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s?vu a;-;6-| RESTRICTED ReportNo. PI- 10 RL' Public Disclosure Authorized Thisreport s for official use only by the BankGroup and specificallyauthorized ornizations or personL It may not be publed, quoted or cited without Bank Group authorization. The Bank Group does not acceptresponbity for the accuracyor completenessof the report.

INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT INTERNATIONALDEVELOPMENT ASSOCIATION Public Disclosure Authorized

APPRAISAL OF

THE MBR IRON ORE PROJECT

MINERACOES BRASILEIRAS REUNIDAS S. A.

BRAZIL Public Disclosure Authorized

June 16, 1971 Public Disclosure Authorized

Industrial Projects Department Currency Equivalents

Exceptwhere otherwise stated all figures are quoted in U.S. dollars (US$). The project cost estimate is shown in both US$ and New Cruzeiros (NCr$) of 1969.

US$1 = Nr$4.06 NCr$1 = US$o.246 NCr$1 rmillion = US$246,305

Weights and Measures

Except where otherwise stated, all tonnages are expressed in Long Tons (LT):

1 Long Ton 1.016 Metric Tons 1 Long Ton = 1.120 Short Tons 1 Long Ton 22,240 Pounds 1 Kilometer(Km) = 0.62 vales

Principal Abbreviations and Acronyms Used

MBR = MineracoesBrasileiras Reunidas S.A. RFFSA = Rede Ferroviaria Federal CAEMI Cia. Auxiliar de Erapresasde Mineracao ICO4 a Industria e Cozerciode M4ineriosS.A. EEM = EmpreendimentosBrasileiros de Mineracao S.A. CMN = Cia. de Mineracao Novalimense SOMISA - Sociedad Mixta Siderurgia

Fiscal Year

April 1 - March 31 BRAZIL

APPRAISAL OF THE MBR IRON ORE PROJECT

TABLE OF CONTENTS

Page No.

SUMMARYAND CONCLUSION§ ...... i

I. INTRODUCTION ...... 1......

II. THE SPONSORS AND THE COMPANY ......

A. CAEMI ...... 2 B. St. John D'el Rey Mining Company ...... 2 C. Hanna Mining Company ...... 2 D. Genesis of the Project ...... 3 E. The Borrower - MBR ., ...... 3

III. WORLD IRON ORE MARKETS ...... 5

A. General Background .... 5 B. Brazilian Iron Ore Production ...... 5 C. Supply and Prices ...... 0 6

IV. THE PROJECT AND ITS EXECUTION ...... 7

A. The Mine - Aguas Claras ...... 7 B. The Ocean Terminal ...... 8 C. Environmental Considerations ...... 8 D. Construction Schedules ...... 9 E. Management, Staff and Labor ...... 9

V. CAPITAL COSTS - FINANCIAL PLAN - PROCUREMENT ...... 10

A. Capital Costs ...... 10 B. Financing Plan ...6 ...... 12 C. Procurement and Disbursement ...... 15

VI. REVENUES - OPERATING COSTS - FINANCIAL ANIALYSIS ...... 16

A. Revenues ...... 16 B. Aguas Claras Operating Costs ...... 17 C. Profitability and Financial Position ...... 18 D. Effects of Expansion on Profitability ...... 20

This report has been prepared by Messrs. R. N. Pigossi, J. W. P. Jaffe, and R. L. Bosson of the Industrial Projects Department and Mr. G. F. Bain of the Transportation Projects Department. Table of Contents (Cont'd)

Page No.

VII. ECONOaIC JUSTIFICATION - RETURNS TO GOVERNMENT AND SHAREHOLDERS- SENSITIVITY ANALYSIS ...... 20

A. Internal Economic Return ...... 20 B. Beneflts to Government ...... 220 C. Returns to MIBRShareholders ...... 21 D. Split of Project Benefits . . .23 E. Foreign Exchange Benefits . . 23 F. Sensitivity Analysis. 24

VIII.AGREEMENTS REACHEDDURING NEGOTIATIONS ...... 24

TABLES

1. Reconstructed Consolidated Income and Cash Flow Statements for All Companies Being Merged into MBR (1966-1971). 2. Reconstructed Consolidated Balance Sheets for all Compaie Being Plerged into MBR (1966-71). 3. Protected Income Statements for Aguas Claras Operation (FY 1974-89). 4. Depletion Allowance for Aguas Claras Operation (FY 1974-84). 5. Projected Cash Flow Statements for Aguas Claras Operation (FY 1971- 89). 6. Projected Cash Flow Statements for Combined Iron Ore Operations (FY 1971-89). 7. Projected Balance Sheets for Combined Iron Ore Operation. (FY 1971- 89). 8. Distribution of Earnings from Aguas Claras Operation (FY 1972-89). 9. Internal Financial Rate of Return, Aguas Claras Operation. 10. Return on Investment for MBR Shareholders and Brazilian Government at Ultimate Production Levels of 10 and 15 million Tons per year. 11. Estimated Split of Net Project Benefits (FY 1972-89). 12. Net Foreign Exchange Earnings from Aguas Claras Operations - Base Project with Sales Buildup to 10 Million Tons per Year. 13. Net Foreign Exchange Earnings from Aguas Claras Operations - Expansion Project with Sales Buildup to 15 Million Tons per Year.

ANNEXES

1-1. MBROwnership and Control 1-2. ICOMI Financial Indicators 1-3. Hanna Mining Company Financial Indicators 1960-70 2-1. Marketing Annex - The Outlook for Iron Ore 2-2. Brazilian Iron Ore Production and Exports 2-3. Trends in Japanese Ore Supplies 3. The Mine 3a. List of Major Units of Mining Equipment Table of Contents (Cont'd)

3b. Mine Facilities Pictorial Flow Sheet 4. Ocean Terminal 5. EnvironmentalConsiderations 6. ImplementationSchedule 7. Detail of Capital Investment 8. Estimated Value of MBR equity as of March 31, 1971 9-1. Equipment to be Financed by World Bank 9-2. ConstructionMaterials to be Financed by World Bank 9-3. Computationof Probable Foreign Exchange Content of Internationally-BidCivil Works That Can Be Financed by the Bank 10. Estimated Schedule of Disbursements 11. Ore Sales 12. Average Operating Costs for Aguas Claras Operations 13-1. Sensitivity Analysis 13-2. Notes to Sensitivity Analysis 13-3. Cash and Profit Break-Even Prices at Constant Sales Level of 9 Million Tons per Year 13-4. Cash and Profit Break-Even Sales Levels at Constant Ore Price of US$8.38/Long Ton

Maps

1. General Location 2. Ore Deposits in the Iron Quadrangle 3. Location of Sepetiba Terminal

BRAZIL

APPRAISAL OF THE MBR IRON ORE PROJECT

SUMMARYAND CONCLUSIONS i. MineracoesBrasileiras Reunidas, S.A. (MBR), a private Braziliah company, has requested a Bank loan of US$50 million to cover one-third of the cost of a project to mine and export a minimum of 10 million tons of iron ore per year beginning in late 1973 from a large deposit near Belo Horizonte in the State of Minas Gerais. Tht ore will be shipped over a largely existing railroad to a new marine ti!rminalsome 640 km away to be constructedon Sepetiba Bay, about 100 km west of Rio de Janeiro. The terminalwill be able to handle bulk ore vessels of up to 250,000 DWT, among the largest presently being built. Transport from mine to port will be provided by the Federal Railways (Rede FerroviariaFederal - RFFSA) which has requested another IBRD loan of US$46 million to finance part of the new rolling stock and spur lines needed to serve the MBR project. The RFFSA loan is appraised in IBRD Report PTR-77a; the present report is concerned only with the appraisal of the loan to MBR for the mine and ocean terminal. ii. The project sponsors are Cia. Auxiliar de Empresas de Mineracao (CAEMI),a private Brazilian holding company engaged primarily in minerals developmentand steel production,and Hanna Mining Company of the U.S., which also was a sponsor of the Alcominas Aluminum Project in Brazil, to which the Bank made a loan of US$22 million in 1968 and which started operations in the fall of 1970 about on schedule and within budgeted cost. CAEZI, and therefore Braziliannationals, will control MBR. Total initial MBR equity will be US$80 million, consistingof existing fixed assets val- ued at US$50 million and US$30 million in new cash investmentsby the sponsors, a consortiumof Japanese steel and trading companies,and a U.S.- owned shipping company. iii. MBR's ore reserves are high grade and are estimated at over 1.6 billion tons. Aguas Claras, the largest of 36 deposits in MBR's concessionarea and the mine upon which the project is based, contains over 375 million tons (proven and inferred) of mineable hematite ore with an average iron content of 68 percent. The deposit has been explored adequately,has very little overburden,and is well suited to the open-pit mining operation envisaged. Engineering design and project executionwill benefit from the sponsors' experiencewith similar large-scalemining projects in the U.S., Canada and Brazil. Hanna will provide technicalassistance at cost during the construction and operating phases. The ecological implicationsof the project have been examined in detail and it is judged that the project can be carried out with minimum adverse effects on the regions surrounding the mine and ocean terminal, provided that certain precautionsare taken. - ii -

iv. Total project Costs are estimated at about US$143 million, with the foreign exchange component varying between 45 and 52%, depending on the degree of participationin procurement by Brazilian manufacturersand contractors. Project costs will be salit about evenly between the mine and the terminal.

v. Financing requirements for the project are estimated at about US$155 million, of which US$30 million will be financed by equity and the remainder by loans from IBRD (US$50 million), five Japanese trading companies (US$50 million), the Japanese Eximbank (US$7 million), and the U.S. Eximbank (US$18 million). There will be no Brazilian loans made for the project, but the US$50 million Japanese loan will be untied and can be used for expenditures in Brazil. The other bilateral funds will be tied to purchases in the U.S. and Japan respectively. Close to 60% of the proposed Bank loan will be used for equipment and constructionmaterials procured worldwidernd the remainder for internationally-bidcivil works and interest during constructionon the Bank loan.

