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SAMARCO MINERAÇÃO S.A. - JUDICIAL RECOVERY
Message from Management, Independent auditor’s report and Financial Statements as of December 31, 2020. 2
SAMARCO MINERAÇÃO S.A. - IN JUDICIAL RECOVERY
Message from Management MESSAGE FROM MANAGEMENT 3
WORDS FROM THE BOARD 2020 Between the collapse of the Fundão dam and December 2020, our production activities were idle. During that period, we based our actions on The year ended December 31, 2020 marked the two pillars: commitment to safely and sustainably beginning of a new organizational cycle at Samarco, repair and return to operations. We partially with gradual resumption of operational activities resumed our operations in December 2020. after five years of stoppage. In this publication, we, at Samarco, present the financial statements COMMITMENT TO REPAIR for the period with their respective explanatory notes, additional information and clarifications. We reaffirm our commitment to surrounding In this first semester, in our Annual Sustainability communities and to areas affected by the collapse Report, we will provide detailed information about of the Fundão dam. Up to December 2020, the company’s management and implemented R$ 11.7 billion was allocated to reparation and environmental and social programs. Also, on April 9, compensation measures. The actions are being 2021, the company filed a Judicial Reorganization conducted by Fundação Renova, an autonomous, petition with the 2nd Business State Court for the independent entity, which started its activities Belo Horizonte District of Minas Gerais to protect in 2016, as set out in the Transaction & Conduct its assets and operations from enforcement actions Adjustment Term (TTAC) and, subsequently, in the brought by its financial creditors and enable it to Conduct & Governance Adjustment Term (TAC seek to negotiate and implement a restructuring Governance), approved in 2018. of its financial debts so that it can emerge as a financially sustainable company with a balance We remain committed to the TTAC, signed in March sheet that allows it to meet its obligations relating 2016, establishing 42 socio-environmental and to the Fundão dam collapse. The petition was socio-economic programs, currently underway, granted on April 12, 2021 and information about and which received, in 2020, R$ 3.9 billion. the Judicial Reorganization Proceeding is available on our website: www.samarco.com. Under the TTAC, we are the primary maintainer and responsible for funding Fundação Renova, with our shareholders having a secondary obligation ABOUT US to provide the necessary funding on a 50/50 basis
in case we fail to meet our obligations. Resources We are Samarco Mineração S.A., a privately- contributed to Renova amounted to R$ 10.9 billion held Brazilian mining company owned by two up to the end of 2020, and the liability provisioned shareholders - BHP Billiton Brasil Ltda. and Vale by Samarco on December 31, 2020 was R$ 17.0 S.A. In 43 years of our history, we have pioneered in billion, for future disbursements. Brazil the mining of low-grade iron ore, based on our own integrated logistics operation, from mine With the suspension of our activities for five to port, and we were among the largest exporters years and, consequently, with no revenue in Brazil until 2015. generation, we had to rely on financial support of our shareholders. Such support was provided The production process begins at the Germano through subscription of debentures issued by Complex, in the municipalities of Mariana and Ouro Samarco, to cover our working capital needs. In Preto, State of Minas Gerais, where extraction and addition, our shareholders, in their capacity as processing of iron ore takes place. In the form of secondary obligors under the TTAC, made direct pulp, the ore is transported via pipelines, routing contributions to Fundação Renova to fund repair through 25 municipalities until reaching the Ubu and compensation actions provided for by the Complex, in Anchieta, State of Espírito Santo. In that TTAC. Because we are primary obligor under the complex, the iron ore undergoes processes that TTAC, we have reimbursement obligations to our add more value, turning it into pellets (Samarco’s shareholders in respect of these contributions. final product), and then shipped from its own port With the partial resumption of our operations, terminal to our customers. Samarco started to provide direct financial support On November 5, 2015, the Fundão dam collapsed to the Fundação Renova. The total amount to be in the municipality of Mariana. That date will invested in Fundação Renova this year by Samarco never be forgotten and marked the history of is estimated to be R$ 3.95 billion. our company. This event impacted the lives of However, when addressing repair programs, it thousands of people and the environment along should be noted that scope, deadlines and costs the Rio Doce watershed, in the states of Minas are only estimates, subject to change, as they Gerais and Espírito Santo. MESSAGE FROM MANAGEMENT 4
depend on completion of studies, action plans and projects and operations, strengthening the sector program reviews, in addition to court decisions. and contributing to a differentiated and sustainable Execution and status of these activities can be mining. verified on Fundação Renova website, at https:// www.fundacaorenova.org/. RESUMPTION
RESUMPTION OF OPERATIONS With the gradual resumption of our operations, we expect to have a positive impact on the finances Over the past five years, we have made all changes of the states in which we operate, Minas Gerais required to write a new story and rebuild trust and Espírito Santo. Throughout our history, we relationships with society. We partially resumed our have played a key role in that region, and so, the operations in December 2020 in a different way, company’s operational resumption also represents using new technologies and ensuring greater safety a remedial action, focusing on the local economy and less impact in territories where we operate. and generation of jobs and income. On the other hand, we are aware of the challenges we will face Since approval of the Corrective Operation License in the coming years, both internally and externally. (LOC) in October 2019, we have acquired all In 2020, not only Samarco but society as a whole environmental licenses required for resumption had to quickly adapt its standards, customs and of our activities. Still, we decided to wait for the procedures to face a new scenario, both from a implementation of the tailings filtering system. health and economic point of view, imposed by the With the contribution of R$ 391.9 million by Covid-19 pandemic. our shareholders, the system was concluded in December 2020, ensuring more safety by enabling We have adopted a series of preventive measures dry stacking of 80% of waste from the operation of in all units to protect health and safety of direct and concentrator number 3. indirect staff, seeking to prevent spread of Covid-19 in communities in which we operate, complying The remaining 20%, composed of water and ore with all protocols established by health authorities. fines from concentrator number 3, is taken to Cava Alegria Sul, a space confined in a structure of In a safe way, we were able to combine readiness natural rock formation, maximizing safety issues. activities for resumption of operations and adoption In the tailings filtration system, it is expected that of preventive measures, protecting health and well- all water extracted will be reused, reinforcing our being of our employees and third parties. sustainability practices. Still on challenges for the coming years, we To resume production, we reactivated one of our highlight the de-characterization program of the three concentrators at the Germano Complex, as Dam and Cava do Germano, currently underway, well as ore pipeline 2 and pelletizing plant 4, at the for execution of activities in stages, in order to Ubu Complex. In October and November 2020, ensure compliance with relevant regulations, long- we carried out cold and hot commissioning of term stability and reconfirmation of the reservoir. structures - tests for confirming proper electrical- The planning was filed in May 2019 at the State mechanical functioning of equipment, ensuring Environment Foundation (FEAM), in compliance with total safety of operations. Joint Resolution SEMAD/FEAM No. 2.784/2019, and submitted to the National Mining Agency (ANM). Our operational resumption is gradual. It is expected an approximate initial production capacity, through The current estimate for expenses related to de- a concentrator, of [7-8] million tons of iron ore per characterization of the Dam and Cava do Germano year (Mtpa), representing around 26% of our total is approximately R$ 2.5 billion, which was not being production capacity. considered in the business plan released in January 2019. Currently, the second concentrator is expected to be restarted in approximately seven years (2028) It should be noted that all geotechnical structures towards a production rate of around [14-16] Mtpy, of our production units are stable, permanently and the third concentrator to be restarted in about monitored and under a Declaration of Stability nine years (2030), reaching a production scale of Condition (DCE), a document recently validated around [22-24] Mtpy. in March 2021, evidencing compliance with safety requirements and rules. At the same time, we continued to seek solutions towards innovations and improvements in our Safety is and will continue to be a non-negotiable MESSAGE FROM MANAGEMENT 5
value for us at Samarco. The Integrated Safety obligations to shareholders and external creditors System, for example, under the Monitoring & will be necessary, as the company has a debt Inspection Center (CMI), is constantly improved. amounting to approximately US$ 8.3 billion. In In 2018, this system had 600 instruments and, in this sense, to allow the company to maintain 2019, this number was increased to 840, ending its production activities and its social function 2020 with over 1,300 state-of-the-art instruments. of generating jobs, income and taxes, on April 9, 2021, Samarco filed a request for Judicial The company continuously invests in strengthening Reorganization with the 2nd Business State Court its geotechnical structures. Until December 2020, for the Belo Horizonte District of Minas Gerais to approximately R$ 428.9 million was allocated renegotiate its debt which, is mostly financial, and to engineering works, under recommendations consists of bonds (foreign debt securities) and from independent audits. By means of a Term of export prepayment agreements and debt owed to Agreement from the Public Prosecutor of the State our shareholders. The request was granted by the of Minas Gerais, we carried out an external audit court on April 12, 2021. to the entire process of operations resumption, ensuring more transparency. In addition, to support its debt restructuring efforts, on April 19, 2021, Samarco filed a petition with the Regarding financial statements, projections and U.S. Bankruptcy Court for the Southern District statements concerning expected production of New York seeking recognition of the Judicial levels, operations (including ramp up) and business Reorganization proceeding as a “foreign main strategy and plans in this document, Samarco proceeding” under Chapter 15 of the U.S. Bankruptcy reinforces that these represent Management’s Code. On May 13, 2021, the U.S. Bankruptcy Court current expectations, rather than guarantees or entered an order granting Samarco’s petition and, promises of any future outcome or performance. among other things, staying all actions against Any forward-looking statements herein are Samarco or any of its assets within the territorial subject to substantial risks, uncertainties, external jurisdiction of the United States. factors (including market and global conditions and potential adverse effects of the COVID-19 The Judicial Reorganization and the Chapter 15 pandemic), litigation, changes in legislation and case are not expected to impact our operational in Samarco’s business environments, which could activities or reparation and compensation measures cause results to be materially different from those carried out by Fundação Renova. contained in any forward-looking statements herein. In some cases, you can identify forward- We reinforce that Samarco sought to enter into an looking statements because they contain words extrajudicial agreement with its financial creditors such as “anticipate,” “believe,” “contemplate,” to renegotiate its debt. However, due to unfeasible “continue,” “could,” “estimate,” “expect,” “forecast,” demands imposed by them, it was not possible “going to,” “intend,” “may,” “plan,” “potential,” to reach a reasonable end to the negotiations. “predict,” “project,” “propose”, “should,” “target,” As a result of enforcement measures by some “will,” or “would” or the negative thereof or of our creditors, the company had no choice comparable terminology, or by discussions of but to commence the Judicial Reorganization vision, strategy or outlook. We caution you that proceeding. the foregoing may not include all of the forward- looking statements made in herein. Accordingly, Samarco will seek a debt restructuring from its the statements contained in this document were creditors that allows it to reestablish an independent based on a series of assumptions and are subject and sustainable financial position with a balance to external factors, risks and uncertainties. We sheet that allows it to fulfil its obligations under the may not actually achieve the plans, intentions, TTAC, continue the employment of its workers and or expectations stated in our forward-looking benefit local stakeholders. statements, and you should not rely on forward- looking statements as predictions of future events. LEARNING TO EVOLVE AND TRANSFORM We undertake no obligation to update any forward- looking statements contained herein to reflect new The lessons learned and our values allowed us to information or events or circumstances occurring resume operations, guiding our purpose of making after their respective reference dates. mining differentiated, safer and more sustainable. We are aware of the current scenario, potential JUDICIAL REORGANIZATION AND CHAPTER 15 risks and, above all, challenges to come. We are grateful for the support received throughout Samarco reinforces that restructuring its financial our journey, and we will move forward based 6
on continuous, transparent dialogue, seeking to rebuild our relationships of trust to, together, learn, evolve and transform.
Good reading!
Rodrigo Alvarenga Vilela CEO
Cristina Morgan Cavalcanti Financial Director
Reuber Luiz Neves Koury Planning and Projects Officer SAMARCO MINERAÇÃO S.A. - IN JUDICIAL RECOVERY
Independent auditor’s report on parent company and consolidated financial statements. 8 9 SAMARCO MINERAÇÃO S.A. - IN JUDICIAL RECOVERY
Financial Statementes 2020 FINANCIAL STATEMENTS 11
FINANCIAL STATEMENT As of December 31 | In thousands of reais – BRL
Parent company Consolidated Assets Note 2020 2019 2020 2019
Current
Cash and cash equivalents 4 79,938 62,617 83,846 65,792
Restricted short-term investments 5 2,848 2,505 2,848 2,505
Accounts receivable 6 2,274 11,126 175 9,502
Inventory 7 285,879 14,367 285,879 14,367
Recoverable taxes 8 39,866 6,055 39,877 6,056
Prepaid expenses 3,942 2,760 4,497 3,175
Advances to supplier 17,509 9,194 17,509 9,194
Other accounts receivable 9 4,319 14,662 4,319 14,662
Other assets 10 10,438 10,330 10,502 10,395
Total current assets 447,013 133,616 449,452 135,648
Non-current
Court deposits 19 1,946,192 1,906,183 1,946,192 1,906,183
Recoverable taxes 8 76,743 76,743 76,743 76,743
Inventory 7 287,669 368,737 287,669 368,737
Advances to supplier 30 44,085 44,085 44,085 44,085
Other assets 10 15,288 16,416 15,288 16,416
Investments 11 24,532 19,010 - -
Property, plant and equipment 12 20,292,630 12,810,506 20,292,641 12,810,513
Intangible assets 13 207,305 131,588 207,305 131,588
Total non-current assets 22,894,444 15,373,268 22,869,923 15,354,265
Total assets 23,341,457 15,506,884 23,319,375 15,489,913
The explanatory notes are an integral part of the parent company and consolidated financial statements. FINANCIAL STATEMENTS 12
FINANCIAL STATEMENT As of December 31 | In thousands of reais – BRL
Parent company Consolidated Liabilities Note 2020 2019 2020 2019
Current
Trade payables 14 258,321 252,065 258,373 252,122
Loans and financing 15 28,313,792 20,233,138 28,313,792 20,233,138
Financial charges payable 15 4,767,459 2,831,708 4,767,459 2,831,708
Payroll, provisions and social 17 29,346 24,641 29,476 24,692 contributions
Taxes payable 18 532,347 451,911 532,347 451,908
Provision for income tax 28 - - 9 167
Other provisions 20 5,205,843 4,271,711 5,205,843 4,271,711
Other liabilities 21 98,900 61,741 76,639 44,715
Total current liabilities 39,206,008 28,126,915 39,183,938 28,110,161
Non-current
Taxes payable 18 112,142 127,123 112,142 127,123
Dividend 22 2,805,548 2,805,548 2,805,548 2,805,548
Provisions for contingencies 19 132,726 127,320 132,726 127,320
Deferred income tax 28 5,340,432 2,967,348 5,340,420 2,967,131
Other provisions 20 16,478,175 12,024,798 16,478,175 12,024,798
Other liabilities in the country of 30 10,156,499 6,356,499 10,156,499 6,356,499 related parties
Other liabilities 21 130,967 49,474 130,967 49,474
Total non-current liabilities 35,156,489 24,458,110 35,156,477 24,457,893
Equity 22
Capital 297,025 297,025 297,025 297,025
Capital reserves 2,476 2,476 2,476 2,476
Carrying value adjustments (8,468,388) 885,138 (8,468,388) 885,138
Accumulated losses (42,852,153) (38,262,780) (42,852,153) (38,262,780)
Total equity (51,021,040) (37,078,141) (51,021,040) (37,078,141)
Total liabilities and equity 23,341,457 15,506,884 23,319,375 15,489,913
The explanatory notes are an integral part of the parent company and consolidated financial statements. FINANCIAL STATEMENTS 13
INCOME STATEMENTS Years ended as of December 31 In thousands of reais - BRL, except for the number of shares
Parent company Consolidated Note 2020 2019 2020 2019
Revenue 23 115,646 57,191 115,646 57,191
Cost of goods sold and services rendered 24 (1,348,082) (955,981) (1,348,062) (956,009)
Gross loss (1,232,436) (898,790) (1,232,416) (898,818)
Operating expenses
Selling 25 (93,716) (56,604) (93,778) (56,337)
General and administrative 25 (66,044) (59,752) (66,044) (59,752)
Other operating (expenses) income, net 26 (3,491,927) (16,630,166) (3,491,972) (16,630,180)
Equity in the results of investees 11 (222) 99 - -
Operating (loss) before finance result (4,884,345) (17,645,213) (4,884,210) (17,645,087)
Finance expenses, net
Finance income 27 50,587 78,038 50,592 78,042
Finance expenses 27 (3,540,128) (1,845,919) (3,540,153) (1,845,925)
Net foreign exchange gains/losses 27 6,157,598 890,517 6,157,680 890,454
(Loss) before taxation (2,216,288) (18,522,577) (2,216,091) (18,522,516)
Current income tax 28 - - (197) (61)
Deferred income tax 28 (2,373,085) (701,354) (2,373,085) (701,354)
Loss for the year (4,589,373) (19,223,931) (4,589,373) (19,223,931)
Loss for the year per share – basic and (875,28) (3,666,38) diluted
Quantity of shares at end of year 22 5,243,298 5,243,298
The explanatory notes are an integral part of the parent company and consolidated financial statements.
STATEMENT OF COMPREHENSIVE INCOME (LOSS) As of December 31 In thousands of reais – BRL
Parent Company and Consolidated 2020 2019
Loss for the year (4,589,373) (19,223,931)
Translation adjustments for the year (9,353,914) (737,717)
Retirement benefit obligations 388 121
Other comprehensive income for the year (9,353,526) (737,596)
Total comprehensive income (13,942,899) (19,961,527)
The explanatory notes are an integral part of the parent company and consolidated financial statements. FINANCIAL STATEMENTS 14
STATEMENT OF CHANGES IN NET EQUITY Years ended as of December 31 In thousands of reais – BRL
Capital reserves
Special Carrying Premium Accumulated Capital monetary Tax incen- value Total on share restate- tive re- losses sub- adjustments -ment of serves scription PPE
Balance as of December 31, 297,025 785 1,681 10 1,622,734 (19,038,849) (17,116,614) 2018
Loss for the year - - (19,223,931) (19,223,931)
Other comprehensive income
Translation adjustment for - - - - (737,717) - (737,717) the year
Retirement benefit - - - - 121 - 121 obligation
Total comprehensive - - - - (737,596) - (737,596) income
Balance as of December 31, 297,025 785 1,681 10 885,138 (38,262,780) (37,078,141) 2019
Losses for the - - - - - (4,589,373) (4,589,373) year
Other comprehensive income
Translation adjustment for - - - - (9,353,914) - (9,353,914) the year
Retirement benefit obligation - - - - 388 - 388
Total comprehensive - - - - (9,353,526) - (9,353,526) income
Balance as of December 31, 297,025 785 1,681 10 (8,468,388) (42,852,153) (51,021,040) 2020
The explanatory notes are an integral part of the parent company and consolidated financial statements. FINANCIAL STATEMENTS 15
STATEMENTS OF CASH FLOWS Years ended as of December 31 In thousands of reais – BRL
Parent company Consolidated Note 2020 2019 2020 2019
Cash flows from operating activities (Loss) for the year before taxation (2,216,288) (18,522,577) (2,216,091) (18,522,516)
Adjustments to reconcile loss before taxes to cash from operations: Depreciation and amortization 12 and 253,893 209,299 253,896 209,333 13 Provision (write-back) for expected credit loss 25 6,786 3 6,786 3 Provision (write-back) for inventory obsolescence 7 (112) 26,394 (112) 26,394 Provision (write-back) for ICMS losses - ES 26 (7,173) (4,530) (7,173) (4,530) Provision (write-back) for socio-environmental 24 and 3,200,947 1,965,637 3,200,947 1,965,637 and socioeconomic recovery 26 Germano dam decommissioning provision (write- 26 (346,713) 2,533,811 (346,713) 2,533,811 back) Provision contributions to the Fundação Renova 26 3,800,000 2,508,000 3,800,000 2,508,000
Provision (write-back) for realization of other 782 741 782 741 assets Provision (write-back) for contingencies 26 12,367 29,096 12,367 29,096 Provision (write-back) for other liabilities 2,766 252 2,766 252 Provision (write-back) for impairment loss 12 and (664,993) 9,705,110 (664,993) 9,705,110 13 Losses on property, plant and equipment 157 2,037 157 2,037 Equity in the results of investees 11 222 (99) - - Financial charges 3,312,445 1,717,833 3,312,445 1,717,833 Exchange variance gains and losses - assets and (9,651,355) (756,174) (9,645,614) (755,396) liabilities (2,296,269) (585,167) (2,290,550) (584,195) (Increase) decrease in operating assets:
Trade accounts receivable 2,066 (3,475) 2,541 (3,412)
Inventory (83,149) 13,140 (83,150) 13,140
Recoverable taxes 10,149 79,025 10,139 79,026
Court deposits (40,009) (67,283) (40,009) (67,283)
Prepaid expenses (968) (909) (1,108) (1,271)
Other assets 4,333 (10,937) 4,334 (10,738)
The explanatory notes are an integral part of the parent company and consolidated financial statements. FINANCIAL STATEMENTS 16
STATEMENTS OF CASH FLOWS Years ended as of December 31 In thousands of reais – BRL
Parent company Consolidated Continuation Note 2020 2019 2020 2019
Trade payables 6,257 175,626 6,251 175,667
Taxes payable 65,454 137,789 65,662 137,738 Increase (decrease) in operating liabilities: Payroll, provisions and social contributions 4,705 3,339 4,785 3,274 Income tax paid (36,787) (2,237) (37,141) (2,275) Interest payment (831) (949) (831) (949) Other liabilities 80,902 (23,349) 75,668 (23,268)
Net cash used in operating activities (2,284,147) (285,387) (2,283,409) (284,546)
Cash flows from investing activities Purchase of property, plant and equipment and (688,772) (760,000) (688,777) (760,007) intangible assets Resources from sale of property, plant, equipment - 2,759 - 2,759 Net cash used in investing activities (688,772) (757,241) (688,777) (757,248) Cash flows from financing activities Restricted short-term investments (343) (586) (343) (586) Financing obtained from the related parties 15 2,987,545 1,023,108 2,987,545 1,023,108 Amortized cost - Financing obtained from third 3,856 4,031 3,856 4,031 parties Payment of loans and financing - third parties 15 (366) (632) (366) (632) Net cash from financing activities 2,990,692 1,025,921 2,990,692 1,025,921
Effects of exchange rate changes on cash and (452) (657) (452) (657) cash equivalents Net increase (decrease) in balance of cash and 17,321 (17,364) 18,054 (16,530) cash equivalents Cash and cash equivalents at the begin-ning of 62,617 79,981 65,792 82,322 year Cash and cash equivalents at the end of the year 79,938 62,617 83,846 65,792
The explanatory notes are an integral part of the parent company and consolidated financial statements. FINANCIAL STATEMENTS 17
STATEMENTS OF VALUE ADDED Years ended as of December 31 In thousands of reais – BRL
Parent company Consolidated Note 2020 2019 2020 2019
Revenue Sales of goods, products and services 123,916 65,279 123,916 65,279
Other revenue 20,423 877,353 20,423 877,353 Revenue relating to construction of company assets 674,044 732,418 674,044 732,418 Provision for expected credit loss (6,786) (3) (6,786) (3) 811,597 1,675,047 811,597 1,675,047 Consumables acquired from third parties Cost of goods sold and services rendered (108,415) (1,151,466) (106,959) (1,148,906) Material, electricity, outsourced services and (5,699,999) (7,787,677) (5,479,408) (7,678,587) other (Loss)/recovery of asset values 669,317 (9,734,283) 669,317 (9,734,283)
(5,139,097) (18,673,426) (4,917,050) (18,561,776) Gross (4,327,500) (16,998,379) (4,105,453) (16,886,729) Depreciation and amortization 12 and (253,893) (209,299) (253,896) (209,333) 13 Net value added produced by the Company (4,581,393) (17,207,678) (4,359,349) (17,096,062) Transferred value added Equity in the results of investees 11 (222) 99 - - Finance income 6,723,803 1,056,402 6,723,807 1,056,500 6,723,581 1,056,501 6,723,807 1,056,500 Total value added to be distributed 2,142,188 (16,151,177) 2,364,458 (16,039,562) Distribution of value added 2,142,188 (16,151,177) 2,364,458 (16,039,562)
Personnel
Direct compensation 154,051 136,221 155,327 138,693
Benefits 60,566 52,858 60,725 52,974
Government Severance Indemnity Fund for 11,866 10,460 11,866 10,460 Employees (FGTS) Taxes
Federal 2,439,918 887,589 2,660,811 996,453
State 3,537 29,787 3,537 29,787
Municipal 5,877 22,073 5,877 22,073
Interest expenses
Interest on loans, financing and other debt items 4,055,746 1,933,766 4,055,688 1,933,929
Interest on stockholders’ equity
Loss for the year (4,589,373) (19,223,931) (4,589,373) (19,223,931)
The explanatory notes are an integral part of the parent company and consolidated financial statements. MANAGEMENT’S EXPLANATORY NOTES 18 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
1. OPERATING BACKGROUND impacts caused by the Collapse of the Fundão tailings dam, with the help of the Fundação Renova, Samarco Mineração S.A. Samarco Mineração S.A. as described in explanatory note 3 (d). (“Samarco”, “Company” or “Parent Company”), a private company, is a joint venture owned by Vale On June 23, 2016, Samarco presented to SEMAD, S.A. (“Vale”) and BHP Billiton Brasil Ltda. (“BHP the Environmental Impact Study and the respective Billiton Brasil”), each with a 50% shareholding. Environmental Impact Report (EIA/RIMA) of the Headquartered in Belo Horizonte - Minas Gerais licensing process for the use of a pit for the disposal (MG). Samarco operates an integrated enterprise, of tailings - SDR Cava de Alegria Sul. In December which comprises the mining and processing of 2016, public hearings were held - coordinated low content iron ore as well as the handling of this by SEMAD - in the municipalities of Mariana and concentrated ore by pipelines, connecting the two Ouro Preto. For this process, the Prior Permit and operating units of the Company, from Minas Gerais Installation Permit (LP + LI) No. 02 was issued on (MG) to Espírito Santo (ES). At the Ponta Ubu unit, December 13, 2017. On September 28, 2018, the in the municipality of Anchieta/ES, the preparation Company signed a Term of Commitment with (which aims to reduce moisture by around 10%) the Public Ministry of Minas Gerais (“MPMG”) to and pelletizing (transformation of concentrated ore contract an independent technical audit to monitor filtered into pellets) processes, our main product, the implementation of the SDR Cava de Alegria Sul. and production distribution processes take place Considering the revalidations of the concessions by means of our own maritime terminal (Anchieta/ granted by the municipal councils of Mariana and ES). The production is traded, significantly, in the Ouro Preto and this important alignment with the foreign market. Public Ministry, Samarco is now able to start the necessary activities for the preparation works for The ore deposits owned by Samarco, prior to the the Cava de Alegria Sul. collapse of the Fundão dam in November 2015, were based on mineral resources located in the Samarco also executed with the Public Ministry of Germano/Alegria areas, in the municipalities of Minas Gerais and the Federal Public Ministry, on Mariana and Ouro Preto, MG, which corresponded September 19, 2019, a term of commitment to to the volume of the order 7.4 billion tons (not carry out an Independent Technical Audit of the audited). According to the technical and economic analysis of the integrity of the Company’s pipeline context and considering the mineral resource and II. its partircular characteristics, the recoverable (or minable) reserves were in the order of 2.9 billion On October 25, 2019, Samarco was granted tons (not audited) until October 2015. Corrective Operation Permit (LOC) No. 020/2019 to resume operating activities in the Germano After the collapse of the Fundão tailings dam, in Complex. The permit was approved by the November 2015, described in explanatory note Chamber of Mining Activities (CMI) of the State 1 (a) and explanatory note 3, and the cessation Council for Environmental Policy (COPAM). of operations in the Germano/Alegria areas, the Company is reviewing the mineral reserves. Acquiring the LOC meant that Samarco now has all the necessary environmental permits to resume its operations.
