6-K
Table of Contents

 
 

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

March 2005

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-__.)

 
 

 


Table of Contents

COMPANHIA VALE DO RIO DOCE
Report on Form 6-K

Table of Contents

PERFORMANCE OF COMPANHIA VALE DO RIO DOCE IN 2004 (US GAAP)

INDEX TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (US GAAP)
REPORT OF INDEPENDENT ACCOUNTANT (US GAAP)
SUPPLEMENTAL FINANCIAL STATEMENTS (US GAAP)
SIGNATURES


Table of Contents

US GAAP

(COMPANHIA VALE DO RIO DOCE LOGO)

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

PERFORMANCE OF COMPANHIA VALE DO RIO DOCE IN 2004                          


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

Department of
Investor Relations

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

Except where otherwise indicated, the operational and financial information contained in this press release is presented based on the consolidated figures in accordance with generally accepted accounting principles in the United States of America (US GAAP). Except for the information on investments and market behavior, this information is based on quarterly financial statements reviewed by the Company’s independent accountants. The main subsidiaries of CVRD that are consolidated are: Caemi, PPSA, Alunorte, Albras, RDM, RDME, RDMN, Urucum Mineração, Docenave, Ferrovia Centro-Atlântica (FCA), Itaco, CVRD Overseas and Rio Doce International Finance.

2004, A RECORD-BREAKING YEAR

Rio de Janeiro, March 21, 2005 – Companhia Vale do Rio Doce (CVRD) posted net income of US$ 2.573 billion in 2004, 66.2% higher than its previous record income of US$ 1.548 billion, in 2003. Earnings per share was US$ 2.23. Return on equity (ROE) was 34.8%, exceeding the 31.7% ROE of 2003.

A combination of three factors made it possible for CVRD to break new records while creating substantial value for its shareholders: (a) strong growth in global demand for ores and metals; (b) expansion of capacity in all the Company’s operational activities, resulting from implementation of highly competitive projects and successful acquisitions; (c) important efficiency gains.

Total shareholder return over the period 2001-2004 reached, on average, 38.9% per year. In 2004 it was 45.9%.

The operating performance was excellent: Adjusted EBIT(1) (earnings before interest and taxes) almost doubled, from US$ 1.644 billion in 2003 to US$ 3.123 billion in 2004. The adjusted EBIT margin, of 38.7%, was the highest in CVRD ´s history.

Cash flow measured by adjusted EBITDA(2) (earnings before interest, taxes, depreciation and amortization) was US$ 3.722 billion, compared to US$ 2.130 billion in 2003.

Several other records were attained in 2004:

  •   Gross revenue, US$8.479 billion, was 52.9% higher than in 2003.
 
  •   Volume of iron ore and pellets sold, 231.043 million tons, was 24.0% higher than in 2003.
 
  •   Sales of manganese ore exceeded the 1-million-ton mark for the first time (vs. 885 thousand tons sold in 2003).
 
  •   Shipments of ferro alloys were 616 thousand tons, 22.7% up from 2003.

4Q04

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US GAAP

  •   Bauxite sales increased 41.0%, from 1.472 million tons in 2003 to 2.076 million tons in 2004.
 
  •   CVRD’s railroads carried 28.743 billion ntk of general cargo for clients in 2004, compared to 26.295 billion ntk in 2003.

Four important projects were completed in 2004: the Sossego copper mine, the expansion of iron ore production capacity at Carajás to 70 million tons per year, the Pier III of the Ponta da Madeira maritime terminal, and the Candonga hydroelectric power plant.

The Company invested US$ 1.956 billion in the year, the second highest annual figure in its history, in real terms. From this amount, US$ 1.245 billion was spent on organic growth, US$ 568 million on sustaining existing business, and US$ 143 million on acquisitions.

In 2004 CVRD distributed US$ 0.68 per share in dividends to its shareholders, 15.7% more than in 2003 and 29.7% more than in 2002.

Highlights of the fourth quarter 2004 (4Q04) result

  •   Net income of US$ 721 million, the second largest ever on a quarterly basis, representing an increase of 167.0% in relation to 4Q03.
 
  •   Adjusted EBITDA of US$ 1.001 billion, also the second highest quarterly EBITDA in the Company’s history.
 
  •   Record gross revenues, US$ 2.428 billion, 43.7% higher than in 4Q03.
 
  •   Record sales volume of iron ore and pellets, 61.824 million tons, 11.0% higher than in 4Q03.
 
  •   Record shipments of manganese ore: 323 thousand tons, vs. 207 thousand tons in 4Q03.
 
  •   Record volume of sales of primary aluminum, 113 thousand tons.

SELECTED FINANCIAL INDICATORS

                                                                 
                                                    US$ million  
    4Q03     3Q04     4Q04     %     %     2003     2004     %  
    (A)     (B)     (C)     (C/A)     (C/B)     (D)     (E)     (E/D)  
Gross revenues
    1,690       2,287       2,428       43.7       6.2       5,545       8,479       52.9  
Gross margin (%)
    38.6       51.5       47.9                       41.5       49.4          
Adjusted EBIT
    392       886       822       109.7       (7.2 )     1,644       3,123       90.0  
Adjusted EBIT margin (%)
    23.9       40.8       35.5                       39.8       46.1          
Adjusted EBITDA
    568       1,007       1,001       76.2       (0.6 )     2,130       3,722       74.7  
Net earnings
    270       943       721       167.0       (23.5 )     1,548       2,573       66.2  
Annualized ROE (%)
    31.7       32.7       34.8                       31.7       34.8          
Total debt/Adjusted LTM EBITDA (x)
    1.89       1.34       1.10                       1.89       1.10          
Capex *
    871.6       424.0       685.7       (21.3 )     61.7       1987.9       1956.0       (1.6 )


*   including acquisitions

4Q04

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US GAAP

(LOGO) BUSINESS OUTLOOK

In spite of the slowdown in the second half, the world economy is estimated to have grown by 4.8% in 2004, the highest rate in the last 20 years, while international trade grew by 18.6% in the year – the highest expansion since 1995.

The recovery was led by the United States, with GDP growth of 4.4%. A 9.5% expansion of the Chinese economy was also extremely important for the excellent performance of the world economy. In broad terms it was a synchronized recovery, though with reasonable variance between regions: 1.7% growth in the Euro zone, 2.6% in Japan, and 6% in Latin America, with the Brazilian economy showing its best performance since 1994 with GDP growth of 5.2%.

As well as the natural cyclical effect of the global economy recovery, the strong growth of China, faster than its already high average annual growth rate over the last 20 years (9.2%), and the fact that its economy is an intensive user of industrial raw materials at this stage of economic development, contributed to considerable demand pressure for ores and metals.

In response to the acceleration of demand, world steel production exceeded one billion tons for the first time, reaching 1.055 billion in the year, 8.8% higher than 2003, and almost double the average annual growth rate of 4.5% in the post-Asian-crisis period (1998-2003). In spite of this significant supply reaction, for the second year running there was a substantial increase in the prices of steel products.

Also as a result of this movement, seaborne iron ore trade grew to 602 million tons in 2004, 12.1% more than in 2003. Part of the disequilibrium between supply and demand was satisfied by the emergence of a spot market of considerable scale, in which prices reached multiples of the benchmark prices.

We expect the world economy to continue to grow at a rate above average long-term trend, although more slowly than in the first half of 2004. Together with the good outlook for the performance of the Chinese economy this tends to support up cycle of ores and metals prices.

Although investments by the global metals and mining industry are firmly expanding, indicating that in 2005 they could reach twice their amount of 2002, we believe that, at least for the next two years, reasonably large-scale imbalances between supply and demand in several markets continue to exist, especially iron ore, alumina and aluminum.

Capacity utilization levels are extremely high, resulting in higher operational costs and problems in the supply chain. Inventories, both in absolute terms and also in relation to consumption, are at historically low levels, while a considerable portion of the increase in the value of investments programmed is due to the increase in the cost of equipment. Further, the average time between the decision to invest and the conclusion of a project is relatively long, and has increased, worldwide, due to the increase in requirements for approval.

In the specific case of iron ore, we estimate an increase of global seaborne demand of 50 million tons. This increase, of 8.3%, would be lower than in 2004, but still shows significant vigor, as this expansion is stonger than the growth trend of the last 10 years – of 5% since the beginning of the 90s. In view of the relative rigidity of supply expansion in the short term, with operation at full capacity and virtual non-existence of inventories, persistence of very tight market conditions can be foreseen.

Although CVRD’s programmed iron ore production for this year is more than 10% greater than in 2004, the Company still faces excess demand.

4Q04

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US GAAP

In 2004 the Company signed contracts for supply of iron ore and pellets totaling approximately 750 million tons with about 40 clients in the Americas, Asia and Europe, with weighted average maturity of seven years. The shipments under these new contracts will provide support for investments in expansion of production capacity.

According to estimates by the International Copper Study Group there was a 705,000-ton deficit in copper in 2004, after an imbalance between demand and production of 368,000 tons in 2003. Further more, the known inventories of copper are at their lowest level for the last 18 years. For this year, there is a forecast of balance between supply and demand starting in the third quarter, but without short-term availability for the necessary rebuilding of inventories.

We expect the Brazilian economy to continue to recover from the period of low growth in 2002 and 2003, while exports will continue to increase, resulting in favorable conditions for the logistics services offered by CVRD in Brazil.

(LOGO) IMPORTANT RECENT EVENTS

  •   Iron ore and pellets: prices for 2005

On February 22, 2005 CVRD and Nippon Steel agreed a 71.5% increase in prices of iron ore fines from Carajás and Southern System.

On March 3, CVRD completed agreement with Arcelor on prices for blast furnace pellets for 2005: an increase of 86.67% for the Tubarão product and 86.43% for the São Luís product.

The agreement with Nippon Steel marked the first time that CVRD agreed the reference price with an Asian client. This can be explained by the fact that Asia is responsible for more than two thirds of the global seaborne iron ore imports and for approximately 80% of the demand growth in recent years.

  •   Fostering growth

CVRD has announced a capital expenditure budget of US$ 3.332 billion for 2005. Of the total budgeted, 22.1% will be allocated to sustain the existing business, and 77.9% to investment in organic growth.

The amount for organic growth is made up of US$ 2.221 billion to be invested in brownfield and greenfield projects, and US$ 375 million in research and development. This is the largest annual Capex in CVRD’s history, in both nominal and real terms. Over the period 2003-2005, 74% of the Company’s total investment was directed to organic growth, projects, and research and development.

The Company has won several international tenders for exploration of mineral deposits that strengthen its growth potential in the long term.

One was an international tender by the government of Mozambique for exploration of coal deposits in the Moatize region, the world´s largest unexplored coal reserve. The Company paid US$ 122.8 million for the concession. Feasibility studies for exploration of these reserves are currently in progress.

In Argentina, CVRD obtained a license for research, evaluation and exploration of a potash deposit in a region on the Colorado River, in the province of Neuquén.

4Q04

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US GAAP

In Brazil, CVRD won an international tender, for US$ 20.0 million, for research, evaluation and exploration of a bauxite deposit in the region of Pitinga, in the Brazilian state of Amazonas.

In Peru, CVRD obtained the rights to exploration of the Bayóvar phosphates deposit, in the department of Piura.

  •   Copper processing plant

CVRD will build a semi-industrial plant to process copper by the hydrometallurgical route, to test this new technological option for production of the metal from sulphide copper concentrate. The investment is estimated at US$ 58 million and the plant will have production capacity of 10 million tons of copper cathode per year. If the technology is approved, a larger-scale plant will be built for processing of copper from other deposits, such as Salobo.

  •   Repurchase of debt securities

In December 2004 CVRD completed the repurchase of US$ 186.996 million of its US$ 300 million debt issue with political risk insurance (PRI) and maturity in 2007.

  •   Minimum dividend to shareholders of US$ 1 billion

CVRD’s senior management will submit a proposal to the Board of Directors for payment of minimum dividend of US$ 1 billion to shareholders for 2005, corresponding to US$ 0.87 per share outstanding.

(LOGO) SALES VOLUME AND REVENUE

  •   A new order of magnitude

CVRD’s gross operating revenue in 2004 was US$ 8.479 billion, 52.9% more than in 2003 – when it was US$ 5.545 billion. This is not only a new record, but indicates a change in the Company ´s size – until 2002 its annual revenue has usually been on a level close to US$ 4 billion.

The US$ 2.934 billion increase in revenue in 2004 is primarily the result of expansion in sales volume – which contributed US$ 1.585 billion, or 54.0%, of the growth.

Europe continued to be the main destination of CVRD’s sales, providing revenue of US$ 2.552 billion in 2004, or 30.1% of the Company’s total revenue. Sales to Brazil were in second place, with US$ 2.367 billion, 27.9% of the total, followed by China with US$ 996 million (11.7%), Japan with US$ 788 million (9.3%), and emerging Asia (excluding China) with US$ 405 million (4.8%). Year-on-year growth was highest in sales to the US, at 105.8%, growing from US$ 189 million to US$ 389 million – followed by Japan, with year-on-year growth of 88.1%, from US$ 419 to US$ 788 million; and China, with growth of 71.7%, from US$ 580 to US$ 996 million.

Revenue in 4Q04, also a record, at US$ 2.428 billion, was 43.7% higher than in 4Q03. The increase in prices was responsible for 65.2% of this growth.

  •   Ferrous mineral sales reached an all-time high

Ferrous minerals – iron ore, pellets, manganese and ferro alloys – produced revenues of US$ 5.844 billion, 68.9% of the Company’s total revenue. Shipments

4Q04

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US GAAP

of iron ore generated US$ 3.995 billion, pellets US$ 1.095 billion, operational services at the Tubarão pelletizing plants US$ 53 million, manganese ore US$ 76 million and ferro alloys US$ 590 million.

In 2004, CVRD’s shipments of iron ore and pellets totaled 231.043 million tons, a record, and 24.0% more than the 186.309 million tons of 2003. This enabled CVRD to maintain its leadership in the world seaborne market, with 32.1% of the volume of iron ore and pellets traded in 2004, compared to around 20% at the late 1990s.

Total sales volume of iron ore was 203.536 million tons, and in pellets, 27.507 million tons.

In view of the disequilibrium between global iron ore supply and demand, the Company acquired 15.926 million of iron ore from small mining companies that operate in the “Iron Quadrangle”, in the Brazilian state of Minas Gerais, to complement its own production and satisfy the growing demand from its clients. These purchases of iron ore from third parties increased by 73.1% – from 9.200 million tons in 2003.

In 2004, CVRD’s shipments to the Chinese market totaled 41.045 million tons, or 17.8% of the total volume sold. This gave CVRD 19.8% market share in the Chinese iron ore imports. The second largest consumer of CVRD ´s iron ore and pellets was Germany, with 10.6% of the Company’s 2004 sales, Japan, with 9.0%, France with 4.9%, and Belgium with 3.5%. The high quality of CVRD’s iron ore products enables it to maintain the position of an important supplier of the Asian steelmakers even with the comparative disadvantage of the longer distance.

The Company sold 55.676 million tons of iron ore in the Brazilian market, consisting of 35.893 million to the steel industry and pig iron producers, and 19.784 million to the pelletizing joint ventures of Tubarão (Nibrasco, Itabrasco, Hispanobras and Kobrasco). The pellet feed sold to these companies is transformed into pellets, which are totally exported.

In 4Q04 CVRD’s sales of iron ore and pellets reached a new record volume, of 61.824 million tons, 11.0% more than the 55.676 million tons sold in 4Q03. The revenue from the sales of these products – another record, US$ 1.420 billion – was 33.8% greater than in 4Q03.

The average sale price of iron ore in 2004 was US$ 19.63 per ton, and the average sale price of pellets was US$ 39.81 per ton – respectively, increases of 20.0% and 18.6% over 2003. In 4Q04 average price of iron ore was US$ 20.69 per ton, and pellets, US$ 40.56 per ton.

CVRD’s sales of manganese ore were a new record in 2004, at 1.002 million tons, 13.2% more than in 2003. The strong expansion of demand caused a substantial increase of prices of this product – the average price in 2004 was US$ 75.85/ton, 37.0% more than in 2003.

The Company shipped 323 thousand tons of manganese ore in 4Q04, 56.0% more than in 4Q03, and a quarterly record.

Shipments of ferro alloys in 2004 were 22.7% higher than in 2003, at 616 thousand tons – also a new record. This was achieved in spite of a maintenance stoppage in RDME, in the second quarter of the year. Volume sold in 4Q04 was 124 thousand tons, 18.4% less than in 4Q03.

The considerable growth in demand for ferro alloys, derived from steel production, contributed to a strong increase in prices. In 4Q04 the average price of CVRD’s sales was US$ 1,346.77 per ton, 135.3% higher than the price realized in 4Q03. In

4Q04

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US GAAP

2004 the average sale price of manganese ferro alloys, which involve a range of types (MC FeMn, HC FeMn, SiMn) with differentiated prices, was US$ 957.14 per ton, compared to US$ 547.81 in 2003.

The price of manganese ore continues to increase in 2005, following the trend in prices of iron ore. By contrast, the prices of alloys have begun to fall as a result of the increase in production caused by reactivation of furnaces with high operational costs.

  •   Aluminum products generate revenue of US$ 1.250 billion

In 2004 the products of the aluminum chain – bauxite, alumina and primary aluminum – generated revenue of US$ 1.250 billion, 46.7% more than in 2003, and representing 14.7% of CVRD’s total revenue.