vi. Iron ore prices, which were depressed through most of the 1960s, recently have firmed up, and the growth of demand for iron ore is expected to require free world production to increase by about 40 million tons each year throughout the 1970s. Over 70X of the project's initial annual output of 10 million tons has been committed in long-term sales contracts with six Japanese steel companies and another 20% to buyers in Europe and Argentina. While these arrangementsprovide a sound commercialbase for the project, it should be noted that the project will be highly dependent on the Japanese steel market. Because of the very good quality of ore that MBR has to offer,, both as to physical properties and chemical composition,it is anticipated that additional long-term contractswill be concluded prior to the project start-up and that the company will increase its annual production to 15 million tons within the first five years of operations.

vii. On the basis of conservativelyprojected ore sales and prices and operating costs, it is estimated that MHR's Internal financial return before income taxes will be 19Z with a sales build-up to 10 million tons per annum or close to 25% if sales increase to 15 million tons annually within the first five years of operations as expected. The internal economic return of the combined MBR and railway projects is expected to range from 18% at the lovor build-up level to 23% at the higher. Sensitivity tests on the impact of various adverse circumstancesindicate that the combined economic return is not likely to drop below 13%, even with a combination of gradually increasing operating costs and price erosion. viii. Since ore reserves are ample and easily accessible, and mining costs therefore can be determinedwith more than a normal degree of accuracy in what otherwise are inherently risky mining projects, only serious adverse commercial circumstances,such as the occurrence of severe recessions in the steel industriesof Japan and elsewhere,would endanger MBR's financial position. Adequate protection of the Bank's loans to MBR and RFPSA is afforded (i) by the strong cash generating ability of the project itself; (ii) by a US$20 million shareholdersguarantee to cover cost overruns and - iii - working capital requirementsuntil such date as the project has demonstrated thetcapacity to mine and siip ore at a rate above break-even; (iii) by liquidity protectionprovided through restrictionsplaced on MBR's ability to declare dividends or reinvest surpluses in fixed assets; and (iv) by a mortgage on MBR's assets that the Bank will hold. ix. In developingone of Brazil's major and abundant resources, the project is of high economic priority to the country. Average net foreign exchange benefits are expected to range from about US$50 million to about US$74 million annually, depending on the ultimate level of sales. Over an assumed project life of 15 years, about 73% of net project benefits are expected to accrue to the Brazilian Government through various direct taxes and reductions in Government subsidies to the Brazilian Railways. Another 11% will accrue to Brazilian shareholders; thus about 84% of net benefits are expected to remain in Brazil. In comparison with other mining projects that the Bank Group has assisted in the past, this is an unusually high return 'o the country in which the mine is located. x. The project provides a suitable basis for a Bank loan to MBR of US$50 million equivalent for a term of 15 years, including a grace period of about 3-1/2 years, with provision for accelerated repayment if dividends to the sponsors surpass certain stipulated levels.

BRAZIL

APPRAISAL OF THE MBR IRON ORE PROJECT

I. INTRODUCTION

1.01 Mineracoes BrasileirasReunidas S.A. (MBR), a private Brazilian corporation,has requested a Bank loan of US$50 million equivalentto cover one-third of the projected cost of an iron ore export project (known as the Aguas Claras or MBR Project). The loan would be guaranteed by the Brazilian Government. A second Bank loan of US$46 million has been requested by the Rede FerroviariliFederal S.A. (RFFSA) to finance part of the railway facilities required to serve the MBR Project and estimated to cost approximately US$113 million. The railway loan is appraised separately in IBRD Appraisal Report PTR-77a. 1/

1.02 The project sponsors, the CADII Group of Brazil and Hanna Mining Company of the U.S., first approached the Bank for financing in 1965, and numerous discussions took place over the next four years as the project concept evolved. Full appraisal by the Bank could not begin, however, until mid-1970, when MBR reached agreement with RFFSA on a rail freight contract and signed a long-term ore sales contract with Japan. Appraisal missions visited MBR headquartersin Rio de Janeiro and the project sites near Belo Horizonte and on Sepetiba Bay (see Map 1) in June and October/November1970 and a special mission to consider the project's ecological implicationswent to Brazil in January 1971. Throughout the appraisal period, MBR had con- current financial discussionswith co-lenders in Japan and the U.S. that resulted in firm commitments to cover required financing for the project.

1.03 This would be the second direct Bank loan to the industrial sector of Biazil; the first was the Alcominas Aluminum Project (Loan 526-BR, January 1968) which also was partly sponsored by Hanna Mining Company and was satis- factorily completed in November 1970.

1.04 This report has been prepared by the appraisal team, consistingof Miessrs.Pigossi, Jaffe and Bosson of the IndustrialProjects Department and Mr. Bain of the TransportationProjects Department.

II. TIIESPONSORS AND TIIECOlMPANY

2.01 The principal sponsors of the project are Cia. Auxiliar de Empresas de Mineracao (CAEMI), a Brazilian holding company, and Hanna Mining Company of the U.S. (Hanna), which is investing in the project through its subsidiary, St. John D'el Rey Mining Company. A Japanese group that will purchase a major portion of MBR's iron ore output will have a minorJty interest in MBR, as will a Liberian subsidiary of a U.S. shipping company (Annex 1-1).

l/ Referred to herein as the "Railway Report'. -2-

A. CAEMI

2.02 CAEMI is a Brazilian holding company, incorporatedin 1951, whose principal activity is manganese ore mining and exporting in the State of Amapa (N4orthernBrazil) carried out through Industria e Comercio de Minerios S.A. (ICOMI), owned 51% by CAEMI and 49% by Bethlehem Steel Corporation of the U.S. ICOMI also serves as CAEMI's principal vehicle for controlling various iron ore activities in the State of Minas Gerais, a speciality steel mill in the State of Sao Paulo, a plywood mill in Amapa, a shipping company which operates tugboats and ocean-going barges, and a company which carries out mineral explorationand research. ICOMI is in a strong financial position, as indicated in Annex 1-2, which probably understates the company's net worth considerably. Projections of ICOMI's future sales indicate that CADII will receive at least US$2.5 million in annual dividends from ICOMI throughout-theimplementation period of the MBR project. CAE1I thereby will have sufficient debt raising ability to allow the company to cover its obligations under the MBR ShareholdersAgreement (Para. 5.08) to provide MBR up to US$10 million for cost overruns and initial working capital deficits that might be incurred. During loan negotiations,CAEMI agreed not to sell or otherwise encumber its shares in ICOMI throughout the period the Share- holders Agreement is in effect, thus protecting CAEMI's principal source of inccme.

B. St. John D'el Rey Mining Company

2.03 St. John D'el Rey is a British corporation that has been engaged in iron ore exploration and mining in Minas Gerais for over 40 years. Its affairs are controlled and managed by Hanna Mining Company of the the U.S., which acquired 51.8% of its stock in 1958. The balance of St. John shares are held in the U.S. and U.K. by private and institutionalshareholders. Only a small portion of the shares are traded regularly. St. John's principal activities are carried out through a wholly-owned Brazilian subsidiary, Cia. de Mineracao Novalimense (CMN), which holds and operates iron ore con- cessions in the immediate vicinity of the City of Belo Horizonte. Its most iiportantproperty is the Aguas Claras deposit, upon which the MBR Project is based.

1'. Hanna Mining Company

.04 Hanna Mining Company and its subsidiary companies collectivelyare the second largest producers of iron ore in the world, with operations in the U.S., Canada, Australia, and South America. The company has shown strong financial growth over the past ten years, as indicated in Annex 1-3. Hanna is responsible for the technical planning and execution of the MBR mining project (Para. 4.16), and will be an indirect guarantor of the Bank loan, providing US$7.5 million to back-up a US$10 million obligation by St. John under the ShareholdersAgreement. Hanna is financially sound and has sufficient resources to cover such a guarantee. -3-

D. Genesis of the Project

2.05 In 1965, CAEMI and St. John entered into an agreement establishing the conditionsunder which they would consolidatetheir iron ore properties and operations in Brazil. An initial plan for exportationof pre from the Aguas Claras reserve through a new terminal on Sepetiba Bay was approved by the President of the Republic in December 1966. In April 1970 Mineracoes BrasileirasReunidas S.A. (MBR), the CAEMI subsidiary that will carry out the project, signed a long-term contract with six Japanese steel companies for delivery of an aggregate of 105 million tons of Aguas Claras ore over a 16-year period. Finally, in July 1970 MBR entered into an agreementwith RFFSA for rail transport from the mine site to the Sepetiba terminal, and Bechtel Overseas Corporation cf the U.S. completed a study of the proposed project, showing it to be technicallyand economicallyfeasible. These actions provided a solid base ipon which financing for the project could proceed.

E. The Borrower - MBR

1. Ownership

2.06 Following consolidationof the CAEMI and St. John assets, MBR will be jointly owned 51% by a holding company, Empreendimentos Brasileirosde Mineracao S.A. (EBM) and 49% by St. John. EBM will in turn be owned 61% by CAEMI which will provide CAEMI with a 31.1% indirect share of MBR. The balance of EBMIownership being held (20%) by a consortium of the six Japanese steel companies buying ore from MBR and the five Japanese trading companies providing debt finance for the project, and (19%) by Universe Tankships, Inc. a Liberian subsidiaryof National Bulk Carriers, a U.S. shipping firm. Hanna owns 51.8% of St. John and has, therefore,a 25.4% effective share of MBR. Annex 1-1 illustrates the pattern of ownership and control for MBR.

2.07 Effective ownership of MBR will be as follows:

% Ownership

EBM 51.0

CAEMI 31.1 Japanese 10.2 National Bulk Carriers 9.7

St. John D'el Rey 49.0

Hanna 25.4 Minority Shareholders 23.6 -4-

2.08 The sponsors have indicated that they plan to offer shares in EBM or MBR itself to the Brazilian public once the project has reached the point where such shares would be marketable.

2. Existing Equity

2.09 'i'hetotal cash investment of CAEMI and the St. John shareholders in the assets being consolidatedinto MBR is US$29.9 million. The partnere have agreed to value their respective properties at the time of merger on the basis of the original cost of each plus interest at 6% per annum from the purchase date tuo to the merger date. This values existi1i equity at somewhat more than US$50 million, tae figure the sponsors wilk use in the first consolidatedbalance sheet. itstudy undertaken by the Bank indicates that US$50 million represents the approximatepresent value eS anticipated future MBR cash flows using a discount rate of 20%. This coetitutes a reasonable basis for acceptanceof the proposed valuation (Anne- 8).