A) COLLAPSE OF THE FUNDÃO DAM After complying with all legal requirements, on October 27, 2020, ANM issued a Notice for As detailed in explanatory note 3, in November Reopening the Minerals Handling Unit, and the 2015, as a consequence of the Collapse of the Company then has all the required acts, from the Fundão tailings, the operations in Germano/Alegria mining regulatory point of view, to resume its (“Mariana complex”) were temporarily stopped operations. as determined by government agencies - State Secretariat for the Environment and Sustainable Samarco resumed its operations in December 2020 Development (“SEMAD”) and National Department using new technologies for stacking dry tailings. of Mineral Production (“DNPM”). The latter became Thus, activities related to the extraction of iron ore, the National Mining Agency (“ANM”). The Company the processing plants in Germano, Mariana, and has been working to meet the legal requirements the pelletizing plant in the Ubu Complex, are taking established by the respective authorities regarding place after the implementation of an ore tailings the remediation of social and environmental filtration system. The operation of the filtration MANAGEMENT’S EXPLANATORY NOTES 19 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
plant took place on November 23, 2020. In 2020, obligations. the Company carried out operating readiness activities that included equipment maintenance, As of December 31, 2020, the Company has negative which were also of paramount importance and net equity of R$ 51,021,040 (R$ 37,078,141 negative which will make it possible to resume its operations. as of December 31, 2019) in the Parent Company and Consolidated and the current liabilities exceed The resume of Samarco’s activities is followed by the current assets by R$ 38,758,995 (R$ 27,993,299 an expert from the Public Ministry of Minas Gerais, as of December 31, 2019) in the Parent Company according to the Term of Commitment signed by and R$ 38,734,486 (R$ 27,974,513 as of December Samarco and MPMG on September 9, 2019. 31, 2019) in the Consolidated. For the fiscal year 2020, the Company also identified negative cash On March 2, 2016, Samarco and its shareholders, flows from operations of R$ 2,284,147 (R$ 285,387 Vale and BHP Billiton Brasil, signed a Term of negative in 2019) in the Parent Company and R$ Transaction and Conduct Adjustment, (“TTAC”) as 2,283,409 (R$ 284,546 negative in 2019) in the per explanatory note 3 (d). Consolidated.
For the fiscal year ended as of December 31, 2020, As disclosed in explanatory note 15, “Loans and Vale and BHP Billiton Brasil contributed with R$ Financings”, the Company did not meet certain 5,809,102, divided between contributions to the obligations in its loan and funds agreements. As Fundação Renova and short-term loans to Samarco. a result of these non-compliances, all loans and The contributions to the Fundação Renova aim financing were reclassified to short term, which to continue the social and environmental repair also reflect the accrued interest on overdue and compensation programs, to comply with the installments and the application of interest on obligations set out in the TTAC. Short-term loans, arrears. The Company has loans and financing on the other hand, supported the works to stabilize (including financial charges payable) in the total the dams and the needs for working capital and amount of R$ 33,081,251 (R$ 23,064,846 as of TTAC programs executed and controlled by December 31, 2019), in the Parent Company and in Samarco. The funds are released to the Fundação the Consolidated, which are classified as current as Renova and to Samarco as needed and when the of December 31 2020. established execution milestones are met. Additionally, Samarco is also a party in several As mentioned in explanatory note 3 (m), as a legal and administrative lawsuits involving civil, result of the collapse of the dam, Samarco is a labor and environmental issues, as disclosed in party in several legal and administrative, civil, explanatory note 3 (m). Samarco negotiated with environmental and labor lawsuits, for which the public entities the TTAC and other agreements, Company cannot reliably estimate the results and in some relevant actions, which created new final consequences. obligations for the Company, according to the terms of such instruments. Furthermore, in several of these proceedings, the Company is subject to precautionary measures, such as compulsory court B) CONTINUITY (GOING CONCERN) deposits and account blocking, which may further affect its cash availability. Unfavorable results Samarco’s main operations consist of the integrated related to these existing litigations can significantly mining and concentration project of low quality worsen the Company’s equity position. iron ore in the municipality of Mariana, in the State of Minas Gerais, as well as the transportation Vale and BHP Billiton Brasil provided financing of this concentrated ore from the Company’s to Samarco and were asked to comply with plants located in Minas Gerais to the preparation Samarco’s current primary obligations under the and pelletizing plants in Espírito Santo, through TTAC. In 2020, the shareholders contributed R$ pipelines, and resulting exportation through its 3,800,000 regarding to the Fundação Renova and own port terminal. R$ 2,009,102 to Samarco, the latter amount being divided into R$ 1,896,938 to support the Company’s Due to the collapse of the Fundão dam, on operational activities and R$ 112,164 to defray November 5, 2015 described in explanatory note the expenses of the TTAC programs which are 1 (a) and explanatory note 3, the extraction and still under Samarco’s responsibility. Vale and BHP transformation operations were suspended. This Billiton Brasil loans to Samarco will be deposited significantly affected the Company’s ability to to Samarco only as required from time to time and generate positive cash flows and meet its financial subject to the proposed budget approval for the MANAGEMENT’S EXPLANATORY NOTES 20 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
period in which the amounts will be allocated. export prepayment transactions, as disclosed in explanatory note 33. The Company believes that It is worth mentioning that in February 2019, this measure will not alter Samarco’s continuity there was a change in legislation involving dam plan. safety policies (law No. 23,291, of February 25, 2019, State Policy for Dam Safety). In line with the aforementioned law, the joint SEMAD/FEAM C) COMPANY EQUITY INTERESTS Resolution No. 2,784, of March 21, 2019, decrees, among other determinations, the disfigurement Samarco participates in the following companies of all tailings dams that use or used the upstream (jointly, the “Group”). raising method, related to mining activities in the state of Minas Gerais. • Samarco Iron Ore Europe B.V. (“Samarco Europe”) - direct interest of 100% - In view of this determination, considering also headquartered in the Netherlands; this Technical Opinion No. 02/2019 - SPM/GSBM- company was incorporated on October 13, GFAM/LPN-ESGJ, which, with a new understanding, 2000 to provide marketing and selling services returns the Cava de Germano structure to the for iron ore produced by Samarco. It also National Registry of Mining Dams - CNBM, in the provides support to clients through technical Integrated Management System for Mining Dams seminars and market studies. - SIGBM, preventing its use for the disposal of tailings, as it is a structure that was raised by the • Samarco Asia Ltd. (“Samarco Asia”) - upstream method. indirect interest of 100% - headquartered in Hong Kong; this company was acquired on Additionally, in view of the new legislation and July 10, 2001 by Samarco Europe to provide aiming at greater safety in the resumption of marketing and selling services through operations (as mentioned in explanatory note commercial representation in the Asia-Pacific 1(a)), Samarco revised the design of the tailings region. disposal system, with emphasis on: (i) removal of the containment dike of the Alegria Sul pit, • Samarco Finance Ltd. (“Samarco Finance”) - adopting the “confined pit” disposal system; and (ii) direct interest of 100% - headquartered in the execution of the Filtration Project that will enable Cayman Islands, this company was incorporated the dewatering of the sandy tailings to allow the on February 21, 2000 to optimize Samarco’s disposal of this material in piles, thus expanding the foreign-trade business, by supporting exports service life of the existing structures. (resale) of iron ore acquired from the Company to designated clients and to borrow funds on Despite this entire challenging scenario, at the end the international market and subsequently pass of November 2020, the Company finalized the them through to the Company. operational readiness for tailings Filtration. The physical advances in the operational readiness of the Germano, Mineroduto and Ubu sites are practically concluded in December 2020 position. The equipment of the entire production chain was tested in cold (no load) and hot (with load) commissioning. In December 2020, Samarco sold a volume of 36.359 dry tons of ore fines. The first shipment of pellets took place in January 2021.
The resumption of operations will be gradual. Samarco will maintain timely compliance with all environmental commitments assumed in the Corrective Operation Permit - LOC No. 20/2019.
On April 9, 2021, Samarco filed a pleading for Judicial Recovery in the Minas Gerais state courts. The pleading was granted on April 12, 2021. That proceeding aims at allowing the renegotiation of Samarco’s debt, which is almost entirely financial, and consists of Bonds (foreign debt securities) and MANAGEMENT’S EXPLANATORY NOTES 21 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
2.PRESENTATION OF THE FINANCIAL and interpretations issued by the Accounting STATEMENTS AND SIGNIFICANT Pronouncements Committee (CPC) and by the ACCOUNTING POLICIES Federal Accounting Council (CFC).
The main accounting policies applied in the preparation of these financial statements are B) BASIS OF PREPARATION outlined below. These policies were applied consistently over the presented years, unless The financial statements were developed on the otherwise stated. basis of historical cost, except for certain financial instruments measured by their fair value, as described in the accounting practices below. The 2.1 PRESENTATION OF FINANCIAL historical cost is generally based on the fair value STATEMENTS of the payments made in exchange for assets.
A) STATEMENT OF COMPLIANCE 2.2 CRITICAL ACCOUNTING ESTIMATES The parent company and consolidated financial AND JUDGMENTS statements have been prepared according to the accounting practices adopted in Brazil (BR GAAP) When preparing these financial statements, and considering all of the relevant information Management used judgments and estimates that pertinent to the financial statements themselves, affect the application of the Group’s accounting to the exclusion of all others, as consistent with the policies and the reported amounts of assets, data used by management in its administration of liabilities, income and expenses. Actual results may the Company. differ from these estimates. Accounting estimates and judgments are The statement of value added was additionally continuously reviewed, based on previous prepared according to accounting pronouncement experience and other factors, including CPC 09 - Statement of Value Added, presented as expectations of future events deemed reasonable an integral part of the financial statements pursuant for the circumstances. The revisions to the to BR GAAP. estimates are recognized prospectively.
The issue of these financial statements was authorized by the Executive Board on May 27, 2021. A) JUDGMENTS Details on the accounting policies of the Company Information on judgments made when applying and its subsidiaries are presented in explanatory accounting policies that have a significant effect notes No. 2.5 to No. 2.20. on the amounts recognized in the financial statements is included in the following explanatory When preparing these financial statements, notes: Management used judgments and estimates that affect the application of the Group’s accounting Explanatory note 12: Lease term: if the Company policies and the reported amounts of assets, is reasonably sure of exercising extension options. liabilities, income and expenses. Actual results Explanatory note 3(g) and 19: The management is may differ from these estimates. Estimates analyzed by the Company’s Management together and assumptions are continuously reviewed. with its legal advisors. The Company’s analyses The revisions to the estimates are recognized include factors such as hierarchy of laws, case law prospectively. Those areas that require a higher available, recent decisions delivered by courts and level of judgment and have greater complexity, their relevance in the legal framework. as well as the areas in which the assumptions and estimates are significant for the financial Explanatory note 28: Uncertainty about income statements, are disclosed in explanatory note 2.2. tax treatment: When it is not clear how tax law applies to a specific transaction or circumstance. The accounting practices adopted in Brazil comprise those included in the Brazilian company law and the statements, guidelines MANAGEMENT’S EXPLANATORY NOTES 22 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
B) USE OF ESTIMATES are determined by using generally accepted geological estimation techniques. The estimated Based on assumptions, the Company makes volume of the mineral reserves is the basis for estimates concerning the future. The resulting determining the depletion of the respective mines accountings estimates will, by definition, seldom and the estimated service life is a prime factor be equal the related actual results. These estimates for quantifying the provision for environmental are based on the best knowledge existing in each recovery of the mines, as informed in explanatory financial year. Changes in facts and circumstances note 13.1. Any change in the estimated volume could lead to a revision of estimates; actual future of reserves of the mine and the service life of the results may differ from those estimated. underlying assets could have a significant impact on the depreciation, depletion and amortization Information on the uncertainties related to charges recognized in the financial statements. estimates and assumptions as of December 31, Changes in the estimated service life of the 2019 that present a significant risk likely to cause mine could affect the estimated provision for a significant adjustment to the carrying amounts environmental expenses, the recovery thereof and of assets and liabilities for the next fiscal year is impairment analyses. included below. After the Collapse of the Fundão tailings dam in November 2015 and the temporary suspension (I) Provision for socio-environmental and of operations in the Germano/Alegria areas, the socioeconomic recovery Company is reviewing the operation’s resources and reserves. The provision for socio-environmental and socioeconomic recovery is made for areas (V) Asset retirement impacted or reparation of damages, which generate a current obligation for the Company. The Company recognizes an obligation to This process involves complex estimates for demobilize assets and environment recovery in determining the future disbursement expected by the period in which they occur. This provision management and by its independent consultants, is determined based on the present value of the as informed in explanatory note 3. cash flows necessary to demobilize the assets and perform the environmental rehabilitation. The (II) Income tax Company considers the accounting estimates related to the recovery of degraded areas and Current and deferred income tax is calculated the cost of closing a mine as a critical accounting according to interpretations resulting from the estimate as it involves large provisions and legislation in force. This process normally involves estimates involving a range of assumptions, such complex estimates to determine the taxable as interest rates, inflation, service life of the asset income and deductible or taxable temporary considering the current stage of depletion as well differences. The measurement of the recoverability as the projected depletion dates of each mine. of deferred tax on temporary differences considers These estimates are revised annually, as informed the estimated taxable income based on future cash in explanatory note 20. flows, as informed in explanatory note 28. (VI) Provision for contingencies (III) Reduction to the impairment of assets A provision is acknowledged when the obligation The Company evaluates its assets with a defined is considered probable by Management, based service life yearly for the existence of indicators on the information and assessments of its internal of impairment. If such indicators are found, the and external legal advisors, and that the funds recoverability of its tangible and intangible assets, that will be required to settle the obligation can grouped by cash generating unit, is tested. The be measured with reasonable certainty. The discounted cash flow criterion is normally used, consideration of the obligation is an expense for which depends on several estimates, subject to the year. This obligation is updated according to market conditions at the time the impairment test the development of the lawsuit or financial burdens is conducted, as informed in explanatory note 12.1. incurred, and can be reversed if the estimated loss is no longer considered probable due to changes in (IV) Mineral reserves and service life of mines circumstances, or written off when the obligation is settled. The estimated proven and probable reserves are periodically evaluated and updated. These reserves MANAGEMENT’S EXPLANATORY NOTES 23 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
2.3 CONSOLIDATION 2.4 FOREIGN CURRENCY TRANSLATION
The Company’s consolidated financial statements, which include the financial statements of its (A) FUNCTIONAL CURRENCY subsidiaries, have been prepared according to applicable consolidation practices and legal The items in the financial statements of each one provisions. Balances, any unrealized revenues, of the companies of the Group were measured expenses and profits and derivatives between using the US dollar (“US$”) which is the functional companies are eliminated from the consolidated currency of the Company and its subsidiaries, as it financial statements. Unrealized gains deriving from is the currency of the main economic environment transactions with investees recorded by the equity in which they operate, generate and consume cash. method are eliminated against the investment in proportion to the Group’s interest in the investee. (B) PRESENTATION CURRENCY
According to Brazilian legislation, these financial (A) SUBSIDIARIES statements are being presented in Brazilian Reais. Financial statements prepared in the Company’s Subsidiaries are all entities over which the Group functional currency are translated to Reais by using exercises control. The Group controls an entity the following criteria: when it is exposed or entitled to variable returns deriving from its involvement in the entity and can • Assets and liabilities are translated using the influence its returns due to the power it exercises closing rate at the respective reporting date. over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the • Accounts in the statements of operations, Group. They are deconsolidated from the date that comprehensive income (loss), cash flows and control ceases. value added are translated at the rates in effect on the transaction dates. • Stockholders’ equity at historical rate. (B) JOINT OPERATIONS The exchange gain/loss resulting from the A joint operation is a joint venture that involves the translation referred to above is recognized in a use of assets and other resources by the owners. Each specific account of stockholders’ equity, under owner uses their own resources in the joint operation. “Carrying value adjustments”. Joint operations are recorded in the financial statements to represent the Group’s contractual rights and obligations. The assets, liabilities, revenue (C) TRANSACTIONS AND BALANCES and expenses related to interests in joint operations are therefore recorded individually in the financial Transactions in currencies other than the Company’s statements. The Company has an interest of 49% functional currency are translated into its functional in the Guilman-Amorim hydroelectric power plant; currency at the exchange rates prevailing on the the remaining 51% of the joint operation belongs to transaction dates or on the valuation dates, when the partner Arcelor Mittal Brasil S.A. items are remeasured. Exchange gains and losses resulting from the settlement of these transactions and from the translation at the exchange rates at the (C) INVESTMENTS end of the year for monetary assets and liabilities in foreign currency are recognized in the income In the parent company financial statements, statement in the financial result. subsidiaries are accounted for using the equity The parent company and consolidated financial method based on the financial statements of the statements measured in the functional currency investees. The financial statements of investments (USS) are as follows: based abroad were prepared by adopting accounting practices consistent with those observed by the Company. The subsidiaries have the same functional currency as the parent company, the US dollar. MANAGEMENT’S EXPLANATORY NOTES 24 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
FINANCIAL STATEMENTS - US$
Parent company Consolidated 2020 2019 2020 2019
Current assets Cash and cash equivalents 15,367 15,520 16,119 16,307 Restricted short-term investments 548 622 548 622 Accounts receivable 424 2,753 24 2,353 Inventory 55,018 3,565 55,018 3,565 Recoverable taxes 7,672 1,502 7,674 1,503 Prepaid expenses 759 685 865 788 Advances to supplier 3,370 2,281 3,370 2,281 Other accounts receivable 831 3,638 831 3,638 Other assets 2,002 2,557 2,003 2,557
Total current assets 85,991 33,123 86,452 33,614 Non-current Court deposits 374,549 472,986 374,549 472,986 Recoverable taxes 14,769 19,042 14,770 19,043 Inventory 55,362 91,496 55,362 91,496 Advances to supplier 8,484 10,939 8,484 10,939 Other assets 2,943 3,909 2,943 3,909 Investments 4,721 4,716 - - Property, plant and equipment 3,905,358 3,178,706 3,905,360 3,178,708
Intangible assets 39,896 32,652 39,896 32,652 Total non-current assets 4,406,082 3,814,446 4,401,364 3,809,733
Total assets 4,492,073 3,847,569 4,487,816 3,843,347 MANAGEMENT’S EXPLANATORY NOTES 25 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
FINANCIAL STATEMENTS - US$
Parent company Consolidated 2020 2019 2020 2019
Current liabilities Trade payables 49,717 62,584 49,731 62,601 Loans and financing 5,449,047 5,020,505 5,449,047 5,020,505 Financial charges payable 917,507 702,640 917,507 702,640 Payroll, provisions and social contributions 5,662 6,129 5,687 6,141 Taxes payable 102,452 112,134 102,452 112,134 Provision for income tax - - 2 41 Other provisions 1,001,875 1,059,952 1,001,875 1,059,952 Other liabilities 19,118 15,333 14,822 11,093
Total current liabilities 7,545,378 6,979,277 7,541,123 6,975,107 Non-current Taxes payable 21,582 31,543 21,582 31,543 Dividend 539,933 696,148 539,933 696,148 Provisions for contingencies 25,562 31,610 25,562 31,610 Deferred Income Tax 1,027,777 736,296 1,027,775 736,243 Other provisions 3,171,258 2,983,747 3,171,258 2,983,747 Other liabilities in the country of related parties 1,954,639 1,577,256 1,954,639 1,577,256 Other liabilities 25,205 12,277 25,205 12,278 Total non-current liabilities 6,765,956 6,068,877 6,765,954 6,068,825
Equity
Capital 409,774 409,774 409,774 409,774
Capital reserves 1,619 1,619 1,619 1,619
Carrying value adjustments (1,189) (1,264) (1,189) (1,264)
Accumulated losses (10,229,465) (9,610,714) (10,229,465) (9,610,714)
Total equity (9,819,261) (9,200,585) (9,819,261) (9,200,585)
Total liabilities and equity 4,492,073 3,847,569 4,487,816 3,843,347 MANAGEMENT’S EXPLANATORY NOTES 26 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
INCOME STATEMENTS - US$
Parent company Consolidated 2020 2019 2020 2019
Revenue 24,658 14,546 24,658 14,546 Cost of goods sold and services rendered (258,933) (241,360) (258,933) (241,360) Gross loss (234,275) (226,814) (234,275) (226,814) Operating expenses Selling (20,263) (15,739) (20,237) (15,671) General and administrative (13,026) (15,223) (13,026) (15,223) Other operating (expenses) income, net (642,614) (4,206,713) (642,623) (4,206,717) Equity in the results of investees 5 35 - - Operating (loss) before finance result (910,173) (4,464,454) (910,161) (4,464,425)
Finance expenses, net Finance income 9,866 20,069 9,867 20,070 Finance expenses (702,123) (388,743) (702,128) (388,744) Foreign exchange gains/losses, net 1,335,942 211,798 1,335,958 211,785 (Loss) before taxation (266,488) (4,621,330) (266,464) (4,621,314) Current income tax - - (24) (16) Deferred income tax (352,263) (161,115) (352,263) (161,115) Loss for the year (618,751) (4,782,445) (618,751) (4,782,445)
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - US$
Parent Company and Consolidated 2020 2019
Loss for the year (618,751) (4,782,445)
Retirement benefit obligations 75 30
Other comprehensive income for the year 75 30
Total comprehensive income (618,676) (4,782,415) MANAGEMENT’S EXPLANATORY NOTES 27 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
STATEMENTS OF CHANGES IN EQUITY - US$
Capital reserves Carrying Accumulated Capital Premium Tax value Total losses on share incentive adjustments subscription reserves
Balance as of 409,774 1,616 3 (1,294) (4,828,269) (4,418,170) December 31, 2018
Loss for the year - - - - (4,782,445) (4,782,445)
Other comprehensive income
Retirement benefit - - - 30 - 30 obligation
Total comprehensive - - - 30 - 30 income
Balance as of 409,774 1,616 3 (1,264) (9,610,714) (9,200,585) December 31, 2019
Loss for the year - - - - (618,751) (618,751)
Other comprehensive income
Retirement benefit - - - 75 - 75 obligation
Total comprehensive - - - 75 - 75 income
Balance as of 409,774 1,616 3 (1,189) (10,229,465) (9,819,261) December 31, 2020 MANAGEMENT’S EXPLANATORY NOTES 28 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
STATEMENTS OF CASH FLOWS - US$
Parent company Consolidated 2020 2019 2020 2019 Cash flows from operating activities (Loss) before taxation (266,488) (4,621,330) (266,464) (4,621,314) Adjustments to reconcile loss before taxes to cash from operations: Depreciation and amortization 100,064 91,254 100,064 91,265 Provision for expected credit loss 1,364 5 1,364 5 Provision (write-back) for inventory (20) 6,418 (20) 6,418 obsolescence Provision (write-back) for ICMS losses - ES (1,338) (1,134) (1,338) (1,134) Provision (write-back) for socio-environmental 599,954 587,812 599,954 587,812 and socioeconomic recovery Germano dam decommissioning provision (65,323) 653,129 (65,323) 653,129 (write-back) Provision contributions to the Fundação Renova 724,532 629,858 724,532 629,858
Provision (write-back) for realization of other 140 196 140 196 assets Provision (write-back) for contingencies 2,359 6,322 2,359 6,322 Provision (write-back) for other liabilities 541 86 541 86 Provision (write-back) for impairment loss (668,367) 2,408,156 (668,367) 2,408,156 Loss on property, plant and equipment 263 956 263 956 Equity in the results of investees (5) (35) - - Financial charges 644,461 361,014 644,461 361,014 Exchange variance gains and losses – assets (1,598,709) (274,624) (1,598,656) (274,624) and liabilities (526,572) (151,917) (526,490) (151,855) (Increase) decrease in operating assets:
Trade accounts receivable 967 (718) 967 (718)
Inventory (15,299) 4,480 (15,299) 4,480
Recoverable taxes 1,231 20,380 1,230 20,379
Court deposits (12,533) (15,011) (12,533) (15,011)
Prepaid expenses (74) (309) (77) (399)
Other assets 4,107 (2,105) 4,106 (2,055)
Increase (decrease) in operating liabilities:
Trade payables (11,841) 42,087 (11,844) 42,096
Taxes payable 9,241 27,946 9,240 27,936 MANAGEMENT’S EXPLANATORY NOTES 29 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
STATEMENTS OF CASH FLOWS - US$
Parent company Consolidated CONTINUATION 2020 2019 2020 2019 Increase (decrease) in operating liabilities: Payroll, provisions and social contributions 323 885 336 868 Income tax paid (7,080) (540) (7,143) (552) Interest payment (164) (228) (164) (228) Other liabilities 18,237 (8,207) 18,181 (8,012) Net cash used in operating activities (539,457) (83,257) (539,490) (83,071) Cash flows from investing activities Purchase of property, plant and equipment and (48,588) (185,258) (48,590) (185,261) intangible assets Resources from sale of property, plant, equipment - 658 - 658
Net cash used in investing activities (48,588) (184,600) (48,590) (184,603)
Cash flows from financing activities Restricted short-term investments 74 (127) 74 (127) Financing obtained from related parties 586,292 261,418 586,292 261,418 Amortized cost - Financing obtained from third 1,693 1,768 1,693 1,768 parties Payment of loans and financing - third parties (70) (150) (70) (150) Net cash from financing activities 587,989 262,909 587,989 262,909 Effects of exchange rate changes on cash and cash (97) (159) (97) (159) equivalents Net decrease in the balance of cash and cash (153) (5,107) (188) (4,924) equivalents Cash and cash equivalents at the beginning of year 15,520 20,627 16,307 21,231 Cash and cash equivalents at the end of the year 15,367 15,520 16,119 16,307 MANAGEMENT’S EXPLANATORY NOTES 30 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
STATEMENTS OF VALUE ADDED - US$
Parent company Consolidated 2020 2019 2020 2019 Revenue Sales of goods, products and services 26,312 16,599 26,312 16,599 Other revenue 3,625 229,151 3,625 229,151 Revenue relating to construction of company assets 128,095 245,560 128,095 245,560 Provision (reversal) for expected credit loss (1,364) (5) (1,364) (5) 156,668 491,305 156,668 491,305 Consumables acquired from third parties Cost of goods sold and services rendered 26,305 (350,629) 26,581 (349,976) Material, electricity, outsourced services and (1,604,564) (1,987,289) (1,575,916) (1,959,248) other Loss/recovery of asset values 669,824 (2,415,726) 669,824 (2,415,725)
(908,435) (4,753,644) (879,511) (4,724,949) Gross (751,767) (4,262,339) (722,843) (4,233,644) Depreciation and amortization (100,064) (91,254) (100,064) (91,265) Net value added produced by the Company (851,831) (4,353,593) (822,907) (4,324,909) Transferred value added Equity in the results of investees 5 35 - - Finance income 1,457,670 251,913 1,457,671 251,908 1,457,675 251,948 1,457,671 251,908
Total value added to be distributed 605,844 (4,101,645) 634,764 (4,073,001)
Distribution of value added 605,844 (4,101,645) 634,764 (4,073,001) Personnel
Direct compensation 29,502 34,323 29,747 34,947
Benefits 11,658 13,381 11,689 13,410
Government Severance Indemnity Fund for 2,280 2,632 2,280 2,632 Employees (FGTS) Taxes
Federal 365,229 208,469 393,884 236,452
State 769 7,394 769 7,394
Municipal 1,172 5,812 1,172 5,812
Interest expenses
Interest on loans, financing and other debt items 813,985 408,789 813,974 408,797
Interest on stockholders’ equity
Loss for the year (618,751) (4,782,445) (618,751) (4,782,445) MANAGEMENT’S EXPLANATORY NOTES 31 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
2.5 FINANCIAL INSTRUMENTS Financial assets and liabilities are presented net in the balance sheet if, and only if, there is a The assets and liabilities are recognized when the current and enforceable legal right to offset the Company and its subsidiaries are a party to the recognized amounts and if there is the intention to contractual provisions of the instrument and are offset, or to realize the asset and settle the liability initially measured according to their fair value. simultaneously.