The volume of bauxite sold in 2004 was 2.076 million tons, 41.0% more than in 2003. This increase in shipment volume, giving rise to another record, was made possible by the expansion of production capacity at Trombetas (MRN), concluded in 2Q03.

The average sale price of bauxite in 2004 was US$ 25.53 per ton, slightly higher than the average price for the previous year, US$ 25.14.

In 4Q04 the Company sold 514 thousand tons of bauxite, 13 thousand tons more than in 4Q03.

Consolidation of Albras starting as of January 2004 produced some changes in the statistics for sales of products in the alumina chain. As a result of this, there is a reduction in the quantities of aluminum sold, due to the elimination of the sales of Alunorte (alumina refinery) to Albras (aluminum smelter). On the other hand, the figures show higher volumes of sales of primary aluminum, since 100% of the sales of Albras are now included, whereas last year only the sales made by CVRD in relation to its take from the smelter were included.

Sales of alumina totaled 1.788 million tons in 2004, compared to 2.653 million in 2003. The volume sold in 4Q04 reached 462 million tons, compared to 756 million tons in 4Q03. Reflecting the strong scarcity of alumina in the global market, the average price realized on CVRD’s shipments was US$ 256.15 per ton in 2004, equivalent to 14.9% of the average price of aluminum at LME, 37.3% higher than in 2003. In 4Q04, the average realization price was US$ 305.19 per ton, corresponding to 16.7% of the average aluminum price.

In 2004 CVRD’s sales of primary aluminum were 430 thousand tons, an increase of 104.8% from 2003. These sales were made at an average price of US$ 1,688.37 per ton, 19.8% higher than in 2003.

CVRD’s sales of aluminum in 4Q04 were 113 thousand tons, vs. 56 thousand tons in 4Q03, for an average price of US$ 1,725.66 per ton. Due to the existence of considerable stocks in 2003, aluminum prices reacted slowly to the impact on demand caused by the global economic recovery, playing the role of a late cycle commodity.

CVRD’s aluminum businesses as a whole generated revenue of US$ 354 million in the fourth quarter of 2004, 39.4% more than in 4Q03.

  •   Copper: good timing

Sossego was the only greenfield copper project in the world to start operating in 2004. The first shipments of copper concentrate took place in June, and totaled 269 thousand tons in the year, for revenue of US$ 201 million.

4Q04

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US GAAP

Sossego came into operation at a very good moment, since copper prices increased 57.0% in 2004, much more than expected. Currently, in the first quarter of 2005, copper prices are at their highest since the end of 1988.

The rate of expansion of global demand, the weakness of the US dollar and the low level of inventories brought together a very favorable environment for copper prices. For the profitability of a copper concentrate producer, two other factors are also important: the price of gold, which tends to reduce the production cost of copper, and the TC/RC charges charged for processing and refining by the smelters. The latter, due to the growth of supply of copper concentrate, practically doubled in 2005, reaching their highest level since the mid-1990s, contributing to a reduction in the profit margins of concentrate producers such as CVRD. However, the negative effect of this factor is more than offset by the current levels of gold prices, around US$ 430 per ounce, and copper, around US$ 1.50 per pound.

In 4Q04 CVRD sold 139 thousand tons of copper concentrate, 44.8% more than in 3Q04, with a substantial increase in revenue, from US$ 70 million in 3Q04 to US$ 107 million in 4Q04. The average realization sale price of copper concentrate was US$ 769.78 in 4Q04, compared to US$ 729.17 in 3Q04 and US$ 705.88 in 2Q04.

  •   Industrial minerals: record kaolin sales

In 2004 CVRD’s sales revenues of potash amounted to US$ 124 million, 31.9% more than in 2003. The growth mainly reflected the increase in prices, since volumes sold in fact fell, from 674 thousand tons in 2003 to 630 thousand tons in 2004, due to the execution of the capacity expansion project at the Taquari-Vassouras mine.

The average price of potash sales was US$ 196.83 per ton, 41.1% higher than in 2003.

CVRD sold 165 thousand tons of potash in 4Q04, almost equal to its 4Q03 sales of 169 thousand tons, generating revenue of US$ 35 million.

Kaolin sales generated revenue of US$ 164 million in 2004, 70.8% more than in 2003. Sales volume increased 84.6%, to 1.207 million tons – on two factors: (a) the consolidation of Cadam for 12 months in 2004, compared to only four months in 2003; and (b) increases of production in 2004 at both PPSA and Cadam.

In 4Q04, CVRD sold 311 thousand tons of kaolin, 11.1% more than in 4Q03. Revenue from these sales was 9.8%, higher, at US$ 45 million in 4Q04, compared to US$ 41 million for 4Q03.

The average price of kaolin in 2004, US$ 136.70 per ton, was 6.9% lower than in 2003, and in 4Q04, at US$ 144.69 per ton, showed a recovery from the previous quarters – US$ 128.53 in 3Q04, and US$ 133.11 in 2Q04.

  •   Logistics: new records in railway transportation, port services and coastal shipping

CVRD’s logistics services provided revenue of US$ 877 million in 2004, 45.2% more than in 2003, contributing 10.3% of the Company’s total revenue for the year.

Railway transportation of general cargo for clients, on the Carajás, Vitória-Minas, and Centro-Atlântica railroads (EFC, EFVM, FCA) produced revenue of US$ 612 million. Port services added US$ 173 million, and coastal shipping and port support services US$ 92 million.

CVRD’s railroads transported 28.743 billion ntk of general cargo for clients, 9.3% more than in 2003, a new all-time record. The main cargos transported were steel

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US GAAP

industry inputs and products (46.6%), agricultural products (32.2%) and fuels (9.8%).

On all three railroads the revenue per thousand ntk (kntk) of general cargo increased: on EFVM, from US$ 13.94 in 2003 to US$ 16.83 in 2004; on EFC, from US$ 12.48 to US$ 14.57; and on FCA from US$ 16.82 to US$ 21.56.

Volume transported in 4Q04, at 6.907 billion ntk, was higher than in 4Q03 (6.402 billion ntk), though volume carried in 4Q04 was lower than in the two previous quarters, a seasonal effect reflecting the grain harvests: the peak is usually in the third quarter, with a decline in the fourth quarter and the subsequent first quarter, recovering in the second quarter.

Reduction of accidents is one of CVRD’s main goals in the operation of its railroads. Even operating at full capacity, the Company has succeeded in reducing the number of accidents in recent years. Between 2001 and 2004 the Company was able to reduce the number of accidents in its railways at an average annual rate of 13.1%.

The Company’s ports and maritime terminals handled 28.741 million tons of cargo for clients, 7.2% more than in 2003. Volume in 4Q04 was 7.097 million tons, compared to 5.288 million tones in 4Q03.

VOLUME SOLD – IRON ORE AND PELLETS

                                                                                 
                                                                    thousand tons  
    4Q03     %     3Q04     %     4Q04     %     2003     %     2004     %  
Iron ore
    48,839       87.7       53,606       88.7       54,748       88.6       162,683       87.3       203,536       88.1  
Pellets
    6,837       12.3       6,847       11.3       7,076       11.4       23,626       12.7       27,507       11.9  
Total
    55,676       100.0       60,453       100.0       61,824       100.0       186,309       100.0       231,043       100.0  

IRON ORE AND PELLET SALES BY DESTINATION

                                 
                            thousand tons  
    2003     %     2004     %  
EU
    49,681       26.7       69,558       30.1  
Germany
    19,753       10.6       24,512       10.6  
France
    8,842       4.7       11,364       4.9  
Belgium
    6,743       3.6       8,022       3.5  
Italy
    5,587       3.0       8,151       3.5  
Others
    8,756       4.7       17,509       7.6  
China
    29,460       15.8       41,045       17.8  
Japan
    18,126       9.7       20,773       9.0  
South Korea
    7,538       4.0       9,614       4.2  
Middle East
    5,780       3.1       7,073       3.1  
USA
    3,849       2.1       5,467       2.4  
Brazil
    47,084       25.3       55,677       24.1  
Steel mills and pig iron producers
    27,976       15.0       35,893       15.5  
Pelletizing joint venturesa
    19,108       10.3       19,784       8.6  
RoW
    24,791       13.3       21,837       9.5  
Total
    186,309       100.0       231,044       100.0  


aThe JVs buy pellet feed from CVRD. All JV´s pellet production is exported.

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US GAAP

VOLUME SOLD — MINERALS AND METALS

                                         
                                    thousand tons  
    4Q03     3Q04     4Q04     2003     2004  
Manganese ore
    207       313       323       885       1,002  
Ferro-alloys
    152       156       124       502       616  
Alumina
    756       508       462       2,653       1,788  
Primary aluminum
    56       101       113       210       430  
Bauxite
    501       652       514       1,472       2,076  
Potash
    169       161       165       674       630  
Kaolin
    280       319       311       654       1,207  
Copper concentrates
    0       96       139       0       269  

LOGISTICS SERVICES

                                         
                                    thousand tons  
    4Q03     3Q04     4Q04     2003     2004  
Railroads (million ntk)
    6,402       7,968       6,907       26,295       28,743  
Ports
    5,288       7,634       7,097       26,803       28,741  

GROSS REVENUES BY PRODUCT

                                                                                 
                                                                    US$ million  
    4Q03     %     3Q04     %     4Q04     %     2003     %     2004     %  
Ferrous minerals
    1,179       69.8       1,579       69.0       1,647       67.8       3,849       69.4       5,844       68.9  
Iron ore
    821       48.6       1.093       47.8       1.133       46.7       2.662       48.0       3.995       47.1  
Pellet plant operation services
    14       0.8       12       0.5       14       0.6       45       0.8       53       0.6  
Pellets
    240       14.2       281       12.3       287       11.8       793       14.3       1,095       12.9  
Manganese ore
    11       0.7       20       0.9       36       1.5       49       0.9       76       0.9  
Ferro-alloys
    87       5.1       169       7.4       167       6.9       275       5.0       590       7.0  
Others
    6       0.4       4       0.2       10       0.4       25       0.5       35       0.4  
Non ferrous minerals
    65       3.8       146       6.4       187       7.7       190       3.4       489       5.8  
Potash
    24       1.4       35       1.5       35       1.4       94       1.7       124       1.5  
Kaolin
    41       2.4       41       1.8       45       1.9       96       1.7       164       1.9  
Copper concentrates
    0             70       3.1       107       4.4                   201       2.4  
Aluminum products
    254       15.0       327       14.3       354       14.6       852       15.4       1,250       14.7  
Primary aluminum
    82       4.9       177       7.7       195       8.0       296       5.3       726       8.6  
Alumina
    149       8.8       130       5.7       141       5.8       495       8.9       458       5.4  
Bauxite
    14       0.8       17       0.7       13       0.5       37       0.7       53       0.6  
Others
    9       0.5       3       0.1       5       0.2       24       0.4       13       0.1  
Logistics services
    192       11.4       232       10.2       234       9.6       604       10.9       877       10.3  
Railroads
    127       7.5       164       7.2       162       6.7       373       6.7       612       7.2  
Ports
    38       2.2       43       1.9       47       1.9       144       2.6       173       2.0  
Shipping
    27       1.6       25       1.1       25       1.0       87       1.6       92       1.1  
Others
    0             3       0.1       6       0.2       50       0.9       19       0.2  
Total
    1,690       100.0       2,287       100.0       2,428       100.0       5,545       100.0       8,479       100.0  

GROSS REVENUES BY DESTINATION

                                                                                 
                                                                    US$ million  
    4Q03     %     3Q04     %     4Q04     %     2003     %     2004     %  
Europe
    614       36,3       699       30,6       625       25,7       1.784       32,2       2.552       30,1  
Brazil
    481       28,5       621       27,2       678       27,9       1.705       30,7       2.367       27,9  
China
    190       11,2       277       12,1       345       14,2       580       10,5       996       11,7  
Japan
    98       5,8       200       8,7       220       9,1       419       7,6       788       9,3  
Emerging Asia (ex-China)
    86       5,1       87       3,8       134       5,5       251       4,5       405       4,8  
USA
    37       2,2       118       5,2       134       5,5       189       3,4       389       4,6  
Rest of the World
    184       10,9       285       12,5       292       12,0       617       11,1       982       11,6  
Total
    1.690       100,0       2.287       100,0       2.428       100,0       5.545       100,0       8.479       100,0  

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US GAAP

AVERAGE PRICES REALIZED

                                         
                                    US$/ton  
    4Q03     3Q04     4Q04     2003     2004  
Iron ore
    16.81       20.39       20.69       16.36       19.63  
Pellets
    35.10       41.04       40.56       33.56       39.81  
Manganese ore
    53.14       63.90       111.46       55.37       75.85  
Ferro Alloys
    572.37       1,083.33       1,346.77       547.81       957.14  
Alumina
    197.09       255.91       305.19       186.58       256.15  
Aluminum
    1,464.29       1,752.48       1,725.66       1,409.52       1,688.37  
Bauxite
    27.94       26.07       25.29       25.14       25.53  
Potash
    142.01       217.39       212.12       139.47       196.83  
Kaolin
    146.43       128.53       144.69       146.79       136.70  
Copper concentrates
          729.17       769.78             747.21  

(LOGO) OPERATIONAL EXCELLENCE AMID COST INFLATION

Worldwide, the metals and mining industry has been undergoing cyclical pressures from costs of labor, energy and equipment.

In addition, the currencies of the main producing countries, such as the Brazilian Real, the Chilean Peso, the Canadian Dollar, the South African Rand and the Australian Dollar, have appreciated significantly against the US Dollar (USD). While this stimulates high prices in USD for ores and metals, it also leads to increases in mining companies’ costs. In the case of the Brazilian Real (BRL), the nominal appreciation against the USD was 26.6% between December 2002 and February 2005.

Finally, operation at full capacity eventually has the effect of increasing costs – examples are expenses on demurrage, and a larger number of maintenance stoppages.

In this adverse environment CVRD has, thanks to rigorous costs controls, succeeded in working with a high level of operational efficiency. To optimize its performance, in 2005 it launched an operational excellence program, made up of dozens of small projects to reduce costs and achieve productivity gains.

Operational profit in 2004, measured by adjusted EBIT, was US$ 3.123 billion, the highest in the Company’s history, and 90.0% higher than in 2003, US$ 1.644 billion. Adjusted EBIT margin was 38.7%, 800 basis points more than the 30.7% of 2003.

The higher margin is basically due to a lower ratio between cost of goods sold (COGS) and net revenues, which fell from 58.5% in 2003 to 50.6% in 2004. While net revenues increased by 50.7%, from US$ 5.350 billion in 2003 to US$ 8.066 billion in 2004, COGS grew by only 30.5%, from US$ 3.128 billion to US$ 4.081 billion.

In absolute terms, the main item in the increase in COGS was outsourced services, US$ 239 million higher than in 2003. This component was strongly affected by the consolidation of Caemi, which contracts transportation services to carry its iron ore to the Guaíba island maritime terminal. Also, there was a US$ 206 million increase in the account line of materials due to: (i) inflation-linked increases in prices in Brazil; (ii) consolidation of Caemi, FCA and Albras; and (iii) nominal appreciation of the BRL against the USD.

The increase in demurrage expenses – expressing the effect of the enormous pressure of demand for iron ore on the logistics infrastructure, of 80.4% from US$

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46 million in 2003 to US$ 83 million in 2004, was another factor in the growth of COGS. The Company is implementing a program to reduce ships ´ waiting time in ports, and consequently demurrage expenses.

Another important cost increase was due to research and development expenditure growth. R&D expenditure was 86.6% higher, at US$ 1531 million in 2004 than its level of US$ 82 million in 2003 – reflecting CVRD’s decision to intensify efforts to find new mineral deposits in Brazil, South America, Africa and Asia, and studies for the development of projects to increase capacity in several sectors. These investments are preparing for the Company’s future growth and are in line with its strategy of focus on organic growth.

SG&A expenses increased from US$ 265 million to US$ 452 million. The main factors in this increase were: (i) a US$ 57 million increase in personnel expenses, due to wages increases of 17% in July 2003 and 4.5% in July 2004, and the increase in headcount due to the consolidation of new companies; (ii) an increase of US$ 48 million in selling expenses; (iii) an increase of US$ 29 million in consultancy expenses; and (iv) an increase of US$ 21 million in contingencies.

Adjusted EBIT margins of all the segments of CVRD’s business increased from 2003 to 2004. In ferrous minerals it rose from 36.7% in 2003 to 42.3% in 2004; in non-ferrous minerals from 28.6% to 41.9%; in aluminum from 16.4% to 41.7%; and in logistics from 21.7% to 21.9%.

Adjusted EBIT in 4Q04, at US$ 822 million, was more than double its value of US$ 392 million in 4Q03, and was 7.2% lower than in 3Q04 (US$ 886 million).

The year-on-year change of US$ 430 million in adjusted EBIT from 4Q03 to 4Q04 is mainly due to an increase of US$ 679 million in net operating revenues, partially offset by additional costs of US$ 203 million.

The components of COGS which most grew were: (i) materials, US$ 67 million higher, caused by deferral of expenditures from 3Q04 to 4Q04 due to implementation of the enterprise resources planning system (ERP) and to material prices increases due to inflation; (ii) an increase of US$ 59 million in purchase of iron ore and pellets from third parties - volumes reached 4.217 million tons in 4Q04 from 2.088 million tons in 4Q03; and (iii) an increase of US$ 60 million in expenses on electricity, mainly due to the consolidation of Albras, reflecting the fact that aluminum production is electricity intensive. It is important to point out that energy cost at Albras in 4Q04 includes provisions of US$ 18 million relative to legal pending issues. Recurring cost of electric energy to produce primary aluminum in 4Q04 was US$ 42 million.