3. Past Financial Performance

2.10 Financial performance during the past 5 years of the various CAEKI and St. John iron ore operations being consolidatedinto MBR is summarized below:

CAEMI and St. John Iron Ore Operations Consolidated Financial Indicators (US$ million)

Jan-March 1966 1967 1968 1969 1970 1971 ft

Shipments (millionLT) 2.2 1.9 1.8 1.8 2.4 0.6 Gross Revenues 19.0 16.4 12.4 17.2 17.4 4.22 Net Earnings (0.3) (0.8) (0.5) 0.4 1.2 0.2 Cash Flow 0.7 0.3 0.5 1.3 2.1 0.5 Quick Ratio 0.35:1 0.46:1 0.41:1 0.49:1 1.0:1 1.1:1

/1 Unaudited.

'.11 These figures are amplified inrTables 1 and 2, which split consolidated totals into CAEMI and St. John components. The statements show that, on their own, the existing operations have been only marginallyviable for much of the period. However, both groups have shown improvement during the last two years and, had all of the operationsbeen consolidatedin a single tntity, it is likely that their overall performancewould have been somewhat better than the above figures indicate. It also should be noted that Hanna's purchase of St. John shares in 1958 was specificallyaimed at development of the Aguas Claras deposit. The existing St. John operations, therefore, have absorbed some of the Aguas Claras development costs, a8d this has tended to redlucetheir apparent profitability. III. WORLD IRON ORE MARKETS

A. General Background

3.01 The long-term outlook for iron ore recently was reviewed by the Bank's Economics Department, whose assessment is attached in Annex 2-1.

3.02 The Bank's view is that world steel production, excluding Japan and the Asian centrally-plannedcountries (ACPC) 1/, can be expected to reach 750 million ingot tons by 1980, in contrast with actual production of 474 million tons in 1969. Japan's steel production,which amounted to 82 million tons in 1969 and about 93 million tons in 1970, is predicted to reach 140 million tons in 1975 and perhaps 200 million tons by 1980. It is anticipated that total world steel production (excludingthe ACPC), will increase from about 556 million ingot tons in 1969 to 950 million tons in 1980.

3.03 Japanese crude steel production of 140 million tons in 1975 implies a need for over 160 million tons of iron ore imports in that year. Of this amount, about 140 million tons were contracted by the end of 1970, including 7 million tons from MBR.

B. Brazilian Iron Ore Production

3.04 Because of its immense, high quality iron ore reserves, estimated at over 30 billion metric tons, or 12% of known world reserves, Brazil is rapidly developing into a major force in the world iron ore market (Annex 2-2). In 1969, Brazil produced about 28 million tons of iron ore, equivalent to 4 percent of world production. During the same year, about 19 million tons were exported, or approximately 13 percent of total world exports. Companhia Vale do Rio Doce (CVRD), the Government mining company which accounts for 80 percent of Brazil's shipments overseas and is the fifth largest iron ore exporter in the world, exported about 24 million tons in 1970. CVRD is negotiating additional contracts with European and Japanese consumers and plans to expand shipments to over 40 million tons annually by 1975.

3.05 In addition, preliminary surveys of high grade deposits in the Serra dos Carajas region in the State of Para indicate reserves sufficient to justify large scale mining operations. A joint company set up by CVRD and a subsidiary of United States Steel Corporation is undertaking detailed exploration,which is expected to be completed by the end of 1971. If the deposits are developed and contracts are secured, the venture probably will be exporting an initial 30 million tons of ore per annum by the late 1970's to the U.S., Europe and Japan.

1/ Mainland China, North Korea, North Vietnam. -6-

C. Supply and Prices

3.06 In 1970, world iron ore supplies had difficulty keeping up with demand for the first time in more than 10 years. C.I.F. prices, which had declined by as much as 30 percent during the preceding 10 years or so as port facilitieswere improved and ship sizes increased, rose by 8 percent at the beginning of the year. Current trends indicate that the market situation -is likely to remain strong up to 1972-73, when a number of recently-started projects are due to come on-stream. Thereafter, price movements are less predictable and likely to be shaped primarily by trends in supply, handling, and ocean transport.4ioncosts, as well as by the organizatiQ of world markets. On balance, these factors are expected to keep average prices during the mid- and late-seventiesin the neighborhoodof recent levels, in actual terms. In real terms, however, prices may decline as much w Jy 10 percent during this period.

3.07 Another factor of importance to price considerationsis the practice introduced by the Japanese steel companies,which collectivelyare by far the world's largest importers of iron ore, of concluding long-term ore purchase contracts stipulatingnot only volumes but prices as well. This has led to the adoption of similar contracts by the European steel companies. Since nw iron ore mines require increasingly large amounts of fixed investment, primarily due to high infrastructure costs associated with mine development, it is not likely that future projects will be undertaken without the assurancoe provided by off-take contracts for a large part of the production. In con- sequence, the world iron ore market is likely to become more stsble than it has been in the past.

3.08 Within the Japanese supply sphere (Annex 2-3), as with most of the world market, the F.O.B. selling price of iron ore specified in individual contracts is greatly influencedby iron content and chemical .ad physical characteristicsof the ore. In such respects NBR will enjoy several advantages over its competitors. First, it will produce a top-quality ore (68 percent iron and low in phosphorus,silica, alumina and sulfur), the deoaad for which will continue to increase as steel companies maintain their effoAwi to improve blast furnace productivity,reduce the coke rate, and meet increasingly strict air pollution standards. The overall quality of the MER ore probably will be superior to any other ore under contract to the Japanese steel mills. The combined silica/aluminacontent of the MBR ore, at 3%, is much lower than that for ores from GVRD (3-7%),Australia (8-10X). and India (some over 12%). The sulfur content of the MBR ore, at 0.01%, is the lowest of all the contracted ores, a positive factor in view of Japan's increasing concern with sulfur-derivedpollution. The typi.l sulfur content for other supplies is in the range of 0.5-0.8%. The MBR ore phos- plhorus content of 0.08% is only marginally higher than that of the majority of the other ores. In addition to advantages stemming from the ore itself, the loading facilities proposed for tho Sepetiba terminal will accommodate the largest ore carriers planned for the mid-70's and thus make transport costs for MBR ore competitivewith those of closer producers not yet equipped to lhandle such large ships. -7-

3.09 These considerationshave resulted in very favorable contract terms for MBR. While MBR's selling prices will be influencedby worldwide movements in the price of iron ore over the long run, its competitiveadvantages should always enable it to receive close to the maximum prices offered at any given time.

IV. THE PROJECT AND ITS EXECUTION

A. The Mine - Aguas Claras

4.01 Full descriptionsof the iron ore reserves and the proposed mining and ore preparationmethods and facilitiesare given in Annex 3.

1. Ore Reserves

4.02 Following consolidationof the CAEMI and St. John iron ore operations, MBR will own properties covering an area of 45 square kilometersin the vicinity of Belo Horizonte in the State of Minas Gerais (see Map 2). These contain reserves estimated at over 1.6 billion tons of high grade iron ore distributed in 36 deposits. Aguas Claras, the largest and highest grade deposit, contains over 375 million tons (250 million tons proven and the balance inferred)of mineable open-pit hematite with a dry grade of 68 percent iron and very low contents of phosphorus, sulfur, silica and alumina. It will be the center of MBR mining activities. The deposit has been thoroughly explored and sampled by means of tunnels, drilling and surface pitting and ore reserves have been estimated conservatively. The orebody has sufficient proven reserves to sustain a mining rate of 15 million tons of iron ore per year for 17 years.

2. Mining Plan

4.03 Because the Aguas Claras orebody is massive and outcropping,it is well-suited to open-pit mining and has a very favorable stripping ratio. Conventionalside-hill open-pit mining methods will be used, with ore and waste drilled, blasted and loaded by shovels into trucks for haulage to the processing plant or waste dumps. Operating 6 days per week and 3 shifts per day, the rate of mining initially will be about 12 million tons of crude ore per annum to produce 10 million tons of saleable ore. A list of the major units of mining equipment is shown in Annex 3a and a pictorial flowsheet of the mine and preparation plan in Annex 3b.

3. Ore Preparation

4.04 The ore preparation plant will consist of primary crushing, screening,secondary crushing, final screening and washing, and hydraulic classificationfacilities. The design of the process plant and ore handling facilitiesis based on data furnished by extensive laboratoryand -8-

pilot tests and follows well-establishedpractice. In its initial confi- guration, the plant is expected to be capable of operating at a rated capacity of 15 million tons of crude ore per year, with provision for future expansion beyond that level.

4.05 Total initially-saleableproduction is expected to amount to about 83 percent of the ore mined. The balance will consist of very fine material (minus 100 mesh) that initiallywill be stored. The company is actively investigating the possibility of marketing this fraction, either in its natural state or as cold-formedpellets.

B. The Ocean Terminal

4.06 A full description of the ocean terminal is provit in Annex 4.

4.07 The terminal will be located on property owned by PMR on Guaiba Island, 1,000 meters off-shore at the entrance of Sepetiba Bay and about 100 km west of Rio de Janeiro. This site was selected after consideration of various alternative sites along the Brazilian coast, giving due weight to technical and economic factors, as well as the feasibilityof transport (Annex 5). The terminal will receive and unload unit trains of iron ore, provide stockpiling facilitiesfor a minimum of three grades of ore, and load ocean-going vessels up to the 250,000 DWT class. The island will be linked to the mainland by a steel piling railway trestle approximately 1,740 meters long which will join with the existing railway whlch runs along the northwest shore of Sepetiba Bay. A small causeway is to be constructed from the island to connect with the trestle and to provide shelter for the four tugs which will assist ships in mooring at the pier. A general layout of the Bay, showing the location of the terminal facilities, is shown in Map 3.

4.08 Sufficient space exists at Guaiba Island and its immediate off- shore areas for future expansion of operations to an annual level of 25 million tons, and provision has been made in the terminal design for additional facilities to meet that level. Adequate provisiOnshave been made for the supply of fresh water and electric power and the disposal of sewage. Additional facilities for the collection of oily wastes from the ore/oil carriers loading at the terminal will be provided if they are demed necessary by studiesto be undertakenduring the next few months (Para. 4.11). The existing approach channel to the terminal site will be dredged to a depth of 22.5 meters and a width of 300 teters to accommodatebulk oil./ore carriers of up to 250,000 DWT.