The transaction costs are directly attributable to the acquisition or issue of financial assets and liabilities FINANCIAL ASSETS (except for financial assets and liabilities recognized at fair value in the income statement) and are added The classification of financial assets is based on to or deducted from the fair value of financial assets the business model in which the asset is managed or liabilities, if applicable, after initial recognition. and its characteristics of contractual cash flows The transaction costs directly attributable to the (binomial contractual cash flow and business purchase of financial assets and liabilities at fair value model), as summarized below: by means of income are immediately recognized in the income statement.
CATEGORIES/MEASUREMENT CONDITIONS FOR DEFINITIONS OF CATEGORY
Financial assets are held according to the Company’s business model to Amortized cost hold financial assets to collect contractual cash flows on specific dates.
Fair value through other There is no specific definition as to holding the financial assets to collect comprehensive income the contractual cash flows on the specified dates or carry out the sale of (“FVTOCI”) the financial assets in the Company’s business model.
Fair value through profit or loss(“FVTPL”) All other financial assets.
For cash, cash equivalents and short-term The Company and its subsidiaries write off a investments, the Company has a policy of investing financial asset only when the contractual rights to its resources in prime banks, with a minimum rating the cash flows from this asset expire or transfer the of A- by Standard & Poor’s or equivalent (A- Fitch, asset and substantially all the risks and benefits of A3 Moody’s). the asset to another company. When a financial asset is written off in its entirety, the difference Accounts receivable from customers and other between the book value of the assets and the sum receivables are classified at amortized cost. Their of the consideration received and receivable is respective classifications between amortized cost, recognized in profit or loss. FVTOCI and FVTPL are presented in explanatory note 31.2. FINANCIAL LIABILITIES All regular acquisitions or disposals of financial assets are recognized or written off based on the These liabilities are classified in the initial trade date. Regular acquisitions or divestitures recognition as: (i) amortized cost; or (ii) measured correspond to acquisitions or disposals of financial at fair value through profit or loss. assets that require the delivery of assets within the term established by means of a market standard or The Company’s financial liabilities are classified practice. as measured at amortized cost using the effective interest method and include loans, financing and debentures, accounts payable to suppliers and MANAGEMENT’S EXPLANATORY NOTES 32 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
obligations with related companies and other The Company periodically reviews its assumptions accounts payable, as informed in explanatory note for the constitution of the provision for credit risk. 31.2. For the accounts receivable, the Company has adopted a simplified approach and calculated the The aforementioned financial liabilities are foreseen credit loss, as informed in explanatory initially recognized in the receipt of funds, net note 6, based on the expectation of default risk of transaction costs, when applicable. At the along the life of the financial instrument in view of balance sheet date, they are presented at their the revision of the history of its current operations initial recognition, minus the amortization of the and improvement of its estimates. installments of principal, when applicable, plus corresponding charges incurred. Transaction costs are presented as a reduction of current liabilities 2.6 ACCOUNTS RECEIVABLE and are appropriated to the income in the same payment term of the financing that originated it, Accounts receivables consist of amounts owed by based on the effective rate of each transaction. customers for goods or services acquired, and are recognized initially at fair value and subsequently measured at amortized cost using the effective IMPAIRMENT OF FINANCIAL INSTRUMENTS interest method, minus an allowance for doubtful accounts. Regarding the impairment of financial assets, CPC 48 - Financial instruments (IFRS 9) requires a model The provision for credit losses reflects the of expected credit losses. The expected credit loss volatility of the global iron ore sector. Based on model requires the Group to account for expected the downward trend in the price of iron ore, credit losses and changes in expected credit losses Management conducts an individual evaluation of on each reporting date to reflect changes in credit each customer’s contracts and makes a provision in risk since the initial recognition of financial assets. In an amount sufficient to cover any losses, pursuant other words, it is not necessary for a credit event to to criteria already informed in explanatory note 2.5. occur before credit losses are recognized. Specifically, CPC 48 requires the Company to recognize a provision for expected credit losses on: 2.7 INVENTORIES
Inventories are valued at average acquisition or (1) Investments in debt instruments subsequently production cost not in excess of the market or measured at amortized cost or at fair value realization value. through other comprehensive income, (2) Amounts receivable from leases, Samarco uses the absorption costing system. Direct (3) Accounts receivable and contract assets, and costs are appropriated objectively and indirect costs are appropriated based on normal production (4) Financial guarantee contracts to which the capacity and include expenses incurred on the impairment requirements of CPC48 (IFRS 9) acquisition of inventory, production and transfor- apply. mation costs and other costs incurred to bring the inventories to their current condition and location. In particular, CPC 48 requires the Company to measure the provision for losses on a financial instrument in an amount equivalent to the expected 2.8 PROPERTY, PLANT AND credit loss (ECL) over the service life if the credit risk EQUIPMENT related to that financial instrument has increased from the initial recognition, or if the financial Property, plant and equipment are recorded at instrument corresponds to a financial asset subject the cost of acquisition, formation or construction to a reduction in the recoverable value acquired or including capitalized financial charges. originated. However, if the credit risk related to a financial instrument has not increased significantly Elements that comprise the cost of an item of since the initial recognition (except for a financial property, plant and equipment are: asset subject to impairment acquired or originated); the Group shall measure the provision for losses for •• Acquisition price, plus import taxes and non- that financial instrument corresponding to the ECL recoverable purchase taxes, after deducting any of the 12-month period. commercial discounts and rebates. MANAGEMENT’S EXPLANATORY NOTES 33 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
•• Any direct costs attributable to bringing the REMOVAL OF OVERBURDEN TO ACCESS THE asset to its location and condition necessary to ORE DEPOSITS allow it to be operated as intended by Management. The cost of overburden (costs associated with stripping overburden and other waste products) •• The initial estimate of the cost of incurred during the development of the mine, disassembling and removing the item and before production, is capitalized as part of the recovering the area where it is located. These depreciable cost of the asset under development. costs comprise the obligation incurred by the These costs are amortized over the mine’s service Company upon acquiring the item or as a result life, based on the proven and probable reserves. of having used the item for a certain period. The cost of overburden removal incurred during When significant parts of an asset item have production is added to the value of the inventory, different useful lives, they are recorded as separate except when a specific extraction campaign is items (principal components) of fixed assets. conducted to access deposits located deeper in the reserve. In this case, the costs are capitalized Subsequent costs are capitalized only when it is and recorded in non-current assets as ore probable that future economic benefits associated extraction takes place, and will be amortized over with the expenses will be earned by the Group. the reserve’s service life.
Depreciation and amortization begin from the date the assets are installed and ready for use. RESEARCH AND DEVELOPMENT For the items directly related to the respective productive areas, the depreciation is calculated Development expenditures are capitalized only by the units produced method. For the if development costs can be measured reliably, remainder, depreciation is calculated based on if the product or process is technically and the straight-line depreciation and amortization commercially viable, if the future economic method considering the useful lives informed in benefits are probable, and if the Group has the explanatory note 12. intention and sufficient resources to complete the development and use or sell the asset. Depreciation methods, useful lives and residual Other development expenses are recognized in values are reviewed on each balance sheet date the income statement as incurred. After initial and adjusted if appropriate. recognition, capitalized development expenses are stated at cost, less accumulated amortization The gains and losses deriving from the sale of and any impairment losses. property, plant and equipment are determined by comparing the funds obtained through the sale against the book value of the property, plant and 2.10 IMPAIRMENT OF NONFINANCIAL equipment, and are recorded in “Other operating ASSETS expenses, net” in profit or loss. The book values of the Company’s nonfinancial assets with a defined service life are reviewed at 2.9 INTANGIBLE ASSETS each reporting date for signs of impairment. If any such indication exists, then the asset’s impairment Intangible assets acquired separately consisting is determined. Assets with an indefinite service of easements, mining rights and software are life are not subject to amortization and are tested measured upon initial recognition at their annually for impairment. In the case of intangible acquisition cost and, subsequently, less the assets in development not yet available for use, the accumulated amortization and impairment losses, impairment is estimated annually. when applicable. The impairment of an asset or cash generating unit Intangible assets with a defined service life are (CGU) is the greater of its value in use and its fair amortized according to their estimated economic value less costs of disposal. When appraising the lives, according to explanatory note 13, and when value in-use, the estimated future cash flows are indications of impairment are identified, they are discounted from their present values at a pre-tax submitted to impairment testing. discount rate that reflects the current market terms regarding the capital recoverability period and the asset’s specific risks. MANAGEMENT’S EXPLANATORY NOTES 34 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
For impairment testing purposes, assets that cannot 2.13 PROVISION FOR ASSET be tested individually are grouped in the smallest RETIREMENT AND SOCIO- group of assets that generate cash from continuous ENVIRONMENTAL AND use and which are mainly independent from the cash flows from other assets or groups of assets SOCIOECONOMIC RECOVERY (“cash generating unit - CGU)”). Provisions are determined by discounting estimated future cash flows to a pre-tax rate that reflects the Impairment losses are recognized when the current market assessments of the time value of book value of an asset or its cash generating unit money and the specific risks for the related liability. (CGU) exceeds its estimated recoverable value. The effects of the derecognition of the discount Impairment losses are recognized in profit or over time are recognized in the income statement loss. After November 2015, and considering the as a financial expense. expected increase in socio-environmental and socioeconomic remediation costs, management conducts an annual impairment test of non-financial (A) ASSET RETIREMENT OBLIGATIONS assets, as informed in explanatory notes 12 and 13. An asset retirement obligation is recognized when there is a legal or constructive obligation to 2.11 LOANS AND FINANCING perform rehabilitation as a result of environmental disturbance, by means of an approved detailed Loans and financing are initially recognized at asset retirement plan. The expenses for mine fair value, net of transaction costs incurred, and closure resulting from the termination of activities are subsequently stated at amortized cost. Any are recorded as asset retirement obligations. The difference between the proceeds (net of transaction obligations primarily consist of closure costs. The costs) and the total settlement value is recognized asset retirement cost related to the obligation in the income statement over the period of the is capitalized as part of the property, plant and outstanding loans using the effective interest equipment and is depreciated over the asset’s method. service life. The loans and financing are classified as current liabilities, unless the Company has an unconditional (B) SOCIO-ENVIRONMENTAL AND right to defer the settlement of the liability for at SOCIOECONOMIC RECOVERY least 12 months after the date of the balance sheet. The provision for socio-environmental and The costs of loans and financing attributed directly socioeconomic recovery is made according to the to the acquisition, construction or production of determinations of the respective authorities and a qualifying asset that requires a substantial time under the agreements signed on March 2, 2016 to be ready for use or sale are capitalized as part and June 25, 2018 (explanatory notes 1 and 3). The of the corresponding asset’s cost when it is likely provision for environmental recovery is recorded that future economic benefits will be generated for when an impacted area is identified that generates the Company and the cost or value can be reliably an obligation for the Company. A liability for measured. Other loans and financing costs are compensating social damages is recognized when recorded as expense in the period they are incurred. the obligation for future payments has been identified arising from past events subject to civil damages and, when there is a reliable estimate of the obligations. 2.12 PROVISION FOR CONTINGENCIES
2.14 PRESENT VALUE ADJUSTMENT OF A provision is recognized if, as a result of a past event, the Company has a legal or constructive obligation ASSETS AND LIABILITIES that can be reliably estimated, and it is probable that an outflow of economic benefits will be required to Monetary assets and liabilities are adjusted to their settle the obligation. present value when the transaction is originally recorded, considering the contractual cash flows, Provisions are determined by discounting expected the explicit and in certain cases implicit interest future cash flows at a pre-tax rate that reflects rate of the respective assets and liabilities and the current market assessments of the time value of prevailing rates in the market for similar transactions. money and the specific risks for the liability. This interest is subsequently reallocated to financial expenses and revenue in the income statement by MANAGEMENT’S EXPLANATORY NOTES 35 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
the effective interest rate method for contractual the projected unit credit method. The present value cash flows. of the defined benefit obligation is determined by discounting future estimated cash disbursements 2.15 INCOME TAX using interest rates in line with market yields, which are denominated in the currency in which benefits are paid and have maturity terms close to those of The Company calculates taxes based on existing the respective pension plan obligation. However, legislation, considering legal tax benefits and no asset is recognized, as there is no such provision deductions. Deferred tax balances are recognized in the bylaws for reimbursing the Company or on temporary differences between the tax bases of reducing future contributions. assets and liabilities and their carrying amounts in the financial statements to the extent that it is probable The actuarial gains or losses arising from the that future taxable profits will be available and adjustment for experience and changes in actuarial against which they can be utilized. This is measured assumptions are recorded directly in stockholders’ at the rates expected to apply to the temporary equity as other comprehensive income, when differences when they are reversed, based on incurred. the laws that have been enacted or substantially enacted by the reporting date. Deferred tax assets and liabilities are offset and presented net in the (B) MEDICAL ASSISTANCE balance sheet if there is a legally enforceable right to offset current tax liabilities and assets, and they The Company provides life insurance and relate to taxes levied by the same tax authority on healthcare insurance benefits for its employees the same taxable entity. and their dependents, which are recorded on the accrual basis and are discontinued in the event the The Company has a tax benefit for exports that employee leaves the Company. provides for a reduction of income tax based on the profits obtained from the exploration of abundant minerals. 2.17 CAPITAL
The Company has a final court decision in its favor, Each common share entitles the holder thereof to which ruled that the social contribution on net one vote on General Meeting resolutions. income (“CSLL”) is unconstitutional. Therefore, it is not considering or paying this tax/contribution, as mentioned in explanatory note 19. 2.18 PAYMENT OF DIVIDENDS
Minimum mandatory dividends paid to the 2.16 EMPLOYEE BENEFITS Company’s stockholders are recognized as a liability in the Company’s financial statements at the end of the year, pursuant to its bylaws. Supplemental (A) RETIREMENT OBLIGATION amounts referring to the portion exceeding the minimum obligation required by law or the bylaws The Company’s defined contribution plan is a is held in a specific account in the stockholders’ retirement benefits plan under which it pays fixed equity, and is only transferred to liabilities when contributions to a separate entity (ValiaPrev) and declared by the stockholders’ General Meeting. incurs no legal or constructive obligations to pay additional amounts. Contributions are recognized as an employee benefit expense when due. 2.19 RESULTS OF OPERATIONS
For the defined benefit portion of the plan (ValiaPrev), Income and expenses are recognized on an which is a constructive obligation, the Company accrual basis, and include costs, expenses and obtains the actuarial calculation. When the benefits revenues, in addition to earnings, charges and of a plan are increased, the portion of the increase indexation or exchange variance at official indices in the benefit related to past service of employees is or rates applied to current and non-current recognized immediately in profit or loss. assets and liabilities. The attributable income tax amounts are charged/credited to the income The defined benefit obligation is the present value statement. of the defined benefit obligation, less the fair value of the plan assets at the balance sheet date and is According to CPC 47 - Customer contract revenue, calculated annually by independent actuaries, using MANAGEMENT’S EXPLANATORY NOTES 36 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
the recognition of revenues from contracts with Income and interest expense are recognized as they customers is based on the transfer of control of accrue in profit or loss, using the effective interest the good or service promised, which may be at method. Foreign currency gains and losses are a point in time or over time, depending on the reported on a net basis. satisfaction or not of the so-called “contractual performance obligations”. Revenue is measured The unwinding of discounting assets and liabilities at the amount that reflects the consideration to previously adjusted to their present value is which it is expected to be entitled and is based recognized in the income statement as a financial on a five-step model detailed below: 1) contract income or expense. identification; 2) identification of performance obligations; 3) determination of the transaction price; 4) allocation of the transaction price to the 2.20 FINANCIAL LEASE performance obligations; 5) revenue recognition. The Group applied CPC 06(R2) using the modified Performance obligations are considered promises retrospective approach and, therefore, comparative to transfer to the customer a good or service information has not been restated and continues to (or group of goods or services) that is distinct, be presented according to CPC 06(R1) and ICPC or a series of distinct goods or services that are 03. Details of accounting policies according to CPC substantially the same and that have the same 06(R1) and ICPC 03 are disclosed separately. standard of transfer to the customer. For contracts before January 1, 2019, lease liabilities were measured at the present value of (A) RECOGNITION OF REVENUE FROM the remaining lease payments, discounted at the PRODUCT SALES Group’s incremental loan rate on January 1, 2019. Right-of-use assets are measured for an amount Revenue is recognized at the moment in which equal to the lease liabilities, adjusted by the value of contractual performance obligations are met. In any anticipated or accumulated lease receipts: the our case, as most of the sales are made on a FOB Group applied this approach to all other leases. (Free-on-Board) basis. The revenue is recognized when the product is delivered to the transporter. When the realization of an amount already recorded under revenue is uncertain, a provision for the uncollectible amount or amount unlikely 3. SIGNIFICANT EVENT - COLLAPSE to be realized is recognized as a price adjustment OF THE FUNDÃO DAM or loss directly classified as an expense.
As a result of the Collapse of the Fundão tailings dam (B) RECOGNITION OF REVENUE FROM on November 5, 2015, Samarco incurred significant SERVICES accounting impacts, particularly related to expenses related to measures to prevent, remediate, contain The Company provides logistics services at its and compensate property, environmental and social own port terminal. Service revenue is recognized damages resulting thereof. at the moment in which contractual performance obligations are met. When the realization of Samarco incurred expenses and made provisions an amount already recorded under revenue is for future disbursements that have been recorded uncertain, the uncollectible amount or amount and reported according to CPC 25 - “Provisions, unlikely to be realized is recognized as an expense. contingent liabilities and contingent assets”.
The material accounting effects from this significant (C) FINANCIAL INCOME AND EXPENSES event on the Company’s Financial Statement, Income Statement and Statement of Cash Flows in Financial income comprises interest income on the financial year ended as of December 31, 2020 funds invested and changes in the fair value of and 2019 are described below: financial assets measured at fair value through profit and loss.
Financial expenses comprise interest expenses on loans and financing, and changes in the fair value of financial assets measured through profit and loss. MANAGEMENT’S EXPLANATORY NOTES 37 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
BALANCE SHEET
Current Assets Note 2020 2019
Advances to supplier (a) 10,430 8,089
Total current assets 10,430 8,089
Non-current
Court Deposits (b) 349,946 337,797
Total non-current assets 349,946 337,797
Current Liabilities
Trade payables (c) (15,306) (28,443)
Other provisions (d) (4,743,522) (4,023,333)
Other Liabilities (SEMAD) (e) (30,985) (30,304)
Total current liabilities (4,789,813) (4,082,080)
Non-current
Other provisions (d) (12,292,811) (8,148,418) Other liabilities in the country of related (f) (10,156,499) (6,356,498) parties Other Liabilities LP (SEMAD) (e) (15,359) (45,197)
Total non-current (22,464,669) (14,550,113)
Net Liabilities (26,894,106) (18,286,307) MANAGEMENT’S EXPLANATORY NOTES 38 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
INCOME STATEMENT
Note 2020 2019
Cost of goods sold and services rendered (g) (27,121) (87,190)
Gross loss (27,121) (87,190)
Operating expenses
Provision contributions to the Fundação Renova (f) (3,800,000) (2,508,000)
Provision for socio-environmental and socioeconomic recovery (d) (3,216,112) (1,955,076)
Expenses with socio-environmental and socioeconomic recovery (h) (194,160) (200,210)
Write-back for capitalization of expenses (h) - 329,290
Expenses input resources - Fundação Renova (d) (9,263) (490,000)
Fines resulting from socio-environmental and socioeconomic - (195) recovery
Operating loss (profit) before financial result (7,246,656) (4,911,381)
Financial expenses provision for socio-environmental and socio- (1,663,636) (665,979) economic recovery
SEMAD interest (1,422) (4,343)
Financial Result (i) (1,665,058) (670,322)
(Loss) before taxation (8,911,714) (5,581,703)
Deferred income tax - (13,285)
Loss for the year (8,911,714) (5,594,988)
STATEMENT OF CASH FLOWS
Cash flows from operating activities 2020 2019
(Loss) before taxation (8,911,714) (5,581,703)
Adjustments to reconcile net income with cash from operations:
Provision (write-back) for socio-environmental and socioeconomic 3,216,112 1,955,076 recovery
Provision contributions to the Fundação Renova 3,800,000 2,508,000
Financial charges 1,663,636 665,979
(Increase) decrease in operating assets:
Court deposits (12,149) 4,145
Advances to supplier (2,341) (2,928)
Increase (decrease) in operating liabilities:
Trade payables (13,137) 6,440
Other Liabilities (SEMAD) (29,157) (25,070)
Net cash used in operating activities (288,750) (470,061)
Total net decrease in the balance of cash and cash equivalents (288,750) (470,061) MANAGEMENT’S EXPLANATORY NOTES 39 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(A) ADVANCES TO SUPPLIER Production (“DNPM”), and the National Indian Foundation (“FUNAI”); (ii) in Minas Gerais, the State As of December 31, 2020, the amount of R$ of Minas Gerais, the State Forestry Institute (“IEF”), 10,430 (R$ 8,089 as of December 31, 2019) refers the State Water Management Institute (“IGAM”), the to advances to suppliers related to the hiring of State Foundation for the Environment (“FEAM”); specialists and support consultants to the Federal and (iii) in Espírito Santo, the State of Espírito Prosecution Office. Santo, the State Institute of Environment and Water Resources (“IEMA”), the Institute of Agricultural and Forestry Defense of Espírito Santo (“IDAF”) and the (B) COURT DEPOSITS State Agency for Water Resources (“AGERH”).
As of December 31, 2020, the balance of court The scope of the TTAC is extremely broad, deposits is reported in the assets at the amount of comprising a total of forty-two (42) programs, R$ 349,946 (R$ 337,797 as of December 31, 2019) of which: (i) twenty-three (23) are of a and its composition is detailed below: socioeconomic nature; and (ii) nineteen (19) are socio-environmental. It is worth mentioning that these programs include the implementation Parent Company and both remediation and compensatory measures.
Consolidated The TTAC further provides for the possibility of extraordinary programs reviews,with the review of 2020 2019 deadlines and obligations, as long as technically Civil 348,047 336,100 justified. Environmental 148 140 The said instrument was structured to allow Labor 1,751 1,557 government authorities to comment, assess and approve the projects developed under the Total 349,946 337,797 programs, and oversee the execution of all of the programs through an Interfederative Committee (“CIF”). Experts and advisory panels have also been appointed to settle technical disputes in a scientific, (C) TRADE PAYABLES substantiated and, above all, fast.
This refers to amounts payable of R$ 15,306 as of The TTAC established the creation of a private December 31, 2020 (R$ 28,443 as of December foundation that will develop and implement the 31, 2019), related to expenses arising from the programs, the management of which will be Collapse of the Fundão dam. independently audited. TTAC’s term is 15 years from its signature, renewable for periods of one year, successively, until all the obligations provided (D) OTHER PROVISIONS for in the TTAC are fulfilled.
