s installations and equipment.

 

    CVRD   19

 


Table of Contents

6.11- Loans and Financing

Long-term

                                 
    Current liabilities
  Long-term liabilities
    06/30/04
  03/31/04
  06/30/04
  03/31/04
Foreign operations
                               
Loans and financing in:
                               
U.S. dollars
    850,163       814,998       3,397,610       2,690,649  
Yen
    1,824       1,780       6,385       6,229  
Other currencies
    9,443       9,241       59,303       60,200  
Accrued charges
    32,403       25,697              
 
   
 
     
 
     
 
     
 
 
 
    893,833       851,716       3,463,298       2,757,078  
 
   
 
     
 
     
 
     
 
 
Local operations
                               
Indexed by TJLP, TR and IGP-M
    18,424       17,973       37,360       43,296  
Basket of currencies
    31,483       35,587       348       3,293  
Loans in U.S. dollars
    56,419       52,808       197,237       197,814  
Non-convertible debentures
                943       884  
Accrued charges
    1,131       1,697              
 
   
 
     
 
     
 
     
 
 
 
    107,457       108,065       235,888       245,287  
 
   
 
     
 
     
 
     
 
 
 
    1,001,290       959,781       3,699,186       3,002,365  
 
   
 
     
 
     
 
     
 
 

(a)   Foreign currency loans and financing were converted into reais at exchange rates effective on the quarterly information date, being US$ 1.00 = R$ 3.1075 on 06/30/04 (R$ 2.9086 on 03/31/04) and ¥ 1.00 = R$ 0.028592 on 06/30/04 (R$ 0.027893 on 03/31/04);

(b)   On June 30, 2004 loans and financing were supported by the following guarantees:

    Guarantees received from the federal government of R$ 554,029, to which we gave as counter-guarantees shares and operating income;

    Property, plant and equipment of R$ 170,877;

    Future operating revenues of R$ 204,023.

(c)   Amortization of principal and financing charges incurred on long-term loans and financing obtained abroad and domestically mature as follows as of 06/30/04:
                 
2005
    321,574       9 %
2006
    1,259,273       34 %
2007
    531,989       14 %
2008
    473,925       13 %
2009 onward
    1,112,425       30 %
 
   
 
     
 
 
 
    3,699,186       100 %
 
   
 
     
 
 

(d)   Long-term foreign and domestic loans and financing are subject to annual interest rates (plus exchange rate and monetary variation) on 06/30/04 as follows:
                 
Up to 3%
    2,989,693       64 %
3.1 to 5%
    1,264,332       27 %
5.1 to 7%
    107,446       2 %
7.1 to 9%
    269,699       6 %
9.1 to 11%
    69,306       1 %
 
   
 
     
 
 
 
    4,700,476       100 %
 
   
 
     
 
 

(e)   The estimated market values of loans and financing approximate their book values.
 
     
20   CVRD    

 


Table of Contents

(f)   Composition of loans and financing by currency/indices:
                 
U.S. dollars
    4,535,085       96 %
Basket of currencies
    31,967       1 %
Others
    133,424       3 %
 
   
 
     
 
 
 
    4,700,476       100 %
 
   
 
     
 
 

6.12- Contingent Liabilities

At the quarterly information dates the contingent liabilities of the Company were:

(a)   Provisions for contingencies and judicial deposits (booked under long-term liabilities and long-term assets, respectively), considered by management and its external legal counsel as sufficient to cover losses from any type of lawsuit, were as follows:
                                 
                    Provisions for
    Judicial deposits
  contingencies
    06/30/04
  03/31/04
  06/30/04
  03/31/04
Tax contingencies
    741,275       697,394       785,571       701,331  
Labor and social security claims
    183,551       178,727       448,197       443,929  
Civil claims
    146,525       140,779       354,718       334,277  
Others
    9,683       16,164       15,071       14,014  
 
   
 
     
 
     
 
     
 
 
Total
    1,081,034       1,033,064       1,603,557       1,493,551  
 
   
 
     
 
     
 
     
 
 

    Tax contingencies relate principally to a legal action claiming the unconstitutionality of CPMF (tax on bank transactions) and others relating to value-added tax (ICMS).
 