Other factors with a negative impact on adjusted EBIT in 4Q04, as compared with 4Q03, were a US$ 30 million increase in expenses on R&D, and an increase of US$ 13 million in provisions for employee bonuses.

Relative to 3Q04, adjusted EBIT decreased by US$ 64 million, leading also to a lower adjusted EBIT margin, that decreased to 35.5% from 40.8%.

Part of the reduction in adjusted EBIT, US$ 47 million, is explained by non-recurring factors: (a) provision of US$ 18 million in Albras; (b) several provisions in SG&A of US$ 11 million; (c) increase of US$ 18 million in material costs generated by deferral of expenses due to the implementation of the ERP, as previously explained.


1 The value of the investments in research and development of 2004, informed in the press release concerning the investment
program for 2005 - of January 18, 2005 - was US$ 184 million. This amount refers to the actual disbursement during 2004.

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US GAAP

The increase in prices of primary aluminum on the London Metal Exchange (LME) has a counterpart in the increase of prices of alumina and electricity used in its production, since both are indexed to the final prices of the metal. Albras has long-term contracts for the supply of alumina and electricity based on these standards and consequently its costs has been growing. In 4Q04, as a consequence of the increase in the price of primary aluminum, the electricity cost of the smelter increased US$ 10 million relatively to 3Q04.

There was also an increase in COGS caused by higher demurrage expenses, which increased by US$ 29 million, vessel chartering for coastal shipping, US$ 12 million, research and development, US$ 31 million, and provisions for payment of employee bonus, US$ 5 million.

COGS BREAKDOWN

                                                                                 
                                                                            US$ million  
    4Q03     %     3Q04     %     4Q04     %     2003     %     2004     %  
Personnel
    100       10.0       98       9.3       108       8.9       291       9.3       386       9.5  
Material
    124       12.3       173       16.4       191       15.8       410       13.1       616       15.1  
Fuels
    108       10.7       119       11.3       128       10.6       350       11.2       446       10.9  
Electric energy
    56       5.6       67       6.4       116       9.6       143       4.6       315       7.7  
Outsourced services
    239       23.8       224       21.3       217       18.0       574       18.4       813       19.9  
Acquisition of iron ore and pellets
    66       6.6       123       11.7       125       10.3       356       11.4       466       11.4  
Acquisition of other products
    169       16.8       102       9.7       110       9.1       604       19.3       411       10.1  
Depreciation and exhaustion
    77       7.7       95       9.0       100       8.3       228       7.3       375       9.2  
Others
    66       6.6       52       4.9       113       9.4       172       5.5       253       6.2  
Total
    1,005       100.0       1,053       100.0       1,208       100.0       3,128       100.0       4,081       100.0  

ADJUSTED EBIT MARGIN

                                                 
                                            %  
1998   1999     2000     2001     2002     2003     2004  
23.9
    29.8       23.5       24.4       34.7       30.7       38.7  

(LOGO)RECORD CASH GENERATION: US$ 3.7 BILLION

CVRD’s 2004 cash generation as measured by adjusted EBITDA was another all-time record: US$ 3.722 billion, 74.7% more than the 2003 EBITDA of US$ 2.130 billion, and 2.1 times 2002 adjusted EBITDA of US$ 1.780 billion.

4Q04 was the eleventh consecutive quarter of growth in last-twelve-month adjusted EBITDA.

The main source of the increase in adjusted EBITDA in 2004 was the growth of US$ 1.479 billion in adjusted EBIT. Additionally, depreciation and amortization increased by US$ 161 million, reflecting the expansion of the asset base, while dividends received from joint ventures and affiliates grew by US$ 3 million. On the other hand, write-offs of assets computed in 2003, which had improved that year’s cash flow by US$ 51 million, did not recur in 2004.

Of the total US$ 200 million in dividends received by CVRD in 2004, US$ 100 million were paid by Samarco, and US$ 54 million by MRN.

Cash flow by business area in 2004 was as follows: ferrous minerals 70.6%, aluminum 16.3%, logistics 9.2% and non-ferrous minerals 3.4%.

Adjusted EBITDA in 4Q04 was US$ 1,001 billion, 76.2% more than in 4Q03. The main factor leading to that, again, was adjusted EBIT, US$ 430 million higher than

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in 4Q03. Depreciation in 4Q04 was US$ 119 million – US$ 41 million higher than in 4Q03 – and dividends received were US$ 60 million, practically unchanged from US$ 59 million in 4Q03.

In 4Q04 ferrous minerals contributed with 71.9% of the cash generation, aluminum 14.9%, logistics 6.7% and non-ferrous minerals 5.9%. Copper was the main factor in the increased contribution of non-ferrous minerals to adjusted EBITDA in 4Q04.

ADJUSTED EBITDA

                                         
                                    US$ million  
    4Q03     3Q04     4Q04     2003     2004  
Net operating revenues
    1,638       2,173       2,317       5,350       8,066  
COGS
    (1,005 )     (1,053 )     (1,208 )     (3,128 )     (4,081 )
SG&A
    (97 )     (112 )     (133 )     (265 )     (452 )
Research and development
    (37 )     (36 )     (67 )     (82 )     (153 )
Other operational expenses
    (107 )     (86 )     (87 )     (231 )     (257 )
Adjusted EBIT
    392       886       822       1,644       3,123  
 
Depreciation, amortization & exhaustion
    78       102       119       238       399  
Dividends received
    59       19       60       197       200  
 
Adjustment for non-recurring items (asset impairment)
    39                   51        
 
Adjusted EBITDA
    568       1007       1001       2,130       3,722  

ADJUSTED EBITDA BY BUSINESS AREA

                                                                                 
                                                                            US$ million  
    4Q03     %     3Q04     %     4Q04     %     2003     %     2004     %  
Ferrous minerals
    446       78.5       722       71.7       720       71.9       1,646       77.3       2,626       70.6  
Non-ferrous minerals
    2       0.4       33       3.3       59       5.9       32       1.5       128       3.4  
Logistics
    31       5.5       100       9.9       67       6.7       180       8.5       341       9.2  
Aluminum
    75       13.2       152       15.1       149       14.9       199       9.3       606       16.3  
Others
    14       2.5             0.0       6       0.6       73       3.4       21       0.6  
Total
    568       100.0       1,007       100.0       1,001       100.0       2,130       100.0       3,722       100.0  

(LOGO)RECORD NET INCOME: US$ 2.6 BILLION

CVRD’s net income in 2004, US$ 2.573 billion, was 66.2% higher than in 2003, US$ 1.548 billion. This is the first time that CVRD has posted net earnings in excess of US$ 2 billion.

There was a non-recurring gain in 2004 of US$ 404 million derived from the sale of CVRD stake in CST. Part of this amount, US$ 314 million, was accounted in 3Q04. The remaining US$ 90 million was accounted in 4Q04 on the financial settlement of the second tranche of the sale transaction.

The sale of the stake in Fosfértil had produced a positive result of US$ 17 million in 4Q03. Hence, gains on sales of assets were responsible for US$ 387 million of the total growth of US$ 1.025 billion in earnings in 2004.

There were two other important factors in the increase in net earnings: (a) an improvement of US$ 1.479 billion in operating income; and (b) an increase of US$ 236 million in equity income from subsidiaries.

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The equity income from holdings in the steel industry, US$ 271 million in 2004 compared to US$ 81 million in 2003, was one of the main reasons for the increase in CVRD’s total equity income.

Among the pelletizing joint ventures, the star performer was Samarco, which increased its contribution to CVRD net earnings from US$ 70 million in 2003 to US$ 117 million in 2004.

Logistics made a positive contribution of US$ 33 million in 2004, compared to negative equity income of US$ 52 million in the previous year.

Equity income from the aluminum area was lower, falling from US$ 147 million in 2003 to US$ 71 million in 2004, the main reason being the consolidation of Albras starting in January 2004, which had provided equity income of US$ 104 million in 2003. Excluding this effect, the contribution from CVRD’s holdings in MRN and Valesul increased by US$ 28 million in 2004.

The following were negative factors in the 2004 result: (a) an increase of US$ 340 million in net financial expenses; (b) a decrease of US$ 177 million in positive monetary variation (c) an increase of US$ 452 million in provisions for income tax and social contribution; and (c) an increase of US$ 118 million in minority interests.

Financial expenses in 2004 were US$ 320 million greater than in 2003. US$ 176 million of this total resulted from the consolidation of Albras, Caemi and FCA, US$ 24 million from losses on derivatives for hedge against commodity price volatility, and US$ 22 million from the repurchase of CVRD 2007 bonds. From the amount derived from consolidations, US$ 98 million are relative to losses on derivatives contracted for hedging against volatility in aluminum prices.

The Company’s net income in 4Q04 was US$ 721 million, 167.0% higher than in 4Q03.

Operating income in 4Q03 was US$ 430 million higher than in 4Q03. US$ 283 million of this amount came from monetary variation and US$ 91 million from equity income.

By the same year-on-year comparison, gains on sales of assets were US$ 73 million higher, and the net result of adjustments in minority interest was US$ 17 million lower. On the other hand there was a substantial increase in provisions for income tax and social contribution, of US$ 330 million.

RESULTS FROM SHAREHOLDINGS

                                         
                                    US$ million  
    4Q03     3Q04     4Q04     2003     2004  
Iron ore and pellets
    23       50       55       134       170  
Aluminum, alumina and bauxite
    24       20       19       146       71  
Logistics
    36       8       11       (50 )     33  
Steel
    21       50       95       82       271  
Others
    (16 )     (1 )     (1 )     (6 )     (3 )
Total
    88       127       179       306       542  

(LOGO)DEBT: LOWER LEVERAGE, HIGHER INTEREST COVERAGE, LOWER RISK PROFILE

CVRD’s total debt on December 31, 2004 was US$ 4.088 billion, US$ 330 million lower than on September 30, 2004, US$ 4.418 billion. Part of the reduction on debt was due to repurchase of 62.33% of the US$ 300 million PRI bonds outstanding

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US GAAP

issued in 2002 and due in 2007. The purpose of this transaction was the improvement of cash management with the buyback of securities that did not fully reflect the Company’s level of risk.

Net debt at the end of December 2004 was US$ 2.839 billion, compared to US$ 2.479 billion at the end of September, and US$ 3.443 billion at the end of December 2003.

The Company’s leverage indicators improved substantially: gross debt/adjusted EBITDA fell from 1.89x as of December 31, 2003 to 1.10x as of December 31, 2004. Total debt/enterprise value fell from 16.0% to 11.8%. Interest coverage measured as adjusted EBITDA/interest paid increased, from 11.51x at the end of 2003 to 12.41x at the end of 2004. These changes are in line with the Company’s strategy of preserving a sound balance sheet.

CVRD has also been successful in reducing the implicit risk of its debt portfolio. Average debt maturity was increased, from 3.60 years at December 2003 to 6.83 years at December 2004, helping reduce refinancing risks. One of the main factors in this change was the issue of a 30-year bond, CVRD 2034. At the same time the percentage of debt with floating interest rates decreased from 71% in December 2002 to 56% in December 2004, reducing interest rate risk. The change in the risk profile took place with an increase in the average cost of debt of less than 100 basis points.

The Company contracted committed credit lines totaling US$ 500 million, contributing to efficiency in cash management and reducing risks of liquidity.

CVRD is rated Ba1 by Moody’s, only one notch below investment grade, with a positive outlook. In view of the importance of cost of capital for its growth projects and creation of value for the shareholders, obtaining the investment grade rating is one of the Company’s main targets.

FINANCIAL EXPENSES

                                         
                                    US$ million  
Financial Expenses on:   4Q03     3Q04     4Q04     2003     2004  
Debt with third parties
    (50 )     (61 )     (63 )     (182 )     (259 )
Debt with related parties
    (2 )     (3 )           (14 )     (10 )
Total debt-related financial expenses
    (52 )     (64 )     (63 )     (196 )     (269 )
                                         
                                    US$ million  
Gross Interest on:   4Q03     3Q04     4Q04     2003     2004  
Tax and labour contingencies
    (24 )     (11 )     (11 )     (46 )     (37 )
Tax on financial transactions (CPMF)
    (8 )     (9 )     (11 )     (23 )     (38 )
Derivatives
    5       (36 )     (67 )     (12 )     (139 )
Others
    (43 )     (45 )     (106 )     (74 )     (188 )
Total gross interest
    (70 )     (101 )     (195 )     (155 )     (402 )
 
Total
    (122 )     (165 )     (258 )     (351 )     (671 )

DEBT INDICATORS

                                         
                                    US$ million  
    4Q03     3Q04     4Q04     2003     2004  
Gross debt
    4,028       4,418       4,088       4,028       4,088  
Net debt
    3,443       2,479       2,839       3,443       2,839  
Gross debt / Adjusted LTM EBITDA (x)
    1.89       1.34       1.10       1.89       1.10  
Adjusted LTM EBITDA / LTM interest expenses (x)
    11.51       13.00       12.41       11.51       12.41  
Gross debt / EV (x)
    0.16       0.16       0.12       0.16       0.12  

EV = enterprise value = market capitalization + net debt

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(LOGO)CONFERENCE CALL AND WEBCAST

A conference call and webcast will be held on March 23 – Wednesday – at noon Rio de Janeiro time, 10:00 a.m. US Eastern Standard time and 3:00 p.m. UK time. Instructions for participation are available on CVRD’s website www.cvrd.com.br, Investor Relations section. A recording of the conference call and webcast will be available on the site for 90 days after March 23, 2004.

FINANCIAL STATEMENTS

                                         
                                    US$ million  
    4Q03     3Q04     4Q04     2003     2004  
Gross operating revenues
    1,690       2,287       2,428       5,545       8,479  
Taxes
    (52 )     (114 )     (111 )     (195 )     (413 )
Net operating revenue
    1,638       2,173       2,317       5,350       8,066  
Cost of goods sold
    (1,005 )     (1,053 )     (1,208 )     (3,128 )     (4,081 )
Gross profit
    633       1,120       1,109       2,222       3,985  
Gross margin (%)
    38.6       51.5       47.9       41.5       49.4  
Selling, general and administrative expenses
    (97 )     (112 )     (133 )     (265 )     (452 )
Research and development expenses
    (37 )     (36 )     (67 )     (82 )     (153 )
Employee profit-sharing
    (9 )     (17 )     (22 )     (32 )     (69 )
Others
    (98 )     (69 )     (65 )     (199 )     (188 )
Operating profit
    392       886       822       1,644       3,123  
Financial revenues
    18       10       41       102       82  
Financial expenses
    (122 )     (165 )     (258 )     (351 )     (671 )
Monetary variation
    (8 )     77       275       242       65  
Gains on sale of affiliates
    17       314       90       17       404  
Tax and social contribution (Current)
    10       (285 )     (10 )     (90 )     (433 )
Tax and social contribution (Deferred)
    (76 )     61       (386 )     (207 )     (316 )
Equity income and provision for losses
    88       127       179       306       542  
Accounting changes for asset write-offs
                      (10 )      
Minority shareholding participation
    (49 )     (82 )     (32 )     (105 )     (223 )
Net earnings
    270       943       721       1,548       2,573  
Earnings per share (US$)
    0.23       0.82       0.63       1.34       2.23  

BALANCE SHEET

                         
                    US$ million  
    12/31/03     09/30/04     12/31/04  
Assets
                       
Current
    2,474       4,246       3,890  
Long term
    1,442       1,694       1,603  
Fixed
    7,518       8,780       10,222  
Total
    11,434       14,720       15,715  
Liabilities
                       
Current
    2,253       2,600       2,455  
Long term
    4,297       5,640       5,869  
Shareholders’ equity
    4,884       6,480       7,391  
Paid up capital
    3,367       3,707       3,707  
Reserves
    1,517       2,773       3,684  
Total
    11,434       14,720       15,715  

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CASH FLOW STATEMENT

                                         
                                    US$ million  
    4Q03     3Q04     4Q04     2003     2004  
Cash flows from operating activities:
                                       
Net income
    270       943       721       1,548       2,573  
Adjustments to reconcile net income with cash provided by operating activities:
                                       
Depreciation. depletion and amortization
    78       102       119       238       399  
Dividends received
    59       19       60       197       200  
Equity in results of affiliates and joint ventures and change in provision for losses on equity investments
    (88 )     (127 )     (179 )     (306 )     (542 )
Deferred income taxes
    76       (61 )     386       207       316  
Provisions for contingencies
    30       53       42       9       137  
Impairment of property. plant and equipment
    39                   51       0  
Gain on sale of investment
    (17 )     (314 )     (90 )     (17 )     (404 )
Change in accounting practice for asset retirement obligations
                      10       0  
Pension plan
    0             0       0       0  
Foreign exchange and monetary losses
    4       (118 )     (106 )     (382 )     112  
Net unrealized derivative losses
    20       36       66       43       134  
Minority interest
    49       82       32       105       223  
Juros pagáveis. líquidos
    43       42       38       24       93  
Others
    (62 )     10       (66 )     (27 )     (89 )
Decrease (increase) in assets:
                                       
Accounts receivable
    (68 )           57       37       (98 )
Inventories
    6       (39 )     (95 )     (22 )     (216 )
Others
    (36 )     (44 )     (76 )     (9 )     (78 )
Increase (decrease) in liabilities:
                                       