On March 2, 2016, Samarco, together with its In compliance with TTAC, on August 2, 2016, shareholders Vale and BHP Billiton Brasil, signed the Samarco, Vale and BHP Billiton Brasil, for TTAC in the proceedings of the Civil Class Action developing and implementing environmental filed by the Federal Government and others, No. and socioeconomic programs to remedy and 0069758-61.2015.4.01.3400, in progress before compensate for the damage caused by the Collapse the 12th Federal Court in Belo Horizonte/MG, to of the Fundão dam, instituted the Fundação Renova. establish the programs, which comprise measures and actions for socio-environmental and socio- Under the terms of the TTAC, Samarco is responsible economic reparations and compensation arising for financing the Fundação Renova for the duration from the collapse of the Fundão dam. of said agreement, according to contributions that are necessary from time to time. To the extent It is important to note that, in addition to the that Samarco fails to meet its financing obligations Company and its stockholders, the following are under the TTAC, Vale and BHP Billiton Brasil have also part of the TTAC: (i) at the federal level, the subsidiary financing obligations in the proportion Federal Government, the Brazilian Institute of of 50% each. Environment and Renewable Natural Resources (“IBAMA”), Chico Mendes Institute for Biodiversity Conservation (“ICMBio”), the National Water Agency (“ANA”), the National Department of Mineral MANAGEMENT’S EXPLANATORY NOTES 40 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
For the year ended 2020, Samarco and its stockholders provided funds to the Fundação Some specific issues related to the execution of Renova, as follows: the Fundação Renova’s programs were subject of legal actions, before the 12th Federal Court, by the signatories of the above-mentioned agreements, R$ 3,921,427 in 2020 (R$ 3,033,113 in 2019), of which led to some judicial decisions that increase which R$ 112,164 (R$ 35,113 in 2019) was invested the actions of these programs, all of them in charge directly by Samarco in the TTAC programs, and R$ of the Fundação Renova. 3,800,000 (R$ 2,508,000 in 2019) contributed by Vale and BHP Billiton Brasil, in the proportion of 50% Based on the information above, Management, each, through deposits at the Fundação Renova on following the advice of external consultants and behalf of Samarco, and R$ 9,263 (R$ 490,000 in experts, has been preparing action plans and studies 2019) contributed directly by Samarco to Fundação for the future remediation of the environmental Renova. and socioeconomic damage caused by the Collapse of the dam, besides the implementation of compensatory programs established in the TTAC. In 2021, the total estimated input to be provided As of December 31, 2019, a provision was reported to Fundação Renova is R$ 5,400,000. Also, a total for future disbursements related to the present of R$ 278,210 is earmarked to cover the programs obligation generated by the Collapse of the Fundão executed by Samarco, including the program for dam. The magnitude, full scope, timing and costs the recovery of the UHE Risoleta Neves reservoir of the future remediation programs are subject (PG009). In 2022, annual contributions to the to significant uncertainty as they depend on the Fundação Renova will be sufficient to cover the conclusion of specialist studies, the preparation of costs of the remediation and compensation action plans and the outcome of pending court projects for each year, and the annual reference cases. amounts for these contributions will be between R$ 800,000 to R$ 1,600,000. These annual amounts The provision made was discounted to present already include the annual amount of R$ 240,000 value at (i) the risk-free rate of 5.1638% per year for compensation projects over a period of 15 years, based on the 10-year Brazil bond in the international counting from the signing of the TTAC on March market maturing on January 5, 2024 obtained 2, 2016. Additionally, a contribution of R$ 500,000 from Bloomberg (EJ137186) and (ii) considering will be allocated to a program of collection and cash outflow foreseen over the next 10 years up to treatment of sewage and the disposal of solid waste December 31, 2030. in certain areas. From 2022 onwards, the amounts to be contributed to the Fundação Renova will be based on the planning of the programs approved by the Fundação Renova on the same date. The TTAC does not specify a minimum or maximum limit on contributions for this period.
On June 25, 2018, the Governance TAC was established providing for the settlement of a Public- Interest Civil Action of R$ 20,000,000, suspension of the Public-Interest Civil Action of R$ 155,000,000, partial ratification of the TTAC and its formal declaration of validity for the signing parties.
This agreement establishes, among other matters, Fundação Renova governance enhancements to ensure a greater participation of the affected people and a process to deal with a possible renegotiation of the programs intended to remedy the collapse of the Fundão dam, that should count with the work of Specialists hired by Samarco to advise the Federal Prosecution Office. The agreement was ratified on August 8, 2018 by the 12th Federal Court of Minas Gerais. MANAGEMENT’S EXPLANATORY NOTES 41 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(a) Composition
Provision for: 2020 2019 Remediation programs (d.1) 12,669,086 6,991,829 Compensation programs (d.2) 3,279,625 3,848,285 Other actions not included in the TTAC (d.3) 1,087,622 1,331,637
17,036,333 12,171,751
Current Liabilities 4,743,522 4,023,333
Non-Current Liabilities 12,292,811 8,148,418
(b) Transaction
2020 2019
Balance as of January 1 12,171,751 9,540,135
Realized provision (194,160) (200,210)
Realized provision - Samarco contribution to the Fundação Renova (9,263) (490,000)
Write-back of provision funding for Fundação Renova by shareholders (3,800,000) (2,508,000) Vale/BHP Billiton Brasil
Financial update 1,663,636 665,979
Increase (decrease) in the provision 7,204,369 5,163,847
Balance as of December 31 17,036,333 12,171,751
Current Liabilities 4,743,522 4,023,333
Non-Current Liabilities 12,292,811 8,148,418
In line with the evolution of actions and knowledge area directly affected by the mud, and in about the impacts, changes in key assumptions may the Risoleta Neves Hydroelectric Power result in future substantial changes in the amounts Plant (Candonga). The other areas will accrued in future publications, highlighting: receive actions for environmental and social recovery. • Method of removing remaining tailings in rivers: the technical solutions are based • Method of removing remaining tailings on the decisions taken within the scope in the dam of the Candonga HPP: the of the Tailings Management Plans (PMR) removal of the remaining tailings in the elaborated for the stretches; in this case dam will be carried out by dredging. the stretches 1 to 11. In the PMRs, impact analyzes are carried out and, based on • ACP 155 Bi: judicial proceedings, according this detailed analysis, solutions are defined to decisions of the 12th Federal Court, and implemented, which have as principle considering the following priority axes: the least impact on the environment and the surroundings, including communities. • Axis 1 - Extra and intrachannel Based on this principle, the waste removal environmental recovery; actions will be concentrated in Barra Longa • Axis 2 - Human health risk and ecological (MG), the only municipality with an urban risk; MANAGEMENT’S EXPLANATORY NOTES 42 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
• Axis 6 - Performance measurement and (D.2) COMPENSATION PROGRAMS: monitoring; • Axis 8 - Resume of economic activities; comprise measures and actions to compensate and non-mitigable or reparable impacts arising from the collapse of the dam, through the improvement • Axis 9 - Supply of water for human of the socio-environmental and socioeconomic consumption. conditions of the impacted areas, under the programs, listed in the TTAC, and the main ones Criteria for compensation of impacted population: are: support for research for the development and the Mediated Indemnity Program began effectively use of socioeconomic technologies applied to in October 2016 for preparing and executing a the remediation of impacts; regional economic compensation and indemnification program. In recuperation and diversification with incentives 2020, there was a change in this scenario and for industry; encouraging local contracting; several aspects of the indemnities for general rehabilitation of permanent protected areas (APP); damages started to be defined through legal recovery of springs; strengthening of screening actions, based on the decisions made by the 12th structures and reintroduction of wildlife; collection Federal Court. and treatment of sewage and destination of solid waste; environmental education; preparation for Besides the judicial proceedings, the program environmental emergencies; creating funds for includes the following indemnities: Covid-19; transfers to the structuring projects of the Integrated Agenda, signed with the •• Mariana’s indemnities: referring to the governments of Minas Gerais and Espírito Santo, impacts suffered as a result of the permanent to leverage actions aimed at social protection, or temporary physical displacement; health, education, economic diversification and •• Fatalities and disappearances; and strengthening the institutional capacities of the •• Moral damage to water: considers residents affected municipalities. of municipalities that had suspended drinking water distribution for more than (D.3) OTHER ACTIONS NOT COVERED BY THE 24 hours in November 2015. TTAC:
Comprise other disbursements required to comply (D.1) REMEDIATION PROGRAMS: with actions related to the Collapse of the Fundão dam not covered by the TTAC programs. comprise remediation measures and actions to mitigate, remedy and/or repair socio- (E) OTHER LIABILITIES environmental and socioeconomic impacts arising
from the collapse of the dam, listed in the TTAC, Samarco was notified by SEMAD at R$ 127,500. whose main programs are: survey and registration Samarco requested the payment of the amount of those impacted; protecting and enhancing the in 60 months. The first installment, corresponding living standards of indigenous peoples; health and to five percent (5%) of the amount, was paid in social protection; school recovery; resumption of December 2016. As of December 31, 2020, the agricultural activities; preservation of historical, amount of R$ 30,985 (R$ 30,304 as of December cultural and artistic heritage; social engagement, 31, 2019) refers to 12 short-term installments and participation, dialogue and control; reconstruction the amount of R$ 15,359 (R$ 45,197 as of December of Bento Rodrigues, Paracatu de Baixo and Gesteira; 31, 2019) refers to long-term installments, restated rehabilitation of other affected communities and by SELIC, according to explanatory note 21. infrastructure between Fundão and Candonga; assistance to animals; emergency financial assistance to those impacted; reforestation and environmental recovery; conservation of aquatic (F) OTHER LIABILITIES IN THE COUNTRY OF biodiversity; water monitoring; management of RELATED PARTIES the resulting tailings, considering conformation and stabilization in situ, excavation, dredging, haulage, treatment and disposal; improvement of On December 30, 2016, contracts were signed water supply systems. between Samarco, Vale and BHP Billiton Brasil to recognize Samarco’s obligation to pay its shareholders the amounts contributed by them to the Fundação Renova. The contributions are to MANAGEMENT’S EXPLANATORY NOTES 43 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
comply with the primary obligations of Samarco Santarém and dike S3 structures were included in provided for in the TTAC. In 2020, the amount the scope of the corrective operational licensing, contributed by the shareholders directly to the giving legal status already regularized for the return Fundação Renova was R$ 3,800,000 (R$ 2,508,000 of operations. in 2019), totaling up to December 31, 2020, a total The Axis 1 dam is an integral part of Vale do Fundão amount of R$ 10,156,499 (R$ 6,356,498 up to and will enable the operation of the Germano Plant December 31, 2019). in the medium term, since the area created by the construction of the dike will be used to dispose of part of the sandy tailings (which will be filtered and (G) COST OF GOODS SOLD AND SERVICES stacked dry). RENDERED
The Company incurred costs to maintain and (I) FINANCIAL RESULT repair facilities affected by the Collapse of the Fundão tailings dam (related to outsourced services, construction materials, fuel, among The financial result is composed of: others). Of the total amount, R$ 42,286 (R$ 76,629 as of December 31, 2019) was recorded as (i) financial expense in the amount of idle capacity, according to explanatory note 24. R$1,663,636 (R$665,979 as of December 31, 2019) from the unwind of discount of the provision for socio-environmental and socio- (H) OTHER OPERATING EXPENSES economic recovery, calculated at present value. The rate used is described in note 3(d); Expenses for socio-environmental and socioeconomic recovery (ii) R$ 1,422 (R$ 4,343 as of December 31, 2019) of interest incurred on the The breakdown of Samarco expenses related to environmental fine applied by SEMAD as the measures to prevent, remedy, contain and described in the explanatory note 3(e). compensate environmental and social impacts caused by the Collapse of the Fundão dam, incurred in 2020 and 2019, is shown below: (J) INVESTIGATIONS 2020 2019 Immediately after the Collapse of the Fundão Remediation programs (19,972) (12,134) dam, the Company with its stockholders Compensation programs (429) - contracted an external investigation team to identify the causes of the failure. The results of Actions not included in the (173,759) (188,076) the investigation were made public at the end of TTAC August 2016. (194,160) (200,210) The results of the investigation were shared with the Federal Police and the Prosecution Office, The description of the nature of each of among other entities involved in the investigation the expenses included in the table above is process. Besides supporting ongoing police detailed in explanatory note 3(d). investigations and judicial measures, the information provided will assist the Company and the mineral sector as a whole in the search Write-back for capitalization of expenses for higher standards of operational safety, so that occurrences of this kind will never be repeated. As of December 31, 2019, the amount of R$ 329,290 On October 22, 2016, the Federal Prosecution refers to the capitalization of expenses incurred in Office filed a complaint against the Company, the Axis 1 project. its shareholders and 22 individuals, regarding the As described in explanatory note 1(b), as a result Collapse of the Fundão dam, and was assessed of the new legislation and aiming at greater under No. 0002725-15.2016.4.01.3822. The security in the resumption of operations, Samarco Company was charged with environmental revised the tailings disposal project in the Alegria crimes as outlined in articles 29, caput, §1, items I Sul pit, removing the containment dike, then and II, §4, items I, III, V and VI, art. 33, art. 38, art. adopting the “confined pit” disposal system. For 38-A, art. 40, caput, §2, art. 49, art. 50, art. 53, this readjustment, as a necessary part to make the items I and II, sub items “c”, “d” and “e”, art. 54, §2, operation of the Germano Plant feasible, the Nova items I, III, IV and V c/c art. 58, item I, art. 62, item I, MANAGEMENT’S EXPLANATORY NOTES 44 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
all included in Law No. 9,605/98, concomitantly default on the obligations of funding for the with the crimes specified in articles 68, 69, and, Socioeconomic and Socio-environmental twice, in art. 69-A, §2, of Law No. 9,605/98. Remediation Programs in response to the The complaint was received on November 17, damage arising from the Collapse of the 2016. After a detailed analysis of documents Fundão dam, according to the records of the and legal issues, related to the proceeding, Public-Interest Civil Action No. 0069758- the Samarco submitted a response within the 61.2015.4.01.3400 (the ACP), brought against legally established timeframe. After considering the Insured by the Federal Government, State the defense presented in the proceedings, the Agency for Water Resources (AGERH), National Federal Court of Ponte Nova proceeded with Water Agency (ANA), National Department its regular processing. TRF1 (Federal Regional of Mineral Production (DNPM), State of Minas Court of the 1st Region), when judging habeas Gerais, State of Espírito Santo, State Foundation corpus filed by accused persons (individuals) for the Environment (FEAM), Brazilian Institute dismissed the accusation of intentional of Environment and Renewable Natural homicide and, still, closed the criminal action Resources (IBAMA), State Forestry Institute regarding some accused persons. As a result, (IEF), State Institute of Environment and Water the Court, in line with the decision issued Resources (IEMA), State Water Management by the TRF1, in addition to excluding several Institute (IGAM) and Chico Mendes Institute for individuals from the charge, changed the Biodiversity Conservation in face of the Policy procedure for processing the proceeding - until Holder among others. Indemnity payments by then submitted to the rite of the jury court, now the insurer will be made on equal conditions adopting the ordinary procedure. The process with other insurance policies submitted in the is currently being processed on a regular basis. case records.
(K) INSURANCE (L) COMMITMENTS
(i) Operational Insurance After the Collapse of the Fundão dam on November 5, 2015, the Company invoked the After the Collapse of the Fundão dam, the force majeure clause in long-term contracts Company has been negotiating with its with suppliers and service providers to suspend contracted insurers to receive indemnity under contractual obligations, except for the electric its various policies that covered its operational power contract. risks. (M) CONTINGENCIES In 2020, the Company continued to obtain reimbursement of defense costs covered by the The Company is a party to legal and Directors’ Civil Liability policy and maintains the administrative proceedings involving civil, channel of negotiations open so that additional labor and environmental issues arising from amounts spent and covered by its insurance the Collapse of the Fundão dam. These actions policies are reimbursed. brought by individuals, private companies, non- governmental organizations (NGOs) and public Any additional indemnity payments still depend and governmental entities seek remediation on completion of the negotiations, definitions and compensation for environmental and of coverages, deductibles and allocation of the socioeconomic impacts, material and moral amount of losses covered by the policies. damage and loss of life, besides a series of compensations for the affected municipalities. (ii) TTAC financial guarantee insurance These legal proceedings include civil public Since 2017, it has been in place a financial actions brought by state prosecutors in guarantee insurance in compliance with Minas Gerais and Espírito Santo, state public the terms of the TAC - Conduct Adjustment defenders in Minas Gerais and Espírito Santo, Agreement signed with the Prosecution Office the defender of the Federal Government and in the 12th Federal Court of Belo Horizonte/ federal prosecutors. Given the situation of all MG to assure the payment of the amount these processes, the duplicity of what was corresponding to the court deposits that the requested in these actions and the claims Policy Holder needs to make as a result of included in the actions of R$ 20,000,000 and R$ 155,000,000, which are detailed in the MANAGEMENT’S EXPLANATORY NOTES 45 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
following paragraphs, it is not possible at this in the interlocutory injunction will be used to time to provide a range of possible results or a pay part of the indemnities. reliable estimate of future exposures. On November 30th, 2015, the Federal As defined in the TTAC, the claims of various Government of Brazil, the states of Espírito Santo lawsuits brought against Samarco are covered and Minas Gerais and other public authorities by the mentioned agreement. Any complaints collectively filed a Public Civil Lawsuit before involving any matter established in the TTAC the 12th Federal Court of Belo Horizonte must seek to be disregarded by resolution of against Samarco and its shareholders, Vale and merits or joint grouping of complaints. The BHP Billiton Brasil, seeking to create a fund of estimated losses in the pretensions addressed up to R$ 20,000.000 to add to the clean-up by the TTAC were included as part of the various and damages costs. provisions for repairing damages caused by the Collapse of the Fundão dam. On May 3rd, 2016, the Federal Prosecutor’s Office filed a Public Civil Lawsuit against The Company was charged by environmental Samarco and its shareholders aiming at full agencies, including IBAMA (Brazilian Institute compensation, indemnity and moral damages of Environment and Renewable Natural due to the environmental damages caused by Resources) due to environmental damage the Collapse of the Fundão dam, requiring (i) caused by the discharge of solid and liquid measures to mitigate the social, economic waste (mining waste) in the waters of the Rio and environmental impacts resulting from Doce, as well as SEMAD and IEMA-ES (State the collapse of the Fundão dam and other Institute of Environment and Water Resources) emergency measures, (ii) payment of for causing pollution and environmental compensation to the community and (iii) degradation resulting in damage to water payment of collective moral damage. The resources. Samarco has presented its defense amount of the initial lawsuit claimed by the against these charges and is awaiting a Federal Prosecutor’s Office is R$ 155,000.000. response from the agencies. The notices of violation total R$ 1,435,077 (R$ 755,686 as of On January 18th, 2017, the Federal Prosecutor’s December 31, 2019). It is noteworthy that three Office, Samarco and its shareholders signed Notices of Violation drawn up by IBAMA have a memorandum of understanding (“MoU” or already exhausted the administrative sphere “Memorandum of Understanding”) with the and are being discussed in the judicial sphere Federal Prosecutor’s Office, which outlines the within the scope of two actions: Action for process and timetable for new negotiations for Annulment and Tax Foreclosure. The resulting an agreement on the lawsuits of R$ 20,000.000 losses and exits are classified as possible. and R$ 155,000.000. This Memorandum of Understanding provides for the appointment Regarding the Public-Interest Civil Action No. of specialists to assess programs in the field 0043356-50.2015.8.13.0400, proposed by the of environmental and social remediation and Prosecution Office of Minas Gerais aiming at program assessment and monitoring under the full compensation of Mariana’s victims, the TTAC. there is an interlocutory injunction in which the amount of R$ 300,000 was blocked in The conclusions of specialized consultants Samarco’s bank account for compensatory use not linked to Samarco, Vale, BHP Billiton Brasil, and remedial measures required by this Public will be considered in the negotiation of a final Civil Lawsuit. Samarco appealed this decision. agreement with the Prosecutor’s Office. However, on December 4th, 2017; the Court Under the terms of the Memorandum of of Justice denied the appeal and upheld the Understanding, Samarco and its shareholders decision that blocked that amount. Part of the also agreed to offer securities (“Provisional amount was released as a result of investments Security”) in the amount of R$ 2,200.000, in emergency actions/recovery through an hiring specialists to federal prosecutors and agreement with the MPMG. On October 2nd, holding public hearings. 2018 Samarco, Vale, BHP Billiton Brasil and the Public Prosecutor’s Office of Minas Gerais The Memorandum of Understanding signed signed an agreement to address the payment in the Public Civil Lawsuit of Ponte Nova of indemnities in that district through the use provides for the allocation of R$ 200,000 to be of the blocked resources in the interlocutory used in compensating actions in the regions injunction. Although the lawsuit was circumscribed in that District. This amount extinguished, the amounts originally blocked was provided for programs at the Fundação MANAGEMENT’S EXPLANATORY NOTES 46 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Renova, and did not represent an increase in the actions of R$ 20,000,000 and R$ 155,000,000, amount of contributions planned for 2018. the definition of the amounts involved, the compensation period, and other judicial and On June 25th, 2018, Samarco, Vale and BHP extrajudicial decisions. Billiton Brasil, and other parties involved, the Prosecutor’s Office and Public Defenders signed Beyond judicial motions to consolidate those the TAC Governance that dissolves the Public other claims before the 12th Federal Court, Civil Lawsuit of R$ 20,000.000 and increases the Samarco understands its contingencies are community participation in decisions related to already covered on these major Public-Interest the remediation process. Civil Actions.
On January 24th, 2017, Samarco, Vale and Other governmental proceedings and BHP Billiton Brasil presented the securities to investigations related to the Collapse of the the Court that will remain in effect for thirty Fundão dam may be brought against the (30) months from the approval of the TAC Company. Until new facts are developed and Governance. the aforementioned uncertainties resolved, we are unable to provide a range of results or The Governance TAC was approved by the 12th a reliable estimate of Samarco’s obligations Federal Court of Minas Gerais on August 8, 2018, arising from these matters. As such, a provision producing, among other effects, the extinction has not been recognized or a contingent liability of the R$ 20,000,000 ACP and suspending the quantified for these claims. Only in time and the Public-Interest Civil Action of R$ 155,000,000 natural development of the disputes and the for 2 years from its ratification. maturity of the process, with new settlements reached and/or legal decisions, will it be The Governance TAC maintains the provisional possible to understand the actual magnitude guarantee provided under the Preliminary of the impacts and the Company’s exposure. Agreement for 30 months, after which Samarco, These items may lead to significant impacts on Vale and BHP Billiton Brasil will be required to provisions and result in further adjustments to provide security for an amount equivalent to the existing provisions and/or the recognition of annual budget of the Fundação Renova up to new provisions for disbursements that cannot the limit of R$ 2,200,000. be currently projected and/or measured. From January 2020, some specific issues related As of 2019, the lawsuits estimated as probable to the execution of the Fundação Renova’s losses related to the Collapse of the Fundão programs were subject to legal actions, before dam were recorded as part of the environmental the 12th Federal Court, by the signatories of and socio-environmental provision. the above-mentioned agreements, which led to some judicial decisions that increase the The Company is a party to other proceedings actions to be performed within the scope of for which the Management, based on the these programs, all of them in charge of the assessment of its legal advisors, internal Fundação Renova. and external, did not set up a provision for contingencies, since the loss expectations were On late 2020, Federal Prosecutor Office filed a considered possible, the main being: motion to resume Public-Interest Civil Action of R$ 155,000,000. Samarco and shareholders responded such motion that waits for judicial decision. Subsequently, the Federal Public Prosecutor’s Office requested the suspension of the motion to return the lawsuit until the end of April 2021.
Those major Public-Interest Civil Actions aim full compensation, indemnity and moral damages due to the environmental damages caused by the Collapse of the Fundão dam. Therefore, Samarco considered other claims classified as possible and/or probable that are in the initial phase and that present significant uncertainties due to the duplicity of what was requested in these actions and the claims contained in the MANAGEMENT’S EXPLANATORY NOTES 47 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
DESCRIPTION POSITION 2020 2019
Civil Proceedings related mainly to indemnities to third Proceedings in the parties, According to the opinion of the Company’s court sphere in 1,640,249 1,332,643 legal advisors, the likelihood of loss in these disputes is several procedural possible. stages.
Proceedings in the Related labor proceedings, the application of fines by court sphere in the control bodies, besides labor claims filed by the 333,377 several procedural 549,239 company employees and third parties. stages.
Proceedings in the Proceedings involving environmental risks referring court sphere in to the States of Minas Gerais and Espirito Santo, with 1,058,067 several procedural 1,376,462 respect to assessments by the supervisory bodies. stages.
3,565,950 2,724,087
4. CASH AND CASH EQUIVALENTS
The composition of the cash balance and cash equivalents is detailed below:
Parent company Consolidated Note Cash and banks 2020 2019 2020 2019
In the country 43 564 43 564
Abroad (a) 76,127 52,720 80,035 55,895
Financial investments
Abroad (b) 3,768 9,333 3,768 9,333
79,938 62,617 83,846 65,792
(a) Current accounts in US$ at financial institutions abroad.
(b) Short-term financial investments in US$ at financial institutions abroad, whose incomes are linkedto prefixed rates, 0.25% per year as of December 31, 2020 and December 31, 2019. The Company’s policy is to invest its funds in prime banks, as described in explanatory note 2.5. MANAGEMENT’S EXPLANATORY NOTES 48 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
5. RESTRICTED SHORT-TERM INVESTMENTS
The composition of the financial investments balance in restricted cash is detailed below:
Parent Company and Consolidated 2020 2019
Restricted short-term 2,848 2,505 investments
2,848 2,505
As of December 31, 2020, the restricted cash amount of R$2,848 (R$2,505 as of December 31, 2019), refers to funds held and invested in specific bank accounts (“collection accounts”) linked to some bank loans and financing, which are under a debt renegotiation process; and also to funds held to guarantee contractual obligations related to energy transmission.