'+.09 The mine and terminal will be connected by a 640 km rail line, most of which is already in existenceand which is describedin the Railway Report.

C. Environmental Considerations

4.10 It should be possible to carry out the MBR project successfully with minimum adverse environmentaleffects on the regions surrounding the - 9 - mine and ocean terminal. MBR is aware of the importance of this issue particularly in view of the project's size, and the Company has agreed to take a number of steps to ensure that the project not only will meet current legal requirementsregarding environmentalcontrols, but also that its actions will not foreclose future options for non-industrialuse of land and water in the regions of the project sites.

4.11 The Bank's study of environmentalissues and the conclusionsre- sulting therefrom are detailed in Annex 5. This investigationincluded a special mission to the Sepetiba terminal site comprising several special- ists in the field of ecology. The findings of this mission were discussed with the project sponsors, and agreement was reached during negotiations that the execution and operation of the project would be carried out with due regard to ecological and environmentalfactors. More specifically, MBR has agreed to prepare plans, acceptable to the Bank and the Brazilian Government, by the end of 1971 for protecting the waters in and around Sepetiba Bay from pollution originating from vessels visiting the terminal or from on-shore wastes, and to carry out these plans, or acceptable alternatives,prior to completion of the project. In addition, MBR has agreed to consult with the Bank prior to implementationof any plans to erect a pelletizing plant at Sepetiba Bay, should the Company's current investigationsof such a plant indicate that its location at the Bay would be desirable. These restrictionsshould enable the Bank to take an active part in any MBR planning and execution pertaining to those developments most likely to affect the ecology at the terminal site.

4.12 At the mine and ore preparation plant MBR will undertake a number of measures to control dust and to filter and purify water used in ore processing. The proposed methods appear satisfactory.

D. Construction Schedules

4.13 The project constructionschedule (Annex 6) is based on MBR's con- tractual obligation to start shipping ore to Japan on October 1, 1973. To meet this date, mining must commence by July 1, 1973 in order to allow buildup of adequate ore stockpiles at the terminal. This means that construction should start no later than July 1971 for the mine and October 1971 for the terminal. Preliminary engineeringis underway and to date the project is on schedule.

E. Management, Staff and Labor

4.14 Primary responsibilityfor engineering design and supervisionof the project during the constructionphase will lie with Bechtel Overseas Corporation of San Francisco, California,although some of the work will be sub-contractedto engineering firms in Brazil. A contract for Bechtel's services has been drawn up and is satisfactory. It is anticipated that Bechtel also will be employed as Technical Adviser to RFFSA in the execution of the railway portion of the project, assuring close coordinationof the total project at the working level (RailwayReport, Para. 4.09). - 10 -

4.15 To provide for coordinationof project implementationat the policy level, MBR and RFFSA have agreed to establish a joint managementbody consistingof senior officials of both organizationswho have authority to take specific actions necessary to keep the project on schedule.

4.16 Hanna has agreed to make available to MBR, at cost, advisory services on all technical and economic aspects of the project, and to provide training of Brazilian personnel in the U.S. and Canada. The basic prin- ciples of the agreement appear satisfactory. Overall management control and responsibilityfor day-to-day operationswill rest with experienced Brazilian executives, most of whom are coming from CAEMI. MKR'e President and chief administrativeofficer is Dr. Arnaldo Walter Blank, former Presi- dent of the Banco Central do Brasil, who has over 40 years of experience in Brazilian banking and financing. The Vice President responsSble for MBR operations is Sr. Daniel G. Sydenstricker,former manager of ICOMI's manganese operations in Amapa and a Director of CAEMI.

4.17 Total staff and labor requirementsat a production level of 10 million tons per annum are estimated to be about 760 at the mine and 180 at the terminal, most of whom will be Brazilian* filling new jobs created by the project. Labor pools in the regions surroundingboth activities are considered of sufficient size to satisfy all skilled and semi-skilled labor requirements,although considerabletraining will be necessary. Labor requirementsduring constructionwill be close to 1,500 people.

V. CAPITAL COSTS - FINANCIAL PLAN - PROCUREMENT

A. Capital CostS

5.01 The project cost estimate, based on a feasibilitystudy undertaken for MBR by Bechtel Overseas Corporation, is detailed in Annex 7 and sumar- ized below: - 11 -

Project Cost Estimate

NCr$ millions US$ millions Foreign Local Foreign Local Currency Currency Total Currency Currency Total

Mine and Preparation Plant 90.9 87.3 178.2 22.4 21.4 43.8

Ocean Terminal 110.8 60.9 171.7 27.3 15.0 42.3

Engineeringand Project 26.0 34.5 60.5 6.4 8.5 14.9 Management

MBR AdministrationDuring 5.3 5.7 11.0 1.3 1.4 2.7 Construction

Uwners' Advance Expenditures 3.2 6.1 9.3 0.8 1.5 2.3

Working Capital 16.2 31.3 47.5 4.0 7.7 11.7

Price Escalation 23.1 30.5 53.6 5.7 7.5 13.2

Contingency 24.0 23.5 47.5 5.9 5.8 11.7

TOTAL PROJECT COSTS 299.5 279.8 579.3 73.8 68.8 142.6

Financial Charges During 51.2 - 51.2 12.6 - 12.6 Construction

TOTAL FINANCING REQUIRED 350.7 279.8 630.5 86.4 68.8 155.2

5.02 The estimates are considered reasonableand reflect the combined experienceof Hanna and CAEMI with similar large scale mining operations in Canada, the U.S., and Brazil, and their knowledge of the region where the Aguas Claras mine is located. Total contingency 1/ and escalation allowances of 8.2% and 9.3% respectivelyprovide adequate protectionagainst price inflation and unexpectedconstruction problems. A provision of US$3.3 million to cover the possible cost of environmentalprotection facilitieshas been included in the above estimates and is considered conservative.

5.03 The estimated foreign exchange component, US$73.8 million, or 52% of total project costs, assumes that all major items of equipment and civil works contracts submitted to internationalcompetition will be supplied or carried out by foreign firma. Brazilian suppliers and contractors are expected to be competitive in several categories, so that actual foreign exchange costs could be as low as US$63.9 million, or 45% of project costs.

1/ The overall contingencylevel has been determined by aggregating contingency requirementsfor individual cost componentsbased on probabilities of quantity and price overruns assigned to each. - 12 -

Possible increases in individualcost elements due to the 15% preference that will be given to Brazilian suppliers (Para 5.15) are adequately covered in the contingency allowance

B. Financing Plan

5.04 The financingplan is as follows:

Projected Financing Plan

US$ mili^on

Long-term Debt

IBRD 50.0 Japanese Trading Compunles 50.0 Japanese Eximbank 7.0 U.S. Eximbank 18.2 125.2

New Equity

St. John 14.7 CAEMI (EBM) 15.3

30.0

Total New Financing 155.2

5.05 At completion of the project and in accordance with the above financing plan, MBR's pro-forma capitalizationis expected to be approximately as follows: - 13 -

Pro-forma MBR Capitalization- September 30, 1973

US$ million US$ million %

Long-Term Debt 125.2 59.1

Equity:

New Equity 30.0 Existing Equity (3/31/71) 5(0.0 Retained Earnings /1 t.6

Total Equity 86.6 40.9

Total Capitalization 211.8 100.0

/1 Projected retained earnings from 3/31/71, the MBR consolidationdate to 9/31/73, the beginning of Aguas Claras Operations (Table 6).

1. Equity Financing

5.06 The project sponsors will be required to advance a total of US$30 million in new equity to MBR in the ratio of 51% (US$15.3)million) for CAEMI and 49% (US$14.7 million) for St. John. Of this new equity contribution,an estimated US$2.3 million in advance owners' expenditureswere incurred prior to 1971 and approximatelyUS$10 million in additional funds will be drawn down prior to effectivenessof the Bank loan to finance work that must be undertaken during the interim period to keep the project on schedule. Common shares will be issued for the US$30 million in new equity, and payment for these shares will be made on a dollar-for-dollarbasis with drawdown of the first US$30 million on the Bank loan. CAEMI has arranged to finance all its new equity contributionto MBR through sale of shares in the holding company, EBM, that will own 51% of MBR's shares (para. 2.06); US$8.2 million will come from the Japanese trading and steel companies for their 10.2% share of MBR and the balance will be covered by Universe Tankships.

5.07 The St. John portion of new equity will be raised through a rights offering to its shareholders.

2. ShareholdersAgreement, Security Agreement, Pledge Agreement

5.08 In addition to their obligations to provide US$30 million in new equity for the project, CAEMI and St. John have agreed to advance MBR up to an aggregate of US$20 million in additional funds to cover (i) possible cost overruns to complete the project; (ii) working capital deficienciesbetween the time of project completion and a date, not less than 12 months thereafter, upon which the project shall have shipped a total of 4 million tons of ore over a period of six continuousmonths (80% of initial capacity);and (iii) at the end of the fiscal year during which the above test has been satisfied, - 14 - additionalworking capital to increase, if necessary, current assets of MBR to a level at least equal to its accounts payable plus MBR's followingyear's full debt service (principaland interest). These funds must be advanced in a form and on terms satisfactoryto the Bank, either as equity or as subordinated loans that can be repaid only after certain liquidityrestrictions are met. CAEMI's portion of the shareholders'guarantee will be 51%, or US$10.2 million, and St. John's will be 49%, or US$9.8 million. Hanna Mining Company has agreed to provide unconditionallyup to US$7.5 million to back up St. John's obligations (the Security Agreement); and, in lieu of firm commitments for the remaining US$2.3 million St. John obligation,St. John has agreed to pledge all of its shares in MBR to the Bank (the Pledge Agreement).

3. Debt Financing

5.09 The proposed US$50 million IBRD loan will be for 13 years at the standard interest rate plus a 2% BrazilianGovernment guarantee fee. Prin- cipal and interest will be in 24 equal installmentsbeginning on December 1, 1974, 14 months after the projected start of Aguas Claras operations. Provisionhas been be made for acceleratedrepayment of the Bank's loan in accordancewith the proceduresset forth in Para. 7.08. From a security standpoint,the Bank loan will rank pari passu with other senior debt.