    Labor-related actions principally comprise employee claims in connection with disputes about the amount of indemnities paid upon dismissal and the one-third extra holiday pay.
 
    Civil actions principally relate to claims made against the Company by contractors in connection with losses alleged to have been incurred as a result of various past government economic plans.
 
(b)   Guarantees given to jointly-controlled companies are as follows:
                                                 
    Amount of                        
    guarantee - R$                        
   
  Denominated                   Counter
Affiliate or Joint Venture
  06/30/04
  03/31/04
  currency
  Purpose
  Final maturity
  guarantees
SAMARCO
    22,653       20,987     US$   Debt guarantee IFC     2008     None
VALESUL
    1,219       1,306       R$     Debt guarantee BNDES     2007     None

    The Company does not expect such guarantees to be executed and therefore no provisions for losses have been made. Except for Valesul, CVRD charges a fee for granting these guarantees.
 
(c)   Upon privatization of the Company in 1997, the Brazilian government stipulated the issuance of non-convertible debentures (Debentures) to the stockholders of record, including the federal government. The maturity dates of these Debentures were established to guarantee that pre-privatization stockholders, including the federal government, would share any future benefits from mineral resources held by the Company and its subsidiary and affiliated companies that were not included at the time of setting the minimum price of CVRD shares at the privatization auction.
 
    A total of 388,559,056 Debentures were issued at a par value of R$ 0.01 (one centavo), whose value is to be restated in accordance with the variation in the General Market Price Index (IGP-M), as set forth in the respective Issue Deed. On October 4, 2002, the Comissão de Valores Mobiliários — CVM (Brazilian Securities Commission) approved the Company’s registration request, filed on June 28, 2002, for public trading of the Debentures. As of October 28, 2002, the Debentures can be traded on the secondary market.
 
     
    CVRD   21

 


Table of Contents

6.13- Environmental and Site Reclamation and Restoration Costs

The Company manages its environmental policies according to the specifications of ISO 14,001 and maintains ongoing programs to minimize the environmental impact of its mining operations as well as to reduce the costs that will be incurred upon termination of activities at each mine.

The Company adopted the concepts of the Accounting for Asset Retirement Obligations, as follows:

    Costs for mine closure are recorded as part of the cost of these assets and a corresponding provision is made for such future expenditure;
 
    The estimated costs are accounted for at the present value of the obligations, discounted using a risk free rate; and
 
    The estimated costs are reviewed annually and changes in the present value are adjusted in the recorded values of the assets and liabilities.

On 06/30/04, the provision for environmental liabilities amounted to R$ 249,343 (R$ 238,381 on 03/31/04), which was accounted for in “Others” in long-term liabilities.

6.14- Paid-up Capital

The Company’s capital amounts to R$ 7.3 billion, comprising 388,559,656 book shares, of which 249,983,143 are common shares, 138,575,913 class “A” preferred shares, including 1(one) golden share (special class share) all without par value.

On May 20, 2004, the Board of Directors approved for presentation to the extraordinary shareholders’ meeting to occur on 08/18/04 proposal for a capital share splitting after approved by the shareholders, each share (common and preferred) will be split into three shares, the company’s capital will comprise 1,165,677,168 shares, of which 749,949,429 common shares 415,727,739 class “A” preferred shares, including three special class shares without par value (“Golden Share”). The share/ADR proportion will be maintained at 1/1; therefore, each common and preferred share, will continue to be represented by one ADR supported by one common share (NYSE: RIO) or by one ADR supported by one class “A” preferred share (NYSE: RIOPR) respectively.

Preferred shares have the same rights as common shares, except for the right to elect the members of the Board of Directors. They have priority to a minimum annual dividend of 6% on the portion of capital represented by this class of share or 3% of the book net equity value of the share, whichever is greater.

The special “Golden Share” created during the privatization in 1997 belongs to the Brazilian Government. This share gives it the right to a permanent veto of changes in the Company’s name, headquarters location, nature as a mining enterprise, continuous operation of the integrated mining, transportation and shipping systems and other matters determined in the Bylaws.