6. ACCOUNTS RECEIVABLE
The composition of the accounts receivable balance is detailed below:
Parent company Consolidated Note 2020 2019 2020 2019 Customers in the country (a) 6,906 10,571 6,906 10,571
Customers in the country - related - 88 - 88 parties (note 30)
Customers abroad (b) 13,723 10,660 15,871 12,333
Customers abroad - related parties (note 2,131 1,656 - - 30)
22,760 22,975 22,777 22,992
Expected credit loss (c) (20,486) (11,849) (22,602) (13,490)
2,274 11,126 175 9,502 MANAGEMENT’S EXPLANATORY NOTES 49 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(a) The receivable amount from customers in the R$13,490 as of December 31, 2019, respectively). country is related to the sale of energy, leasing of A provision for loss is recognized for the financial port area and sale of supply inventory. instrument corresponding to the expected credit loss for the 12-month period, according to the policy (b) The consolidated balance of R$15,871 as of disclosed in explanatory note 2.5. The provision in December 31, 2020 (R$12,333 as of December 31, the Parent Company does not include receivables 2019) from customers abroad came from amounts from sales made to the subsidiary Samarco Finance. receivable from mining customers abroad. The transaction of estimated losses on bad debits on (c) Estimated losses on bad debits amount to accounts receivable are shown in the table below: R$20,486 at December 31, 2020 at Parent Company and R$22,602 at consolidated (R$11,849 and
Parent company Consolidated 2020 2019 2020 2019
Balance as of January 1 11,849 11,845 13,490 13,423
Additions 244 4 244 4
Write-backs (119) - (119) -
Foreign exchange gains/losses 8,512 - 8,987 63
Balance as of December 31 20,486 11,849 22,602 13,490
The composition of the accounts receivable balance, ranked by maturity, is detailed below:
Parent company Consolidated 2020 2019 2020 2019 Due 105 2,499 105 2,530
Up to 30 days past due 23 1,583 23 1,583
61 to 90 days past due 231 - 263 -
Past-due for more than 90 days 22,401 18,893 22,386 18,878
22,760 22,975 22,777 22,991 MANAGEMENT’S EXPLANATORY NOTES 50 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
7. INVENTORIES
The composition and transactions in the balance of inventories are detailed below:
Parent Company and
Consolidated (a) Composition 2020 2019 Finished products 34,902 2,041
Products in progress 42,993 12,263
Inputs 135,451 96,670
Consumption and maintenance materials 386,799 304,348
Provision for obsolescence of materials (41,516) (32,282)
Advances to suppliers 14,919 64
Total 573,548 383,104
Current assets 285,879 14,367
Non-current 287,669 368,737
Total 573,548 383,104
Parent Company and
Consolidated (b) Transaction of finished products 2020 2019
Balance as of January 1 2,041 2,939
Additions 23,822 -
Sales write-offs (3,521) (1,416)
Addition due to inventory adjustment 121 990
Conversion 12,439 (472)
Balance as of December 31 34,902 2,041
Parent Company and
Consolidated (c) Transaction of the provision for inventory obsolescence 2020 2019
Balance as of January 1 (32,282) (6,169)
Additions (187) (26,477)
Write-backs 298 83
Conversion (9,345) 281
Balance as of December 31 (41,516) (32,282) MANAGEMENT’S EXPLANATORY NOTES 51 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
The Company evaluated its inventories as of for the use of its materials in the short and long December 31, 2020, and concluded that they do terms considering the partial return on transactions not exceed their realizable values. that were held in December 2020 (as disclosed in explanatory note 1). Additionally, the Company carried out an analysis
8. RECOVERABLE TAXES
The composition of the recoverable taxes balance is detailed below:
Parent company Consolidated Note 2020 2019 2020 2019
ICMS – Minas Gerais (MG) (a) 76,688 76,688 76,688 76,688
ICMS – Espírito Santo (ES) (b) 1,478,965 1,486,138 1,478,965 1,486,138
Provision for ICMS losses - ES (b) (1,478,965) (1,486,138) (1,478,965) (1,486,138)
PIS and COFINS (c) 1,636 2,305 1,636 2,305
Recoverable income tax (d) 36,841 1,902 36,841 1,902
IRRF on income from financial 24 22 24 22 investments
Others 1,420 1,881 1,431 1,882
Total 116,609 82,798 116,620 82,799
Current assets 39,866 6,055 39,877 6,056
Non-current 76,743 76,743 76,743 76,743
Total 116,609 82,798 116,620 82,799
(a) Refer mainly to credits on the acquisition of fixed (d) Recoverable income tax referring to overpaid assets. monthly estimates.
(b) These refer to credits on the acquisition of fixed assets, inputs, materials and others. Considering the 9. OTHER ACCOUNTS RECEIVABLE history of non-realization of ICMS credits with the State of Espírito Santo, the Company set up a 100% provision for losses on these credits as there is no At December 31, 2020, the amount of R$ 4,319 expectation of use. (R$ 14,662 as of December 31, 2019) in the Parent Company and in the Consolidated refers to the (c) The PIS and COFINS credits refer mainly receipt of indemnity related to the difference to the acquisition of materials, inputs, electric between the monthly contracted energy versus the power, and fixed assets. In 2020, only the credits consolidated measured energy, and to the sale of referring to the acquisitions of electric power were surplus electric power acquired for the production appropriated, considering that the return of the process but not used. operations occurred in December 2020. MANAGEMENT’S EXPLANATORY NOTES 52 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
10. OTHER ASSETS
Parent company Consolidated Note 2020 2019 2020 2019 Recoverable insurance 1,923 1,579 1,923 1,579
UHE Guilman-Amorim consortium (note 3,994 3,510 3,994 3,510 2.3(b) and note 21)
Advances to employees 4,509 5,229 4,509 5,229
Others 12 12 76 77
Current 10,438 10,330 10,502 10,395
COHESA (a) 17,275 17,275 17,275 17,275
(-) Present value adjustment COHESA (a) (3,749) (2,860) (3,749) (2,860)
Advances to employees 393 632 393 632
Other accounts receivable Ponta Ubu (b) 1,327 1,327 1,327 1,327 Agropecuária (note 30)
Others 42 42 42 42
Non-current 15,288 16,416 15,288 16,416
(a) The Company transfers funds to the Samarco 11. INVESTMENTS Employees’ Housing Cooperative - COHESA, through an agreement for the implementation of a housing plan signed on March 1, 1994, for financing The Company recorded negative equity accounting the acquisition of properties by employees, with of its subsidiaries of R$222 as of December 31, 2020 terms that vary from 8 to 25 years. The amounts (R$99 positive as of December 31, 2019). In 2020 and passed on will be received in their entirety when the 2019, the Company did not receive dividends from Samarco Housing Plan - PHS is closed, i.e. when the investments in subsidiaries. None of the investees financing is settled by the employees. The balances have their shares traded on a stock exchange. receivable from COHESA are adjusted to present value. The interest charged by COHESA is updated by the collective wage adjustment indexes exercised by the Company.
(b) The balances as of December 31, 2020 and 2019 worth R$ 1,327, refer to expenses under the responsibility of Ponta Ubu Agropecuária, which were disbursed by the Company. MANAGEMENT’S EXPLANATORY NOTES 53 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Number of Non- Costs Current Total Current Total Results for Shareholding shares or current Equity Revenue and assets assets liabilities liabilities the year quotas assets expenses
2020
Samarco Finance 100% 50,000 2,309 - 2,309 2,116 193 2,309 5 (45) (40) Ltd.
Samarco Iron Ore 100% 180 23,936 6,393 30,329 5,990 24,339 30,329 2,557 (2,739) (182) Europe B.V
Total 26,245 6,393 32,638 8,106 24,532 32,638 2,562 (2,784) (222)
2019
Samarco 100% 50,000 1,824 - 1,824 1,641 183 1,824 - (25) (25) Finance Ltd.
Samarco Iron Ore 100% 180 18,259 4,880 23,139 4,312 18,827 23,139 3,833 (3,709) 123 Europe B.V
Total 20,083 4,880 24,963 5,953 19,010 24,963 3,833 (3,734) 99
The transactions of investments in subsidiaries, presented in the individual financial statements of the parent company, are as follows:
Parent Company and
Consolidated 2020 2019
Balance as of January 1 19,010 18,136
Equity in earnings (equity accounting) (222) 99
Translation adjustments 5,744 775
Balance as of December 31 24,532 19,010
12. FIXED ASSETS
In 2020, as well as in 2019, the investments made corresponded to the Company’s current needs.
The composition of the balance of the fixed asset accounts is detailed below: MANAGEMENT’S EXPLANATORY NOTES 54 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent Consolidated company
Data Industrial processing facilities Pipeli- Assets Plant de- equip- Vessels Tools (buildings, ne and Right under Cost Land commis- -ment and and Vehi- and Mass Total Total machinery related of Use construc- -sioning Furniture cles Assets and equip- systems -tion and fixtu- -ment) res
Balance as of December 31, 239,176 16,782,178 9,239,884 43,852 272,340 569,669 334,055 - 155,423 27,636,577 27,635,041 2018
Additions (a) - - - - 6 - - 28,334 729,647 757,987 757,981
Evaluation of Plant Decom- (e) ------1,068,323 1,068,323 1,068,323 missioning Study
Transfers - (c) 39,203 8,851 2,037 1,068,323 4,596 718 578 - - 1,124,306 1,124,306 Incoming
Transfers - - (8) (647) - - - - - (1,123,553) (1,124,208) (1,124,208) Withdrawal
Write-off of property, plant (b) (2,625) (1,717) (49) - (1,603) (3,071) (16) (6,161) (1,265) (16,507) (16,507) and equipment cost
Effect of ex- change rate (d) 10,181 668,360 371,974 (17,673) 9,106 21,732 13,450 735 4,661 1,082,526 1,082,459 variations
Balance as of December 31, 285,935 17,457,664 9,613,199 1,094,502 284,445 589,048 348,067 22,908 833,236 30,529,004 30,527,395 2019
Additions (a) - - - - 6 - - 14,726 668,193 682,925 682,919
Provision Write-off (b) - 1,200 5,278 ------6,478 6,478 (CEMIG) Write- back
Evaluation of Plant Decom- (e) ------609,330 609,330 609,330 -missioning Study
Transfers - (c) 1,387 793,860 147,034 609,330 24,195 1,642 4,716 - - 1,582,164 1,582,164 Incoming
Transfers - - (560) ------(1,581,604) (1,582,164) (1,582,164) Withdrawal
Write-off of property, plant (b) - (2,393) (5,228) - (744) (114) (9) (18,317) (462) (27,267) (27,267) and equipment cost
Effect of ex- change rate (d) 83,823 5,191,054 2,805,882 (110,735) 83,474 170,681 102,150 124 27,703 8,354,156 8,353,654 variations
Balance as of December 31, 371,145 23,440,82512,566,165 1,593,097 391,376 761,257 454,924 19,441 556,396 40,154,626 40,152,509 2020 MANAGEMENT’S EXPLANATORY NOTES 55 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent Consolidated company
Accumulated Data pro- Industrial depreciation, -cessing facilities Pipeli- Assets impairment Plant de- equip- Vessels Tools (buildings, ne and Right of under and Land -commis- -ment and and Vehi- and Mass Total Total machinery relat-ed Use cons- exchange sion-ing Furni-ture -cles Assets and equip- systems truction and fixtu- rate variation -ment) res
Balance as of December - (5,053,903) (1,799,494) (33,478) (196,862) (298,237) (99,898) - - (7,481,872) (7,480,378) 31, 2018
Depreciation - (118,741) (6,220) (4,381) (15,921) (25,044) (9,022) (19,582) - (198,911) (198,877) in the period
Accumulated depreciation - 983 36 - 1,475 1,911 14 5276 - 9,695 9,695 write-off
Impairment - constitu- (f) (138,389) (4,716,094) (2,908,155) (949,696) (33,093) (114,476) (103,610) (6,222) (634,001) (9,603,736) (9,603,736) tion/write- back
Effect of ex- change rate (d) - (313,784) (75,522) 1,348 (15,123) (28,542) (11,468) (576) - (443,667) (443,593) variations
Balance as of December (138,389) (10,201,539) (4,789,355) (986,207) (259,524) (464,388) (223,984) (21,104)(634,001) (17,718,491) (17,716,889) 31, 2019
Depreciation - (140,141) (6,219) (29,226) (14,432) (27,270) (8,970) (20,357) - (246,615) (246,612) in the period
Provision Write-off (b) - (163) (856) ------(1,019) (1,019) (CEMIG) Write-back
Accumulated depreciation (b) - 994 1,108 - 691 105 7 18,317 - 21,222 21,222 write-off
Impairment - constitu- (f) 18,682 225,568 316,575 (259,159) (1,899) 33,637 17,582 4,705 293,191 648,882 648,882 tion/write- back
Effect of ex- change rate (d) - (1,752,893) (541,625) (14,909) (75,677) (133,923) (46,584) (353) - (2,565,964) (2,565,463) variations
Balance as of December (119,707) (11,868,174) (5,020,372) (1,289,501) (350,841) (591,839) (261,949) (18,792)(340,810) (19,861,985) (19,859,879) 31, 2020 MANAGEMENT’S EXPLANATORY NOTES 56 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent Consolidated com- pany
Balance Data pro- Industrial cessing facilities Pipeli- Plant Assets equip- Vessels Tools (buildings, ne and de-com- Right of under Land ment and and Vehi- and Mass Total Total machinery relat-ed -mis-sio- Use constru- Furniture -cles Assets and equip- systems ning c-tion and fixtu- -ment) res
Balance as of 147,546 7,256,125 4,823,844 108,295 24,921 124,660 124,083 1,804 199,235 12,810,513 12,810,506 Decem-ber 31, 2019
Balance as of 251,438 11,572,651 7,545,793 303,596 40,535 169,418 192,975 649 215,586 20,292,641 20,292,630 Decem-ber 31, 2020
(a) As of December 31, 2020, additions related to its operational process for handling tailings, so assets under construction resulted in an amount that it has implemented new technologies and of R$ 668,193 (R$ 729,647 in 2019). Of this total of procedures for the disposal of flotation sandy additions, it is worth highlighting the main project, tailings and sludge, seeking safer and space detailed below: optimizing solutions.
• R$ 281,808 - dewatering system for sandy The sandy tailings and sludge dewatering system tailings and sludge is intended to make the Germano Plant operation feasible for concentrators II and III. As described in explanatory note 1(b), as a result of the new legislation and aiming at greater safety The composition of the additions by nature is as when resuming operations, Samarco has adjusted follows:
Project Name Start date End date 2020 2019
Dewatering system for sandy tailings and sludge 2018 2021 281,808 70,994
Shaft Bus 1 2019 2021 66,946 385,280
Refurbishment and Acquisition of Components - 2020 2021 45,943 - Mine Fleet
Germano/Ubu Spare Parts 2014 2021 35,624 7,411
PCN - replacement of tailings in the pit 2016 2021 28,037 110,197
Hydric environmental conditioning 2018 2021 26,548 11,210
Structural recovery of Ubu 2018 2021 21,630 17,607
Adequacy of video monitoring of the port area 2020 2021 19,037 -
IT projects - Operational Readiness Hardware 2019 2021 10,249 5,477
Recovery structure 56RC00 2020 2021 7,783 - MANAGEMENT’S EXPLANATORY NOTES 57 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Structural recovery of Germano 2020 2021 6,549 -
Land 2018 2021 6,503 15,352
Adequacy of the Macacos dam and workshop 2018 2021 5,052 24,933
Water intake in Santarém 2020 2021 4,809 -
Capitalizable equipment - gmg 2020 2021 3,712 -
Alegria norte office and workshop relocation 2020 2021 3,619 -
Acquisition of refractory for furnaces 2020 2021 2,973 -
Customs System Adequacy 2020 2021 2,964 -
Breakwater structural recovery 2020 2021 2,590 -
Drainage of alegria norte basins 2020 2021 2,513 -
SDCI Centralization 2020 2021 2,512 -
Matipó dam adequacy 2018 2021 2,490 509
Concentrator 2 return 2018 2021 2,352 1,063
Atmospheric environmental conditioning - ubu 2020 2021 2,198 -
Recovery of pier piles 2020 2021 1,658 -
Capital expenditures - UHE Guilman Amorim 2016 - 726 937
North dam adaptation 2018 2021 4 230
Muniz Freire Dam 2018 2021 - 1,463
Protection of Samarco property exchange values 2018 2021 - 1,353
Others - - 71,364 75,631
Total 668,193 729,647
(b) Transfer, free of charge, of the property, plant presentation currency (Real). and equipment of the 230KV substation installed in the UHE Guilman Amorim hydroelectric plant (e) The evaluation study for decommissioning consortium. The assets were transferred to CEMIG the industrial plants was reviewed at the discount - Companhia Energética de Minas Gerais S.A. - as rate and resulted in an increase of approximately a result of a legal requirement. R$ 609,330 (1,068,323 in 2019), according to explanatory note 20. (c) The investments in fixed and intangible assets are recorded in assets under construction. Once these (f) The Company recognized, in the result for investments are concluded and start operating, the the year ended as of December 31, 2020, an assets are capitalized (transferred) to the respective impairment write-back of R$ 648,882 in the value accounts of fixed and intangible assets, according of its property, plant and equipment as detailed in to the accounting nature of each asset. explanatory note 12.1.
(d) The effect of changes in the exchange rate refers to the translation of the financial statements from the functional currency (US dollar) to the MANAGEMENT’S EXPLANATORY NOTES 58 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
12.1 IMPAIRMENT ANALYSIS assets in perfect operation and producing for long time until they effectively become obsolete or scrapped. Therefore there is no expectation of As of December 31, 2020, still due to the partial recovering values on the sale of fixed assets, or that stoppage of the Company’s operations, Samarco their residual values will approach zero. identified indicators that certain property, plant and equipment may be recorded at amounts above their recoverable value and carried out an 12.3 ASSETS IN GUARANTEE impairment test.
As of December 31, 2020 the Company had The evaluation of the recoverable value of the collateral for legal proceedings. These assets assets was based on projected cash flows with are recorded as property, plant and equipment the revised mine plan, considering the Company and comprise machinery and equipment, land as a single cash generating unit (CGU). To make and related systems, whose net book value is the cash flow projections, the following were R$ 2,331,821 (R$ 2,347,362 in 2019). The value considered: (i) estimated service life of Samarco’s is composed of the acquisition cost of the asset mines; (ii) assumptions and budgets approved minus depreciation and does not include the result by the Company’s Management for the period of impairment. corresponding to the estimated service life; (iii) discount rate derived from the weighted average cost of capital (WACC) calculation method; (iv) 12.4 SERVICE LIFE market projections regarding exchange rates (Real/US Dollar) ;(v) market projections regarding In compliance with technical pronouncement the iron ore pellet price quotation (BF and DR). To CPC 27 - Fixed Assets, the Company concluded calculate the impairment, the amounts recorded in during 2020 that the residual service lives of its fixed and intangible assets were considered. industrial complex were normal, since there were no changes in the expected use of the asset, which is evaluated based on its capacity or expected The main assumptions used in the cash flow physical production. Therefore, there were no projections to determine the value in use of the changes in the use patterns of Samarco’s property, CGU were: WACC of 9.14% (10.9% in 2019); average plant and equipment in 2020, i.e., their service exchange rate for 2021 of R$ 5.27 (R$ 3.94 in 2020); lives are compatible with the expected benefit of average pellet price BF and DR, according to Platts its industrial complex. index and pellet premium projected by market analysts and international sea freight references. Please find below a summary of the description of the accounts that make up the fixed assets, as well as the service life by accounting nature of the Due mainly to the revised projections for expenses assets, used to calculate depreciation, based on and long-term investment, the Company the produced units method for the items directly recognized in the result for the year ended as related to the respective productive areas and the of December 31, 2020 an impairment write- straight-line depreciation method for the others: back of R$ 664,993 (R$ 648,882 in property, plant and equipment and R$ 16,111 in intangible assets) that was recognized in the result of the financial statements. The remaining impairment of R$ 9,040,117 continues to be monitored by the Company and will be reversed as soon as the future projections make possible.
12.2 RESIDUAL VALUE
The company adopts the policy of extending the service life of its assets as much as possible, by carrying out preventive and corrective maintenance. These policies allow it to keep its MANAGEMENT’S EXPLANATORY NOTES 59 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
2020 2019
Weighted Weighted Years of Description of average Years of average Item deprecia- accounts service life deprecia-tion service life in tion in years years
Buildings Buildings, sheds, gate 28 10 a 50 29 10 a 50 houses, paving, and civil works improvements.
Machinery and Furnace, pelletizing 17 10 a 50 17 10 a 50 equipment disks, ship loader, loaders, precipitators, ball mills, grate cars, among others.
Pipeline and related Piping for ore 15 20 a 43 15 20 a 43 systems transportation and industrial facilities, such as belt conveyors, cabling among others.
Plant decommis- Environmental 37 43 37 43 sioning obligations for discontinuing the Germano and Ubu pipeline and industrial facilities.
Data processing Microcomputers, 4 5 4 5 equipment printers, monitors, note- books, servers, optical interfaces, collec-tors, switch, hub, patch panel, racks, etc.
Furniture and fixtures Chairs, tables, cabinets, 5 10 5 10 and other related furniture.
Vessels Boats, rafts, speedboats 17 9 a 24 15 9 a 24 and dredges.
Vehicles Cars, trucks, forklifts, 7 4 a 25 8 4 a 25 cranes, tractors, load- ers.
Tools Impact wrenches, 7 10 a 25 7 10 a 25 multimeters, tachyme- ters, microscopes, and other small appliances.
Rotation assets Parts and pieces of 19 10 a 27 20 10 a 27 machinery and equip- ment and industrial plants.
Bulk assets Circuit breakers, 14 5 a 24 15 5 a 24 capacitors, hydraulic pumps, and other small assets. MANAGEMENT’S EXPLANATORY NOTES 60 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
12.5 RIGHT-OF-USE ASSETS As of 2019, with the implementation of CPC 06(R2) - Leases, the Company started to recognize right- As described in the explanatory note 2.20, the of-use assets, i.e. these leases started to constitute various assets such as: real estate, vehicles, the property, plant and equipment group in the production equipment and IT equipment, were balance sheet. previously classified as either operating or financial, based on their assessment of whether the lease significantly transferred all the risks and benefits 13. INTANGIBLE inherent in ownership of the underlying asset to the Group. The composition of intangible assets is detailed below:
Parent Consolidated company
345KV LT Software Assets Basic Ne- Rights of Mining Other Barren Appli- under twork Con- Total Total Way Rights Rights Removal cation construc- nection-Use Systems tion Rights Cost
Balance as of 32,897 49,008 2,232 29,910 153,581 194,364 3 461,995 461,986 December 31, 2018
Additions (a) ------4,036 4,036 4,036
Transfers - Incoming 346 - - - - 3,522 - 3,868 3,868
Transfers - With- (100) - - - - - (3,868) (3,968) (3,968) drawal
Effect of exchange (b) 1,347 1,972 90 1,204 6,180 8,083 4,461 23,337 23,337 rate variations
Balance as of 34,490 50,980 2,322 31,114 159,761 205,969 4,632 489,268 489,259 December 31, 2019
Additions (a) ------6,313 6,313 6,313
Transfers - Incoming 84 - - - - 5,110 - 5,194 5,194
Transfers - With------(5,194) (5,194) (5,194) drawal
Write-off of intan------(83) - (83) (83) gible cost
Effect of exchange (b) 9,975 14,750 671 9,002 46,222 60,183 263 141,066 141,062 rate variations
Balance as of 44,549 65,730 2,993 40,116 205,983 271,179 6,014 636,564 636,551 December 31, 2020 MANAGEMENT’S EXPLANATORY NOTES 61 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent Consolidated company
345KV LT Software Assets Basic Ne- Rights of Mining Other Barren Appli- under twork Con- Total Total Way Rights Rights Removal cation construc- nection-Use Amortization Systems tion Rights
Balance as of (12,223) (34,300) (2,232) (13,495) - (168,219) - (230,469) (230,460) December 31, 2018
Amortization for the (c) (296) (163) - (1,560) - (8,403) - (10,422) (10,422) period
Impairment - (d) (7,663) (4,313) - (8,062) (66,831) (10,981) (3,524) (101,374) (101,374) constitution/write- back
Effect of exchange (b) (853) (1,662) (90) (1,654) - (11,156) - (15,415) (15,415) rate variations
Balance as of (21,035) (40,438) (2,322) (24,771) (66,831) (198,759) (3,524) (357,680) (357,671) December 31, 2019
Amortization for the (c) (296) (163) - (627) (19) (6,176) - (7,281) (7,281) period
Accumulated - - - - - 50 - 50 50 amortization write-off
Impairment - (d) 1,043 618 - 1,381 7,817 2,052 3,200 16,111 16,111 constitution/write- back
Effect of exchange (b) (4,419) (10,862) (671) (5,592) (28) (58,887) - (80,459) (80,455) rate variations
Balance as of (24,707) (50,845) (2,993) (29,609) (59,061) (261,720) (324) (429,259) (429,246) December 31, 2020
Parent Consolidated company
345KV LT Assets Basic Ne- Software Rights of Mining Other Barren under twork Con- Application Total Total Way Rights Rights Removal construc- nection-Use Systems Balance tion Rights
Balance as of 13,455 10,542 6,343 92,930 7,210 1,108 131,588 131,588 December 31, 2019 -
Balance as of 19,842 14,885 - 10,507 146,922 9,459 5,690 207,305 207,305 December 31, 2020 MANAGEMENT’S EXPLANATORY NOTES 62 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(a) The investments and the expenses related to accounts of intangible assets, according to the intangible assets are registered in the assets under accounting nature of each asset. construction item in the fixed assets. Once these investments are concluded and start operating, the The composition of the additions by nature is as assets are capitalized (transferred) to the respective follows:
Start Project Name End date 2020 2019 date
Mine planning software 2018 2020 1,699 1,717
Update of critical network assets 2020 2021 1,178 -
Update of telephone services 2020 2021 899 -
Geotechnical expert software 2020 2021 827 -
IT projects - operational readiness software 2019 2020 - 1,258
IT management systems - software/licensing acquisitions 2013 2019 - 715
Regularization of real estate compliance 2019 2019 - 346
Others 710 -
Total 6,313 4,036
(b) The effect of changes in the exchange rate (d) The Company recognized, in the year ended as refers to the translation of the financial statements of December 31, 2020, an impairment write-back from the functional currency (US dollar) to the of R$ 16,111 in the value of its intangible assets as presentation currency (Real). detailed in explanatory note 12.1.
(c) For the rights of way and mining rights, the 13.1 SERVICE LIFE amortization of intangible assets is calculated according to the expected service life of the iron Please find below a summary description of the ore mines owned by the Company. For the others, accounts that compose the intangible assets, as the straight-line method is applied. well as the service life by accounting kind:
2020 2019
Weighted Years of Weighted av- average Years of de- Item Description of accounts deprecia- erage service service life in preciation tion life in years years
Rights of way Rights acquired for the use of 31 43 33 43 the strip of land easement for the passage of pipelines.
Mining Rights Mining rights for exploration of 33 43 34 43 iron ore deposits.
Barren Removal Cost of barren removal, incurred 21 25 21 25 in a strip mine during the production phase of the mine.