5.10 The five Japanese trading companies handling the long-term ore purchases from MBR will serve as the conduit for a loan to MBR of US$50 million, comprisingUS$30 million from the Japanese Eximbank and US$20 million from commercialbanks. The loan agreementwas signed in February 1971. The effective interest rate is about 9.6%, including Brazilian withholding taxes on the commercialportion. This loan will be secured by a first mortgage on MBR's assets in which the Bank will share ari passu. The combined loan is for 15 years, with repayment of principal proportional to ore shipped under the sales contract at the rate of U.S. Cents 60 per ton for the first 84 million tons (representingabout 12-1/2 years for total repayment). These amounts will be withheld in Japan from payments made to MBR for the ore shipped.

5.11 MBR also is expecting to draw upon an additionalUS$7 million in supplier credits from the Japanese Eximbank for equipment purchases in Japan. This loan has not yet been negotiated,but it is MBR's firm intention to use these funds if the prices on Japanese equipment are competitivewith alternative sources.

5.12 MBR has received a financing cormitment from the U.S. Eximbank totaling US$26.3 million, of which US$22.5 million 1/ can be applied against purchase of U.S. goods and services and $3.8 million can be used for local currency expenditures.2/ The financing plan shown in Para. 5.04 indicates that only about 70% of these funds will be needed if the Japanese supplier

1/ 50% will come from Eximbank itself, 50% from commercial banks with Exiinguarantees. 2/ Representinglocal'currency loans guaranteedby Eximbank. - 15 - credits described above are used as intended, leaving a balance of about US$8.1 million. The U.S. Eximbank loan will be for 12-1/2 years, ineludtilng 2-1/2 years grace. The effective overall interest rate wll.l be about Li'.

5.13 With full utilizationof the US$7 million in Japanese supplier credits, the resulting US$8.1 million of uiused US Exim funds, plus the US$20 million shareholderscompletion and working capital guarantee described above. will yield MBR up to US$28.1 million of contingency financing. This is considered sufficient to cover foreseeablecost overruns within a reasonable range of probabilities.

C. Procurementand Disbursement

1. Under the IBRD Loan

5.14 The categoriesof expenditure recommended for Bank finance are:

Recommended IBRD Procurement

Percent of US$ million Total Loan

(a) Equipment to be procured with internationalcompetitive bidding 25.4 51

(b) Constructionmaterials to be procured with internationalcompetitive bidding 4.0 8

(d) Unallocated amount available for expenditures for equipment,materials or civil works 5.0 10

(e) Interest during constructionon IBRD loan 3.0 6

Total IBRD Loan 50.0 100

5.15 Detailed breakdowns of categories (a) and (b) are shown in Annexes 9-1 and 9-2. All goods and services financed under the proposed loan will be acquired through internationalcompetitive bidding. The loan will finance the c.i.f. imported cost of equipment and constructionmaterials, up to US$3 million of interest during constructionon the loan and 54% of internationally-bidcivil works, such fraction corresponding to the estimated foreign exchange component of those civil works contracts most likely to attract meaningful internationalcompetition (Annex 9-3). The foreign exchange component of civil works hgs been estimated on the basis of an eval- uation of likely participationby Brazilian contractors. Actual Bank - 16 - disbursementsfor civil works expendituresare expected to represent no more than one third of the total cost of all civil works in the project, including those to be bid only locally. This is close to the foreign exchange percentage the Bank presently is using for disbursementsof road and port projects in Brazil. The disbursementrate for civil works will be the same whether or not Brazilian contractors are chosen.

5.16 Brazilian manufacturerswill be given a preference on internationally-bid equipment and constructionmaterials equal to 15 percent, which is lower than prevailing import duties. In all cases, the Bank will disburse the full cost of such items even if they are won by Brazilian suppliers. Brazilian manufacturersare expected to be chosen for approximtely 15-20 percent of total equipment purchases and up to 50 percent of the total for constructionmaterials. The equipment component of US$25.4 minllionto be financed by the Bank represents about 63 percent of projected overseas equipment purchases for the project.

5.17 To ensure that the project is kept on schedule the Bank agreed during loan negotiationsto recommend financing on a retroactive basis MBR's actual cash outlays from June 1, 1971 for items that will be purchased in accordance with the Bank's procurement guidelines. The total of such retroactive financing is not likely to exceed $800,000.

2. Under Other Financing

5.18 Out of total project expendituresof US$155.2 million, US$25.8 million, or about 17X, will be tied to specific sources of finance. All overseas purchases of equipment not covered by the Bank loan will be obtained under the Japanese and/or U.S. Eximbank loans. Thes* goods are expected to cost about US$17.6 million and will consist primarily of items that can be obtained on a tied basis in Japan and the U.S. at prices reasonably competitivewith world-wide sources. The U.S. Eximbank loan also will cover the estimated US$7.6 million cost of Bechtel's engineering and constructionmanagement contract.

5.19 The US$50 million loan from the Japanese trading companies will be available for project expendituresanywhere in the world and will be applied mainly to local currency costs.

VI. REVENUES - OPERATING COSTS - FINANCIAL ANALYSIS

A. Revenues

6.01 Details of the ore contracts that already have been signed by MBR are presented in Annex 11.

6.02 Annual ore sales of 9.3 million tons (wet long ton basis) are fixed by long term agreements with five Japanese steel compaflie.(7.3 million tons), British Steel Corporation (1.3 million tons), and Soeiedad Mixta - 17 -

Siderurgia (SOMISA) of Argent:.na(700,000 tons). Each of these contracts provides for periodic renegotiationof the sales price on terms that are likely to favor MBR. A further 700,000 tons annually will be reserved initially for spot sales, following normal practice in the industry. It should be noted that the overall project will be highly dependent on the Japanese steel industry, which will purchase over 70Z of production rewulting from development of the Aguas Claras mine.

6.03 Financial planning for the Aguas Claras operation has been based on an assumed steady sales rate of 10 million tons per year. It is reasonable to expect that this level will be exceeded quickly and that sales from the Aguas Claras mine will rise to 15 million tons per annum within the first five years of operations.

6.04 The three long-term contracts and spot sales are expected to yield annual revenues from the Aguas Claras operation of US$83.8 million, or US$8.38 per ton FOB. These estimates are considered to be conservative.

6.05 While all of the projectionshave been based on prices and revenues FOB Sepetiba Bay, the Japanese and SOMISA contracts give HBR the option to deliver 20% and 50X respectivelyof the total tonnages C & F the destination port. It is likely that the British Steel Corporationcontract will contain a similar provision. MBR currently is investigatingpossibili- ties that are available for taking up these options, either by shipment in its own bottoms, probably through a subsidiary company, or by charter arrangements, and the sponsors feel they soon should be able to make an offer acceptable to the Japanese for C & F shipments beginning in 1975. The Bank will be informed of these arrange'entsas they are finalized.

6.06 For purposes of projectingthe financial condition of MBR as a whole, and not merely the Aguas Claras operation,it has been assumed that the iron ore operationsof the existing St. John and CAEMI propertieswill continue to export at least 2.2 million tons of ore annually through the Port of Rio de Janeiro until 1980. Sales projections for these operations are shown in Para. 9 of the Notes to Tables 3 to 8. These are considered to be reasonablesince the ores coming from the existing mines, like those of Aguas Claras, are of high quality and should remain in strong demand if market conditionsare as projected in Chapter III.

B. Aguas Clare Operating Costs

6.07 Projected operating costs for the Aguas Claraa mine are shown in detail in Annex 11. At the base productionlevel of 10 million long tons per year, they are expected to be as follows: - 18 -

Projected Operating Costa for A&uas Claras Project

Percent of Unit Costs at Sales Price 10 million LTPY (US$8.38/LT (US /LT)

Direct Costs (mine and terminal) 1.73 20.6 Rail Freight 2.62 31.3 Indirect Costs (including average dqpreciationand interest) 1.97 23.5

Average Annual Costs (before income taxes) 6.32 75.4

6.08 These figures assume utilization of equipment and facilities at an average rate of 80%, leaving considerableroom for decreaoee in unit costs with improved operating efficiency. Like the capital cost estimates discussed in Chapter V, they have been based on estimates by the sponsors, assisted by Bechtel Overseas Corporationand other consultants,and reflect their extensive experiencewith similar large-scaleiron ore operationsin Canada and the United States, in addition to their knowledge of Brazilian conditions. On the whole, the estimates are considered to be realistic. Except for depreciationand interest, all costs used in the projections have been escalated at an annual rate of 6% from 1970, when they were made, to March 1977, the end of the initial fixed price period under the Japanese ore sales agreement. It can be expected that thereaftermost inczases in operating costs can be offset by price increasesnegotiated periodicallywith the major ore buyers generally following world inflation.

C. Profitabilityand Financial Position with Aguas Clara Production Buildup to 10 Million Tons 1. Financial Roturn

6.09 Projected financial statements for the Aguas Claras operation, assuming sales buildup to 10 million tons per annum, a sales price of US$8.38 per long ton, and a constant price/cost relationshipafter FY 1977, are shown in Tables 3 to 5. The major indicators are as follows: Prolected Financial Indicators for Selected Years - Aquas Claras (US$ million) Fiscal Year Ending March 31 Total 1974 1975 1976 1970 1980 1985 1989 1974-89 Total Shipments CMLT) 1.4 8.6 10.0 10.0 10.0 10.0 10.0 150.0 Gross Revenues 11.7 72.1 83.8 83.8 83.8 83.8 83.8 1,257.0 Before-Tax Profits (10.6) 7.2 13.5 15.0 17.1 27.4 33.7 304.0 Income Taxes - - - 2.0 2.6 8.2 10.0 67.7 Net Income (10.6) 7.2 13.5 13.0 14.5 19.2 23.6 236.3 Cash Surplus after Debt Service ( 5.0) 10.7 16.1 14.0 15.2 16.7 26.4 249.7 - 19 -

6.10 The projectionsassume that MBR wiLl elect to minimize its tax liabilitiesby taking up full depletionallowances, equal to 20% of minehead value of all ore shipped during the first 10 years of Aguas Claras production. Projected depletionreserves will total US$78.1 million over this period. By law this amount must be capitalizedand thus becomes ineligible for dividends. The cash flow statementsindicate cash surpluseson Aguas Claras account in all but FY 1974, when losses from the first six months of operationwill cause a short-termdeficit. The total project cash flow during constructionand operations,excluding financialcharges and capital inflows, is projected to be US$314.0 million, representingan internal financial rate of return, after taxes, of 17.5%. The return before taxes is estimatedat 18.8% (Table 9).