Suppliers
    59       26       288       (18 )     230  
Payroll and related charges
    (17 )     27       22       (25 )     28  
Income Tax
    0       370       (22 )     0       348  
Others
    69       96       (126 )     94       105  
Net cash provided by operating activities
    514       1,103       1,071       1,757       3,471  
Cash flows from investing activities:
                                       
Loans and advances receivable
    (56 )     (9 )     (14 )     (51 )     36  
Guarantees and deposits
    (13 )     (48 )     (21 )     (99 )     (111 )
Additions to investments
    1       (4 )     (15 )     (68 )     (34 )
Additions to property. plant and equipment
    (594 )     (348 )     (877 )     (1,543 )     (2,022 )
Proceeds from disposals of investment
    83       415       164       83       579  
Proceeds from disposals of property. plant and equipment
          4       7       58       11  
Net cash used to acquire subsidiaries
                      (380 )     0  
Net cash used in investing activities
    (579 )     10       (756 )     (2,000 )     (1,541 )
Cash flows from financing activities:
                                       
Short-term debt. net issuances (repayments)
    (1 )     40       (100 )     (38 )     (60 )
Loans
    22       13       (18 )     46       (6 )
Long-term debt
    41       43       116       1,039       1,051  
Repayments of long-term debt
    (351 )     (225 )     (390 )     (770 )     (1,286 )
Interest attributed to stockholders
    (427 )           (518 )     (675 )     (787 )
Net cash used in financing activities
    (716 )     (129 )     (910 )     (398 )     (1,088 )
Increase (decrease) in cash and cash equivalents
    (781 )     984       (595 )     (641 )     842  
Effect of exchange rate changes on cash and cash equivalents
    26       (104 )     (95 )     135       (204 )
Initital cash in new consolidated subsidiaries
    0       0       0       0       26  
Cash and cash equivalents. beginning of period
    1,340       1,059       1,939       1,091       585  
Cash and cash equivalents. end of period
    585       1,939       1,249       585       1,249  
Cash paid during the period for:
                                       
Interest on short-term debt
    0       0       (3 )     (7 )     (5 )
Interest on long-term debt
    (38 )     (82 )     (82 )     (178 )     (295 )
Income tax
    (16 )           (108 )     (55 )     (108 )
Non-cash transactions
                                       
Conversion of loans receivable to investments
    (91 )     (43 )     (67 )     (187 )     (192 )
Income tax paid with credits
                0       0       (81 )
Interest capitalized
    (6 )     (11 )     (9 )     (19 )     (31 )

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US GAAP

APPENDIX

Reconciliation of “non-GAAP” information with corresponding US GAAP figures

(1) Adjusted EBIT

                                         
                                    US$ million  
    4Q03     3Q04     4Q04     2003     2004  
Net operating revenues
    1,638       2,173       2,317       5,350       8,066  
COGS
    (1,005 )     (1,053 )     (1,208 )     (3,128 )     (4,081 )
SG&A
    (97 )     (112 )     (133 )     (265 )     (452 )
Research & development
    (37 )     (36 )     (67 )     (82 )     (153 )
Other operating expenses
    (107 )     (86 )     (87 )     (231 )     (257 )
Adjusted EBIT
    392       886       822       1,644       3,123  

(2) Adjusted EBITDA

The term “EBITDA” refers to a financial measure that is defined as earnings (losses) before interest, taxes, depreciation and amortisation; we use the term “Adjusted EBITDA” to reflect that our financial measure also excludes monetary gains/losses, equity in results of affiliates and joint ventures less dividends received from those companies, changes in provision for losses on equity investments, adjustments for changes in accounting practices, minority interests and non-recurring expenses. However, Adjusted EBITDA is not a measure determined under GAAP in the United States of America and may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA should not be construed as a substitute for operating income or as a better measure of liquidity than cash flow from operating activities, which are determined in accordance with GAAP. We have presented Adjusted EBITDA to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. The following schedule reconciles Adjusted EBITDA to net cash provided by (used in) operating activities reported on our Consolidated Statements of Cash Flows, which we believe is the most directly comparable GAAP measure:

RECONCILIATION BETWEEN ADJUSTED EBITDA VS, OPERATING CASH FLOW

                                         
                                    US$ million  
    4Q03     3Q04     4Q04     2003     2004  
Operating cash flow
    514       1,103       1,071       1,763       3,471  
Income tax
    0       285       0       94       423  
Income tax paid
    (10 )           10       (4 )     10  
Monetary and foreign exchange losses
    4       41       (169 )     140       (177 )
Financial expenses
    61       113       179       196       496  
Net working capital
    (13 )     (436 )     (48 )     (59 )     (319 )
Others
    12       (99 )     (42 )     (1 )     (182 )
Adjusted EBITDA
    568       1,007       1,001       2,129       3,722  

(3) Gross debt / last 12 months adjusted EBITDA

                                         
    4Q03     3Q04     4Q04     2003     2004  
Total debt / adjusted LTM EBITDA (x)
    1.89       1.34       1.10       1.89       1.10  
Total debt / LTM operating cash flow (x)
    2.26       1.51       1.18       2.26       1.18  

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(4) Net debt

RECONCILIATION BETWEEN GROSS DEBT VS, NET DEBT

                                         
                                    US$ million  
    4Q03     3Q04     4Q04     2003     2004  
Gross debt
    4,028       4,418       4,088       4,028       4,088  
Cash and cash equivalents
    585       1,939       1,249       585       1,249  
Net debt
    3,443       2,479       2,839       3,443       2,839  

(5) Total debt / enterprise value

                                         
    4Q03     3Q04     4Q04     2003     2004  
Total debt / EV (x)
    15.98       16.16       11.77       15.98       11.77  
Total debt / total assets (x)
    35.23       30.01       26.01       35.23       26.01  

Entreprise Value = net debt + market capitalization

(6) Adjusted LTM EBITDA / LTM interest expenses

                                         
    4Q03     3Q04     4Q04     2003     2004  
Adjusted LTM EBITDA / LTM interest expenses (x)
    11.51       13.00       12.41       11.51       12.41  
LTM operating income / LTM interest expenses (x)
    8.89       10.64       10.41       8.89       10.41  


“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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(COMPANHIA VALE DO RIO DOCE LOGO)
 
(ANEFAC LOGO)

Financial Statements - 2004

USGAAP

Filed at CVM and SEC on 03/21/05

Gerência Geral de Controladoria - GECOL

 


Table of Contents

COMPANHIA VALE DO RIO DOCE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     
    Page
  F-2
 
   
  F-3
 
   
  F-5
 
   
  F-6
 
   
  F-7
 
   
  F-8
 
   
  S-1

F - 1


Table of Contents

Report of Independent Registered Public Accounting Firm

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

In our opinion, based upon our audits and the reports of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in stockholders’ equity, present fairly, in all material respects, the financial position of Companhia Vale do Rio Doce and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain affiliates, the investments in which total US$ 376 million at December 31, 2003 and equity in earnings of US$157 million and US$60 million for 2003 and 2002, respectively. Also, we did not audit the financial statements of certain majority-owned subsidiaries as at and for the years ended December 31, 2003, which statements reflect total assets of US$1,352 million at December 31, 2003 and total revenues of US$839 million and US$426 million for 2003 and 2002, respectively. The financial statements of these affiliates and subsidiaries were audited by other auditors whose reports there on have been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts for these affiliates and subsidiaries, is based solely on the reports of the other auditors. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for the opinion expressed above. The financial information relating to quarterly consolidated statements of income, of cash flows, of changes in stockholders’ equity and related explanatory notes included in the consolidated financial statements have not been audited by us.

As discussed in Note 4 to the financial statements, the Company changed its method of accounting for asset retirement obligations, as from January 1, 2003.

PricewaterhouseCoopers
Auditores Independentes

Rio de Janeiro,Brazil
March 21, 2005

F - 2


Table of Contents

Consolidated Balance Sheets
Expressed in millions of United States dollars

                 
    As of December 31,  
    2004     2003  
Assets
               
 
Current assets
               
 
Cash and cash equivalents
    1,249       585  
Accounts receivable
               
Related parties
    124       115  
Unrelated parties
    905       703  
Loans and advances to related parties
    56       56  
Inventories
    849       505  
Deferred income tax
    203       91  
Recoverable taxes
    285       214  
Others
    219       205  
 
           
 
    3,890       2,474  
 
           
 
Property, plant and equipment, net
    9,063       6,484  
 
               
Investments in affiliated companies and joint ventures and other investments, net of provision for losses on equity investments
    1,159       1,034  
 
               
Other assets
               
Goodwill on acquisition of subsidiaries
    486       451  
Loans and advances
               
Related parties
    55       40  
Unrelated parties
    56       68  
Prepaid pension cost
    170       82  
Deferred income tax
    70       234  
Judicial deposits
    531       407  
Unrealized gain on derivative instruments
    4       5  
Others
    231       155  
 
           
 
               
 
    1,603       1,442  
 
           
 
               
TOTAL
    15,715       11,434  
 
           

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Table of Contents

Consolidated Balance Sheets
Expressed in millions of United States dollars
(Except number of shares)

(Continued)

                 
    As of December 31,  
    2004     2003  
Liabilities and stockholders’ equity
               
 
               
Current liabilities
               
 
               
Suppliers
    689       482  
Payroll and related charges
    141       78  
Interest attributed to stockholders
    11       118  
Current portion of long-term debt - unrelated parties
    730       1,009  
Short-term debt
    74       129  
Loans from related parties
    52       119  
Provision for income taxes
    433       21  
Others
    325       297  
 
           
 
    2,455       2,253  
 
           
 
               
Long-term liabilities
               
Employees post-retirement benefits
    215       198  
Long-term debt - unrelated parties
    3,214       2,767  
Loans from related parties
    18       4  
Provisions for contingencies (Note 18)
    914       635  
Unrealized loss on derivative instruments
    236       96  
Others
    484       268  
 
           
 
    5,081       3,968  
 
           
Minority interests
    788       329  
 
           
 
               
Stockholders’ equity
               
Preferred class A stock - 1,800,000,000 no-par-value shares authorized and 415,727,739 issued
    1,176       1,055  
Common stock - 900,000,000 no-par-value shares authorized and 749,949,429 issued
    2,121       1,902  
Treasury stock - 11,951 (2003 - 12,549) preferred and 14,145,510 common shares
    (88 )     (88 )
Additional paid-in capital
    498       498  
Other cumulative comprehensive deficit
    (3,774 )     (4,375 )
Appropriated retained earnings
    4,143       3,035  
Unappropriated retained earnings
    3,315       2,857  
 
           
 
    7,391       4,884  
 
           
TOTAL
    15,715       11,434  
 
           

See notes to consolidated financial statements.

F - 4


Table of Contents

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

                                                 
    Three months ended (unaudited)     Year ended December 31,  
    December     September     December                    
    31, 2004     30, 2004     31, 2003     2004     2003     2002  
    (unaudited)                          
Operating revenues, net of discounts, returns and allowances
                                               
Sales of ores and metals
    1,834       1,725       1,244       6,333       4,060       3,342  
Revenues from logistic services
    234       232       192       877       604       458  
Aluminum products
    354       327       254       1,250       852       462  
Other products and services
    6       3             19       29       20  
 
                                   
 
    2,428       2,287       1,690       8,479       5,545       4,282  
Taxes on revenues
    (111 )     (114 )     (52 )     (413 )     (195 )     (159 )
 
                                   
Net operating revenues
    2,317       2,173       1,638       8,066       5,350       4,123  
 
                                   
Operating costs and expenses
                                               
Cost of ores and metals sold
    (840 )     (751 )     (670 )     (2,881 )     (2,066 )     (1,579 )
Cost of logistic services
    (155 )     (126 )     (138 )     (513 )     (370 )     (252 )
Cost of aluminum products
    (210 )     (174 )     (194 )     (674 )     (678 )     (412 )
Others
    (3 )     (2 )     (3 )     (13 )     (14 )     (20 )
 
                                   
 
    (1,208 )     (1,053 )     (1,005 )     (4,081 )     (3,128 )     (2,263 )
Selling, general and administrative expenses
    (133 )     (112 )     (97 )     (452 )     (265 )     (224 )
Research and development
    (67 )     (36 )     (37 )     (153 )     (82 )     (50 )
Employee profit sharing plan
    (22 )     (17 )     (9 )     (69 )     (32 )     (38 )
Others
    (65 )     (69 )     (98 )     (188 )     (199 )     (119 )
 
                                   
 
    (1,495 )     (1,287 )     (1,246 )     (4,943 )     (3,706 )     (2,694 )
 
                                   
Operating income
    822       886       392       3,123       1,644       1,429  
 
                                   
Non-operating income (expenses)
                                               
Financial income
    41       10       18       82       102       127  
Financial expenses
    (258 )     (165 )     (122 )     (671 )     (351 )     (375 )
Foreign exchange and monetary gains (losses), net
    275       77       (8 )     65       242       (580 )
Gain on sale of investments
    90       314       17       404       17        
 
                                   
 
    148       236       (95 )     (120 )     10       (828 )
 
                                   
Income before income taxes, equity results and minority interests
    970       1,122       297       3,003       1,654       601  
 
                                   
Income taxes
                                               
Current
    (10 )     (285 )     10       (433 )     (90 )     (12 )
Deferred
    (386 )     61       (76 )     (316 )     (207 )     161  
 
                                   
 
    (396 )     (224 )     (66 )     (749 )     (297 )     149  
 
                                   
 
Equity in results of affiliates and joint ventures and change in provision for losses on equity investments
    179       127       88       542       306       (87 )
Minority interests
    (32 )     (82 )     (49 )     (223 )     (105 )     17  
 
                                   
Income from continuing operations
    721       943       270       2,573       1,558       680  
 
                                   
Change in accounting practice for asset retirement obligations (Note 4)
                            (10 )      
 
                                   
Net income
    721       943       270       2,573       1,548       680  
 
                                   
 
Basic and diluted earnings per Preferred Class A Share
    0.63       0.82       0.23       2.23       1.34       0.59  
 
                                   
Basic and diluted earnings per Common Share
    0.63       0.82       0.23       2.23       1.34       0.59  
 
                                   
Weighted average number of shares outstanding (thousands of shares)
                                               
Common shares
    735,804       735,804       735,804       735,804       735,804       749,592  
Preferred Class A shares
    415,716       415,716       415,714       415,716       415,714       405,126  

See notes to consolidated financial statements.

F - 5


Table of Contents

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

                                                 
    Three months ended (unaudited)     Year ended December 31,  
    December     September     December                    
    31, 2004     30, 2004     31, 2003     2004     2003     2002  
    (unaudited)                          
Cash flows from operating activities:
                                               
Net income
    721       943       270       2,573       1,548       680  
Adjustments to reconcile net income to cash provided by operating activities:
                                               
Depreciation, depletion and amortization
    119       102       78       399       238       214  
Dividends received
    60       19       59       200       197       91  
Equity in results of affiliates and joint ventures and change in provision for losses on equity investments
    (179 )     (127 )     (88 )     (542 )     (306 )     87  
Deferred income taxes
    386       (61 )     76       316       207       (161 )
Provisions for contingencies
    42       53       30       137       9       53  
Impairment of property, plant and equipment
    4       7       39       34       51       62  
Gain on sale of investments
    (90 )     (314 )     (17 )     (404 )     (17 )      
Change in accounting practice for asset retirement obligations (Note 4)
                            10        
Foreign exchange and monetary losses (gains)
    (106 )     (118 )     4       112       (382 )     1,031  
Unrealized derivative losses, net
    66       36       20       134       43       83  
Minority interests
    32       82       49       223       105       (17 )
Interest payable, net
    38       42       43       93       24        
Others
    (70 )     3       (62 )     (123 )     (27 )     57  
Decrease (increase) in assets:
                                               
Accounts receivable
    57             (68 )     (98 )     37       (123 )
Inventories
    (95 )     (39 )     6       (216 )     (22 )     (69 )
Others
    (76 )     (44 )     (36 )     (78 )     (9 )     (105 )
Increase (decrease) in liabilities:
                                               
Suppliers
    288       26       59       230       (18 )     102  
Payroll and related charges
    22       27       (17 )     28       (25 )     23  
Income taxes
    (22 )     370             348              
Others
    (126 )     96       69       105       94       94  
 
                                   
Net cash provided by operating activities
    1,071       1,103       514       3,471       1,757       2,102  
 
                                   
Cash flows from investing activities:
                                               
Loans and advances receivable
                                               
Related parties
                                               
Additions
    (21 )     (6 )     (65 )     (33 )     (157 )     (101 )
Repayments
    5             9       51       71       75  
Others
    2       (3 )           18       35       20  
Guarantees and deposits
    (21 )     (48 )     (13 )     (111 )     (99 )     (78 )
Additions to investments
    (15 )     (4 )     1       (34 )     (68 )     (1 )
Additions to property, plant and equipment
    (877 )     (348 )     (594 )     (2,022 )     (1,543 )     (766 )
Proceeds from disposal of investments
    164       415       83       579       83        
Proceeds from disposals of property, plant and equipment
    7       4             11       58       7  
Cash used to acquire subsidiaries, net of cash acquired
                            (380 )     (45 )
 
                                   
Net cash provided by (used in) investing activities
    (756 )     10       (579 )     (1,541 )     (2,000 )     (889 )
 
                                   
Cash flows from financing activities:
                                               
Short-term debt, net issuances (repayments)
    (100 )     40       (1 )     (60 )     (38 )     (345 )
Loans
                                               
Related parties
                                               
Additions
          15       24       21       72       54  
Repayments
    (18 )     (2 )     (2 )     (27 )     (26 )     (75 )
Issuances of long-term debt
                                               
Related parties
    20             12       20       14       17  
Others
    96       43       29       1,031       1,025       698  
Repayments of long-term debt
                                               
Related parties
          (3 )           (3 )     (4 )     (15 )
Others
    (390 )     (222 )     (351 )     (1,283 )     (766 )     (330 )
Interest attributed to stockholders
    (518 )           (427 )     (787 )     (675 )     (602 )
 
                                   
Net cash used in financing activities
    (910 )     (129 )     (716 )     (1,088 )     (398 )     (598 )
 
                                   
Increase (decrease) in cash and cash equivalents
    (595 )     984       (781 )     842       (641 )     615  
Effect of exchange rate changes on cash and cash equivalents
    (95 )     (104 )     26       (204 )     135       (641 )
Initial cash in new consolidated subsidiary
                      26              
Cash and cash equivalents, beginning of period
    1,939       1,059       1,340       585       1,091       1,117  
 
                                   
Cash and cash equivalents, end of period
    1,249       1,939       585       1,249       585       1,091  
 
                                   
Cash paid during the period for:
                                               
Interest on short-term debt
    (3 )                 (5 )     (7 )     (46 )
Interest on long-term debt
    (82 )     (82 )     (38 )     (295 )     (178 )     (157 )
Income tax
    (108 )           (16 )     (108 )     (55 )     (12 )
Non-cash transactions
                                               
Conversion of loans to investments
    (67 )     (43 )     (91 )     (192 )     (187 )     (55 )
Income tax paid with credits
                      (100 )     (81 )      
Interest capitalized
    (9 )     (11 )     (6 )     (31 )     (19 )     (27 )

See notes to consolidated financial statements.