345KV LT basic 345KV LT basic network 24 25 25 25 network right connection-use rights
Software Software and licenses. 4 5 4 5 application systems MANAGEMENT’S EXPLANATORY NOTES 63 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
13.2 RESEARCH AND DEVELOPMENT to R$23,538 (R$19,602 in 2019); these were recognized as other net operating expenses in The Company made disbursements related to 2020 as per explanatory note 26. research and development expenses amounting
14. SUPPLIERS
Parent company Consolidated 2020 2019 2020 2019
Domestic market 245,189 250,578 245,206 250,595 Foreign market 13,132 1,164 13,167 1,204 Related parties (note 30) - 323 - 323 258,321 252,065 258,373 252,122
15. LOANS AND FINANCING
Loans and financing are tools used to finance the of these defaults, all loans and financing were Company’s projects and other needs. reclassified to short-term, reflecting an increase in interest. With the stoppage of its operational activities, the Company did not meet certain obligations in its loan and funds agreements. As a consequence
Parent Company and Consolidated Loans and Financing 2020 2019
Operations Abroad Bonds 11,403,067 8,837,406 EPPs (export revenue) 8,292,976 6,432,040
BNDES FINAME 139,323 139,323 Petrobrás Loan 5,883 6,249 Operations in the country DEBENTURES (note 30) 8,472,544 4,818,120
Total 28,313,792 20,233,138 Current 28,313,792 20,233,138
In 2020, the Company contracted loans with its All the issuances that expired in 2020 were shareholders Vale and BHP Billiton Brasil through renegotiated and had their validations extended. the issue of simple, non-convertible debentures. The Vale and BHP Billiton Brasil issuances have identical As of December 31, 2020, the provision for interest conditions regarding amount, term, and interest on foreign currency loans and financing, which (LIBOR plus 1.15% per year). represented 73.5% of total loans and financing (75.5% as of December 31, 2019), was as follows: MANAGEMENT’S EXPLANATORY NOTES 64 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent Company and Consolidated Finance charges payable - foreign currency 2020 2019 USD Principal Accrued Principal Accrued Interest rate (per year) amount interest amount interest
2% to 3% 2,525,305 478,672 1,958,629 291,067 3% to 4% 5,767,671 1,126,147 4,473,411 623,055 Above 4% 11,403,067 2,981,745 8,837,406 1,771,720 19,696,043 4,586,564 15,269,446 2,685,842
As of December 31, 2020, interest on local currency loans and financing, which represented 26.5% (24.5% as of December 31, 2019) of total loans and financing, was as follows:
Parent Company and Consolidated 2020 2019 Finance charges payable - local currency BRL Principal Accrued Principal Accrued Interest rate (per year) amount interest amount interest
2% to 3% 8,611,867 174,734 - - 3% to 4% - - 4,719,632 134,829 Above 4% 5,883 6,161 244,060 11,037 8,617,749 180,895 4,963,692 145,866
Debenture issues in local currency have interest rates pegged to Libor.
The average cost of debt in 2020 in foreign currency was 4.3% p.y. and in local currency was 2.3% p.y. In 2019 the average cost of debt in foreign currency and local currency was 3.7% p.y. and 4.3% p.y, respectively.
In 2020, the transaction in loans and financing and financial charges payable is represented as shown in the table below:
Parent Company and Consolidated 2020 2019
Loans and financing, financial charges payable as of January 1 23,064,846 20,374,555 Addition of Financing Raising 2,987,545 1,027,139 Payment of loans and financing (366) (632) Addition of financial charges 1,361,470 1,023,697
Payment of financial charges (831) (949)
Net exchange variation 5,668,127 639,331 Amortized cost 460 1,705 Loans and financing, financial charges payable as of December 31 33,081,251 23,064,846 MANAGEMENT’S EXPLANATORY NOTES 65 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(A) GUARANTEES AND OBLIGATIONS OF phase. LOANS AND FINANCING The Plaintiffs have appealed against this Due to the non-operational situation of the extinguishment decision. This appeal was also Company, since the collapse of the Fundão dam, rejected in March 2021. some covenants present in its loans and financing The decision that rejects the appeal can be appealed contracts have not been met, such as the debt to to the Supreme Court until June 2, 2021. equity ratio (Net Debt/EBITDA limited to 4:1). Also, the Company failed to pay principal and interest on Samarco accompanies the eventual interposition of loans due in the year. the appeal.
For the calculation of the Net Debt/EBITDA ratio, the If the extinguishment decision is reversed, the case Company uses an adjusted EBITDA as the basis for will return to the filing of supporting documents calculating the financial covenants, which is in line phase to determine the amount of damages with the definitions included in the various contracts claimed. in force with the creditors. For this criterion, non- cash extraordinary gains and losses, such as Given the preliminary stage of this lawsuit, it is not provisions, are excluded to reflect in the EBITDA possible at this time to provide possible results or the expectation of cash generation, thus evaluating a reliable estimate of Samarco’s potential future the Company’s financial solidity and liquidity and its exposure. ability to pay all the debt in a certain time. On September 2, 2020, the Bank of New York Mellon, The Company hired J.P. Morgan to act as financial Trustee of creditors, commenced three actions in advisor in the renegotiation of its debt. In order to the New York State Supreme Court, Commercial aims at allowing the renegotiation of debt , in order Division seeking payment from Samarco of amounts to adapt it to Company’s new situation, on April 9, due on three global notes totaling approximately R$ 2021, Samarco filed a pleading for Judicial Recovery 15,2 billion ( US$ 2.7 billion). as described in explanatory note 33. All three actions were removed to the Federal Court in the Southern District of New York and, besides (B) CLASS ACTION COMPLAINT granting a request for an extension of time, the Court provided the opportunity for them to file pre- On November 14, 2016, a putative class action was motion letters with the main arguments of their filed in the United States District Court - Southern claims. Samarco informed that it would seek the District of New York - on behalf of all bond notes dismissal/suspension of the case and the Plaintiff purchasers, papers that were purchased between informed that it would seek a search and seizure of October 31, 2012 and November 30, 2015, and assets before the end of the case. maturing in ten years (2022, 2023 and 2024), against Samarco and its former CEO. The complaint The Court allowed the filing of both Samarco’s contains claims under US federal securities laws and the Plaintiff’s motion and set a schedule for and indicates that the plaintiff will seek US court the parties to manifest themselves as of October approval to proceed with a class action. 30, 2020. Both Samarco and the Bank of New York Mellon presented their reasons within the On March 6, 2017, this putative class action was established deadlines, and the Plaintiff also amended to include BHP Group Ltd, BHP Group Plc, requested the designation of a hearing and bearing BHP Billiton Brasil Ltda., and Vale S.A. and executives of a Samarco’s representative. of Samarco, including four members of its Board of Directors, which is composed of representatives This lawsuit is classified as a possible loss, according of Vale and BHP Billiton Brasil. On April 5, 2017, to explanatory note 19. Safra filed a motion to dismiss the lawsuit against the individuals, only maintaining the corporations (Samarco, Vale, and BHP Billiton Brasil).
As of August 31, 2017, the “Motion to Dismiss the Amended Complaint” prepared jointly by Samarco, Vale and BHP Billiton Brasil was filed. In June 2019 Samarco’s preliminary defense was accepted 16. judging the action extinguished in its preliminary MANAGEMENT’S EXPLANATORY NOTES 66 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
16. EMPLOYEE BENEFITS (a) Defined contribution retirement plan To fund the plan, ordinary contributions are made in an amount equal to that of the participant, limited 16.1 RETIREMENT BENEFITS to 9% on the portion of the participation salary exceeding 10 reference units of the plan, and also The company sponsors Fundação Vale do Rio contributions to guarantee the risk benefits (disability Doce de Seguridade Social (ValiaPrev), a multi- and death in activity and annual bonus) and for the sponsored, multi-plan entity that manages benefit administrative cost of the plan. plans with asset independence and provides participants and their dependents with benefits that In 2020, the Company made contributions to the are supplementary or similar to those of the Basic defined contribution plan in the amount of R$ 7,132 Official Pension Plan. The plan offered is a defined (R$ 5,118 in 2019). contribution one and encompasses the following benefits: (b) Defined benefit portion of the pension plan
• Normal retirement income The costs and obligations related to the retirement • Anticipated retirement income benefits offered to its employees upon retirement are recorded based on a specific actuarial appraisal • Supplementation of invalid pension report. • Supplementation of surviving spouse pension The actuarial appraisal report calculated the • Income of surviving spouse pension retirement benefits considering the definitions in the • Income of deferred benefit due to dismissal regulations, regarding eligibilities, benefit formulas and forms of readjustment. • Supplementation of annual bonus The actuarial appraisal report evaluated the • Income of annual bonus defined benefit portion, existing in the plan, which • Redemption represents the constructive obligation referring to supplementary retirement due to permanent disability, surviving spouse pension and annual bonus, called Risk Plan, and the retirement income.
1 – CHANGE IN CURRENT VALUE OF OBLIGATION
2020 2019
Present value of the actuarial obligation at the beginning of the year 64,195 45,127 Cost of current service 737 427 Interest cost on present value of actuarial obligation 4,646 4,028 Actuarial (Gains)/Losses - Experience 3,565 7,219
Actuarial (Gains)/Losses - Demographic assumptions - -
Actuarial (Gains)/Losses - Financial assumptions (1,206) 11,082 Benefits paid by the plan (3,900) (3,688) Past service cost - plan shortening - - Present value of the actuarial obligation at the end of the year 68,037 64,195 MANAGEMENT’S EXPLANATORY NOTES 67 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
2 – CHANGE IN FAIR VALUE OF ASSETS
2020 2019
Fair value of assets at the beginning of the year 99,635 86,553 Actual return on investments 3,424 16,480 Contributions paid by the Company 336 291 Benefits paid by the plan (3,900) (3,688)
Fair value of assets at the end of the year 99,495 99,635
3 – CHANGE IN UNRECOVERABLE SURPLUS
2020 2019
Unrecoverable Surplus at the End of the Previous Year 35,441 41,426 Interest on unrecoverable surplus 2,640 3,832 Change in unrecoverable surplus during the period (6,624) (9,817)
Unrecoverable Surplus at the End of the Current Year 31,457 35,441
4 – DEFINED BENEFIT COSTS
4.1 - Results for the year 2020 2019
Cost of the Company’s current service 737 427 Net interest on net liabilities/(assets) (13) (15)
Cost of defined benefit in the result 724 412
4,2 - Other Comprehensive Results (OCR) 2020 2019
Actuarial (Gains)/Losses on Liability Development 3,565 7,219 Actuarial (Gains)/Losses on changes in assumptions (1,206) 11,082
Actuarial (Gains)/Losses arising in the period 2,359 18,301
Income in plan assets (greater)/less than discount rate 3,877 (8,606)
Change in unrecoverable surplus (6,624) (9,816)
Remeasurement of effects on other comprehensive income (388) (121) MANAGEMENT’S EXPLANATORY NOTES 68 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
4.3 - Defined benefit cost 2020 2019
Cost of current service 737 427
Net interest on net liabilities/(assets) value (13) (15)
Remuneration of the effects recognized in OCR (388) (121)
Defined benefit cost 336 291
5 – TRANSACTIONS IN NET LIABILITIES/ASSETS
5.1 - Net (liabilities)/assets 2020 2019
Present value of the obligation (PVO) (68,037) (64,195) Fair value of assets 99,495 99,636
Total net (liability) 31,458 35,441
5.2 - Reconciliation of total net (liabilities)/assets 2020 2019
(Liabilities)/total net assets at the beginning of the year - -
Service Cost (737) (427)
Net interest on net liabilities/(assets) value 13 15
Remuneration of the effects recognized in OCR 388 121
Contributions paid by the Company 336 291
(Liabilities)/total net assets at the end of the year - -
6 – ESTIMATED COST OF BENEFIT DEFINED FOR 2020
Cost of current service 818 Net interest on net liabilities (assets) - Cost to be touted in the result 818
7 – EXPECTED CASH FLOW FOR 2020
Company Contributions - Benefits paid by the plan 3,972 MANAGEMENT’S EXPLANATORY NOTES 69 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
8–ACTUARIAL ASSUMPTIONS 2020 2019
Economic Discount rate 7.04% per year 5.25% per year
Wage growth rate 5.32% per year 6.080% per year
Inflation 3.25% 4.00% per year
Benefit growth 3.80% per year 4.00% per year
Return on long-term assets 7.04% per year 9.25% per year
Demographic
Mortality table AT-2000 (H) AT-2000 (H)
Mortality table for disabilities CSO-1980 CSO-1980
Entrance table for disabilities RGPS 1992-2002 RGPS 1992-2002 55% 55% Turnover table 0% to 55 years old 0% to 55 years old % of active participants who were married at retirement date 100% 100%
Age difference between participant and spouse Wives are 5 years Wives are 5 years younger than younger than husbands husbands
2020 2019 Sensitivity Sensitivity 8.1 Sensitivity analysis VPO VPO analysis analysis Discount rate 1% increase 60,879 0.5% increase 60,597
Discount rate 1% decrease 76,749 0.5% decrease 68,166
9 - SUMMARY OF THE PARTICIPANTS’ DATA 2020 2019
Active and self-sponsored employees Number 1,381 1,328
Average age 41.58 40.84
Average time of employement (years) 11.72 11.45 Average annual salary 94,369 86,929
Participants with assisted benefits
Number 131 123
Average annual salary 31,670 30,913 MANAGEMENT’S EXPLANATORY NOTES 70 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
10 - THE PLAN ASSETS ARE MANAGED AS FOLLOWS:
Active per category 2020 2019 Fixed Income 719,621 659,271
Variable income 150,373 131,068
Structured Investments 88,059 83,668 Foreign Investments 736 -
Loans 23,547 20,085
982,336 894,092
16.2 OTHER EMPLOYEE BENEFITS plan provides the beneficiaries with health care services in outpatient, hospital, dental, The Company also offers other benefits to and pharmacy procedures, and is assured by a employees, such as a self-managed and co- Collective Bargaining Agreement and for which payment health care plan (referring to expenses the Company assumes the entire administrative incurred), which extends to dependents of fee. The expenses with other benefits were employees, called Supplemental Health Care recognized in the income as follows: (Assistência Médica Supletiva - AMS). This
Parent company Consolidated 2020 2019 2020 2019
Remuneration and charges (171,658) (155,378) (172,958) (157,896) Social security charges (40,353) (35,801) (40,353) (35,801) Retirement plan benefits (7,899) (5,772) (7,899) (5,786) Meal vouchers (15,249) (12,064) (15,249) (12,064) Health care (12,235) (11,331) (12,235) (11,332) Others (19,226) (14,706) (19,385) (14,809)
(266,619) (235,052) (268,079) (237,688)
17. SALARIES, PROVISIONS AND SOCIAL CONTRIBUTIONS
The balance of salaries, provisions and contributions is detailed below:
Parent company Consolidated 2020 2019 2020 2019
Vacation provision 22,769 18,494 22,896 18,541 Employees’ Social Security 3,790 3,732 3,790 3,732 FGTS payable 1,544 1,480 1,544 1,480 Others 1,243 935 1,246 939 Total 29,346 24,641 29,476 24,692 MANAGEMENT’S EXPLANATORY NOTES 71 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
18. TAX PAYABLE
The balance of tax payable is detailed below:
Parent company Consolidated Note 2020 2019 2020 2019
ICMS to be collected 3,332 4 3,332 4
DIFAL of ICMS to be collected 1,137 531 1,137 531
REFIS - Tax Recovery - taxes in (a) 129,336 143,985 129,336 143,985 installments
Withholding income tax on interest - (b) 495,729 295,532 495,729 295,532 remittance abroad
Withholding income tax to be collected 4,322 4,421 4,322 4,421
Withheld ISS 3,872 2,773 3,872 2,773
DIFAL of Social Security to be collected 3,916 2,198 3,916 2,198
IPTU Anchieta installment plan (c) - 39,885 - 39,885
PIS/COFINS on financial income 92 4,858 92 4,858
Taxes on nationalization of inputs (d) - 78,415 - 78,415
Others 2,753 6,432 2,753 6,429
Total 644,489 579,034 644,489 579,031
Current Liabilities 532,347 451,911 532,347 451,908
Non-Current Liabilities 112,142 127,123 112,142 127,123
Total 644,489 579,034 644,489 579,031
(a) As of December 20, 2013, Samarco joined the Europe related to the intermediation of iron ore REFIS IV installment payment program, pursuant to sales. Law 12,865/13. The first installment was paid upon adhesion. As of December 31, 2020, the amount of R$ (ii) the provision for interest on loans and 112,142 (R$ 127,123 as of December 31, 2019) refers financing in the country. to the long-term installments, updated by SELIC. The short-term installments totaled R$ 17,194 (R$ (c) The mutual interest between Samarco and 16,862 as of December 31, 2019). The consolidation the Municipality of Anchieta in putting an end of debts was carried out with the Brazilian Federal to disputes regarding IPTU (property tax) on the Revenue Service (“other debts” modality with 90 Company’s properties in this municipality led to a installments payable as of December 31, 2020 tax transaction between the parties in June 2019. and “social security” modality with 92 installments After the transaction, duly instructed by a technical payable as of December 31, 2020) and the Office report, it was decided that the territorial extension of Attorney-General of the National Treasury (“other subject to taxation, which corresponds to the debts” modality with 88 installments as of December industrial expansion area, would be 133 ha. All 31, 2020), in September 2017 and February 2018, amounts were paid up to February 2020. respectively, keeping the Company regularly active under this installment plan. (d) Taxes payable related to the nationalization of inputs imported by the Company under the (b) Basically refers to the provision for taxes levied customs regime, which were not consumed due on: to the stoppage of operations after the collapse of the Fundão dam. All amounts were settled by (i) services rendered by the subsidiary Samarco 05/29/2020. MANAGEMENT’S EXPLANATORY NOTES 72 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
19. PROVISIONS FOR contingencies in an amount assessed sufficient to CONTINGENCIES cover the losses considered probable. In 2020, the provisions for probable contingencies The Company is a party to lawsuits and administrative are presented net of the corresponding court proceedings before courts and government deposits in the amount of R$ 132,726 (R$ 127,320 agencies, arising from the normal course of its in 2019). The balance of court deposits without operations, mainly involving tax, civil, labor and related provisions is recorded in the assets as the environmental issues. The Management, based amount of R$ 1,946.192 (R$ 1,906.183 in 2019) and on the information and assessments from its legal its composition is detailed below: advisors, internal and external, set up provisions for Parent Company and Consolidated 2020 2019
Tax court deposits 1,586,696 1,555,188 Civil court deposits 346,186 336,941 Labor court deposits 9,633 10,385 Environmental court deposits 3,677 3,669 1,946,192 1,906,183
The transaction to the Company’s provisions for probable contingencies is as follows.
Parent Company and Consolidated 2018 Additions Write-backs Charges 2019
Tax claims 86,612 62,138 (4,359) 2,013 146,404 ( - ) Tax court deposits (72,431) (2,248) - (3,132) (77,811) Civil claims 54,205 - (35,110) (12,003) 7,092 ( - ) Civil court deposits (114) - 9 - (105) Labor claims 54,390 7,863 - - 62,253 ( - ) Labor court deposits (11,368) (1,125) 3,219 (1,508) (10,782) Environmental claims 2,232 - (1,482) (481) 269
113,526 66,628 (37,723) (15,111) 127,320
Parent Company and Consolidated Write- 2019 Additions Charges 2020 backs Tax claims 146,404 513 - 1,339 148,256 ( - ) Tax court deposits (77,811) - (849) (78,660) Civil claims 7,092 6,361 (438) 802 13,817 ( - ) Civil court deposits (105) (2,252) - (58) (2,415) Labor claims 62,253 12,592 (20,198) 13,382 68,029 ( - ) Labor court deposits (10,782) (3,032) 2,360 (5,145) (16,599) Environmental claims 269 - - 29 298
127,320 14,182 (18,276) 9,500 132,726 MANAGEMENT’S EXPLANATORY NOTES 73 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
The provisions composition occurs according to the following table:
Parent Company and Consolidated 2020 2019 Court Court de- Provision Net Provision Net deposits posits ECE - ES (a.1) 42,465 (41,531) 934 41,995 (41,995) -
ECE - MG (a.1) 33,934 (33,934) - 33,567 (33,567) -
Attorneys’ fees (a.2) 4,578 - 4,578 4,578 - 4,578
Others 67,279 (3,195) 64,084 66,264 (2,249) 64,015
Tax Claims 148,256 (78,660) 69,596 146,404 (77,811) 68,593
Civil claims (a.3) 13,817 (2,415) 11,402 7,092 (105) 6,987
Labor claims 68,029 (16,599) 51,430 62,253 (10,782) 51,471
Environmental claims 298 - 298 269 - 269
230,400 (97,674) 132,726 216,018 (88,698) 127,320
(a) Provisions recognized by the Company for litigation: Parent Company and Consolidated
Note Description Position 2020 2019
(a.1) Litigation proceedings seeking the declara- ES – Proceedings in the liquidation tion of unconstitutionality and illegality of the phase with partially favorable requirement for charges and the purchase of decision to Samarco. emergency electric power, due to technical flaws 76,399 75,562 as per the institution of these exceptions. MG – proceedings pending decision by the Superior Courts.
(a.2) Provision related to attorneys’ fees regarding - 4,578 4,578 proceedings that are classified as remote loss.
(a.3) Provision set up to cover potential losses from Proceedings in the court scope, in 13,817 7,092 civil proceedings. several procedural stages.
(a.4) Proceedings related to the payment of profit Proceedings pending closing at the - sharing distribution (PLR) for managerial positions. administrative level. 11,828
(a.5) Proceedings related to the former Guilman Proceedings awaiting analysis of the Amorim Hydroelectric Power Plant, dissolved by Writ of Mandamus at the second spin-off and subsequent merger, referring to the instance court 195 - inclusion in the COFINS calculation base of lease revenue.
Others Provision set to cover potential losses from tax Proceedings in the administrative proceedings and court scope, in several 55,256 66,264 procedural stages.
Labor Labor proceedings related, above all, to the Proceedings in the administrative application of fines by the control bodies, besides and court scope, in several 68,029 62,253 labor claims filed by the company employees and procedural stages. third parties.
Environmental Provision set up to cover potential losses from Proceedings in the administrative environmental proceedings and court scope, in several 298 269 procedural stages.
230,400 216,018 MANAGEMENT’S EXPLANATORY NOTES 74 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(b) Possible contingencies:
The Company is a party to other proceedings for which the Management, based on the assessment of its legal advisors, internal and external, did not set up a provision for contingencies, since the loss expectations were considered possible, the main being:
Description Position 2020 2019
Tax Assessment Notices referring to the The collections of 2007/2008 and 2009/2010 alleged lack of payment of the “CSLL” in the CSLL, as well as an isolated fine for the calendar years 2007 to 2014 and a writ of 2007/2008 period, are subject to suspension mandamus involving the period from 2013 due to a preliminary court decision. The onwards. 2011/2012 CSLL requirement is suspended at the administrative level awaiting analysis of leading cases by the Supreme Court. Pending 5,861,459 5,771,753 appreciation regarding the isolated fine in the last administrative instance. For the period from 2013 onwards, Samarco has a writ of mandamus with a favorable decision in the first and second instances, considering the unconstitutionality of the CSLL collection vis- à-vis the Company.
Tax Foreclosure for the years 2000 to 2003, Proceedings related to the period from 2000 2007 to 2008 and Tax Assessment Notices to 2003 and 2007 to 2008 subject to collection for the periods from 2009 to 2014 for in the court sphere with full guarantee of the allegedly incorrect calculation of the IRPJ debt. 2009 and 2010 period with partially due to the application of the 18% rate on favorable decision at the first instance court the profit from the export of minerals and pending analysis at the second instance. In 4,539,459 4,480,468 discussion to respect of the deductibility of relation to the period from 2011 to 2014, in the acquisition cost of mining rights. February of 2021 a favorable decision for the Company was issued in the first instance, pending review of the appeal by the Federal Government.
Tax Assessment Notices drawn up Charges for the period from 1991 to 2017. by the National Mining Agency for Regarding tax foreclosures that charge debts alleged underpayment of the Financial for the period from 1991 to 2005, the statutory Compensation for the Exploitation of Mineral limitation for the period from Jan/91 to Sep/98 Resources (CFEM). was recognized. The remaining period from Oct/98 to Dec/2005 is pending judgment 1,667,509 1,640,765 at the first instance court. The collection for the period from 2008 and 2009 is still under review of the appeal at the administrative level. The collection for the period from 2010 to 2017 is pending analysis of administrative challenges by ANM.
Tax Foreclosures related to the PIS 1 case pending decision at the first instance contribution calculation basis for the periods court and 1 case pending review at the second 22,942 22,805 from September 1989 to December 1993. instance court.
Tax Assessment Notices relating to the Awaiting analysis of administrative appeals. requirement for social security contributions on payments made to its insured employees as a “Campo de Ideias” Premium, among other matters, such as (i) social contributions 5,824 allegedly due to the National Development 4,623 Fund, levied on the aforementioned payments; (ii) fine for failing to collect social contributions; and (iii) fine for lack of information in the GFIPs.
Disallowance of PIS and COFINS credits from Proceedings awaiting analysis of administrative April 2006 to December 2007 and 2008 to appeals. 2010 with IRPJ debts of monthly estimate calculated in the same period, delivering 316,040 310,429 the PER/DCOMPs individualized by quarter and source of credits (credits from PIS and COFINS). MANAGEMENT’S EXPLANATORY NOTES 75 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Assessment regarding the collection of ICMS in the electric power transfer operations A favorable decision was issued in the first of the SHP Muniz Freire, owned by the instance, awaiting judgment by the State of 24,145 36,188 Company, for consumption at its industrial Espírito Santo at the second instance. establishment in Ponta Ubu, Anchieta/ES.
Civil Proceedings related mainly to indemnities to third parties. According to Proceedings in the court sphere in several the opinion of the Company’s legal advisors, 1,772,294 1,475,385 procedural stages. the likelihood of loss in these disputes is possible.
Related labor proceedings, the application of fines by the control bodies, besides labor Proceedings in the court sphere in several 653,074 606,489 claims filed by the company employees and procedural stages. third parties.
Proceedings involving environmental risks referring to the States of Minas Gerais and Proceedings in the court sphere in several 1,739,572 1,074,161 Espirito Santo, with respect to assessments procedural stages. by the supervisory bodies.