2. Debt Service Coverage

6.11 Projected cash flow statementsfor the combined operationsof MBR are shown in Table 6. Long term debt service coverage is insufficientin FY 1974 only, rising to 1.7 times in the followingyear and then ranging from 1.9 to 2.5 times in subsequentyears. The ratios for Aguas Claras operationsalone are only slightly lower. The debt equity ratio, with a write-up to US$50 million of existing assets being consolidatedinto MBR, decreases from about 60:40 at the beginning of Aguas Claras operationsto below 30:70 after FY 1980.

6.12 Pro-formabalance sheets for MBR as a whole are shown in Table 7. The quick ratio (cash and equivalentsdivided by current liabilities)is projected to increase from a low of 0.8:1 in FY 1974 to around 1:1 thereafter, assuming maximum payout of dividends. Agreementwas reached during negotiationsto protect MBR's liquidityby disallowingdividends if, as a result of such dividends,MBR's current ratio (definedas cash and equivalents plus inventoriesdivided by current liabilities,including the following year's principaland interest on long-termdebt) would drop below 1:1. In addition, it was agreed that investmentof cash surpluses in flxed assets above US$2 million per annum would be subject to prior approval of the Bank or similar liquidityrestrictions, except for necessary capitalizedexpenditures for renewals and replacements of existing assets.

6.13 Despite the healthy long term cash position projected for MBR, the initial period of operationcould find the company short of cash if the sponsors' expectationsfor existing operations,set forth in Table 6, are not achieved. Even if they are, and these operationsgenerate US$9.4 million in surplus cash during the PY 1972-74period as projected,the cumulative net surplus for MBR as a whole at the end of the first six months of Aguas Claras operation still will be only US$7.4 million. The sponsors' forecasts for the existing operations assume profit and cash margins considerably in excess of past performance,which at most has yielded net annual cash generationof only US$2.1 million (Para. 2.10). They base their opti- mism on two factors: (i) increasedprices achieved during the past year that appear likely to hold during the next 2-3 years and (ii) increased operating and administrativeefficiency that will be attained through - 20 - consolidationof the various mines into a single company under one management structure. Even though these assumptions probably are valid, it may become necessary for MBR to call upon CAEMI and St. John (Hlanna)under the terms of the ShareholdersAgreement and Security Agreement (Para. 5.08) to make up working capital deficienciesduring the initial operating period resulting from any failure of the existing MBR operations to perform as expected. To allow MIBRto respond to cash shortages that are only short-term in nature and thereforedo not require permanent advances from the shareholders, the Bank agreed during negotiations to allow the company to undertake unsecured short- term borrowings not exceeding US$4 million outstanding at any one time during the period the ShareholdersAgreement is in effect and up to an aggregate of US$10 million thereafter. Further borrowings of any type without the prior approval of the Bank will be restricted to US$7.5 million, and this amount will be allowed only after the debt/equityratio drops below 50:50. These restrictions,together with those on investment and dividends (Para. 6.12) will provide sufficient protection of MBR's liquidity.

D. Effects of Expansion on Profitability

6.14 As indicated in Annex 13-1, operating costs are only expected to increase by about one third with an increase in annual production from 10 to 15 million tons. As a result, it is anticipated that margins will increase significantly and the internal financial return before taxes will increase from 18.8% for the 10 million-ton project to 24.5% if the amuual sales buildup is to 15 sillion tons as expected.

VII. ECONOMIC JUSTIFICATION- RETURNS TO GOVERNMENT AND SHAREHOLDERS- SENSITIVITYANALYSIS

A. Internal Economic Return

7.01 The internal economic return of the combined MBR (Aguas Claras) ancdRailway Project is projected to be 18.3% per annum with minimum sales buildup to the base level of 10 million tons per annum and 22.8% if the buildup is to 15 million tons. This range is considered to be satisfactory in the Brazilian context. The assumptionsbehind the estimates are detailed in Annex 13-2. Non-economiccosts incurred by MBR and RFFSA in the form of d;-ect and indirect taxes have been subtracted from the operating cost streams. On the whole, the cost and benefit streams that have been used are considered to be conservative, thus tending to understate the actual economic returns that are likely to be attained.

B. Benefits to Government

7.02 The estimated revenues that will accrue to the Brazilian Govern- inentover the life of the project assuming sales buildup to 10 million tons are shiownin Table 8 and summarizedbelow: - 21 -

Benefits to the Brazilian Government Accrued Revenues D)uring 15-1/2 year Percent Source of Revenues Operatint Period of Total (t1S$millions)

Iaxes on I'roductionand Property 28.5 8.4 Income Taxes 90.8 26.8 Taxes on D)ividend Distributions 57.3 16.9 Taxes on Earnings Remittances Overseas 28.5 8.4 Covernment Guarantee Fee on IBRD Loan 9.7 2.9 Keduced Government Subsidies to RFFSA 123.9 36.6

Total Revenues 338.7 100.0 With a 50% increase in the ultimate sales level, to 15 mlIlion tons annually, revenues to the Government can be expected to nearly double, to US$585 million (Table 10).

7.03 The Government's total newv investment in the combinedl project will consist of 2IUSA'sUF$60.5 million contribution to the railway portion. Therefore, as Table 10 indicates, the discounted rates of return on the Gov- ernment's investment will be 19.57 and 28.3% witlh utti-iatesales buildup to 10 and 15 million tons annually respectively.

7.04 The above revenue estitates do not include indirect taxes on tBR and RFFSA operating inputs, whiclh slhouldyield US$70-SO million in additional Government revenues over the assumed 15-1/2-year operating period. Nor clo they include the long-term indirect benefits that will accrue to the railway system through the plhysicaland operational improvements made to accommodate the MBR project.

C. 1'eturns to M1I'BRShareholders

7.05 Projected distributions of earnings from thc Aguias Claras project with sales btilduitipto 10 million tons are slhowin in Table 8. It has been as- sur,ed thlatmaximum possible divldendlswill be paid otut, subject to the following:restrictions, whlicliwere agreed during negotiations:

(a) Divtdends can be paidlonly fromnnet accumulated earnings;

(b) Reserves of cash and equivalents for the wlhole of MER must be sufficient, after dlividendsare declarecl, to cover accounts payable and total MBiP debt service req'iirements (principal and interest) for the followIng year;

7.06 W4ith the above restrietions basic dividlends froni Aguas Claras earn- lngs are projected to begin in FY 1977, 3 years after the start of operations 22 -

arn total LSS212 million over tlheprojected life of the 10 million ton- ?er-year project. After an effective tax rate of about 40% on gross divi- Juw&;-, tlie shareholders' actual net receipts will be US$127 inil ion. hliese L\ecelpt-S wi.ll almost double, to US$.239 million, if time ultimate annual sales lCvil reaclies 1.5instead of only the b)aSiC 10 million.

7.07 'l'lieretLrns on Investment for thievarious MBP, shareholders are showni in 'ab Ibe 1 t and stimmnmarized belov,.:

Not Returus Lo iharehollder!

Brasilian Shareholdaers(CAEMt) St. Johni D'dl Hey Other Forelgn Shareholdorsi All Shareholders Total Ilnvestplruit US;26't;!U Total Invu:itmant. IWiVOMM Total Invostravnt UZ'ItMA Total Investwntn U&5S(O:Q4 Now Invustjiient 0 t?'w Invuut.1alrit lF:;'Ml!1 New Jnvest,nont 1.13WMM New Investment U'MIU!!M 10t5fFrr l5M--p-r -E&M9 ' 10) MM

Ir,asinucli as thle original Investment of the sponsors in MBR is less than tlhe U"S$50 million value to be assigned to the MBR assets at the time of 70loso lidation (Palra. 2.09), the rates of return on total investnient shown for CAFMI andl St. Jolhni undlerstate the expected profitability of thleir investments considerably. Conversely, the returns on new investment are ovcrstatod insofair as they fall to recognize any value for the existing 3.I;sel ;. Tlhe result, therefore, is that time true returns to the two major ;harehmoledtrs are Il?ely to lie somiiewlhere between the two extremes.

7.08 To ensure thlat the rate of payout to the 11il1l'shareholders does not t?\cced tlit! -ate of amortizaition of the Bank's loan to any serious degree, it a; reed dur inli. negot i at i ozns thait if gross (dividlendls in any year exceed ;. Illionl phi is the sihortial l b etweieil llS$15.0) mliiion and dlividends .i Ini:11v 1 -c1 lared * irinI,, thc previous two years, senior debt will be pre- ;I II b,\. Hc 1,. olillt of :;tlc ess. Because of PJSlK's considerab)l. cash thi,o..,',t this provi:;imn i:; not IikeI.y to restrict dividlendls to any signifi- .Z1,':\tr [til it -oliolld, hlotwever, res isL in lIt.' loan being fully amortized ,I t III tci, Veils cam IV , wi t II prepaivImmtt s beginninjg, ab)(ou1t lY 19@79-80. - 23 -

D. Split of Project Benefits

7.09 The financialprojections indicate that approximately84-85X of net cash benefits accruing from the MBR project will flow to the Government and Brazilian shareholders(in the ratio of about 5 to 1). The total split of such benefits is shown in Table 11 and summarizedbelow:

Split of Net Project Benefits

Net Cash Benefits Percent of Total Recipient 10 MTPY 15 MTPY 10 MTPY 15 MTPY (US$ millions)

All Shareholders 126.7 238.7 27.2 29.0

Brazilians 53.7 111.4 11.5 13.5 St. John 49.7 85.7 10.7 10.4 Japanese 23.3 41.6 5.0 5.1

Brazilian Government (Incl. RFFSA) 338.7 584.8 72.8 71,0

Total Taxes and Net Dividends 465.4 823.5 100.0 100.0

Total Accruing to Brazil 392.4 696.2 84.3 84.5

Total Leaving Brazil 73.0 127.3 15.7 15.5

7.10 These figures point out one of the most importantconclusions that can be drawn concerning this project: that by far the major portion of the benefits flowing from exploitation of one of Brazil's most valuable resources will accrue to the nation itself. The outside investorswill receive reasonable returns on their investmentsand technologicalinputs, but not at the expense of a reasonablereturn to Brazil. Both the percentageof net project benefits remaining in Brazil and the Governmentshare compare very favorably with past projects of this type financed by the Bank. Furthermore,despite the fact that Brazilian shareholderswill own only 31% of MBR's shares, they will receive approximately45% of its effective net income distributionsto private participants.