F - 6


Table of Contents

Consolidated Statements of Changes in Stockholders’ Equity
Expressed in millions of United States dollars
(except number of shares and per-share amounts)

                                                 
    Three months ended (unaudited)     Year ended December 31,  
    December 31,     September 30,     December 31,                    
    2004     2004     2003     2004     2003     2002  
    (unaudited)                                  
Preferred class A stock (including one special share)
                                               
Beginning of the period
    1,176       1,176       1,055       1,055       904       820  
Transfer from appropriated retained earnings
                      121       151       84  
 
                                   
End of the period
    1,176       1,176       1,055       1,176       1,055       904  
 
                                   
Common stock
                                               
Beginning and end of the period
    2,121       2,121       1,902       1,902       1,630       1,479  
Transfer from appropriated retained earnings
                      219       272       151  
 
                                   
End of the period
    2,121       2,121       1,902       2,121       1,902       1,630  
 
                                   
Treasury stock
                                               
 
                                   
Beginning and end of the period
    (88 )     (88 )     (88 )     (88 )     (88 )     (88 )
 
                                   
Additional paid-in capital
                                               
Beginning and end of the period
    498       498       498       498       498       498  
 
                                   
Other cumulative comprehensive deficit
                                               
Cumulative translation adjustments
                                               
Beginning of the period
    (4,296 )     (4,757 )     (4,473 )     (4,449 )     (5,185 )     (3,475 )
Change in the period
    427       461       24       580       736       (1,710 )
 
                                   
End of the period
    (3,869 )     (4,296 )     (4,449 )     (3,869 )     (4,449 )     (5,185 )
 
                                   
Unrealized gain on available-for-sale securities
                                               
Beginning of the period
    82       61       14       74              
Change in the period
    13       21       60       21       74        
 
                                   
End of the period
    95       82       74       95       74        
 
                                   
Adjustments relating to investments in affiliates
                                               
Beginning of the period
                10             10       10  
Transfer to retained earnings
                (10 )           (10 )      
 
                                   
Beginning and end of the period
                                  10  
 
                                   
Total other cumulative comprehensive deficit
    (3,774 )     (4,214 )     (4,375 )     (3,774 )     (4,375 )     (5,175 )
 
                                   
Appropriated retained earnings
                                               
Beginning of the period
    2,719       2,501       2,251       3,035       2,230       3,212  
Transfer (to) from retained earnings
    1,424       218       784       1,448       1,228       (747 )
Transfer to capital stock
                      (340 )     (423 )     (235 )
 
                                   
End of the period
    4,143       2,719       3,035       4,143       3,035       2,230  
 
                                   
Unappropriated retained earnings
                                               
Beginning of the period
    4,268       3,667       3,472       2,857       3,288       2,184  
Net income
    721       943       270       2,573       1,548       680  
Interest attributed to stockholders
                                               
Preferred class A stock
    (90 )     (45 )     (40 )     (241 )     (275 )     (117 )
Common stock
    (160 )     (79 )     (71 )     (426 )     (486 )     (206 )
Appropriation (to) from reserves
    (1,424 )     (218 )     (774 )     (1,448 )     (1,218 )     747  
 
                                   
End of the period
    3,315       4,268       2,857       3,315       2,857       3,288  
 
                                   
Total stockholders’ equity
    7,391       6,480       4,884       7,391       4,884       3,287  
 
                                   
 
Comprehensive income (deficit) is comprised as follows:
                                               
Net income
    721       943       270       2,573       1,548       680  
Cumulative translation adjustments
    427       461       24       580       736       (1,710 )
Unrealized gain (loss) on available-for-sale securities
    13       21       60       21       74        
 
                                   
Total comprehensive income (deficit)
    1,161       1,425       354       3,174       2,358       (1,030 )
 
                                   
 
Shares
                                               
Preferred class A stock (including three special share)
    415,727,739       415,727,739       415,727,739       415,727,739       415,727,739       415,727,739  
 
                                   
Common stock
    749,949,429       749,949,429       749,949,429       749,949,429       749,949,429       749,949,429  
 
                                   
Treasury stock (1)
                                               
Beginning of the period
    (14,157,477 )     (14,158,059 )     (14,158,059 )     (14,158,059 )     (14,158,953 )     (14,145,783 )
Acquisitions
                                  (13,170 )
Sales
    16       582             598       894        
 
                                   
End of the period
    (14,157,461 )     (14,157,477 )     (14,158,059 )     (14,157,461 )     (14,158,059 )     (14,158,953 )
 
                                   
 
    1,151,519,707       1,151,519,691       1,151,519,109       1,151,519,707       1,151,519,109       1,151,518,215  
 
                                   
Interest attributed to stockholders (per share)
                                               
Preferred class A stock (including one special share)
    0.22       0.11       0.10       0.58       0.66       0.28  
Common stock
    0.22       0.11       0.10       0.58       0.66       0.28  


(1)   As of December 31, 2004, 14,145,510 common shares and 11,951 preferred shares were held in treasury in the amount of US$ 88. The 14,145,510 common shares guarantee a loan to our subsidiary Alunorte.

Notes to consolidated financial statements.

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

1  The Company and its operations

Companhia Vale do Rio Doce (CVRD) is a limited liability company, duly organized and existing under the laws of the Federative Republic of Brazil. Our operations are carried out through CVRD and its subsidiary companies, joint ventures and affiliates, and mainly consist of mining, non-ferrous metal production and logistics, as well as energy, aluminum and steel activities. Further details of our operations and those of our joint ventures and affiliates are described in Note 13.

The main operating subsidiaries we consolidate are as follows:

                 
        % voting   Head office    
Subsidiary   % ownership   capital   location   Principal activity
Alumina do Norte do Brasil S.A. - Alunorte (Alunorte)
  57   61   Brazil   Alumina
Alumínio Brasileiro S.A. - Albras (Albras) (8)
  51   51   Brazil   Aluminum
CADAM S.A. (CADAM) (2) (4)
  37   100   Brazil   Kaolin
CELMAR S.A. - Indústria de Celulose e Papel (3)
  100   100   Brazil   Forestry
CVRD Overseas Ltd.
  100   100   Cayman Island   Trading
Ferrovia Centro-Atlântica S.A. (4)
  100   100   Brazil   Logistics
Ferteco Mineração S.A. - FERTECO (3)
  100   100   Brazil   Iron ore and Pellets
Itabira Rio Doce Company Ltd. - ITACO
  100   100   Cayman Island   Trading
Mineração Serra do Sossego S.A. (5)
  100   100   Brazil   Copper
Minerações Brasileiras Reunidas S.A. - MBR (4) (7)
  56   90   Brazil   Iron ore
Navegação Vale do Rio Doce S.A. - DOCENAVE
  100   100   Brazil   Shipping
Pará Pigmentos S.A.
  76   86   Brazil   Kaolin
Rio Doce International Finance Ltd. - RDIF
  100   100   Bahamas   International finance
Rio Doce Manganês S.A. (6)
  100   100   Brazil   Manganese and Ferroalloys
Rio Doce Manganèse Europe - RDME
  100   100   France   Ferroalloys
Rio Doce Manganese Norway - RDMN
  100   100   Norway   Ferroalloys
Salobo Metais S.A. (1)
  100   100   Brazil   Copper
Urucum Mineração S.A.
  100   100   Brazil   Iron ore, Ferroalloys and Manganese


(1)   Development stage companies
(2)   Through Caemi Mineração e Metalurgia S.A. Caemi holds 61.48% of the total capital and 100% of the voting capital of Cadam. CVRD holds 60.2% of the total capital and 100% of the voting capital of Caemi.
(3)   Merged with CVRD on August 29, 2003
(4)   Consolidated as from September 2003
(5)   Merged with CVRD on December 30, 2003
(6)   Formerly Sibra-Eletrosiderúrgica Brasileira S.A.
(7)   Through Caemi Mineração e Metalurgia S.A. and Belém Administrações e Participações Ltda.
(8)   Consolidated as from January 1, 2004 (See Note 4)

2   Basis of consolidation
 
    All majority-owned subsidiaries where we have both share and management control are consolidated, with elimination of all significant intercompany accounts and transactions. Additionally variable interest entities in which are the primary beneficiary (Note 4(b)) are consolidated as from January 1, 2004. Investments in unconsolidated affiliates and joint ventures are reported at cost plus our equity in undistributed earnings or losses. Included in this category are certain joint ventures in which we have majority ownership but, by force of shareholders’ agreements, do not have effective management control. We provide for losses on equity investments with negative stockholders’ equity where applicable (Note 13).
 
    We evaluate the carrying value of our listed investments relative to publicly available quoted market prices. If the quoted market price is below book value, and such decline is considered other than temporary, we write-down our equity investments to quoted market value.

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    We define joint ventures as businesses in which we and a small group of other partners each participate actively in the overall entity management, based on a shareholders agreement. We define affiliates as businesses in which we participate as a minority stockholder but with significant influence over the operating and financial policies of the investee.
 
    Our condensed consolidated interim financial information for the three-month periods ended December 31, 2004, September 30, 2004, and December 31, 2003 is unaudited. However, in our opinion, such condensed consolidated financial information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for interim periods. Certain interim footnotes have been excluded due of the inclusion of the footnote for the annual information.
 
3   Summary of significant accounting policies
 
    In preparing the consolidated financial statements, we are required to use estimates to account for certain assets, liabilities, revenues and expenses. Our consolidated financial statements therefore include various estimates concerning the selection of useful lives of property, plant and equipment, provisions necessary for contingent liabilities, fair values assigned to assets and liabilities acquired in business combinations, income tax valuation allowances, employee post-retirement benefits and other similar evaluations; actual results may vary from our estimates.
 
(a)   Basis of presentation
 
    We have prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which differ in certain respects from the accounting practices adopted in Brazil that we use in preparing our statutory financial statements.
 
    The U.S. dollar amounts for the years presented have been remeasured (translated) from the Brazilian currency amounts in accordance with the criteria set forth in Statement of Financial Accounting Standards 52 – “Foreign Currency Translation” (SFAS 52).
 
    Prior to July 1, 1997, Brazil was considered under SFAS 52 to have a highly inflationary economy and accordingly, up to June 30, 1997, we adopted the U.S. dollar as both our functional currency and reporting currency.
 
    As from July 1, 1997, we concluded that the Brazilian economy had ceased to be highly inflationary and changed our functional currency from the reporting currency (U.S. dollars) to the local currency (Brazilian Reais), for Brazilian operations and extensions thereof. Accordingly, we translated the U.S. dollar amounts of non-monetary assets and liabilities into Reais at the current exchange rate, and those amounts became the new accounting bases for such assets and liabilities.
 
    We have remeasured all assets and liabilities into U.S. dollars at the current exchange rate at each balance sheet date (R$2.6544 and R$2.8892 to US$1.00 at December 31, 2004 and 2003, respectively), and all accounts in the statements of income (including amounts relative to local currency indexation and exchange variances on assets and liabilities denominated in foreign currency) at the average rates prevailing during the period. The translation gain or loss resulting from this remeasurement process is included in the cumulative translation adjustments account in stockholders’ equity.
 
    The net exchange transaction gain (loss) included in our statement of income was US$65, US$242 and (US$580) in 2004, 2003 and 2002, respectively, included within the line “Foreign exchange and monetary losses, net”.
 
(b)   Business combinations
 
    We adopt the procedures determined by SFAS 141 – “Business Combinations” to recognize acquisitions of interests in other companies. The method of accounting used in our business combination transactions is the “purchase method”, which requires that acquirers reasonably determine the fair value of the identifiable assets and liabilities of acquired companies, individually, in order to determine the goodwill paid in the purchase to be recognized as an intangible asset. On the acquisition of assets, which include the rights to mine reserves of natural resources, the

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    establishment of values for these assets includes the placing of fair values on purchased reserves, which are classified in the balance sheet as property, plant and equipment.
 
    Goodwill was amortized in a systematic manner over the periods estimated to be benefited through December 31, 2001. As required by SFAS 142 — “Goodwill and Other Intangible Assets” from January 1, 2002 goodwill resulting from the acquisitions is no longer amortized, but is tested for impairment at least annually and reduced to fair value to the extent any such impairment is identified.
 
(c)   Inventories
 
    Inventories are stated at the average cost of purchase or production, lower than replacement or realizable values. We record allowances for slow moving or obsolete inventories when considered appropriate, reflecting our periodic assessment of recoverability. A write-down of inventory utilizing the allowance establishes a new cost basis for the related inventory.
 
    Finished goods inventories include all related materials, labor and direct production expenditures, and exclude general and administrative expenses.
 
(d)   Property, plant and equipment
 
    Property, plant and equipment are recorded at cost, including interest cost incurred during the construction of major new facilities. We compute depreciation on the straight -line basis at annual rates which take into consideration the useful lives of the items, such as: from 2% to 20% for the railroads, 5% for ships, 3% for buildings, from 2% to 5% for installations and from 5% to 20% for mining and other equipment. Expenditures for maintenance and repairs are charged to operating costs and expenses as incurred.
 
    We capitalize the costs of developing major new ore bodies or expanding the capacity of operating mines and amortize these to operations on the unit-of-production method based on the total probable and proven quantity of ore to be recovered. Exploration costs are expensed until economic viability of mining activities is established; subsequently such costs are capitalized together with further exploration costs. We capitalize mine development costs as from the time we actually begin such development.
 
(e)   Available-for-sale equity securities
 
    Equity securities classified as “available-for-sale” are recorded in accordance with SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities”. Accordingly, we exclude unrealized holding gains and losses, net of taxes, if applicable, from income and recognize them, net of tax effects, as a separate component of stockholders’ equity until realized.
 
(f)   Revenues and expenses
 
    Revenues are recognized when title has transferred to the customer or services are rendered. Revenue from exported products is recognized when such products are loaded on board the ship. Revenue from products sold in the domestic market is recognized when delivery is made to the customer. Revenue from transportation services, other than shipping operations, is recognized when the service order has been fulfilled. Shipping operations are recorded on the completed voyage basis and net revenue, costs and expenses of voyages not completed at period-end are deferred. Anticipated losses on voyages are provided when probable and can be reasonably estimated. Expenses and costs are recognized on the accrual basis.
 
(g)   Environmental and site reclamation and restoration costs
 
    Expenditures relating to ongoing compliance with environmental regulations are charged against earnings or capitalized as appropriate. These ongoing programs are designed to minimize the environmental impact of our activities. With respect to our major iron ore mine at Carajás, which has extensive remaining reserves, liabilities for final site reclamation and restoration costs will be recorded when the respective reclamation and restoration strategies can be reasonably determined and the related costs can be reasonably estimated.

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(h)   Compensated absences
 
    We fully accrue the employees’ compensation liability for vacations vested during the year.
 
(i)   Income taxes
 
    In accordance with SFAS 109 — “Accounting for Income Taxes”, the deferred tax effects of tax loss carryforwards and temporary differences have been recognized in the consolidated financial statements. A valuation allowance is made when we believe that it is more likely than not that tax assets will not be fully recoverable in the future.
 
(j)   Statement of cash flows
 
    Cash flows relating to overnight financing and investment are reported net. Short-term investments that have a ready market and maturity to us, when purchased, of 90 days or less are considered cash equivalents.
 
(k)   Earnings per share
 
    Earnings per share are computed by dividing net income by the weighted average number of common and preferred shares outstanding during the period.
 
(l)   Interest attributed to stockholders
 
    As from January 1, 1996 Brazilian corporations are permitted to attribute interest on stockholders’ equity. The calculation is based on the stockholders’ equity amounts as stated in the statutory accounting records and the interest rate applied may not exceed the long-term interest rate (TJLP) determined by the Brazilian Central Bank. Also, such interest may not exceed 50% of net income for the year nor 50% of retained earnings plus revenue reserves.
 
    The amount of interest attributed to stockholders is deductible for income tax purposes. Accordingly, the benefit to us, as opposed to making a dividend payment, is a reduction in our income tax charge equivalent to the statutory tax rate applied to such amount. Income tax is withheld from the stockholders relative to interest at the rate of 15%.
 