In the face of the news of Judicial Recovery On September 2nd, 2020, the Bank of New request in Brazil , the judge responsible for York Mellon, Creditors Trustee, filed three said actions called the parties for clarification As lawsuits in the Supreme Court of the State and it was agreed, in a conference call held disclosed in of New York, Commercial Division intending between the parties on April 13, 2021, that - explanatory Samarco to pay the amounts due in three the process would be suspended and that the note 15 (b) global invoices, totaling approximately US$ parties would update the court regarding new 2,7 billion developments. The granting of Chapter 15 will suspend actions.
Others - 196,718 458,007
17,059,124 15,620,985
20. OTHER PROVISIONS
Parent Company and
Note Consolidated 2020 2019
Provision of electric power (a) 3,714 949
Provision for socio-environmental and socioeconomic recovery (b) 4,743,522 4,023,333
Provision for environmental liabilities at the Germano dam (c) 458,607 247,429
Total current 5,205,843 4,271,711
Parent Company and
Note Consolidated 2020 2019
Provision for mining rights (note 30) (d) 112,222 112,222
Provision with obligation to demobilize assets (e) 2,186,132 1,477,776
Provision for socio-environmental and socioeconomic recovery (b) 12,292,811 8,148,418
Provision for environmental liabilities at the Germano dam (c) 1,887,010 2,286,382
Total non-current 16,478,175 12,024,798 MANAGEMENT’S EXPLANATORY NOTES 76 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(a) Acquisition of energy for use in the production dam presupposes the removal of the dam function, process, not billed by the concessionary companies interrupting the process of tailings disposal (which in the period. makes it an inactive structure), with no more water accumulation with the formation of a permanent (b) Provision related to the Collapse of the Fundão lake and it requires, within a long-term vision, the tailings dam, as disclosed in explanatory note 3(d). joint adoption of solutions aimed at the physical, (c) According to explanatory note 1 (b), in February chemical and biological stability of the structure. 2019, there was a change in legislation involving The transaction in the provision for the dam safety policies (Law No. 23,291, of February decommissioning of the Germano dam is shown in 25th, 2019, instituted the State Dam Safety Policy). the table below: In line with the aforementioned law, the joint SEMAD/FEAM Resolution No. 2,784, of March 21, 2019, decrees, among other determinations, the disfigurement of all tailings dams that use or used the upstream raising method, related to mining activities in the state of Minas Gerais. Parent Company and
In this sense, the process of closing the Germano Consolidated 2020 2019
Balance as of January 1 2,533,811 -
Provision constitution - 2,557,646
Realized provision (125,193) (23,835)
Financial Update 158,519 -
Increase (decrease) in the provision (221,520) -
Balance as of December 31 2,345,617 2,533,811
Current Liabilities 458,607 247,429 Non-Current Liabilities 1,887,010 2,286,382
(d) The Company pays the shareholder Vale (e) The transaction in the provision for the for the assignment of mining rights over the obligation to demobilize assets is shown in the geological resources of iron ore. These amounts table below: are calculated at the rate of 4% on dividends paid.
Parent Company and
Consolidated 2020 2019
Balance as of January 1 1,477,776 381,297
Increase in provision (financial update) 99,026 28,156
Estimated revisions to cash flows 609,330 1,068,323
Balance as of December 31 2,186,132 1,477,776
Non-current 2,186,132 1,477,776
The conceptual closure plan of the units is drawn operation, the socio-environmental scope and the up by successive approximations, in evolution project service life. This plan includes a diagnosis of the levels of studies aimed at closing actions of the current sites situation, evaluates potential throughout the project service life until the level impacts and risks of the projects closure in several of detail for executive projects near to the closing spheres such as economic, environmental, social, period is reached, which depends on the type of legal and engineering spheres, it establishes MANAGEMENT’S EXPLANATORY NOTES 77 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
measures to be adopted before, during and after industrial plants was updated at a discount rate. This the closure to achieve the desired objectives and resulted in an increase of R$ 609,330 of liabilities minimize the risks, estimates a physical financial referring to the provision for assets demobilization. closure schedule based on the project’s assets service life and estimates the closing costs according The provision for assets demobilization was to the plan phase. based on current information including available technology and current prices. The provision set The Company’s policy is to review this plan every up was deducted to present value using a discount three years, or whenever there are significant changes rate of 6.8700% per year, based on the parameters in the project or in the surrounding conditions. In adopted by the Company for economic and financial December 2020, the decommissioning assessment assessments. study for the Germano, Ubu and Minerodutos
21. OTHER LIABILITIES
The other liabilities are represented as follows:
Parent company Consolidated Note 2020 2019 2020 2019
Commissions/services payable abroad (a) 22,383 17,108 - - to related parties (note 30)
Demurrage payable (b) 1,158 895 1,158 895
Amounts payable (materials/services) (c) 3,254 737 3,254 737
HPP Guilman-Amorim Consortium 3,994 3,510 3,994 3,510 (note 2,3(b) and note 10)
Environmental fines Installments- (d) 46,344 75,500 46,344 75,500 SEMAD
Lease liabilities 2,291 8,240 2,291 8,240
TEP - NG contract with Petrobrás (e) 144,807 - 144,807 - Distribuidora - BR
Others 5,636 5,225 5,758 5,307
Total 229,867 111,215 207,606 94,189
Current liabilities 98,900 61,741 76,639 44,715
Non-current 130,967 49,474 130,967 49,474
(a) Refers to marketing services provided by the (d) Environmental fines arising from the damages subsidiary Samarco Europe. caused by the Collapse of the dam, as disclosed in explanatory note 3(e). (b) Amount due by Samarco for the additional time used for loading or unloading the product at the (e) Refers to the debt related to the TEP (Pending port. Issues Closing Term) signed between Samarco and Petrobrás Distribuidora - BR on August 11, 2020, (c) Amounts referring to materials and goods related to the natural gas agreement, updated acquired whose tax registration was not carried monthly by the IGPM since April / 2020, being out, since the respective invoice had not been divided into 30 installments, to be paid six months issued by the supplier. The goods and materials are after the resumption of Samarco’s operations. already accounted for in inventory and cost. MANAGEMENT’S EXPLANATORY NOTES 78 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
22. NET EQUITY
22.1 CAPITAL
The share capital, fully subscribed and paid up as of December 31st, 2020 and 2019, is R$ 297,025 divided into 5,243.298 nominative common shares as follows:
Number of shares % of total capital
BHP Billiton Brasil Ltda, 2,621,649 50
Vale S,A, 2,621,649 50
5,243,298 100
22.2 DIVIDENDS According to the Company’s Bylaws, mandatory At the Ordinary General Meeting held on April 28th, dividends are 25% of net income under the terms of 2015, the distribution of dividends related to 2014 Law 6,404/76. was approved in the amount of R$ 2.805,548, with the following: (i) the amount of R$ 2.104,161 refers As of December 31st, 2020, the Company to additional dividends and; (ii) the amount of R$ accumulated a loss of R$ 42,852.153 (R$ 38,262.780 701.387 refers to mandatory dividends recorded in as of December 31st, 2019). non current liabilities.
22.3 COMPREHENSIVE INCOME Parent Company and
Note Consolidated 2020 2019
Inventory 239,106 131,923
Property, plant and equipment and intangible assets 16,227,995 10,379,196
Loans and Financing 15,814 12,418
Cost 1,362,793 1,119,875
Foreign exchange gains/losses (23,870,420) (11,077,396)
Others (a) (2,440,043) 323,142
Cumulative translation adjustments (b) (8,464,756) 889,158
Remeasurement of retirement obligations (c) (3,632) (4,020)
(8,468,388) 885,138
(a) The amount refers to cumulative translation evolution of liabilities, changes in scenarios, income adjustments for advances to suppliers, prepaid on plan assets and changes in irrecoverable surplus expenses and revenues, equity pick-up, cost of (explanatory note 16). products sold and other (income) net expenses.
(b) It refers to foreign exchange gains/losses 23. REVENUE resulting from the balance sheet translation and the income of the exercise of the functional currency US dollar to the presentation currency of The Company operates in the mining market, the financial statements, Real. providing its revenue through the sale of iron ore pellets: PDR - Pellet for direct reduction and PBF - (c) It refers to actuarial gains and losses on the Pellet for blast furnace. The surplus production of MANAGEMENT’S EXPLANATORY NOTES 79 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
iron ore concentrate is marketed as fines (pellet feed). In 2020 and 2019, the Company sold to the Due to the Collapse of the Fundão dam and domestic and foreign markets, selling pellet feed the subsequent suspension of exploration to countries in the Americas and Asia and pellets licenses, operations were temporarily suspended to Brazil. In addition to revenues from products in November 2015, with no production until and by-products, the Company obtained revenues November de 2020. As disclosed in explanatory from surplus electric power and revenues from note 1, Samarco gradually resumed operations in logistical services at its port, such as rental of December 2020, thus restarting activities related tugboats and provision of areas. to iron ore extraction, in processing and pelletizing plants.
Parent Company and
Consolidated 2020 2019 Pelotas - Country - 10,843
Fines - Abroad 55,365 -
Electric power 42,873 38,545
Provision of Port Berth 18,618 12,139
Other products and services 7,060 3,752
Total gross revenue 123,916 65,279
Sales taxes (8,239) (8,088)
Sales returns (31) -
Net Revenue 115,646 57,191
24. COSTS OF GOODS SOLD
The costs of goods sold are shown below:
Parent company Consolidated Note 2020 2019 2020 2019
Currency translation (a) (242,918) (145,786) (242,918) (145,786)
Sale of electric power (8,242) (8,986) (8,242) (8,986)
Provision of port berth (5,465) (4,985) (5,465) (4,985)
CFEM (1,653) (300) (1,653) (300)
Idle capacity (b) (1,082,507) (768,531) (1,082,507) (768,531)
Right of use amortization (c) (20,357) (19,582) (20,357) (19,582)
Provision (write-back) for (d) 15,165 (10,561) 15,165 (10,561) reinforcement of dam installations
Others (2,105) 2,750 (2,085) 2,722
Costs of goods sold (1,348,082) (955,981) (1,348,062) (956,009) MANAGEMENT’S EXPLANATORY NOTES 80 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(a) The effect of changes in the exchange rate Ubu, ES units until November 31st, 2020 and refers to the translation of the financial statements 2019, were allocated directly to cost, under the from the functional currency (US dollar) to the “idle capacity” budget item. After the operation presentation currency (Real). resumption, costs were allocated according to the production volume and fixed costs resulting from (b) Samarco resumed operations gradually in the idleness of both units and they were allocated December 2020 (explanatory note 1). Accordingly, directly to cost under the “idle capacity” budget Samarco’s fixed costs for the Germano, MG and item, as detailed below:
2020 2019 Inputs (969) (974)
Materials (87,991) (56,197)
Services (259,566) (201,421)
Labor (149,157) (148,994)
Electric power (28,857) (30,713)
Depreciation (206,702) (179,823)
Structural Reinforcement for Dams (42,286) (76,629)
TEP - NG contract with Petrobrás Distribuidora - BR (124,175) -
Operational readiness (175,635) (67,197)
Others (7,169) (6,583)
Total (1,082,507) (768,531)
Part of the balance recorded in the “idle capacity” budget item, in the amount of R$ 42,286 (R$ 76,629 in 2019), it refers to third-party services for the maintenance and repair of Samarco’s facilities affected by the Collapse of the dam disclosed in the explanatory note 3 (g).
(c) Amortization of lease agreements as explained (d) Provision related to the Collapse of the Fundão in explanatory note 12.5. tailings dam, as disclosed in explanatory note 3 (g).
25. SALES, GENERAL AND ADMINISTRATIVE EXPENSES
Parent company Consolidated 2020 2019 2020 2019
Sales expenses
Contracted services (39,660) (15,716) (39,975) (15,950)
Personnel expenses (15,989) (13,897) (17,449) (16,533)
Depreciation and amortization (10,184) (9,142) (10,187) (9,175)
Auxiliary materials (9,170) (6,036) (9,170) (6,036)
Shipping expenses, net (192) - (192) - MANAGEMENT’S EXPLANATORY NOTES 81 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent company Consolidated Continuation 2020 2019 2020 2019
Provision for loss on doubtful liquidation (6,786) (3) (6,786) (3)
Provision (write-back) for taxes under remittance (2,357) 45 (2,357) 45 abroad
Subsidiaries' commercial expenses (Note 30) (2,389) (3,744) - -
Maintenance activities expenses (4,190) (4,612) (4,190) (4,612)
General expenses (2,799) (3,499) (3,472) (4,073)
Total (93,716) (56,604) (93,778) (56,337)
General and administrative expenses
Contracted services (16,227) (10,857) (16,227) (10,857)
Personnel expenses (42,108) (42,612) (42,108) (42,612)
Depreciation and amortization (1,254) (752) (1,254) (752)
Auxiliary materials (354) (131) (354) (131)
General expenses (6,101) (5,400) (6,101) (5,400)
Total (66,044) (59,752) (66,044) (59,752)
26. OTHER OPERATING INCOME (EXPENSES), NET
The balance of other net operating expenses is detailed below:
Parent company Consolidated Note 2020 2019 2020 2019 Provision for restructuring plan - VRP - (123) - (123)
Write-back for ICMS losses - ES 7,173 4,530 7,173 4,530
Provisions for contingencies (12,367) (29,096) (12,367) (29,096)
Provision for socio-environmental and (a) (3,216,112) (1,955,076) (3,216,112) (1,955,076) socioeconomic recovery
Expenses with socio-environmental and (a) (194,160) (200,210) (194,160) (200,210) socioeconomic recovery
Provision contributions to the Fundação (a) (3,800,000) (2,508,000) (3,800,000) (2,508,000) Renova (note 30)
Provision (write-back) for the 346,713 (2,533,811) 346,713 (2,533,811) decommissioning of the Germano dam
Expenses with Germano dam (125,193) (23,835) (125,193) (23,835) environmental liabilities
Provision (write-back) for impairment 664,993 (9,705,110) 664,993 (9,705,110) loss - CGU (note 12,1) MANAGEMENT’S EXPLANATORY NOTES 82 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Tax Expenses (26,265) (190,691) (26,265) (190,691)
Expenses with investments and social (18,240) (13,603) (18,240) (13,603) projects
Expenses with Fundação Renova (a) (9,263) (490,000) (9,263) (490,000)
Fines resulting from socio- (a) - (195) - (195) environmental and socioeconomic recovery
Research expenses (note 13) (23,538) (19,602) (23,538) (19,602)
Attorney and expert fees (4,398) (10,075) (4,398) (10,075)
Inventory adjustment (warehouse) (4,096) (3,657) (4,096) (3,657)
Write-back to permanent asset write- 5,459 - 5,459 - off
Disposal of property, plant and - 134 - 134 equipment
Write-back for capitalization of - 329,290 - 329,290 expenses
Other provisions (670) (27,135) (670) (27,135)
Other, net 147,823 940,624 147,778 940,610
Currency translation (b) 2,770,214 (194,525) 2,770,214 (194,525)
Total (3,491,927) (16,630,166) (3,491,972) (16,630,180)
(a) Provisions and expenses related to the Collapse (b) The effect of changes in the exchange rate of the Fundão tailings dam, as disclosed in refers to the translation of the financial statements explanatory note 3. from the functional currency (US dollar) to the presentation currency (Real).
27. FINANCIAL RESULT
The financial result breakdown is represented as follows:
Parent Company and
Note Consolidated Finance income 2020 2019 Income on judicial deposits (a) 49,283 71,878
Income from financial investments 82 1,326
Deductions obtained 12 196
Other financial income 1,215 4,642
Financial income - consolidated 50,592 78,042
Subsidiaries’ recorded income (5) (4)
Financial income - parent company 50,587 78,038 MANAGEMENT’S EXPLANATORY NOTES 83 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent Company and
Note Consolidated Finance expenses 2020 2019
Charges on loans and financing (1,349,736) (1,023,697)
Interest on contingencies (a) (1,977) 10,517
Late payment and tax interest (8,607) (13,517)
Bank fees and commissions (19,502) (19,825)
Withholding income tax on interest - remittance abroad (197,840) (92,450)
PIS and COFINS on financial income (1,459) (1,834)
Financial expenses provision for socio-environmental and (b) (1,663,636) (665,979) socioeconomic recovery
Financial expenses with lease liabilities (396) (843)
Other financial expenses (297,000) (38,297)
Financial expenses - consolidated (3,540,153) (1,845,925)
Subsidiaries' recorded expenses 25 6
Parent Company’s financial expenses (3,540,128) (1,845,919)
(a) It refers to the updating of judicial deposits and (b) Financial update of the provisions related to the provisions for contingencies related to tax, civil, Collapse of the Fundão tailings dam, as disclosed labor and environmental lawsuits. in explanatory note 3 (i).
The foreign exchange gains/losses balance is represented as follows:
Foreign exchange gains/losses 2020 2019
Cash flow 3,624 (4)
Customers (174) 184
Recoverable taxes (24,689) (4,540)
Court deposits (512,129) (83,845)
Trade payables 30,134 1,162
Payroll, provisions and social contributions 3,466 791
Taxes payable 137,108 (6,097)
Dividend 719,811 119,204
Contingency 55,692 3,312
Deferred income tax 274,841 39,566
Other accounts payable in the country related parties 1,591,916 195,483
Other Provisions 3,785,096 628,508
Others 92,984 (3,270)
Foreign exchange gains/losses, net – consolidated 6,157,680 890,454
Foreign exchange gains/losses, net – recorded from subsidiaries (82) 63
Foreign exchange gains/losses, net – parent company 6,157,598 890,517 MANAGEMENT’S EXPLANATORY NOTES 84 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
28. INCOME TAX
The Company is subject to income tax at a rate of 25%.
28.1 INCOME TAX PAYABLE
Below, we present the transaction of income tax payable:
Parent company Consolidated 2020 2019 2020 2019
Balance at the beginning of the year - - 167 143
Provisions for the period 36,787 - 36,983 24
Payments (36,787) - (37,141) -
Balance at the end of the year - - 9 167
28.2 DEFERRED INCOME TAX of 25% will not be sufficient to support the use of deferred income tax and tax loss, the Company The Company has deferred income tax recorded opted to do the write-off of deferred income tax. in non-current assets constituted on temporarily non-deductible provisions at rates of 25%, according to the application of each provision as 28.3 DEFERRED INCOME TAX ON NON- an adjustment to taxable income. MONETARY ITEMS
Due to the uncertainty of the Company’s The financial statements have been translated from operational activities resumption (explanatory note the functional currency of the US dollar (US$) to 1 (b)), an analysis was carried out regarding the the Real (R$), which is the presentation currency, realization of the deferred income tax constituted while the calculation basis for income tax on assets up to December 31st, 2020. and liabilities is determined in the Real currency (R$). Accordingly, the rate fluctuation can have And, because it understands that future taxable a significant effect on the amount of income tax profits and income subject to taxation at arate expenses, especially on non-monetary assets.
2020 2019
Amounts constituted by the rate of: 25% 25% 18% Total
Provision for ICMS losses - ES 369,741 371,535 - 371,535
Provision for property, plant and equipment write-off - 1,365 - 1,365
Provision for civil claims 3,455 1,713 - 1,713
Provision for tax claims 16,084 15,895 9,827 25,722
Provision for labor claims 16,982 15,538 - 15,538
Provision for environmental claims 75 67 - 67
Provision for mining rights 28,055 28,055 - 28,055
Provision for socio-environmental and 4,259,083 5,265,515 - 5,265,515 socioeconomic recovery MANAGEMENT’S EXPLANATORY NOTES 85 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Provision for other accounts payable related parties 2,539,125
Germano dam environmental provision 586,404
Provision with obligation to demobilize assets 85,192 60,435 - 60,435
Foreign exchange gains/losses not carried out 2,521,568 861,939 - 861,939
Provision for impairment 2,260,029 2,426,280 - 2,426,280
Tax loss 3,374,556 3,048,001 - 3,048,001
Provision for liability of tax loss (3,374,556) (3,048,001) - (3,048,001)
Others 168,125 117,606 - 117,606
Provision for assets loss (12,680,787) (9,014,430) - (9,014,430)
Total consolidated assets 173,131 151,513 9,827 161,340
Translation - functional currency difference (4,120,926) - (1,894,321) (1,894,321)
Tax depreciation (1,229,470) - (1,082,854) (1,082,854)
Financial income on judicial deposits (163,155) (151,296) - (151,296)
Total consolidated liabilities (5,513,551) (151,296) (2,977,175) (3,128,471)
Total consolidated net (5,340,420) 217 (2,967,348) (2,967,131)
Subsidiaries’ recorded provisions (12) (217) - (217)
Total parent company net (5,340,432) - (2,967,348) (2,967,348)
Samarco has changed the IRPJ calculation at the administrative and judicial levels. With the criterion for the base year 2021, ceasing to adopt recent operational return and to promote greater the tax incentive of 18% on the export activity predictability to the Company, it was decided for of abundant minerals, and starting to collect not using the tax incentive in the period, to avoid the tax according to the general rule of the Real further questions by the tax authorities on this topic, Profit with the incidence of the final rate of 25%. despite the fact that the Company understands that Notwithstanding the fact that the Company has a the calculation is legitimate with the application of final and unappealable decision that assures it to the incentive rate, and it will continue with the past be assessed with the incidence of a differentiated discussions in progress. rate of 18%, since the base year 2000, the Federal Revenue Service of Brazil has promoted repeated The expected realization of the deferred income assessments questioning the form of assessment tax on translation and tax depreciation is detailed adopted by the Company, which still are discussed below:
From From From More Up to 1 From 8 to Total 1 to 3 3 to 5 5 to 8 than 10 year 10 years 2020 years years years years Others (9,976) - - - - - (9,976)
Translation - functional 138,888 298,528 256,302 743,102 866,163 1,817,943 4,120,926 currency difference
Tax depreciation - - - - 368,264 861,206 1,229,470
Total consolidated 128,912 298,528 256,302 743,102 1,234,427 2,679,149 5,340,420
Subsidiaries’ provisions 12 - - - - - 12
Total parent company 128,924 298,528 256,302 743,102 1,234,427 2,679,149 5,340,432 MANAGEMENT’S EXPLANATORY NOTES 86 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
28.4 INCOME TAX ON THE FINANCIAL RESULT
Parent company Consolidated 2020 2019 2020 2019
Loss before taxation (2,216,288) (18,522,577) (2,216,091) (18,522,516)
Difference in functional currency - art.62 of Law (15,314,687) (1,395,505) (15,314,687) (1,395,505) 12,973/2014
Taxable net loss (17,530,975) (19,918,082) (17,530,778) (19,918,021)
Permanent differences:
Equity in the results of investees (8,204) (876) - -
Profits earned abroad 213 186 213 186
Non-deductible tax fines 1,834 8,452 1,834 8,452
Non-deductible donations 10,771 5,477 10,771 5,477
Other permanent additions (exclusions) 166 147 (8,038) (782)
Temporary differences:
Provision for socio-environmental and 8,664,583 5,139,616 8,664,583 5,139,616 socioeconomic recovery
Provision for the Germano dam (188,195) 2,533,811 (188,195) 2,533,811 decommissioning
Provision for property, plant and equipment (5,459) - (5,459) - write-off
Tax depreciation (585,790) (623,560) (585,790) (623,560)
Income on judicial deposits (47,435) (68,213) (47,435) (68,213)
Foreign exchange gains/losses not carried out 6,638,515 834,153 6,638,515 834,153
Impairment (664,993) 9,705,110 (664,993) 9,705,110
Other temporary additions (exclusions) 268,969 244,095 268,772 244,095
Tax loss (3,446,000) (2,139,684) (3,446,000) (2,139,676)
Nominal tax rate 25% 25% 25% 25%
Calculated income tax 861,500 534,921 861,500 534,921
Deferred income tax, tax depreciation (146,481) (156,005) (146,481) (156,005)
Deferred income tax on temporary additions 3,519,878 5,369,630 3,519,878 5,369,630 (exclusions)
Income tax of foreign companies - - (197) (61)
Provision for deferred income tax loss temporary (3,519,878) (5,875,808) (3,519,878) (5,875,808) additions
Provision for liability of tax loss (861,500) (455,721) (861,500) (455,721)
Deferred income tax on translation (2,226,604) (118,371) (2,226,604) (118,371)
Income tax on the financial result (2,373,085) (701,354) (2,373,282) (701,415)
Effective rate 13,54% 4,47% 13,54% 4,47% MANAGEMENT’S EXPLANATORY NOTES 87 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
The following is a breakdown of income tax (expense) segregated between current and deferred:
Parent company Consolidated 2020 2019 2020 2019 Current income tax - - (197) (61)
Deferred income tax, tax loss 861,500 532,685 861,500 532,685
Provision for deferred income loss, tax loss (861,500) (534,921) (861,500) (534,921)
Provision for deferred income tax 3,519,878 5,295,061 3,519,878 5,295,061
Provision for deferred income tax loss (3,666,359) (5,875,808) (3,666,359) (5,875,808)
Deferred income tax on non-monetary items (2,226,604) (118,371) (2,226,604) (118,371)
Deferred and current income tax expenses (2,373,085) (701,354) (2,373,282) (701,415)
29. COMMITMENTS
The Company has long-term agreements for the supply of raw materials, services and property, plant and equipment purchases, as shown in the following table:
From From From More Up to 1 Total Total 1 to 2 2 to 3 3 to 5 than 5 year 2020 2019 years years years years Capital expenditures for 381,463 18,477 - - - 399,940 128,259 expansion and renovation of fixed assets
Services and others 1,301,083 584,749 163,155 64,978 61 2,114,026 1,648,397
Acquisition of iron ore 395,937 320,311 324,632 694,476 2,011,378 3,746,734 1,203,282
Supply of energy and raw 415,337 404,854 367,899 13,896 - 1,201,986 957,189 material
Chartering and logistics 3,472 - - - - 3,472 2,692 costs
2,497,292 1,328,391 855,686 773,350 2,011,439 7,466,158 3,939,819
The commitments demonstrate Samarco’s long- Due to the Collapse of the Fundão dam, the term contractual obligations with suppliers for the Company took some actions regarding its renewal and expansion of fixed assets, as well as commitments as disclosed in explanatory note 3 for the provision of various services aimed at the (l). maintenance of manufacturing and administrative units, acquisition of iron ore from third parties, supply of energy and inputs, as well as freight costs with shipments. MANAGEMENT’S EXPLANATORY NOTES 88 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
30. RELATED PARTIES
The main balances of transactions with related parties are detailed below:
Entity under Shareholders Subsidiaries Parent company Consolidated common control
BHP Ponta Ubu Samarco Samarco Billiton Vale Agropecu- 2020 2019 2020 2019 Finance Europe Brasil ária
Current assets
Accounts receivable (a) - - - 2,131 - 2,131 1,744 - 88 (note 6)
Non-current
Advances to supplier (b) - 44,085 - - - 44,085 44,085 44,085 44,085
Other assets (note 10) - - 1,327 - - 1,327 - 1,327 -
Property, plant and (c) - 11,424 - - - 11,424 12,026 11,424 12,026 equipment
Current liabilities
Other liabilities - - - - 22,383 22,383 17,108 - - (commissions/services payable) note 21
Loans and Financing 4,236,272 4,236,272 - - - 8,472,544 4,818,120 8,472,544 4,818,120 (note 15)
Financial charges 73,830 73,830 - - - 147,660 119,468 147,660 119,468
Non-current
Dividends (note 22) 1,402,774 1,402,774 - - - 2,805,548 2,805,548 2,805,548 2,805,548
Mining Rights (note 20) (d) - 112,222 - - - 112,222 112,222 112,222 112,222
Other liabilities in the (e) 5,078,250 5,078,249 - - - 10,156,499 6,356,499 10,156,499 6,356,499 country of related parties
Income Statement
Sales, general and - - - - (2,389) (2,389) (3,744) - - administrative expenses (note 25)
Other net operating (e) (1,900,000) (1,900,000) - - -(3,800,000) (2,508,000) (3,800,000) (2,508,000) income (expenses) (Note 26)
Finance expenses (14,097) (14,094) - - - (28,191) (116,529) (28,191) (116,529) MANAGEMENT’S EXPLANATORY NOTES 89 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(a) The balance of accounts receivable and agreement governs that Vale ceded and transferred revenues of the subsidiary Samarco Finance refer mining rights to two mineral reserves to Samarco. to the sale of iron ore, acquired from the Parent The agreement amount observed the payment Company and sold on the foreign market to third of mining rights: (i) Single payment made in the parties. amount of R$ 19,972, and (ii) Variable payments corresponding to 4% on the gross amount of (b) Prepayment of R$ 44,085 to Vale for the partial dividends paid by Samarco to its shareholders until lease of the mining rights of “Conta História Norte” the depletion of capital reserves. and “Alegria” (mining areas). Vale is responsible in full for holding the rights until the date of the lease The price agreed in the agreement is not fixed, registration, by the competent authority. being established as a percentage of the gross dividends paid. For the year ended as of December (c) Assets transferred in loan for use to Vale. 31st, 2020 and 2019, there were no payments.