E. Foreign Exchange Benefits

7.11 Projected foreign exchange effects of the combined mine, terminal and railway project are shown in Tables 12 and 13. During the 15-1/2-year operating period, net foreign exchange earnings are expected to total US$777 million with sales buildup to 10 million tons and US$1,135 million for the more likely 15-millionton project. These represent annual surpluses of US$50 million and US$74 million respectively,or about 60% of projected sales. The figures have assumed maximum foreign exchange outlays in capital and operating costs and therefore probably understate the net exchange earning capacity of the project. - 24 -

F. SensitivitvAnalysis

7.12 An analysis of the sensitivityof the .'inancialand economic projections to various adverse circumstanceshas been undertaken and is described in Annex 13. The tests indicate that the economic return of the combined mine, port and railway project is not likely to drop below an acceptable level of 13%, even under the following severe circumstances:

(i) A 25% constructioncost increase and a delay in initial revenues of one year; or

(ii) A combinationof gradually decreasing real ore prices-(10% every 5 years) and increasing real operating costs for both MBR and RFFSA (15% every 5 years).

Under such circumstancesthe internal financial return to MBR alone also can be expected to remain at acceptable levels: 9% and 17% with annual production buildup to 10 and 15 million tons respectively.

7.13 The break-even analysis shown in Annex 13 indicates that with min- iniumarnual sales of 9 million tons (somewhatbelow the amount presently covered under long-term contracts), ore prices could drop more than 15% for extended periods of time and not endanger HBR's ability to meet all of its cash obligations,including those to RFFSA. Similarly, if the ore price remains at least at its initial level of US$8.38 per ton, sales could drop 25-30% below planned minimum levels for several years and still allow MBR to meet its cash obligations. It is concluded, therefore, that MBR's financial position will be strong enough to enable the company to withstand any adverse circumstancesthat it is likely to encounter.

VIII. AGREEMENTS REACHED DURING NEGOTIATIONS

8.01 During loan negotiations,agreement was reached between the Govern- ment, MBR, CAEMI, St. John, Hanna and the Bank on the following principal points:

(i) CAEMI and St. John each will undertake to provide up to US$10 million to cover project cost overruns and working capital deficienciesduring the startup period. These funds will be advanced on terms satisfactoryto the Bank, either as subordinated loans or as equity. Hanna will guarantee unconditionallyup to US$7.5 million of St. John's obligation, with the balance to be secured by a pledge to the Bank of all of St. John's shares in MBR. CAEMI's obligation will be secured by a negative pledge providing that it will not sell, pledge or otherwise encumber its shareholdingsin its major subsidiary, ICOMI, during the period the ShareholdersAgreement is in effect (Paras. 2.02 and 5.08). - 25 -

(ii) Payment for the US$30 million in new MBR equity will be made dollar for dollar with drawdown of the firet US$30 million of the Bank loan (Para 5.06).

(iii) MER can declare dividends only out of cumulative earned surplus and only to the extent that the company's current ratio (as defined) after such dividends remains above 1:1 (Para 705).

(iv) Annual dividend payments in excess of US$7.5 million, averaged over three consecutiveyears, will be matched by prepayment of senior debt to the extent of such excess (Para 7.08).

(v) MBR investmentsin fixed assets above US$2 million per annum will be subject to prior approval of the Bank or liquidity restrictions,except for necessary capitalizedexpenditures for renewals and replacementsof existing assets (Para 6.12).

(vi) MBR may undertake short-term borrowings not exceeding US$4 million outstanding at any one time during the period of effectivenessof the ShareholdersAgreement and up to an aggregate of US$10 million thereafter. Medium- and long-term borrowings will be limited to the lesser of US$7.5 million or an amount that would increase the debt equity ratio to no more than 50:50 (Para 6.13).

(vii) By the end of 1971 MBR will prepare plans, acceptable to the Bank and the Government, for protecting the waters of Sepetiba Bay from pollution and will carry out such plans, or acceptable alternatives,prior to completion of the project. HBR will consult the Bank prior to implementionof any plans to erect a pelletizing plant at Sepetiba Bay (Para 4.11).

8.02 Major conditions of effectivenessof the loan are the following:

(i) The reorganizationof MBR to consolidate the various St. John and CAEKI properties shall have been completed and approved by the Government.

(ii) The Pledge Agreement providing for a pledge of St. John's shares in MBR to the Bank shall have been executed.

(iii) The mortgage to be shared pari passu by the Bank and the Japanese lenders shall have been executed.

(iv) All of the conditions of effectivenessfor the Railway Loan shall have been met.

8.03 Based on the foregoing, the proposed project constitutesa suitable basis for a Bank loan to MBR of US$50 million equivalent for a term of 15 years, includinga grace period of 3-1/2 years.

Industrial Projects Department June 1971

MIM IRON ORE PROJECT

RECONSTRUCTED OWSOLMATE.D INCOME AND CASH FIDW STATEMIITS FR ALL QDMPANI2 HUM MERGED INTO II-3 (in tZ$S000 equivalent)

*oTear 79 December 31, r 2961 1968Z9' 1969-1 _ 19703-/ Jan. 1. 7 to ab 31, 1971- St. Jduo 3t John St. JoS St. h St. JohntJons John CAU4I D'el Rey CAEII D'el Rey CARNI D'el Rey CAEI D'el Rey CAM4I D'e1 Rey CADI D'el Rey Propwties Properties Total Properties Properties Total Properties Properties Total Properties Propties Total Properties Properties Total Properties Properties Total

Sales 12,055 6,918 18,973 10,o09 6,034 16,443 8,369 4,003 12,372 11,784 5,431 17,215 11,749 5,625 17 371 2,950 1,21.6 4166 Cost of Sal] 9.623 6,799 16,422 9,039 5,381 14,423 6,646 3,528 10,171. 9,161 4,955 14,116 9.059 5,160 14:219 2,265 1, 089 3 354

Oroas Profit 2,432 119 2,551 1,370 65o 2,020 1,723 475/ 2,208 2,623 476 3,099 2,690 465, 3,155 685 127 812 Aazietrative Eapenmes 1,431 1V 1,131 1,242 - 4/ 1,242 895 895 1,354 - Wt/ 1,3541 1,551 1 390 / 39 Dqseciatim Amortizatimo 650 419- 1,069 600 557 1,157 544 480 1,024 667 292 959 600 311 911 15O 80 230

Operating Profit (Loss) 351 (300) 51 (472) 93 (379) 284 ( 5) 279 602 184 786 539 154 693 145 47 192

Other Inco 685 211 896 463 286 749 296 471 767 781 338 1,119 922 750 1,672 230 l55 385 Other EXpeees 529 699 1,228 586 607 1,193 1,006 434 1,440 1,088 401 1,489 456 236 692 114 110 224

Earmings before Tax 507 (788) (281) (595) (228) (823) (426) 32 (394) 295 121 416 1,004 667 1,671 261 92 353 Taxes 26 13 39 - 13 13 - 108 108 - 73 73 330 142 472 80 30 110

UT AliNNsOlG 481 (801) (320) (595) (2411) (836) (426) ( 76) (502) 295 48 363 674 526 1.199 181 62 243

CASHFow /

Net Ernings 481 (801) (320) (595) (2411) (836) (426) ( 76) (502) 295 48 343 674 526 1,199 181 62 243 Depreciati and Amortization 650 419 1,069 600 557 1,157 541 480 1,024 667 292 959 600 311 911 150 80 230

1_131 (382) 749 5 316 321 118 404 522 962 340 1,302 1,274 837 2,110 331 1412 1.73

1/ Thse subaidiaries ead propertiea of CAEMI and St. John D0el Rey being sombined to fore MBR.

2/ The accounts for the years 1966-69 are -onversions of audited -ruseiro sttet nts into do11ar-equivalent statements ad teus have some distortions due to the variou rates of esnetary correction that h-', bee, used. Thq are cosidered, hero , to reflct accurately the financial condition of the compnies.

3/ The accounts for the yre 1970-71 are esti_tes, based upon audited cruseiro statesnts for Septembe 30, 1970 and projectioe made by sponsor.

V Addiistrative Expenses have been aggregated into cost of sales.

Industrial Projects Departent IY i1971 MR IRGtl ORE PROJECT

fECONiSTRUtCEDCONSDLIDATKD -AIAN-CESHFEETS FM LL COMPMIEl BEINO MMRED INTO MM11 (Ir, US$ 000 equivalent)

YeazlPLdlng Deceaer 31, 1966'- 1967- 98 1969-/ 1970.'- Mar.h 31. 19712 St. John St. Jh t"A M St. John St. John St. John CAEM D'el Ray CAEMI D'el Rey CAEMI D'el Rey CAEMI D'e1 Rey CAEMI D'el hey CAEMI D'el Rey ASSTSP PropertiePropertal Properties Total Properties PropertiesProperties Total Properties Total Properties Properties Total Properties Properties Total

Cash and Receivables 1,700 303 2,003 1,261 398 1,659 1,225 420 1,645 1,414 524 1,938 2,036 857 2,893-4/ 2,320 1,252 3,5724/ In.entories: Ore 886 583 1,469 744 385 1,129 1,151 236 1,387 660 288 948 975 390 1,365 1,000 30G 1,300 Supplies and Prepaid Itoe 457 548 1,005 737 459 1,196 1,061 529 1,590 1,005 500 1,505 866 665 1,521 900 500 1,400 1,343 1,131 2,474 1,481 844 2,325 2,212 765 3,977 1,665 788 2,453 1,8141 1,055 2,886 1,900 800 2,700 Total Current assets 3,G03 1,134 4,477 2,742 1,2h2 3,984 3,437 1,185 4,622 3,079 1,312 4,391 3,877 1,912 5,789 4,220 2,052 6,272 Investmets m.d Dhferred Bxer.ee5/ 308 2,306 2,614 337 1,854 2,245 471 2,174 2,645 471 2,186 2,657 481 2,150 2,631 480 2,120 2,6-o Fixed Assets - Net 6,693 1,1,7 8,140 6,683 1,297 7,980 6,180 681, 6,864 6,205 702 6,907 5,605 880 6,485 5,450 800 6,250 Other Asets 101 - 101 169 - 169 ------