    Under Brazilian law, interest attributable to stockholders is considered as part of the annual minimum dividend (Note 16). Accordingly such distributions are treated as dividends for accounting purposes.
 
    We have opted to pay such tax -deductible interest to our stockholders and have therefore accrued the amounts due as of December 31, 2004, 2003 and 2002, with a direct charge to stockholders’ equity.
 
(m)   Derivatives and hedging activities
 
    As of January 1, 2001 we adopted SFAS 133 — “Accounting for Derivative Financial Instruments and Hedging Activities”, as amended by SFAS 137, SFAS 138 and SFAS 149. Those standards require that we recognize all derivative financial instruments as either assets or liabilities on our balance sheet and measure such instruments at fair value. Changes in the fair value of derivatives are recorded in each period in current earnings or in other comprehensive income, in the latter case depending on whether a transaction is designated as an effective hedge.
 
(n)   Comprehensive income
 
    We have disclosed comprehensive income as part of the Statement of Changes in Stockholders’ Equity, in compliance with SFAS 130 — “Reporting Comprehensive Income”.
 
(o)   Reclassification
 
    Certain minor reclassifications have been made to the financial statements for 2003 and 2002 to make them comparable with the 2004 presentation.

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(p)   Stockpiled inventory

We classify proven and probable reserve quantities attributable to stockpiled inventory as inventory and account for them as processed when they are removed from the mine. These reserve quantities are not included in the total proven and probable reserve quantities used in the units of production, depreciation, depletion and amortization calculations.

(q)   Removal of waste materials to access mineral deposits

During the development of a mine, before production commences, stripping costs (i.e., the costs associated with the removal of overburden and other waste materials) are capitalized as part of the depreciable cost of building and constructing the mine. Such costs are subsequently amortized over the useful life of the mine based on proven and probable reserves.

Post-production stripping costs are recorded as cost of sales when incurred.

4   Change in accounting practice

(a) 2003 – SFAS 143

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS 143 — “Accounting for Asset Retirement Obligations”. We adopted SFAS 143 as from January 1, 2003, and as a consequence an additional US$26 for asset retirement obligations was recorded as “Others - long-term liabilities”, a net increase of US$11 in mine development costs was registered within “Property, plant and equipment” and a resulting charge of US$10 was registered as “Change in Accounting Practice for Asset Retirement Obligations” on the Statement of Income, net of income tax (US$15 gross of deferred income tax). Over time the liabilities will be accreted for the change in their present value and initial capitalized costs will be amortized over the useful lives of the related assets.

(b)   2004 – FIN 46R

As from January 1, 2004 we have consolidated Albras based on our 51% interest in that entity under FASB Interpretation (FIN) “Consolidation of Variable Interest Entities (revised December 2003)”. Albras is an Aluminum company with revenues of US$707 and total assets of US$805 for the year ended December 31, 2004 which sells all of its output to its shareholders based in its participation.

Albras purchases its principal raw material, alumina, from Alunorte and obtains financing principally from CVRD and its subsidiaries. None of Albras or CVRD’s assets guarantee Albras’ obligations except for industrial property, plant and equipment of US$316 given in guarantee of US$192 of third party basis but CVRD has provided financial guarantees for Albras financings. Had Albras been consolidated at and for the year ended December 31, 2003 CVRD’s consolidated statement of income would have been as follows:

                         
    2003  
                    Pro Forma  
    CVRD     Albras     (unaudited)  
Net revenues
    5,350       165       5,515  
Cost of sales
    (3,128 )     58       (3,070 )
Operating costs
    (578 )     (16 )     (594 )
Non-operating income (expense)
    10       34       44  
Income taxes
    (297 )     (36 )     (333 )
Equity in results of affiliates and joint ventures
    306       (105 )     201  
Change in accounting practice
    (10 )           (10 )
Minority interests
    (105 )     (100 )     (205 )
                   
Net income
    1,548             1,548  
                   

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5   Recently-issued accounting pronouncements

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” which sets accounting requirements for “share-based” compensation to employees, including employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for awards to non-employees. This Statement will require companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. For public entities, this Statement is effective for the first interim period beginning after June 15, 2005. We do not currently provide any share-based payments to employees or non-employees.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets an amendment of APB No. 29. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date this Statement is issued. Retroactive application is not permitted. We will apply this Statement in the event exchanges of nonmonetary assets occur in fiscal periods beginning after June 15, 2005.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4, which amends Chapter 4 of ARB No. 43 that deals with inventory pricing. The Statement clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and spoilage. Under previous guidance, paragraph 5 of ARB No. 43, chapter 4, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs might be considered to be so abnormal, under certain circumstances, as to require treatment as current period charges. This Statement eliminates the criterion of “so abnormal” and requires that the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement shall be effective for 2005. Also, this Statement requires that allocation of fixed production overheads to inventories by June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after the date this Statement is issued. The provisions of this Statement shall be applied prospectively. We are analyzing the requirements of this new Statement and believes that its adoption will not have any significant impact on the Company’s financial position, results of operations or cash flows.

In September 2004, the FASB issued FSP EITF Issue 03-1-1, which delayed the effective date of paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. Paragraphs 10-20 of EITF Issue No. 03-1 give guidance on how to evaluate and recognize an impairment loss that is other that temporary. Application of these paragraphs has been deferred pending issuance, of proposed FSP EITF Issue 03-1a. We do not expect EITF Issue No. 03-01 to have any impact on its financial position, results of operations or cash flows.

At its March 31, 2004 meeting, the Emerging Issues Task Force (EITF) reached final consensus on EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share. Typically, a participating security is entitled to share in a company’s earnings, often via a formula tied to dividends on the company’s common stock. The issue clarifies what is meant by the term participating security, as used in Statement 128. When an instrument is deemed to be a participating security, it has the potential to significantly reduce basic earnings per common share because the two-class method must be used to compute the instrument’s effect on earnings per share. The consensus also covers other instruments whose terms include a participation feature. The consensus also addresses the allocation of losses. If undistributed earnings must be allocated to participating securities under the two-class method, losses should also be allocated. However, EITF 03-6 limits this allocation only to situations when the security has

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(1) the right to participate in the earnings of the company, and (2) an objectively determinable contractual obligation to share in net losses of the company;

The consensus reached in EITF 03-6 is effective for fiscal periods beginning after March 31, 2004. EPS in prior periods must be retroactively adjusted in order to comply with the consensus decisions reached in EITF 03-6. We do not expect that this consensus will have any impact on its calculation of Basic and Diluted EPS.

6   Our privatization

In May 1997, we were privatized by the Brazilian Government, which transferred voting control to Valepar S.A. (“Valepar”). The Brazilian Government has retained certain rights with respect to our future decisions and those of Valepar and has also caused us to enter into agreements which may affect our activities and results of operations in the future. These rights and agreements are:

  •   Preferred Special Share. The Brazilian Government holds three preferred special shares of CVRD which confers upon it permanent veto rights over changes in our (i) name, (ii) headquarters location, (iii) corporate purpose with respect to mineral exploration, (iv) continued operation of our integrated iron ore mining systems and (v) certain other matters.
 
  •   Shareholder revenue interests. On July 7, 1997, we issued to shareholders of record on April 18, 1997 (including the Brazilian Government) revenue interests providing holders thereof with the right to receive semi-annual payments based on a percentage of our net revenues above threshold production volumes from identified mining resources. These instruments are not secured by the corresponding mineral reserves and deposits (Note 18(f)).

7   Major acquisitions and disposals during the years presented

We made the following acquisitions during the periods presented. Pro forma information with respect to our acquisitions of the control of Alunorte in June 2002 and Caemi in September 2003 is shown in items (b) and (c) below:

(a)   In December 2001, acting through our wholly-owned foreign subsidiary Itabira Rio Doce Company Ltd. — ITACO, we acquired common shares of Caemi Mineração e Metalurgia S.A. (Caemi), corresponding to 16.82% of its total capital and 50% of its voting capital from a wholly-owned subsidiary of Mitsui & Co., Ltd. (Mitsui) for US$ 279. Caemi is a Brazilian company headquartered in Rio de Janeiro, which operates in the iron ore, kaolin, refractory bauxite and railroad sectors and was accounted for as an equity investee up to September 2, 2003 (see below).

This acquisition was approved by the European Commission subject to the commitment for Caemi to sell its equity investment in Quebec Cartier Mining Company (QCM), a Canadian producer of iron ore and pellets. On December 31, 2003 Caemi sold its holding of QCM ´s common shares to the Quebec Provincial Government for the symbolic amount of 100 Canadian dollars and converted loans to QCM of 20 million Canadian dollars into preferred stock with no voting rights (other than on matters required by law). Caemi will continue to guarantee certain financings of QCM until 2007 and has undertaken to provide further financial support to QCM, if necessary, in the form of subordinated loans up to 2010, limited to 34.5 million Canadian dollars (equivalent to US$27 at December 31, 2004 ). The fair value of this commitment has been fully provided.

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

On September 2, 2003 we acquired a further 43.37% of the capital of Caemi for US$426, increasing our total participation to 60.23%. Caemi has been consolidated as from this date.

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The acquisition cost of the 43.37% of Caemi, net of cash acquired, was as follows:

         
    September 2, 2003  
Estimated fair value of assets
    1,699  
Estimated fair value of liabilities
    (716 )
 
     
Net assets at fair value
    983  
Interest in total capital acquired
    43.37 %
Estimated fair value of net assets acquired
    426  
 
Purchase price
    426  
Less cash acquired
    (46 )
 
     
Acquisition cost of Caemi, net of cash acquired
    380  
 
     

Caemi Pro forma

The unaudited condensed pro forma statement of income below shows the impact of the acquisition of Caemi on the consolidated statements of income as if the current 60.23% participation in Caemi had been acquired on January 1, 2002 (instead of the 16.86% equity investment previously held, being 16.82% initially acquired and 0.04% purchased subsequently).

                                                 
    2003     2002  
            Pre-                            
    CVRD     acquisition             CVRD              
    Consolidated     CAEMI (1)     Pro Forma     Consolidated     CAEMI (2)     Pro Forma  
                    (unaudited)                     (unaudited)  
Net operating revenues
    5.350       424       5.774       4.123       572       4.695  
 
                                               
Operating costs and expenses
    (3.706 )     (343 )     (4.049 )     (2.694 )     (545 )     (3.239 )
 
                                   
Operating income (loss)
    1.644       81       1.725       1.429       27       1.456  
Non-operating income (expenses)
    10       16       26       (828 )     (101 )     (929 )
 
                                   
Income before income taxes, equity results and minority interests
    1.654       97       1.751       601       (74 )     527  
Income taxes
    (297 )     (41 )     (338 )     149       12       161  
Equity in results of affiliates and joint ventures and change in provision for losses on equity investments
    306       (20 )     286       (87 )     (2) (3)     (89 )
Minority interests
    (105 )     18       (87 )     17       64       81  
 
                                   
Income from continuing operations
    1.558       54       1.612       680             680  
Change in accounting practice for asset retirement obligations
    (10 )           (10 )                  
 
                                   
Net income
    1.548       54       1.602       680             680  
 
                                   


(1)   Period from January to August, 2003 (Consolidated as from September 2003).
(2)   Period from January to December, 2002, net of consolidation adjustments.
(3)   Includes elimination of Caemi equity investment write-down based on quoted market price - US$86.

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

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Unaudited pro forma information with respect to the effect on our consolidated statements of income, reflecting the consolidation of ALUNORTE as if control has been acquired as at January 1, 2002 is as follows:

                         
    2002  
                    Pro Forma  
    CVRD Consolidated     ALUNORTE     (unaudited)  
Net operating revenues
    4.123       138       4.261  
 
Operating costs and expenses
    (2.694 )     (151 )     (2.845 )
 
                 
Operating income
    1.429       (13 )     1.416  
Non-operating income (expenses)
    (828 )     (38 )     (866 )
 
                 
Income before income taxes, equity results and minority interests
    601       (51 )     550  
Income taxes
    149             149  
Equity in results of affiliates and joint ventures
    (28 )     23       (5 )
Change in provision for losses on equity investments
    (59 )           (59 )
Minority interests
    17       28       45  
 
                 
Net income
    680             680  
 
                 

(c)   On October 10, 2003, the subsidiary Companhia Paulista de Ferro Ligas (CPFL) finalized the sale of its shares in Fertilizantes Fosfatados S.A. (Fosfértil) to Bunge Fertilizantes S.A. for US$84. The profit on the operation was US$61.
 
(d)   On November 7, 2003 we sold our investment in Companhia Ferroviária do Nordeste (CFN) to CSN for a symbolic amount, recording a loss on this transaction of US$44.
 
(e)   On July 30, 2004 we sold part of our stake in Companhia Siderúrgica de Tubarão – CST representing 4.42% of the voting capital and 29.96% of the non-voting capital for US$415. In December 2004 we concluded the sale of our remaining 20.51% voting capital interest for US$163. The profit on the transaction was US$314 and US$90, respectively.

8   Income taxes

Income taxes in Brazil comprise federal income tax and social contribution, which is an additional federal tax. The statutory composite enacted tax rate applicable in the periods presented is 34% represented by a 25% federal income tax rate plus a 9% social contribution rate.

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

                                                 
    Three months ended (unaudited)     Year ended December 31,  
    December     September     December                    
    31, 2004     30, 2004     31, 2003     2004     2003     2002  
 
                                               
Income before income taxes, equity results and minority interests
    970       1,122       297       3,003       1,654       601  
 
                                   
 
                                               
Federal income tax and social contribution expense at statutory enacted rates
    (330 )     (381 )     (101 )     (1,021 )     (562 )     (204 )
Adjustments to derive effective tax rate:
                                               
Tax benefit on interest attributed to stockholders
    65       50       42       214       271       99  
Exempt foreign income (expenses)
    69       143       (26 )     247       (59 )     196  
Difference on tax basis of equity investees
    (135 )     (75 )     (56 )     (240 )     (56 )     20  
Tax effect related to provision for losses and write-downs
                                  29  
Tax incentives
    9       32       12       53       60       4  
Valuation allowance reversal (provision)
    6       19       40       77       53       (12 )
Non-taxable losses on derivative
    (57 )                 (57 )            
Other non-taxable gains (losses)
    (23 )     (12 )     23       (22 )     (4 )     17  
 
                                   
Federal income tax and social contribution expense in consolidated statements of income
    (396 )     (224 )     (66 )     (749 )     (297 )     149  
 
                                   

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We have certain tax incentives relative to our iron ore and manganese operations in Carajás, potash in Sergipe and relative to alumina in Alunorte. The incentives relative to iron ore and manganese comprise full income tax exemption on defined production levels up to 2005 and partial exemption up to 2013. The incentive relative to potash expires in 2013 while incentives relative to alumina expire in 2010. An amount equal to the tax saving must be appropriated to a reserve account within stockholders’ equity and may not be distributed in the form of cash dividends.

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

                 
    As of December 31  
    2004     2003  
Current deferred tax assets
               
Accrued expenses deductible only when disbursed
    110       91  
Interest attributed to stockholders
    93          
 
               
 
           
 
    203       91  
 
           
Long-term deferred tax assets and liabilities
               
Assets
               
Deferred tax relative to temporary differences
          3  
Tax deductible goodwill in business combinations
    10       79  
Related to provision for losses and write-downs of investments
    51       149  
Employees post retirement benefits provision
    83       73  
Tax loss carryforwards
    235       132  
Other temporary differences
    19       206  
 
           
 
    398       642  
 
           
Liabilities
               
Inflationary income
    (23 )     (26 )
Relative to investments acquired
    (115 )     (202 )
Prepaid retirement benefit
    (58 )     (28 )
Fair value adjustments in business combinations
    (55 )     (40 )
 
           
 
    (251 )     (296 )
 
           
Valuation allowance
               
Beginning balance
    (112 )     (230 )
Translation adjustments
    (42 )     (37 )
Business acquisition, sales and others
          102  
Change in allowance
    77       53  
 
           
Ending balance
    (77 )     (112 )
 
           
Net long-term deferred tax assets
    70       234  
 
           

9   Cash and cash equivalents
                 
    As of December 31  
    2004     2003  
Cash
    123       88  
Deposits in local currency
    385       267  
Deposits in United States dollars
    741       230  
 
           
 
 
    1,249       585  
 
           

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10   Accounts receivable
                 
    As of December 31  
    2004     2003  
Customers
               
Domestic
    236       195  
Export, all denominated in
               
United States dollars
    847       665  
 
           
 
    1.083       860  
Allowance for doubtful accounts
    (37 )     (30 )
Allowance for ore weight credits
    (17 )     (12 )
 
           
Total
    1.029       818  
 
           

Accounts receivable from customers in the steel industry represent 29.2% and 27.5% of domestic receivables and export receivables represent 82.0% and 88.1% at December 31, 2004 and 2003, respectively.