6.15- Treasury Stock

The Board of Directors, under the terms of subparagraph XV of Article 13 of the Bylaws and based on Article 30 of Law 6404/76 and CVM Instructions 10 of 02/14/80 and 268 of 11/13/97, approved the acquisition by the Company of its own shares to be held in treasury for later sale or cancellation.

Through 06/30/04, the Company had acquired 4,715,170 common shares and 4,183 preferred shares, which are held in treasury in the amount of R$ 131,318. The 4,715,170 common shares guarantee a loan of the subsidiary Alunorte.

                                                         
Shares
                           
                                            Average
Class
  Quantity
  Unit acquisition cost
  quoted market price
    06/30/04
  03/31/04
  Average
  Low
  High
  06/30/04
  03/31/04
Preferred
    4,183       4,183       51.36       14.02       52.40       120.30       135.78  
Common
    4,715,170       4,715,170       27.80       20.07       52.09       145.04       158.56  
 
   
 
     
 
                                         
 
    4,719,353       4,719,353                                          
 
   
 
     
 
                                         

      

22   CVRD    

 


Table of Contents

6.16- Financial Result

                                                                         
    Quarter
    2Q/04
  1Q/04
  2Q/03
            Monetary and                   Monetary and                   Monetary and    
            exchange                   exchange                   exchange    
    Financial   rate variation           Financial   rate variation           Financial   rate variation    
    expenses
  on liabilities
  Total
  expenses
  on liabilities
  Total
  expenses
  on liabilities
  Total
Foreign debt
    (53,763 )     (178,042 )     (231,805 )     (36,095 )     (34,599 )     (70,694 )     (50,432 )     677,401       626,969  
Local debt
    (5,443 )     (20,600 )     (26,043 )     (5,916 )     (3,064 )     (8,980 )     (7,794 )     67,575       59,781  
Related parties debt
    (47,228 )     (289,182 )     (336,410 )     (46,726 )     (16,227 )     (62,953 )     (42,179 )     315,643       273,464  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
    (106,434 )     (487,824 )     (594,258 )     (88,737 )     (53,890 )     (142,627 )     (100,405 )     1,060,619       960,214  
Labor, tax and civil contingencies
    (26,733 )     (33,736 )     (60,469 )     (17,481 )     (24,141 )     (41,622 )     (17,187 )     482       (16,705 )
Derivatives (interest and currencies)
    23,209       (8,523 )     14,686       (18,865 )     (815 )     (19,680 )     (20,634 )     33,204       12,570  
Derivatives (gold)
    30,682       (4,967 )     25,715       (15,079 )     (759 )     (15,838 )     (5,512 )     5,651       139  
CPMF
    (33,394 )           (33,394 )     (4,133 )           (4,133 )     (16,293 )           (16,293 )
Others
    (41,067 )     (145,445 )     (186,512 )     (20,306 )     (33,606 )     (53,912 )     (3,469 )     161,793       158,324  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
    (153,737 )     (680,495 )     (834,232 )     (164,601 )     (113,211 )     (277,812 )     (163,500 )     1,261,749       1,098,249  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
                                                                         
            Monetary and                   Monetary and                   Monetary and    
            exchange                   exchange                   exchange    
    Financial   rate variation           Financial   rate variation           Financial   rate variation    
    income
  on assets
  Total
  income
  on assets
  Total
  income
  on assets
  Total
Related parties
    13,943       77,772       91,715       18,883       21,729       40,612       28,047       (341,815 )     (313,768 )
Marketable securities
    1,361       15,276       16,637       5,347       15,043       20,390       26,024       6,991       33,015  
Others
    5,015       17,584       22,599       5,080       6,819       11,899       7,096       (41,448 )     (34,352 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
    20,319       110,632       130,951       29,310       43,591       72,901       61,167       (376,272 )     (315,105 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Financial income (expenses), net
    (133,418 )     (569,863 )     (703,281 )     (135,291 )     (69,620 )     (204,911 )     (102,333 )     885,477       783,144  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 

      

    CVRD   23

 