(d) In November 1989, the Company entered into (e) Funding from the Shareholders Vale an agreement with Vale for the transfer of mining and BHP Billiton Brasil to Fundação Renova, as rights for the exploitation of iron ore deposits. The disclosed in explanatory note 3(f).
Compensation of key management personnel.
The amounts related to the compensation of key management personnel are shown below:
2020 2019
Compensation (i) 7,994 11,287
Health care plan 28 53
Private pension 592 470
Life insurance 92 72
8,706 11,882
(i) Includes wages, salaries and indemnity.
Board members and general managers are considered to be key Management personnel.
and security. Financial management considers the 31. FINANCIAL INSTRUMENTS AND risk exposure analysis that Management intends to RISK MANAGEMENT cover (exchange rate, interest rate, etc.) and the policies and strategies defined by the Company’s Management, always approved by its Finance Committee. 31.1 FINANCIAL RISK MANAGEMENT The Company and its subsidiaries do not make The Company has financial instruments inherent speculative investments in derivatives or in any to its operations, represented by cash and cash other risky assets. equivalents, short-term investments, accounts receivable, other assets, suppliers, loans and financing, financial charges payable and other 31.2 FINANCIAL INSTRUMENTS BY liabilities. CATEGORY
The management of these instruments aims to The Company’s financial instruments were ensure the maximum possible liquidity, profitability classified as follows: MANAGEMENT’S EXPLANATORY NOTES 90 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent company Consolidated 2020 2019 2020 2019
Amortized Amortized Amortized Amortized Cost Cost Cost Cost Current assets Cash and cash equivalents 79,938 62,617 83,846 65,792
Restricted short-term investments 2,848 2,505 2,848 2,505
Accounts receivable 2,274 11,126 175 9,502
Other accounts receivable (note 9) 4,319 14,662 4,319 14,662
Other assets (note 10) 10,438 10,330 10,502 10,395
Total current assets 99,817 101,240 101,690 102,856
Non-current
Other assets (note 10) 15,288 16,416 15,288 16,416
Total assets 115,105 117,656 116,978 119,272
Current liabilities
Trade payables 258,321 252,065 258,373 252,122
Loans and financing 28,313,792 20,233,138 28,313,792 20,233,138
Financial charges payable 4,767,459 2,831,708 4,767,459 2,831,708
Other liabilities (note 21) 98,901 61,741 76,640 44,715
Total current liabilities 33,438,473 23,378,652 33,416,264 23,361,683
Non-current
Other liabilities (note 21) 130,967 49,474 130,967 49,474
Total liabilities 33,569,440 23,428,126 33,547,231 23,411,157
31.3 FINANCIAL RISK FACTORS tools use quantitative information (such as the counterparty financial information), as well as The Company’s regular activities expose it qualitative information (counterparty strategic to several financial risks: credit risk, market position and the commercial relationship risk (including price risk, interest rate risk and history). Based on the credit risk attributed to the exchange rate risk) and liquidity risk, as follows: counterparty, the Company uses different risk mitigation strategies, such as prepayment, letters of credit, corporate and bank guarantees, among (A) CREDIT RISK others.
The Company’s sales policy is subject to the credit Gross sales revenue was R$ 123,916 in 2020 (R$ rules established by its Management, aiming to 65,279 in 2019), while the expected credit loss mitigate risks of non-receipt of outstanding sales in 2020 was R$ 22,602 (R$ 13,490 in 2019), in and sales to be made. The Company uses a robust Consolidated. credit analysis methodology for its counterparties (customers), which combines external and The credit risk exposure of the receivables is internal tools for the risk classification. The distributed according to the table below: MANAGEMENT’S EXPLANATORY NOTES 91 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Parent Company and Consolidated
2020 2019
Middle East / Africa 8.8% 20.2%
Asia (except China) 91.2% 79.8%
(I) Interest rate risk interest rate risk also arises from a small portion of the debt referenced to the IGP-DI. This risk arises from the possibility that the Company and its subsidiaries may suffer unexpected impacts due to the fluctuation in (ii) Exchange rate risk interest rates on financial assets and liabilities, as well as inflation. Most of the Company’s loans and It arises from the possibility of fluctuations in the financing as of December 31st, 2020 are stated in exchange rates of foreign currencies (currencies US dollars. Of the total loans and financing, R$ other than the functional currency) used by the 11,542 million are related to fixed rates and R$ Company for the acquisition of national inputs 16,771 million to floating rates, which correspond and/or services, payment of taxes, dividends and mainly to the variation in LIBOR plus contractual others. The Company has the following assets spread. The Company does not have protection and liabilities, in Reais, which can influence the for the variation in LIBOR, according to its internal Company’s income, by changing the exchange guidelines and those of its shareholders. The rate:
(¹) Asset exposure Consolidated
Current assets 2020 2019
Cash and cash equivalents 43 564
Restricted short-term investments 1,355 1,355
Accounts receivable in the country 203 4,081
Recoverable taxes 39,877 6,056
Prepaid expenses 4,497 3,175
Other accounts receivable 4,319 14,662
Other assets 10,502 10,395
Non-current
Court deposits 1,946,192 1,906,183
Recoverable taxes 76,743 76,743
Other assets 15,288 16,416
2,099,019 2,039,630 MANAGEMENT’S EXPLANATORY NOTES 92 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
(²) Liability exposure Consolidated
Current liabilities 2020 2019
Trade payables (245,206) (250,918)
Loans, financing and charges (8,798,645) (5,109,558)
Payroll, provisions and social contributions (29,476) (24,692)
Taxes payable (532,347) (451,908)
Provision for income tax (9) (167)
Other provisions (5,205,843) (4,271,711)
Other Liabilities (74,555) (43,820)
Non-current
Taxes payable (112,142) (127,123)
Provisions for contingencies (132,726) (127,320)
Deferred income tax (5,340,420) (2,967,131)
Dividend (2,805,548) (2,805,548)
Other provisions (16,478,175) (12,024,798)
Other liabilities in the country of related parties (10,156,499) (6,356,499)
Other liabilities (126,960) (49,474)
(50,038,551) (34,610,667)
(³) Exposure not recorded in the balance sheet:
Tax claims 2020 2019 Civil claims 2020 2019
Remote loss (2,400,150) (2,663,665) Remote loss (156,079) (10,072) expectation expectation
Possible loss (12,894,184) (12,464,950) Possible loss (1,772,294) (1,475,385) expectation expectation
Labor claims Environmental claims
Remote loss (61,114) (6,575) Remote loss (363) (340) expectation expectation
Possible loss (653,074) (606,489) Possible loss (1,739,572) (1,074,161) expectation expectation
Exchange rate exposure summary 2020 2019
Exposure recorded in the balance sheet (¹ + ² ) (47,939,532) (32,571,037)
Exposure not recorded in the balance sheet (³) (19,676,830) (18,301,637)
Total net exposure (67,616,362) (50,872,674) MANAGEMENT’S EXPLANATORY NOTES 93 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
The Company does not carry out financial US$ 1,00 equivalent to R$ 5,1961 as of December operations to protect its assets and liabilities in 31st, 2020 and US$ 1,00 equivalent to R$ 4,0301 Reais, according to its internal guidelines. Foreign as of December 31st, 2019. currency assets and liabilities were translated into the functional currency at the exchange rate on (iii) Credit quality of financial assets the date of the financial statements preparation,
Cash and cash equivalents Parent company Consolidated 2020 2019 2020 2019
Current account and short-term bank deposits
Investment Grade 79,938 62,616 83,846 65,792
79,938 62,616 83,846 65,792
Current accounts and financial investments in banks were included in this category.
Trade accounts receivable
Parent company Consolidated 2020 2019 2020 2019
Counterparties with External Credit Rating (S&P)
Investment Grade 6 - 6 7
Counterparties without External Credit Rating (S&P)
Group 1 - customers with up to 5 years of - 1,656 - 1,666 relationship
Group 2 - customers over 5 years of relationship 15,848 10,659 15,865 10,659 with low default history
Group 3 - customers in the country who are not in 6,906 10,569 6,906 10,659 iron ore area
22,760 22,975 22,777 22,991
(B) LIQUIDITY RISK tailings dam, such as, for example, the non- fulfillment of certain obligations present in its loan agreements and financing. The Company’s Liquidity risk is the likelihood that the Company liquidity in 2020 was supported by funds from will not have sufficient resources to meet its its Shareholders, through the issuance of non- obligations within the due periods. convertible private debentures, as detailed in explanatory note 15. The Company’s management has faced challenges in its liquidity risk management, The book values of cash flows from financial as a result of the suspension of its productive liabilities (excluding loans and accounts payable operations after the Collapse of the Fundão to shareholders) are: MANAGEMENT’S EXPLANATORY NOTES 94 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
Consolidated 2020 Up to 12 1 – 10 Value months years Trade payables 258,373 258,373 -
Loans and financing 19,841,248 19,841,248 -
Financial charges payable 4,619,799 4,619,799 -
The value of undiscounted cash flows contracted is shown as follows:
Consolidated 2020 Book Contractual 2021 Financial liabilities Value cash flow 0 - 6 6- 12 months months Trade payables 258,373 258,373 258,373 - -
Loans and financing 19,841,248 19,841,248 19,841,248 - -
Financial Charges 4,619,799 4,619,799 4,619,799 - -
Total 24,719,420 24,719,420 24,719,420 - -
As explained in explanatory note 3(d), besides financing and the IGP-DI for operations in the these financial obligations in the table, there are country. obligations established under the terms of the TTAC, which affect the Company’s liquidity. It To identify the index sensitivity, in long-term is noteworthy that, to the extent that Samarco debt, to which the Company was exposed as of does not have the resources to comply with such December 31st, 2020, three different scenarios financial obligations, each of its shareholders, were defined, to cover the period of the following Vale and BHP Billition Brasil will do so, according 12 months. Based on the accumulated IGP-DI to their 50% interest each in Samarco’s share index and the Libor rate valid for 6 months, in capital. effect as of December 31st, 2020, the Company defined a probable scenario and two additional scenarios, starting from the first - scenarios II and (C) SENSITIVITY ANALYSIS III, with an increase of 25% and 50%, respectively.
The main risks linked to the Company’s operations are linked to the variation in Libor for long-term
Likely Risk Scenario II Scenario III scenario I Loans and financing abroad Libor 0,2576% 0,3220% 0,3864%
Interest as of December 31st, 2020 21,662 27,077 32,493
Loans and financing in the country IGP-DI 23,0743% 28,8429% 34,6115%
Interest as of December 31st, 2020 1,357 1,696 2,036 MANAGEMENT’S EXPLANATORY NOTES 95 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
The simulation considers the balances of the was exposed as of December 31st, 2020, three respective debts (in dollars and in local currency) different scenarios were defined for the asset as of December 31st, 2020 with repayment only and liability accounts, with scenarios II and III at the end of the period. contemplating a reduction in the exchange rate of 25% and 50%, respectively, from the first, To identify the sensitivity of variations arising called probable scenario I. from foreign currency to which the Company
Likely Scenario II Scenario III Exposure (R$) scenario I (US$) (US$) (US$)
Financial liabilities Exchange rate - (Risk - R$/US$) 0 5,1961 3,8971 2,5981
Total assets 2,099,019 403,960 538,614 807,921
Total liabilities (50,038,551) (9,630,021) (12,840,027) (19,260,041)
Net exposure in Reais recorded in the (47,939,532) (9,226,060) (12,301,414) (18,452,120) balance sheet
31.4 BANK GUARANTEES updated as of December 31st, 2020, of R$ 1,095. 795 (December 31st, 2019 R$ 1,219.870). The total As shown in the table below, the Company has amount originally contracted is R$ 1,080.468. bank guarantees issued by financial institutions for an indefinite period, mostly to guarantee The balances of the guarantees were updated the suspension of the enforceability of tax according to the balances of the CDAs during foreclosure proceedings in the total amount, the year 2020.
Contracted Updated Index Deadline amount amount Bank Bradesco 607,850 498,774 Selic Indeterminado
Bradesco 27,956 55,204 VRTE Indeterminado
Votorantim 100,948 176,549 Selic Indeterminado
Itaú 276,052 365,267 Selic Indeterminado
Itaú 67,662 - IPCA-E Indeterminado
Total 1,080,468 1,095,795 MANAGEMENT’S EXPLANATORY NOTES 96 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
31.5 CAPITAL MANAGEMENT form of financial covenants (Net Debt/EBITDA). Net Debt/EBITDA is an index that corresponds The Company’s purposes when managing its to net debt compared to the Company’s cash capital are to safeguard liquidity, managing the generation, as measured by EBITDA. Net debt, cost of capital to minimize it, and, at the same in turn, corresponds to total loans and financing time, to offer a sustainable and adequate return to (including short and long-term loans, as shown shareholders and benefits to other stakeholders. in the consolidated balance sheet), less the amount of cash and cash equivalents. To maintain or adjust the Company’s capital structure, the management usually monitors its In December 2020, Samarco restarted its level of indebtedness, in line with its dividend operational activities and it was unable to policy, which, in turn, follows the shareholders’ comply with the Net Debt/EBITDA limit of 4:1 in guidelines. its financial contracts.
Under normal operating conditions, the Company Additionally, we show the calculation of the monitors and manages the levels of financial financial leverage ratio considering net debt as leverage according to the market standards, its a percentage of total capital. The total capital is strategy and compliance with financial ratios calculated by adding the shareholders’ equity to provided for in loan and financing contracts in the the net debt as follows:
2020 2019
Total loans and financing 33,081,251 23,064,846
(-) Cash and cash equivalents and short-term investments (86,694) (68,297)
Net debt 32,994,557 22,996,549
Total equity (51,021,040) (37,078,141)
Total capital (18,026,483) (14,081,592)
Financial leverage ratio (183%) (163%)
Under normal conditions, the analysis of strives to use the best information available. these indicators supports the working capital Consequently, the Company uses valuation management process, to maintain the Company’s techniques that maximize the use of observable leverage at levels equal to or lower than the inputs and minimize the use of unobservable leverage ratio that Management considers inputs. The Company is able to classify fair value appropriate. balances based on observable inputs. The fair value hierarchy is used to prioritize the inputs used to measure fair value. The three levels of 31.6 FAIR VALUE HIERARCHY the fair value hierarchy are as follows:
The Company considers “fair value” to be the • Level 1. Active market: quoted price - A price that would be obtained on the sale of an financial instrument is considered to be asset or paid to transfer a liability in a transaction quoted in an active market if quoted prices are between market participants on the measurement readily and regularly available for exchange date (exit price). The Company uses market data or organized by over-the-counter operators, or assumptions that market participants would brokers, or market associations by entities use to price the asset or liability, including that aim to have prices disclosed by regulatory assumptions about risks and the risks inherent in agencies, and if those prices represent market the inputs used in the valuation technique. The transactions that occur regularly between Company mainly applies the market approach independent parties, without favor. to use the measurement of fair value and it MANAGEMENT’S EXPLANATORY NOTES 97 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
• Level 2. No active market: Valuation Technique free from other interests and motivated by - For an instrument without an active market, commercial considerations. fair value is valued using a valuation/pricing methodology. Other criteria can be used, • Level 3. No active market: equity instruments such as the fair value data of another current - Fair value of investments in shares/ instrument that is substantially the same, a shareholding interest or equity that do not deducted cash flow analysis and option pricing have market prices quoted in an active market models. The valuation technique aims to and derivatives that are linked to them and that determine what the transaction price would must be settled through the delivery of shares/ be on the measurement date in an exchange shareholding interest not negotiated.
Balance as of Fair value hierarchy 2020 Level 1 Level 2 Level 3
Loans and financing 33,081,251 14,384,812* 18,696,439 -
(*) Amount referring only to Bonds, other loans and financing were classified as level 2.
The fair value of financial liabilities related to loans and financing, whose carrying amounts are measured at amortized cost, is calculated as follows:
2020 2019
Estimated fair Estimated fair Book value Book value value value
Bonds (i) 14,384,812 10,071,290 10,609,125 7,028,624
EPPs (export pre 9,419,123 7,953,814 7,346,162 6,336,065 payments) (ii)
Others 9,277,316 8,720,218 5,109,556 4,732,669
33,081,251 26,745,322 23,064,843 18,097,358
(i) The fair value of bond operations is made based on the quotation of bonds in the obtained by quoting the security on the secondary market. secondary market (using the closing value, as reported by Bloomberg); Management understands that other financial instruments, such as accounts receivable, cash (ii) For EPP (Export Pre-Payment) loan and cash equivalents, short-term investments operations, debentures and other operations and, suppliers, which are recognized in the of little representative value, which do not have financial statements at their book values; do disclosure in a secondary debt market, or for not present significant variations regarding the which the said market does not have sufficient respective fair values. liquidity, the calculation of fair value was also MANAGEMENT’S EXPLANATORY NOTES 98 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
32. INSURANCE COVERAGE A) JUDICIAL RECOVERY:
To partially mitigate the risks and considering the kind Samarco have received three execution, distributed of its operations, the Company maintains several as follow: types of insurance policies under contract. The policies are in line with the risk management policy, (i) York: Execution in the amount of US$125 the guidelines of its management committees and million. Samarco presented an Embargo on they are similar to the policies contracted by other Execution in March 25, 2021 and obtained companies in the same business line as Samarco. a suspensive effect on the exectution. York These policies coverage includes: life and personal appealed and obtained the reversal on the accident insurance, vehicle fleet insurance, civil first instance decision, determining pledge liability insurance, miscellaneous risks, guarantees of amount in Samarco accounts or 15% of and others. invoicing limited to the amount of the Debts.
The Company’s civil liability and operations policy (ii) Bank of America: Execution in the amount was duly renewed and expires on May 9th, 2022. of US$200 million. Samarco was cited on April Coverages for dams, dikes, tailings disposal and 8, 2021. the like, due to the incident that occurred, were excluded from the policy in force. (iii) HSBC: execution distributed by HSCBC on April 9, 2021, in the amount of US$250 million. In addition, Samarco maintains a civil liability insurance policy with coverage for directors and In view of the impending lien imposed on financial officers, effective until April 2022. This insurance assets and in order to allow the Company to covers members of the board of directors, maintain its production activities and preserve its executive officers, audit committee and any other social function of generating employment, income body mentioned in the bylaws, as well as certain and taxes, on April 9, 2021, Samarco filed a pleading employees at management and strategic levels, for Judicial Recovery, maintained under number both in the Company and in its parent companies 5046520-86.2021.8.13.0024, which is pending (collectively called “Insured Parties”). The policy before the 2nd Business Court of the County of covers financial losses resulting from claims against Belo Horizonte/MG. the insured party for acts and omissions in the exercise of its contracting functions. It also covers The measure aims at allowing the renegotiation agreements previously authorized by the insurer with of the mostly financial debt that is in hands of the purpose of terminating legal or administrative foreign funds, in order to adapt it to Samarco’s new proceedings and coverage for payment of the situation. The debt declared subject to bankruptcy insured party’s defense costs, if and when incurred. creditors’ joint claim of the Judicial Recovery is approximately R$ 50.5 billion. Samarco’s operational risk insurance was contracted on December 29th, 2020, with a 12-month term. In a decision handed down on April 12, 2021, the The instrument aims to protect the assets belonging processing of Samarco’s Judicial Recovery was to the Company, material damage from external granted (pages 5295/5302), at which time the and internal causes and economic losses resulting following Bankruptcy Trustees were appointed to from these occurrences. Direct and consequential act together and in a coordinated manner: damages from any events related to the dam and the like are excluded from the policy in force. Paoli Balbino & Barros Administração Judicial, CNPJ (Business Taxpayer ID) # 31.841.449/0001-06, The cash collateral insurance has been in force represented by Mr. Otávio De Paoli Balbino, OAB/ since 2017, with the purpose of complying with the MG (Minas Gerais Bar) # 123.643. Phone: (31) 3656- terms of the TAC - Term of Conduct Adjustment 1514, e-mail: [email protected]. with the Public Ministry in its 12th Federal Court of Belo Horizonte/MG, as described in explanatory Inocêncio de Paula Sociedade de Advogados, CNPJ # 12.849.880/0001-54, represented by Mr. note 3(k). Dídimo Inocêncio de Paula, OAB/MG # 26.226. Phone: (31) 2555-3174, e-mail: informacao@ inocenciodepaulaadvogados.com.br. 33. SUBSEQUENT EVENTS Bernardo Bicalho Sociedade de Advogados, MANAGEMENT’S EXPLANATORY NOTES 99 TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND 2019 (In thousands of reais - BRL, unless otherwise stated)
CNPJ # 17.308.338/0001-08, represented by Mr. the decision suspends legal proceedings against Bernardo Bicalho de Alvarenga Mendes, OAB/MG # the Company in the US. 80.990. Phone: (31) 2552-5692, e-mail: bernardo@ bernardobicalho.com.br. B) FILED LAWSUIT BY THE FEDERAL PROSECUTORS OFFICE’S. Arnoldo Wald Filho, OAB/RJ (Rio de Janeir Bar) # 58.789, with office at the address Avenida Juscelino Kubitschek, nº 510, 8º andar, São Paulo/SP. Phone: On February 2021, the Federal Prosecutors (11) 307446007, e-mail: [email protected]. Office’s, filed lawsuit against Renova, Samarco, BHP Billiton Brasil and Vale. The Plaints request The Notice mentioned in article 52, § 1 of Law # Renova’s extinction and preliminary injunction on 11,101/05 was published in the Diário de Justiça Renova’s management until the extinction claim is Eletrônico (Electronic Court Gazette) on April decided. The court issued a decision postponing 30, 2021. It was also made available on the the examination of the preliminary injunctions. website (recuperacaojudicialsamarco.com.br) This process is not mature to measure its impacts. according to the availability: EDITAL20210430. PDF (recuperacaojudicialsamarco.com.br), as of May 03, 2021, by the Bankruptcy Trustees. On that same date, the Company Under Reorganization published the above-mentioned notice on its website, which can be found at: EDITAL20210430. PDF (samarco.com).
Samarco has a term of 60 days, counted from the date of publication of the decision that deferred the processing of the Judicial Recovery, to add the Judicial Recovery Plan to the records, pursuant to Article 53 of Law # 11,101 / 05. The deadline for filing the Judicial Recovery Plan in the case file is June 11, 2021.
On April 19, 2021, Samarco filed an auxiliary insolvency application in the United States, seeking, in a preliminary order, to protect its assets in this territory due to the deferral of Judicial Recovery processing, as provided for in Chapter 15 of the North American Bankruptcy Code ( Bankruptcy Code). On April 22, 2021, the Bankruptcy Court of the Southern District of New York (United Stated Bankruptcy Court for the Southern District of New York) issued a favorable decision to Samarco, on a preliminary and provisional basis until the final decision of this court on the application for recognition of the effects of Judicial Recovery in North American territory.
As for the actions filed by the Bank of New York Mellon, (Trustee), in the face of the news of Judicial Recovery request in Brazil , the judge responsible for said actions called the parties for clarification and it was agreed, in a conference call held between the parties on April 13, 2021, that the process would be suspended and that the parties would update the court regarding new developments in 30 days.
On May 13, 2021, the Southern District of New York Court issued an order acknowledging Samarco’s Judicial Recovery as a principal foreign record for the purposes of Chapter 15. Among other issues, 100
SAMARCO MINERAÇÃO S.A. - IN JUDICIAL RECOVERY
BOARD OF DIRECTORS
EFFECTIVE MEMBERS
Atif Nazir Janjua Cláudio Renato Chaves Bastos Nelly Angelica Pazó León Vagner Silva de Loyola Reis
SUBSTITUTES
Kesley Medeiros Julianelli Luis Fernando Madella Athayde Viktor Nigri Moszkowicz
EXECUTIVE BOARD
Rodrigo Alvarenga Vilela Chief Executive Officer and Chief Operating Officer
Cristina Morgan Cavalcanti Chief Financial Officer
Reuber Luiz Neves Koury Planning and Projects Officer
TECHNICAL MANAGER
Lucas Brandão Filho Accountant - CRC-MG 046442/O – TES