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

11   Inventories
                 
    As of December 31  
    2004     2003  
Finished products
               
Iron ore and pellets
    205       146  
Manganese and ferroalloys
    156       78  
Alumina
    20       20  
Aluminum
    54        
Kaolin
    17       16  
Others
    11       8  
Spare parts and maintenance supplies
    386       237  
 
           
 
    849       505  
 
           

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12   Property, plant and equipment
 
a)   By business area:
                                                 
    As of December 31, 2004     As of December 31, 2003  
            Accumulated                     Accumulated        
    Cost     depreciation     Net     Cost     depreciation     Net  
Ferrous
                                               
Ferrous - Southern System
                                               
Mining
    2,397       963       1,434       2,196       812       1,384  
Railroads
    1,047       447       600       866       389       477  
Marine terminals
    326       153       173       183       87       96  
 
                                   
 
    3,770       1,563       2,207       3,245       1,288       1,957  
 
                                               
Ferrous - Northern System
                                               
Mining
    804       318       486       676       277       399  
Railroads
    1,072       446       626       924       376       548  
Marine terminals
    270       100       170       196       85       111  
 
                                   
 
    2,146       864       1,282       1,796       738       1,058  
 
                                               
Pelletizing
    430       160       270       382       133       249  
Ferroalloys
    362       197       165       273       153       120  
Energy
    198       18       180       128       11       117  
Construction in progress
    1,546             1,546       914             914  
 
                                   
 
    8,452       2,802       5,650       6,738       2,323       4,415  
 
                                   
Non-Ferrous
                                               
 
                                               
Copper
    578       71       507                    
Potash
    65       30       35       54       22       32  
Gold
    6       2       4       27       25       2  
Kaolin
    254       97       157       220       75       145  
Research and projects
    33       19       14       86       62       24  
Construction in progress
    731             731       797             797  
 
                                   
 
    1,667       219       1,448       1,184       184       1,000  
 
                                   
Logistics
                                               
General cargo
    769       232       537       575       188       387  
Maritime transportation
    31       8       23       8       6       2  
Construction in progress
    114             114       35             35  
 
                                   
 
    914       240       674       618       194       424  
 
                                   
Holdings
                                               
Aluminum
    1,317       445       872       545       92       453  
Others
    1             1       2       1       1  
Construction in progress
    230             230       111             111  
 
                                   
 
    1,548       445       1,103       658       93       565  
 
                                   
Corporate Center
                                               
Corporate
    68       43       25       67       28       39  
Construction in progress
    163             163       41             41  
 
                                   
 
    231       43       188       108       28       80  
 
                                   
Total
    12,812       3,749       9,063       9,306       2,822       6,484  
 
                                   

b)   By type of assets:
                                                 
    As of December 31, 2004     As of December 31, 2003  
            Accumulated                     Accumulated        
    Cost     depreciation     Net     Cost     depreciation     Net  
Land and buildings
    991       396       595       749       303       446  
Installations
    3,600       1,262       2,338       2,466       932       1,534  
Equipment
    1,218       574       644       883       405       478  
Railroads
    2,091       884       1,207       1,741       756       985  
Mine development costs
    1,345       150       1,195       931       123       808  
Others
    783       483       300       638       303       335  
 
                                   
 
    10,028       3,749       6,279       7,408       2,822       4,586  
Construction in progress
    2,784             2,784       1,898             1,898  
 
                                   
Total
    12,812       3,749       9,063       9,306       2,822       6,484  
 
                                   

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Losses on disposals and impairments of property, plant and equipment totaled US$34, US$51 and US$62 in 2004, 2003 and 2002, respectively. Disposals and impairments mainly relate to impairment of gold mines, sales of ships and trucks, locomotives and other equipment which were replaced in the normal course of business.

In 2002 we sold certain forestry assets of our subsidiary Florestas Rio Doce S.A. for US$59 and recorded a gain on this sale of US$49. In 2003 we sold a gold mining operation for US$ 21 the equivalent to its book value.

(c)   Hydroelectric projects

We participate in several jointly-owned hydroelectric plants, already in operation or under construction. We have an undivided interest in these plants and are responsible for our proportionate share of the costs of construction and operation and are entitled to our proportionate share of the energy produced. We record our proportion of these assets as property, plant and equipment.

The situation of these projects at December 31, 2004 is as follows:

                                                         
    Date of                     Our share     Our share of             Our share of  
    completion /     Our     Plant in     of plant in     accumulated     Plant under     plant under  
    expected     interest     service     service     depreciation     construction     construction  
Project   completion     %     $     $     $     $     $  
Igarapava
  September, 1999       38.1       148       56       (11 )            
Porto Estrela
  November, 2001       33.3       63       21       (2 )            
Funil
  January, 2003       51.0       129       66       (4 )            
Candonga
  September, 2004       50.0       110       55       (1 )            
Aimorés
  July, 2005       51.0                         237       121  
Capim Branco I
    2006       48.4                         69       33  
Capim Branco II
    2006       48.4                         27       13  
Foz do Chapecó
          40.0                         4       2  
Estreito
          30.0                         7       2  

Income and expenses relating to operating plants are not material.

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13   Investments in affiliated companies and joint ventures
                                                                                                                                                         
    December 31,                                                                                                        
                                                                                                                                                    Quoted  
    2004     Investments     Equity Adjustments     Dividends received     market  
                                                                                                                                                    Decem-  
                            Net                     Three months ended (unaudited)     Year ended December 31,     Three months ended (unaudited)     Year ended December 31,     ber 31,  
                            income                                                                                                      
    Participation in     Net     for the                     December     September     December                             December     September     December                          
    capital (%)     equity     period     2004     2003     31, 2004     30, 2004     31, 2003     2004     2003     2002     31, 2004     30, 2004     31, 2003     2004     2003     2002     2004  
    voting     total                                             Unaudited                                             (unaudited)                                          
Steel
                                                                                                                                                       
Usinas Siderúrgicas de Minas Gerais S.A. — USIMINAS
    22.99       11.46       1,223       995       140       31       62       18             114       34       (15 )                       13       3       4       483  
Companhia Siderúrgica de Tubarão — CST (1)
                                      86       15       9       19       102       45       19                   17             52       4       N/A  
California Steel Industries Inc. — CSI
    50.00       50.00       298       109       149       103       18       23       2       55       2       19       7                   9       5       9        
SIDERAR (cost $15) — available for sale investment
    4.85       4.85                   110       89                                                                               110  
 
                                                                                                                         
 
                                    399       309       95       50       21       271       81       23       7             17       22       60       17       593  
 
Aluminum and bauxite
                                                                                                                                                       
Mineração Rio do Norte S.A. — MRN
    40.00       40.00       427       142       171       168       16       16       12       57       33       38       13             11       54       27       31        
Valesul Alumínio S.A. — VALESUL (6)
    54.51       54.51       101       26       55       49       3       4       2       14       10       14       3             6       12       9       6        
Alumínio Brasileiro S.A. — ALBRAS
    51.00       51.00                         112                   10             104                                                  
Alumínio Brasileiro S.A. — ALBRAS — change in provision for losses
                                                                              10                                            
Alumina do Norte do Brasil S.A. — ALUNORTE (4)
    62.09       57.03                                                             (23 )                                          
 
                                                                                                                         
 
                                    226       329       19       20       24       71       147       39       16             17       66       36       37        
 
Ferrous
                                                                                                                                                       
Caemi Mineração e Metalurgia S.A. (3)
    100.00       60.23                                                       23       (102 )                                   3       N/A  
Companhia Nipo-Brasileira de Pelotização — NIBRASCO (6)
    51.11       51.00       60       25       30       18       4       3             13       3       4                                     2        
Companhia Hispano-Brasileira de Pelotização — HISPANOBRÁS (6)
    51.00       50.89       50       17       26       17       3       2             9       3       5       1                   1       2       2        
Companhia Coreano-Brasileira de Pelotização — KOBRASCO
    50.00       50.00       25       21       13       1       4       4       1       11       1       (2 )                                          
Companhia Coreano-Brasileira de Pelotização — KOBRASCO - change in provision for losses
                                                            8             17       (15 )                                          
Companhia Ítalo-Brasileira de Pelotização — ITABRASCO (6)
    51.00       50.90       36       12       18       11       2       1             6       3       5                               1       4        
Gulf Industrial Investment Company — GIIC
    50.00       50.00       90       32       45       40       6       4       3       16       12       5       4                   11       9       6        
SAMARCO Mineração S.A. — SAMARCO (5)
    50.00       50.00       441       233       261       221       37       35       12       117       70       28       32       19       25       100       78       17        
Minas da Serra Geral S.A. — MSG
    50.00       50.00       36       (6 )     18       15       (1 )                 (3 )     2       4                               1       1        
Others
                            24       21               1       (1 )     1       (1 )     2                                                
 
                                                                                                                         
 
                                    435       344       55       50       23       170       133       (66 )     37       19       25       112       91       35        
 
Logistics
                                                                                                                                                       
Companhia Ferroviária do Nordeste — CFN — change in provision for losses (2)
                                                                (3 )     (4 )                                          
Ferroban — Ferrovias Bandeirantes S.A. — change in provision for losses
                            1       1                                     (1 )                                          
Ferrovia Centro-Atlântica S.A. — FCA — change in provision for losses (3)
                                                                (93 )     (42 )                                          
MRS Logística S.A
                            78       39       11       8       37       33       39       (20 )                                          
MRS Logística S.A. — change in provision for losses
                                                                6       (7 )                                          
Sepetiba Tecon S.A. — change in provision for losses
                                                    (1 )           (1 )     (9 )                                          
Others, mainly investments sold in 2003
                                    4                                         (5 )                                                      
 
                                                                                                                         
 
                                    79       44       11       8       36       33       (52 )     (88 )                                          
 
Other affiliates and joint ventures
                                                                                                                                                       
Fertilizantes Fosfatados S.A. — FOSFERTIL (2)
                                                        (9 )           1       8                               9       2        
Others
                            20       8       (1 )     (1 )     (7 )     (3 )     (4 )     (3 )                             1              
 
                                                                                                                         
 
                                    20       8       (1 )     (1 )     (16 )     (3 )     (3 )     5                               10       2        
 
                                                                                                                         
Total
                                    1,159       1,034       179       127       88       542       306       (87 )     60       19       59       200       197       91       593  
 
                                                                                                                         


(1)   During the quarter ended June 30, 2003 CVRD acquired an additional 5.17% of CST’s total capital for US$60. During 2004 CVRD sold its interest in CST (Note 7(e));
(2)   Investment sold in 2003;
(3)   Consolidated as from September 2003, after acquisition of control;
(4)   Consolidated as from June 30, 2002, after acquisition of control;
(5)   Investment includes goodwill of US$37 and US$30 in 2004 and 2003, respectively.
(6)   CVRD held more than a majority of the voting power of several entities that were accounted for under the equity method in accordance with EITF 96-16 due to veto rights held by minority shareholders under shareholders agreements.

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14   Short-term debt

Our short-term borrowings are from commercial banks and relate export financing denominated in United States dollars.

Average annual interest rates on short-term borrowings were 2.33%, 3.19% and 3.97% at 2004, 2003 and 2002, respectively.

15   Long-term debt
                                 
    As of December 31  
    Current liabilities     Long-Term liabilities  
    2004     2003     2004     2003  
Foreign debt
                               
Loans and financing contracted in the following currencies:
                               
United States dollars
    376       470       1.179       1.151  
Japanese Yen
    1       30       2       2  
Others
    3       3       23       25  
Fixed Rate Notes - US$ denominated
          300       913       600  
Securitization of export receivables - US$ denominated
    55       44       425       481  
Perpetual notes
                65       65  
Accrued charges
    61       54              
 
                       
 
    496       901       2.607       2.324  
 
                       
Local debt
                               
Indexed by Long-Term Interest Rate - TJLP
    22       10       89       88  
Indexed by General Price Index-Market (IGPM)
    21       16       14       19  
Basket of currencies
    7       30       17       23  
Non-convertible debentures
                117       90  
Indexed by U.S. dollars
    166       33       368       221  
Accrued charges
    18       19       2       2  
 
                       
 
    234       108       607       443  
 
                       
Total
    730       1.009       3.214       2.767  
 
                       

     The long-term portion at December 31, 2004 becomes due in the following years:

         
2005
    411  
2006
    459  
2007
    486  
2008
    235  
2009 thereafter
    1,441  
No due date (Perpetual notes and non-convertible debentures)
    182  
 
     
 
    3,214  
 
     

At December 31, 2004 annual interest rates on long-term debt were as follows:

         
Up to 7%
    2.574  
7.1% to 9%
    1.202  
9.1% to 11%
    18  
Over 11%
    79  
Variable (Perpetual notes)
    71  
 
     
 
    3.944  
 
     

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

                         
    2004     2003     2002  
TJLP — Long-Term Interest Rate (effective rate)
    9.8       11.5       9.9  
IGP-M — General Price Index — Market
    12.4       8.7       25.3  
United States Dollar
    (8.1 )     (18.2 )     52.3  

On December 15, 2004 Vale Overseas Limited finalized the cash tender offer for its US$ 300 million principal amount outstanding 8.625% Enhanced Guaranteed Notes due 2007. The amount of US$ 186.9 has been repurchased by the price of US$ 1,117.34 per US$ 1,000.00 of principal Notes remaining US$ 113.1 of amount outstanding.

At December 31, 2004 the US$ denominated Fixed Rate Notes of US$913 (2003 — US$900) and other debt of US$1,834 (2003 — US$1,634) are unsecured. The export securitization of US$480 (2003 — US$525) is secured by existing and future accounts receivable of our subsidiary CVRD Overseas Ltd. Loans from international lenders of US$170 (2003 — US$232) are guaranteed by the Federal Government, to which we have given counter-guarantees of US$170 (2003 — US$165) secured by our own shares and accounts receivable of a subsidiary. We also have loans from local and international institutions secured by property, plant and equipment in the amount of US$251 (2003 — US$165). The remaining long-term debt of US$296 (2003 — US$387) is secured mainly by assets of subsidiaries.

16   Stockholders’ equity

Each holder of common and preferred class A stock is entitled to one vote for each share on all matters that come before a stockholders’ meeting, except for the election of the Board of Directors, which is restricted to the holders of common stock. As described in Note 6, the Brazilian Government holds a preferred special share which confers to it permanent veto rights over certain matters.

A three for one stock split proposal was approved by the Extraordinary General Shareholders’ Meeting on August 18, 2004. Therefore, CVRD’s capital is composed of 1,165,677,168 shares, with 749,949,429 common shares and 415,727,739 preferred class “A” shares. All share numbers and per share amounts included herein reflect retroactive application of the stock.

As of December 31, 2004, we had acquired 14,157,461 shares to be held in treasury for subsequent disposal or cancellation at an average weighted unit cost of US$6.17 (minimum cost of US$ 2.67 and maximum of US$7.84).

Both common and preferred stockholders are entitled to receive a dividend of at least 25% of annual net income, upon approval at the annual stockholders’ meeting. In the case of preferred stockholders, this dividend cannot be less than 6% of the preferred capital as stated in the statutory accounting records or, if greater, 3% of the statutory book equity value per share. With respect to each of 2004, 2003 and 2002 we distributed dividends to preferred stockholders in excess of this limit. Interest attributed to stockholders as from January 1, 1996 is considered part of the minimum dividend.

Brazilian law permits the payment of cash dividends only from retained earnings as stated in the statutory accounting records and such payments are made in Reais. At December 31, 2004, we had no undistributed retained earnings. In addition, appropriated retained earnings at December 31, 2004 includes US$3,221, related to the unrealized income and expansion reserves, which could be freely transferred to retained earnings and paid as dividends, if approved by the stockholders.

No withholding tax is payable on distribution of profits earned as from January 1, 1996, except for distributions in the form of interest attributed to stockholders (Note 3 (e)).

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

                                                 
    Three months ended (unaudited)     Year ended December 31  
    December     September     December                    
    31, 2004     30, 2004     31, 2003     2004     2003     2002  
Appropriated retained earnings
                                               
Unrealized income reserve
                                               
Balance January 1
    195       179       255       193       211       548  
Transfer to retained earnings
    (65 )     16       (62 )     (63 )     (18 )     (337 )
 
                                   
Balance December 31
    130       195       193       130       193       211  
Expansion reserve
                                               
Balance January 1
    1,795       1,651       1,361       2,090       1,494       1,667  
Transfer to capital stock
    -       -       -       (309 )     (423 )     -  
Transfer from (to) retained earnings
    1,296       144       729       1,310       1,019       (173 )
 
                                   
Balance December 31
    3,091       1,795       2,090       3,091       2,090       1,494  
Legal reserve
                                               
Balance January 1
    378       348       292       374       241       325  
Transfer from (to) retained earnings
    151       30       82       155       133       (84 )
 
                                   
Balance December 31
    529       378       374       529       374       241  
Fiscal incentive depletion reserve
                                               
Balance January 1
    351       323       343       347       284       649  
Transfer to capital stock
    -       -       -       -       -       (212 )
Transfer to retained earnings
    27       28       4       31       63       (153 )
 
                                   
Balance December 31
    378       351       347       378       347       284  
Fiscal incentive investment reserve
                                               
Balance January 1
    -       -       -       31       -       23  
Transfer to capital stock
    -       -       -       (31 )     -       (23 )
Transfer from retained earnings
    15       -       31       15       31       -  
 
                                   
Balance December 31
    15       -       31       15       31       -  
 
                                   
Total appropriated retained earnings
    4,143       2,719       3,035       4,143       3,035       2,230  
 
                                   

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

  •   Unrealized income reserve - this represents principally our share of the earnings of affiliates and joint ventures, not yet received in the form of cash dividends.
 
  •   Expansion reserve - this is a general reserve for expansion of our activities.
 
  •   Legal reserve - this reserve is a requirement for all Brazilian corporations and represents the appropriation of 5% of annual net income under Brazilian GAAP up to a limit of 20% of capital stock under Brazilian GAAP.
 