Table of Contents

                                                 
    Accumulated
   
 
    2004
  2003
            Monetary and                   Monetary and    
            exchange                   exchange    
    Financial   rate variation           Financial   rate variation    
    expenses
  on liabilities
  Total
  expenses
  on liabilities
  Total
Foreign debt
    (89,858 )     (212,641 )     (302,499 )     (113,357 )     924,242       810,885  
Local debt
    (11,359 )     (23,664 )     (35,023 )     (18,814 )     102,733       83,919  
Related parties
    (93,954 )     (305,409 )     (399,363 )     (85,914 )     440,831       354,917  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    (195,171 )     (541,714 )     (736,885 )     (218,085 )     1,467,806       1,249,721  
Labor, tax and civil contingencies
    (44,214 )     (57,877 )     (102,091 )     (38,639 )     (44,111 )     (82,750 )
Derivatives, net of gain/losses (interest and currencies)
    4,344       (9,338 )     (4,994 )     (62,805 )     45,875       (16,930 )
Derivatives (gold)
    15,603       (5,726 )     9,877       10,692       7,871       18,563  
CPMF
    (37,527 )           (37,527 )     (29,385 )           (29,385 )
Others
    (61,373 )     (179,051 )     (240,424 )     (9,924 )     181,447       171,523  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    (318,338 )     (793,706 )     (1,112,044 )     (348,146 )     1,658,888       1,310,742  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
                                                 
            Monetary and                   Monetary and    
            exchange                   exchange    
    Financial   rate variation           Financial   rate variation    
    income
  on assets
  Total
  income
  on assets
  Total
Related parties
    32,826       99,501       132,327       68,308       (466,167 )     (397,859 )
Marketable securities
    6,708       30,319       37,027       27,607       32,510       60,117  
Others
    10,095       24,403       34,498       14,869       (59,830 )     (44,961 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    49,629       154,223       203,852       110,784       (493,487 )     (382,703 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial income (expenses), net
    (268,709 )     (639,483) (*)     (908,192 )     (237,362 )     1,165,401 (*)     928,039  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

(*)   See item 1.2.5 — Net financial result.

      

24   CVRD    

 


Table of Contents

Debt Indices

                                         
    Quarter
  Accumulated
    2Q/04
  1Q/04
  2Q/03
  06/30/04
  06/30/03
Current liabilities
                                       
Current portion of long-term debt — unrelated parties
    1,001,290       959,781       2,394,227       1,001,290       2,394,227  
Short-term debt
                102,920             102,920  
Related parties debt
    1,395,001       1,483,965       1,085,334       1,395,001       1,085,334  
 
   
 
     
 
     
 
     
 
     
 
 
 
    2,396,291       2,443,746       3,582,481       2,396,291       3,582,481  
Long-term liabilities
                                       
Long-term debt — unrelated parties
    3,699,186       3,002,365       2,563,575       3,699,186       2,563,575  
Related parties
    5,138,937       4,484,432       2,982,995       5,138,937       2,982,995  
 
   
 
     
 
     
 
     
 
     
 
 
 
    8,838,123       7,486,797       5,546,570       8,838,123       5,546,570  
 
   
 
     
 
     
 
     
 
     
 
 
Gross Debt
    11,234,414       9,930,543       9,129,051       11,234,414       9,129,051  
 
   
 
     
 
     
 
     
 
     
 
 
Interest paid
    95,930       109,384       74,255       205,314       182,884  
EBITDA
    1,729,320       1,341,900       983,095       3,071,220       2,131,209  
Stockholders’ equity
    16,678,311       15,422,451       14,187,982       16,678,311       14,187,982  
EBITDA / Interest paid
    18.03       12.27       13.24       14.96       11.65  
Gross Debt / EBITDA (annualized)
    1.62       1.85       2.32       1.83       2.14  
Gross Debt / Equity capitalization
    40       39       39       40       39  

6.17- Financial Instruments — Derivatives

The main market risks the Company faces are related to interest rates, exchange rates and commodities prices. CVRD has a policy of managing risks through the use of derivative instruments.

The Company’s risk management follows policies and guidelines reviewed and approved by the Board of Directors and Executive Board. These policies and guidelines prohibit speculative trading and short selling and require diversification of transactions and counterparties. The policy of the Company is to settle all contracts financially without physical delivery of the products. The credit limits and creditworthiness of counterparties are also reviewed periodically and are defined according to the rules approved by the Company’s management. The results of hedging are recognized monthly in the results.

Interest Rate Risk

Interest rate risk derives from floating-rate debt, mainly from trade finance operations. The portion of floating-rate debt denominated in foreign currency is mainly subject to fluctuations in the LIBOR — London Interbank Offered Rate. The portion of floating-rate debt expressed in reais refers basically to the Brazilian long-term interest rate TJLP, established by the Brazilian Central Bank. Since May 1998, CVRD has been using derivatives to limit its exposure to fluctuations in the LIBOR.

The interest rate derivatives portfolio consists mainly of instruments contracted to limit exposure to interest rate fluctuations, establishing upper and lower limits. Some operations are subject to knock-out provisions which, if triggered, eliminate the protection contracted.

The table below provides information regarding the interest rate derivatives portfolio as of 06/30/04 and 06/30/03.

                                                         
    06/30/04
  06/30/03
                                                    Unrealized gain
    Notional value           Unrealized (loss)   Final   Notional value           (loss) (in
Type
  (in US$ millions)
  Rate range
  (in R$ thousands)
  maturity
  (in US$ millions)
  Rate range
  R$ thousands)
Cap
    500       5,8 - 11,0 %         May-07     500       5,8 - 11,0 %     39  
Floor
    500       5,8 - 6,0 %     (38,616 )   Nov-06     500       5,8 - 6,0 %     (60,112 )
Swap
    242       5,9 - 6,7 %     (53,833 )   Oct-07     464       5,9 - 6,7 %     (127,143 )
 
                   
 
                             
 
 
Total
                    (92,449 )                             (187,216 )
 
                   
 
                             
 
 

The unrealized loss represents the present value payable as of all operations had been settled on 06/30/04.

         
    CVRD   25

 


Table of Contents

Exchange Rate Risk

Exchange rate risk arises from foreign currency debts. On the other hand, a substantial part of the Company’s revenues are denominated or indexed in U.S. dollars, while the majority of costs are in reais. This provides a natural hedge against possible devaluation of the Brazilian currency. Events of this nature have an immediate negative impact on foreign currency debt, offset by the positive effect on future cash flows.

The Company adopts a strategy of monitoring market fluctuations and, if necessary, carrying out derivatives operations to cover risks related to these variations.

The portion of debt denominated in euros and yen (main components of basket of currencies) is protected by derivatives to cover risks of exchange rate movements of these currencies.

The table below shows the exchange rate derivatives portfolio for 06/30/04 and 06/30/03. These operations are forwards and range forwards which were structured to ensure the purchase price of the following currencies:

                                                         
    06/30/04
  06/30/03
                    Unrealized                           Unrealized
    Notional value           gain (loss) (in   Final   Notional value           gain (loss) (in
Type
  (in millions)
  Rate range
  R$ thousands)
  maturity
  (in millions)
  Rate range
  R$ thousands)
Yen purchased
  ¥ 134     ¥79 - 81 per US$      (1,284 )   Apr-05   ¥ 3.462     ¥79 - 86 por US$      (1,590 )
Euros purchased
  22     1,04 - 1,23 per US$      4,706     Dec-11   5     1,19 - 1,23 por US$      (876 )
Euros sold
  8               63     Aug-04   3     1,05 - 1,10 por US$      230  
 
                   
 
                             
 
 
Total
                    3,485                               (2,236 )
 
                   
 
                             
 
 

The unrealized gain represents the present value receivable if all operations had been settled on 06/30/04.

Commodities Price Risk

The prices of iron ore, the Company’s main product, are set in annual negotiations between producers and consumers and are notably stable over time. The Company does not enter into derivatives operations to hedge iron ore price exposure.

The Company uses hedge instruments to manage its exposure to changes in the price of gold, aluminum and alumina. These derivatives operations allow establishment of a minimum profit level for future output. The Company actively manages its open positions, with the results reported monthly to senior management to allow adjustment of targets and strategies in response to market conditions.