  •   Fiscal incentive depletion reserve - this represents an additional amount relative to mineral reserve depletion equivalent to 20% of the sales price of mining production, which is deductible for tax purposes providing an equivalent amount is transferred from retained earnings to the reserve account. This fiscal incentive expired in 1996.
 
  •   Fiscal incentive investment reserve - this reserve results from an option to designate a portion of income tax otherwise payable for investment in government approved projects and is recorded in the year following that in which the taxable income was earned. As from 2000, this reserve also contemplates tax incentives (Note 8).

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Basic and diluted earnings per share

Basic and diluted earnings per share amounts have been calculated as follows:

                         
                    Basic and  
                    diluted per  
                    share  
    Income     Thousand of     amount  
    (Numerator)     Shares     (US$ per  
    (US$ million)     (Denominator)     share)  
Net income for the year ended December 31, 2004
    2,573                  
 
                       
Income available to preferred stockholders
    929       415,716       2.23  
Income available to common stockholders
    1,644       735,804       2.23  
 
                       
Net income for the year ended December 31, 2003
    1,548                  
 
                       
Income available to preferred stockholders
    559       415,714       1.34  
Income available to common stockholders
    989       735,804       1.34  
 
                       
Net income for the year ended December 31, 2002
    680                  
 
                       
Income available to preferred stockholders
    239       405,126       0.59  
Income available to common stockholders
    441       749,592       0.59  

17   Pension plans

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

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

Additionally we provide employees with supplementary pension payments through the Abono Complementação plan.

The following information details the status of the defined benefit elements of the Old Plan and supplementary pension plan (SPP) in accordance with SFAS 132 — “Employers’ Disclosure about Pensions and Other Post-retirement Benefits”, as amended.

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(a)   Change in benefit obligation
                 
    As of December 31  
    2004     2003  
Benefit obligation at beginning of year
    1.485       1.476  
Service cost
    2       2  
Interest cost
    188       151  
Benefits paid
    (133 )     (128 )
Effect of exchange rate changes
    137       20  
Actuarial loss
    40       (36 )
 
           
Benefit obligation at end of year
    1.719       1.485  
 
           

We use a measurement date of December 31 for our pension and post- retirement benefit plans.

(b)     Change in plan assets
                 
    As of December 31  
    2004     2003  
Fair value of plan assets at beginning of year
    1.657       1.301  
Actual return on plan assets
    410       436  
Employer contributions
    37       31  
Benefits paid
    (133 )     (128 )
Effect of exchange rate changes
    137       17  
 
           
Fair value of plan assets at end of year
    2.108       1.657  
 
           

Old plan assets at December 31, 2004 include US$274 of portfolio investments in our own shares (US$194 at December 31, 2003) and US$37 of shares of related parties (US$20 at December 31, 2003), as well as US$303 of Federal Government Securities (US$323 at December 31, 2003).

Employer contributions expected for 2005 are US$ 16 (unaudited).

(c)   Accrued pension cost liability (prepaid pension cost)
                 
    As of December 31  
    2004     2003  
Funded status, excess of benefit obligation over plan assets
    (389 )     (172 )
Unrecognized net transitory obligation
    (51 )     (56 )
Unrecognized net actuarial loss
    459       323  
 
           
Accrued pension cost liability (prepaid pension cost)
    19       95  
 
           

(d)   Assumptions used in each year (expressed in nominal terms)
                 
    2004     2003  
Discount rate
    13.40% p.a       13.40% p.a  
Expected return on plan assets
    13.40% p.a       13.40% p.a  
Rate of compensation increase — up to 47 years
    6.91% p.a       6.91% p.a  
Inflation
    5.00% p.a       5.00% p.a  

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(e)   Investment targets and composition of plan assets

The fair value of Old Plan assets for these plans is US$2,079 and US$1,637 at the end of 2004 and 2003, respectively. The asset allocation for the Company’s Old Plan at the end of 2004 and 2003, and the target allocation for 2005, by asset category, follows.

                         
    Target     Percentage of plan assets at  
    allocation     December 31,  
Asset category   for 2005     2004     2003  
    (unaudited)                  
Equity securities
    29 %     29 %     27 %
Real estate
    6 %     6 %     6 %
Loans
    3 %     3 %     2 %
Fixed Income
    62 %     62 %     65 %
 
                 
Total
    100 %     100 %     100 %
 
                 

The fixed income allocation target of 59% was established in order to match the asset with the benefit payments. The proposal for 2004 is an increase of up to 33% in the investments in inflation-indexed funds. The remaining investments in fixed income would be responsible for the payment of short-term plan benefits.

The increase in the target allocation for equity securities is related to a 32% expected return in the IBOVESPA (Brazilian stock index). This high return is due to an expected increase of corporate profits, and a belief that Brazil’s risk will decrease, economic activity will increase, and U.S. interest rates will remain low.

(f)   Pension costs
                         
    Year ended December 31  
    2005              
    (unaudited)     2004     2003  
Service cost
    2       2       2  
Interest cost
    220       188       151  
Estimated return on plan assets
    (274 )     (213 )     (158 )
Amortization of initial transitory obligation
    9       9       9  
Amortization of actuarial gain/loss
    (15 )     (24 )     -  
 
                 
Net periodic pension cost
    (58 )     (38 )     4  
 
                 

In addition to benefits provided under the SPP and Old Plan, accruals have been made relative to supplementary heath care benefits extended in previous periods as part of early-retirement programs. Such accruals included in long-term liabilities totaled US$61 and US$57, at December 31, 2004 and 2003, respectively, plus US$4 and US$4, respectively, in current liabilities.

The cost recognized in the years 2004, 2003 and 2002 relative to the defined contribution element of the New Plan was US$7, US$5 and US$5, respectively.

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18   Commitments and contingencies

(a)   At December 31, 2004, we had extended guarantees for borrowings obtained by affiliates and joint ventures in the amount of US$7, as follows:
                                         
    Amount of     Denominated             Final     Counter  
Affiliate or Joint Venture   guarantee     currency     Purpose     maturity     guarantees  
SAMARCO
    6     US$    Debt guarantee     2008       None  
VALESUL
    1       R$     Debt guarantee     2007       None  
 
                                     
 
    7                                  
 
                                     

We expect no losses to arise as a result of the above guarantees. We charge commission for extending these guarantees in the case of Samarco.

We have not provided any significant guarantees since January 1, 2003 which would require fair value adjustments under FIN 45 – “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”.

(b)   CVRD and its subsidiaries are defendants in numerous legal actions in the normal course of business. Based on the advice of our legal counsel, management believes that the provision made against contingent losses is sufficient to cover probable losses in connection with such actions.

The provision for contingencies and the related judicial deposits are composed as follows:

                                 
    December 31, 2004     December 31, 2003  
    Provision for     Judicial     Provision for     Judicial  
    contingencies     deposits     contingencies     deposits  
Labor claims
    221       109       177       66  
Civil claims
    185       72       167       54  
Tax - related actions
    502       344       285       279  
Others
    6       6       6       8  
 
                       
 
    914       531       635       407  
 
                       

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

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

Tax - related actions principally comprise our challenges of certain revenue taxes, value added tax and of the tax on checking accountant transactions – CPMF.

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

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

Contingencies settled in 2004, 2003 and 2002 aggregated US$67, US$182 and US$178, respectively, and additional provisions aggregated US$183, US$146 and US$264, respectively.

In addition to the contingencies for which we have made provisions we have possible losses

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totaling US$727 at December 31, 2004, for which based on the advice of our legal counsel, no provision is maintained.

(c)   We are defendants in two actions seeking substantial compensatory damages brought by the Municipality of Itabira, State of Minas Gerais, which we believe are without merit. Due to the remote likelihood that any loss will arise therefrom no provision has been made in the financial statements with respect to these two actions.
 
(d)   We are committed under a take-or-pay agreement to purchase approximately 42,391 thousand metric tons of bauxite from Mineração Rio do Norte S.A. - MRN at a formula price, calculated based on the current London Metal Exchange (LME) quotation for aluminum. Based on a market price of US$ 20.45 per metric ton as of December 31, 2004, this arrangement represents the following total commitment:
         
2005
    57  
2006
    57  
2007
    57  
2008
    57  
2009 and thereafter
    625  
 
     
 
    853  
 
     

(e) We and BNDES entered into a contract, known as the Mineral Risk Contract, in March 1997, relating to prospecting authorizations for mining regions where drilling and exploration are still in their early stages. The Mineral Risk Contract provides for the joint development of certain unexplored mineral deposits in approximately two million identified hectares of land in the Carajás region, as well as proportional participation in any financial benefits earned from the development of such resources. Iron ore and manganese deposits already identified and subject to development are specifically excluded from the Mineral Risk Contract.

Pursuant to the Mineral Risk Contract, we and BNDES each agreed to provide US$ 205 million, which represents half of the US$ 410 million in expenditures estimated as necessary to complete geological exploration and mineral resource development projects in the region. We will oversee these projects and BNDES will advance us half of our costs on a quarterly basis. Under the Mineral Risk Contract, as of December 31, 2004, the remaining contributions towards exploration and development activities totaled US$ 52 million. In the event that either of us wishes to conduct further exploration and development after having spent such US$ 205 million, the contract provides that each party may either choose to match the other party’s contributions, or may choose to have its financial interest proportionally diluted. If a party’s participation in the project is diluted to an amount lower than 40% of the amount invested in connection with exploration and development projects, then the Mineral Risk Contract provides that the diluted party will lose all the rights and benefits provided for in the Mineral Risk Contract and any amounts previously contributed to the project.

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

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

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

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Commissions (CVM) in order to permit trading.

Under Brazilian Central Bank regulations, pre-privatization shareholders that held their shares through our preferred share American Depositary Receipt, or ADR, program and institutional investors that held their shares through rule 1,298/87 of Brazilian Central Bank were not permitted to receive the debentures or any financial benefits relating to the debentures. We sought approval from the Central Bank to distribute the debentures to these investors, but the Central Bank rejected our request. We renewed our request to the Central Bank, but we cannot be sure that we will succeed. Therefore, unless the Central Bank approves our request, the debentures will not have any value for ADR holders and foreign investors through Annex V of Brazilian Central Bank.

Under the terms of the debentures, holders will have the right to receive semi-annual payments equal to an agreed percentage of our net revenues (revenues less value added tax) from certain identified mineral resources that we owned as of May 1997, to the extent that we exceed defined threshold production volumes of these resources, and from the sale of mineral rights that we owned as of May 1997. Our obligation to make payments to the holders will cease when the relevant mineral resources are exhausted at which time we are required to repay the original par value plus accrued interest. Based on current production levels, and estimates for new projects, we began payments referring to copper resources in 2004 and expect to start payments referring to iron ore resources in approximately 2020 for the Northern System and 2030 for the Southern System, and payments related to other mineral resources at the end of the current decade.

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

         
Area   Mineral   Required Payments by CVRD
Southern System
  Iron ore   1.8% of net revenue, after total sales from May 1997 exceeds 1.7 billion tons.
 
       
Northern System
  Iron ore   1.8% of net revenue, after total sales from May 1997 exceeds 1.2 billion tons.
 
       
Pojuca, Andorinhas, Liberdade and Sossego
  Gold and copper   2.5% of net revenue from the beginning of commercialization.
 
Igarapé Bahia and Alemão
  Gold and copper   2.5% of net revenue, after total sales from May 1997 exceeds 70 tons of gold.
 
       
Fazenda Brasileiro (*)
  Gold   2.5% of net revenue after total sales from May 1997 exceeds 26 tons.
 
       
Other areas, excluding
Carajás/Serra Leste
  Gold   2.5% of net revenue.
 
       
Other areas owned as of May 1997
  Other minerals   1% of net revenue, 4 years after the beginning of the commercialization.
 
       
All areas
  Sale of mineral rights owned as of May 1997   1% of the sales price.

We sold Fazenda Brasileiro in August 2003 and paid the corresponding amount of US$2 to debenture holders in 2004.

(g)   We use various judgments and assumptions when measuring our environmental liabilities and asset retirement obligations. Changes in circumstances, law or technology may affect our estimates and we periodically review the amounts accrued and adjust them as necessary. Our accruals do not reflect unasserted claims because we are currently not aware of any such issues. Also the amounts provided are not reduced by any potential recoveries under cost sharing, insurance or indemnification arrangements because such

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recoveries are considered uncertain. The changes are demonstrated as follows:

                                         
    Three months ended (unaudited)     Year ended  
    December     September     December              
    31,2004     30,2004     31,2003     2004     2003  
            (unaudited)                          
Environmental liabilities beginning of period
    91       82       60       81       15  
Initial recognition of SFAS 143 as at January 1, 2003
                            26  
Increase due to new subsidiaries acquired
                2             11  
Accretion expense
    5       3       2       13       6  
Liabilities settled in the current period
          (2 )           (3 )      
Revisions in estimated cash flows
    31             15       31       15  
Cumulative translation adjustment
    7       8       2       12       8  
 
                             
Environmental liabilities end of period
    134       91       81       134       81  
 
                             

Had SFAS 143 been applied prior to January 1, 2003, the pro forma asset retirement obligation at December 31, 2003, would have been US$41. Additionally, had SFAS 143 been applied previously, net income for the year ended December 31, 2002 on a pro forma basis would have been lower by US$8 (unaudited). Had SFAS 143 been applied in prior years the impact on net income and earnings per share have been as follows:

         
    2002  
Net income
    680  
Net income (pro forma — unaudited)
    672  
 
Basic and diluted earnings per Preferred Class A Share
    1,77  
Basic and diluted earnings per Common Share
    1,77  
 
Basic and diluted earnings per Preferred Class A Share (pro forma — unaudited)
    1,75  
Basic and diluted earnings per Common Share (pro forma — unaudited)
    1,75  

(h)   Description of Leasing Arrangements

We conduct part of our railroad operation from leased facilities. The lease, which is for 30 years expiring in August, 2026, is classified as an operating lease and can be renewable for a further 30 years. At the end of the lease term, we are required to return the concession and the lease assets. In most cases, management expects that in the normal course of business, leases will be renewed.

Operating Leases

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non- cancelable lease terms in excess of one year as of December 31, 2004:

         
Year ending December 31:
       
2005
    44  
2006
    44  
2007
    44  
2008
    44  
Later years
    790  
 
     
Total minimum payments required
    966  
 
     

The total expenses of operating leases in 2004 and 2003 was US$39 and US$37, respectively.

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19   Segment and geographical information

In 1999 we adopted SFAS 131 “Disclosures about Segments of an Enterprise and Related Information” with respect to the information we present about our operating segments. SFAS 131 introduced a “management approach” concept for reporting segment information, whereby such information is required to be reported on the basis that the chief decision-maker uses internally for evaluating segment performance and deciding how to allocate resources to segments. Our business segments are currently organized as follows:

Ferrous products – comprises iron ore mining and pellet production, as well as the Northern and Southern transportation systems, including railroads, ports and terminals, as they pertain to mining operations. Manganese mining and ferroalloys are also included in this segment.

Non-ferrous products – comprises the production of non-ferrous minerals.

Logistics – comprises our transportation systems as they pertain to the operation of our ships, ports and railroads for third-party cargos.

Holdings – divided into the following sub-groups:

  •   Aluminum - comprises aluminum trading activities, alumina refining and investments in joint ventures and affiliates engaged in bauxite mining and aluminum metal smelting.
 
  •   Steel - comprises our investments in joint ventures and affiliates operating in the steel industry.
 
  •   Others - comprises our investments in joint ventures and affiliates engaged in other businesses.

Information presented to senior management with respect to the performance of each segment is generally derived directly from the accounting records maintained in accordance with accounting practices adopted in Brazil together with certain minor inter-segment allocations.

Consolidated net income and principal assets in accordance with US GAAP are reconciled as follows:

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Results by segment – before eliminations

                                                                                                                                                                         
    As of and for the three months ended (unaudited)  
    December 31, 2004     September 30, 2004     December 31, 2003  
                            Holdings                                             Holdings                                             Holdings              
            Non             (1)                                     Non             (1)                                     Non                                
    Ferrous     ferrous     Logistics     Aluminum     Others     Eliminations     Consolidated     Ferrous     ferrous     Logistics     Aluminum     Others     Eliminations     Consolidated     Ferrous     ferrous     Logistics     Aluminum     Others     Eliminations     Consolidated  
RESULTS
                                                                                                                                                                       
Gross revenues - Export
    2.111       256       27       455             (1.099 )     1.750       2.041       150       24       419             (968 )     1.666       1,650       36       22       233             (732 )     1,209  
Gross revenues - Domestic
    397       45       234       68             (66 )     678       376       55       234       53             (97 )     621       296       30       156       41             (42 )     481  
Cost and expenses
    (1.825 )     (242 )     (194 )     (390 )     (1 )     1.165       (1.487 )     (1.714 )     (172 )     (158 )     (320 )           1.065       (1.299 )     (1,552 )     (76 )     (147 )     (216 )     (3 )     774       (1,220 )
Depreciation, depletion and amortization
    (94 )     (11 )     (5 )     (9 )                 (119 )     (72 )     (12 )     (9 )     (9 )                 (102 )     (60 )     (7 )     (6 )     (5 )                 (78 )
 
                                                                                                                             
Operating income (loss)
    589       48       62       124       (1 )           822       631       21       91       143                   886       334       (17 )     25       53       (3 )           392  
Financial income
    105       2       4       7       1       (78 )     41       39             5       6             (40 )     10       50             3       2             (37 )     18  
Financial expenses
    (232 )     (3 )     (2 )     (99 )           78       (258 )     (150 )           (4 )     (52 ) &nb