The following table shows the gold derivatives portfolio of the Company on 06/30/04 and 06/30/03:

                                                         
    06/30/04
  06/30/03
                    Unrealized gain                           Unrealized gain
            Price range   (loss) (in   Final           Price range   (loss) (in
Type
  Quantity (oz)
  (US$/oz)
  R$ thousands)
  maturity
  Quantity (oz)
  (US$/oz)
  R$ thousands)
Puts purchased
    338,000       270 - 385       4,933     Dec-08     408,000       270 - 385       13,519  
Calls sold
    403,000       317 - 440       (80,039 )   Dec-08     598,000       317 - 440       (44,144 )
Hybrid instruments
    20,000             (3,330 )   Nov-06     20,000             (969 )
 
                   
 
                             
 
 
Total
                    (78,436 )                             (31,594 )
 
                   
 
                             
 
 

The unrealized loss represents the present value payable if all operations had been settled on 06/30/04.

         
26   CVRD    

 


Table of Contents

The following table shows the movement of gains and (losses) on derivatives:

                                 
    2Q/04
    Interest rates            
    (libor)
  Currencies
  Gold
  Total
Gains (losses) unrealized on 03/31/04
    (139,975 )     3,861       (107,295 )     (243,409 )
Financial settlement
    33,144       (680 )     3,144       35,608  
Financial expenses
    23,035       174       30,682       53,891  
 
   
 
     
 
     
 
     
 
 
 
    56,179       (506 )     33,826       89,499  
Monetary variations
    (8,653 )     130       (4,967 )     (13,490 )
 
   
 
     
 
     
 
     
 
 
Gains (losses) unrealized on 06/30/04
    (92,449 )     3,485       (78,436 )     (167,400 )
 
   
 
     
 
     
 
     
 
 
                                 
    1Q/04
    Interest rates            
    (libor)
  Currencies
  Gold
  Total
Gains (losses) unrealized on 12/31/03
    (135,977 )     15,856       (91,980 )     (212,101 )
Financial settlement
    11,122       (7,435 )     523       4,210  
Financial expenses
    (14,202 )     (4,663 )     (15,079 )     (33,944 )
 
   
 
     
 
     
 
     
 
 
 
    (3,080 )     (12,098 )     (14,556 )     (29,734 )
Monetary variations
    (918 )     103       (759 )     (1,574 )
 
   
 
     
 
     
 
     
 
 
Gains (losses) unrealized on 03/31/04
    (139,975 )     3,861       (107,295 )     (243,409 )
 
   
 
     
 
     
 
     
 
 
                                 
    2Q/03
    Interest rates            
    (libor)
  Currencies
  Gold
  Total
(Losses) unrealized on 03/31/03
    (230,264 )     (3,138 )     (33,374 )     (266,776 )
Financial settlement
    30,360       1,020       1,641       33,021  
Financial expenses
    (20,078 )     (556 )     (5,512 )     (26,146 )
 
   
 
     
 
     
 
     
 
 
 
    10,282       464       (3,871 )     6,875  
Monetary variations, net
    32,766       438       5,651       38,855  
 
   
 
     
 
     
 
     
 
 
(Losses) unrealized on 06/30/03
    (187,216 )     (2,236 )     (31,594 )     (221,046 )
 
   
 
     
 
     
 
     
 
 
         
    CVRD   27

 


Table of Contents

6.18- Exchange Rate Exposure

The exchange rate exposure is predominantly in U.S. dollars, as follows:

                                 
    In millions of reais
                    Subsidiaries and
    Parent Company
  Affiliated Companies (*)
Assets
 
  06/30/04
  03/31/04
  06/30/04
  03/31/04
Current
                               
Cash and cash equivalents
    63       158       508       369  
Others
    1,724       1,272       1,304       1,133  
 
   
 
     
 
     
 
     
 
 
 
    1,787       1,430       1,812       1,502  
Long-term receivables
    526       508       52       50  
Investments
    3,783       3,329       17       16  
 
   
 
     
 
     
 
     
 
 
Total
    6,096       5,267       1,881       1,568  
 
   
 
     
 
     
 
     
 
 
Liabilities
                               
Current
                               
Short-term loans and financing
    982       941       1,608       1,668  
Others
    1,411       1,539       392       325  
 
   
 
     
 
     
 
     
 
 
 
    2,393       2,480       2,000       1,993  
Long-term liabilities