Total Ion-Current Assets 7,102 3,753 10,855 7,189 3,205 10,394 6,651 2,858 9,509 6,676 2,888 9,564 6,086 3,030 9,116 5,930 2,950 8,850 TOTAL ASSETS 10,14,5 5,185 15,332 9,931 4,447 14,378 10,088 4,0143 14,131 9,755 4,200 13,955 9,963 4,942 14,905 10,140 4,972 15,122 LIAEILITIES

Current 1iahlities 4,665 971 5,636 3,309 296 3,605 3,611 408 4,019 3,238 742 3,980 2,449 700 2,896 2,500 700 3,200 Due to Associated Coopanies§/ - 4,243 4,243 - 4,534 4,534 - 4,1214 4,1224 - 3,909 3,909 - 4,132 4,132 - 14,'0C 14,100 fleserve. for Contingencies 259 - 259 67 - 67 50 - 50 35 - 35 60 60 60 - 60 Kmon-Current Liabilities 259 4,243 259 67 4,534 4,601 59 4,124 4.,183 35 3,909 3,944 60 4,132 4,192 60 4,10 14,160 Paid-in Capital 7,005 3,317 10,322 8,950 3,317 12,267 8,950 3,317 12,267 8,950 3,317 12,267 8,950 3,306 12,256 8,950 3,306 12,256 Accumulated Deficit (1,784) (3,344) (5,128) (2,395) (3,700) (6,035) (2,532) (3,806) (6,338) (2,468) (3,768) (6,236) (1,496) (3,196) (4,692) (1,360) (3,U14) (I1: ':9' het Worth 5,221 ( 27) 5,194 6,555 ( 385) 6,172 6,418 ( 489) 5,929 6,482 ( 145i) 6,031 7,454 110 7,564 7,590 172 7,762 TOTAL LIARILITIES 10,.145 5,187 15,332 9,931 4,447 14,378 10,088 1403 14,131 9,755 4,200 13,955 9,963 4,942 114,905 10,150 4,972 15,122

Quick Ratio 0.36:1 0.31:1 0.35:1 0.38:1 1.3:1 0.46:1 0.34:1 1.3:1 0.41:1 0.44:1 0.71:1 0.49:1 0.83:1 1.2:1 1.0:1 0.95:1 1.8:1 1.1:1

I/ Those subsidiaries and properties of CAlM and St. Jobn D'el Rey being combined to fore MRR.

2/ The accounts for the years 1966-69 are cconversios of audited cruzeiro statements into dollar-equivalent state,oeets and thus have sose distortions doe to the differing rates of monetary correction that suat be used in such transformati-s. They are considered, hwever, to reflect adeqoately the financial condition of the copwnie.

3/ The accounts for tbe years 1970-71 are estimates based upon audited cruzeiro statements f- September 30, 1970 and projections cade by the sponsors. 4/ Cash generated during these periods, if not put to alternative uses, will be available for later expansion and is incluied in the combined cash flo, shoen in Table 6.

5/ Includes 25% equity investeent in Minwacao Morro Valho Gold Mine.

6/ Unsecured loans fron the holding company, St. John D'el Rey. Upon formation of MK, this debt is to be aggregated into the revalued capital of Us$50 aillion.

Industrial Projects Departssst 11ny MBRIRON CRE PROJECT

PROJECREDINCO3tE SATJA{EIITS FOR AGQtS ClAUS OPERATION BASEPfdJ1CT WITHSALES BUILDIPTO 10 MILLIONTONS PER WAR (In 0 '000 equivalent)

Fisal year ending March 31, 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Total (6 n_thITt

Total production (dillion long tons) 2.9 9.0 10.0 10.( 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 151.9 Increase in in.entories (mllion long tons) 1.5 0,4 _ ------1.9 Total shipmects (dillion long ton,) 1.4 8.6 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 150.0

OpeiatIng Rerecme (9888.38/LT) 11.7 72.1 83.8 83,8 83.8 83.8 83.8 83.8 S3.8 83.8 83.8 83.8 83.8 83.8 83.8 83.8 1,257.0

Direct Costa

Mine and preparation plant 3.8 9.7 11.2 11.6 11.6 11.6 11.6 11.6 11.6 11.6 11.6 11.6 11.6 11.6 11.6 11.6 Rail freight ($2.62/LT shipped) 6.7 23.2 26.2 26.2 26.2 26.2 26.2 26.2 26.2 26.2 26.2 26.2 26.2 26.2 26.2 26.2 Terminal 1.2 2.7 3.0 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 Nine developnt stripping 2- 3.C 3.2 3.4 3.b 3.2 2.7 2.7 2.7 2.7 2.6 2.0 2.0 2.0 2.0 2.0 Increase in insentories at sine and terninal (4 7) %0.9) - - - _ ------

Indirect Costs

ejr. ia Ira t' 0 .? 1.4 1.4 1.5 1.5 1.5 1.5 1.5 i.5 1.5 i.5 1.5 1.5 1.5 1.5 1.5 Taxes - sole = p-nperty O.' 1.6 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 Ins;rance 0.7 0.6 0.6 0.6 0.6 0.6 o.6 o.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Dprectaon 4..5 8.9 89 8.7 8.4 9.2 8.9 7.5 7.2 7.2 6.0 4.7 5.3 5.3 h.6 1.6 Anort1zati n 1.6 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.? 1.6

Total opeating csto 16.6 53.L 5,.6 6&,2 59.9 60.5 59.7 58.3 5.0 58.o 56.7 54.8 55.4_ •5.8 54.7 50.1 874.1

Operating Prolit (4.9) 1 . 7 24.2 23,S 23.9 23.3 24.1 25.5 25.8 25.8 27.1 29.0 28.8 28.4 29.1 33.7 385.7 Interest on long-ters debt 5.7 31.5 10.7 10.0 8.9 .01 7.0 6.0 4.9 3.9 2.7 1.6 0.7 - - 81.7

Profit Befe axes (1G.6) 7.2 13.5 13.6 15.0 15,2 17.1 19.5 20.9 21.9 2L.4 27.8 27.7 28.4 29.1 33.7 3o4.0

Depletion allo-ance - - 10.1 12.6 8.2 d.2 8. 4 8.6 8.7 8.8 !4., - 18.17 Taxable income (10.6) 7.2 3.4 1.0 6.8 7.0 8.7 10.9 12.2 13.1 19.9 27.4 27.7 20.4 29.1 33.7 225.9

Less: Income tax - 3. - - 0.3 2.0 2.1 2.6 3.3 3.7 3.9 b.O 9.2 9.3 t.5 d.7 10.1 07.7 Add: Lepletion (Table 8) - 10.1 12.6 8.2 8.2 8.4 8.6 8.7 8.8 4.5 - - - 78.1

met Profit (10.6) 7 .2 13.5 13.3 13.0 13.1 14.5 16.2 17.2 10.0 i8.4 19.2 19.4 19.9 20.84 23.6 236.3

Profit IIable fr lDivi ends _ _ _ 0.7 4.8 L9 6.1 7.6 8.5 9.2 13.9 19.2 19.4 19.9 20.4 23.6 158.2 (Net pro it e deipletign)

Indostrial Projects Departmt hRY1971 MhA Ir)l? t,RE PROJECT

DEPLETIONJAL1IANCE FOtl AGUASCLARAS OPERATION BASE PROJECT WTIF SAIES BUILDUP TO 1G MILLION TONS PER YE"A (In US$ millions equivalent)

Fiscal year ending March 31, 1971h 1975 1976 1977 lQ78 197, 2 1;o.'0 170;' 191) 1984 (6 months)

Ooerating revenue - FOB Sepetiba 1 .7 72.1 81.8 8.8 88 d.d3.d 8?.9 83.8 83.8 83.8

Less:

Rail freight 3.7 22.5 26.2 26.. 26.2 2t., 26.. 2. 6 . : 26.? 26.2 Terminal

OperatlnglSost 1.2 2.7 3.C 3.1 3.' .1 ,.1 22 3.1 3.1 3.1 Interest 2.7 5.4 5.0 4.7 4.2 3.8 3.3 2.8 2.3 1.8 1.3 Lepreciation and Anortization2/ 2.9 5.7 5.7 5.6 5.5 5.o 5.7 5.0 h.o h.944.3

Adninistration C.7 1.L; 1.1, 1.5 1.' 1.r 1.5 l.: 12 1.5 1.5 Taxes - Sole and oroperty G.3 1.6 1.9 1.9 1.9 1.9 i.9 1.9 1.9 1.9 1.9 Insurance - transit and terirnal J.1 C.2 _.2 ^. ', , .3 .- .i C.) 0.3

4 3 T^-al :educt_ons 11.6 39.5 .4 3.3.3 hie.7 42.6 42.0 lo.8 40.2- 39.7 38.6

Net 'alue FCB ;inre '.1 .6 403.4 4o.5 Li .1 41.2 41.8 3-.43.6 4IJ.1 45.2

Lepletiort Al'owance 20 _ 6.5 8.1 8.1 8.? 8.2 3. 8.1.6 8.7 8.8 4.53) 6 Cumrulative Le?letion _ 6.'5 14.6 22.7 r.0 '.1 h7.' 56".1 lh.8 73.6 78.1

t -/ Arsuried equal to L 7% of total interest Da:nmer s. Basis is ratio of capital cost of terrir.al 'aci1'.t,es anc eqz:Q i.ent to si-ilar co:tts :>r e.t usa a J.,1.

2/ Equal to 317%at total depreciation and amortization on same 17asis as in Note 1.

3/ Allowance for t months.

Industrial Projects Department Hay 1971 MBRIaDN ORE P20JSCT

PDJECTED0AS3 FLOWST T3JIFTSIOR AWAS CLARASOlhUTON ?SZIJUPR)C 10TXUXO 202 (In us* mlj1on eqeiltJt)

Fisoal Year aidin Yhrl 31, 11 1972 1973 197i 1975 1976 1977 1978 1979 1980 1981 1982 1983 98 5 V 36 1938 1969 Tow

5ixc Or FPOWs

Povft before ine ta et d ii rla t - - (4.9) 18.7 24 2 23.6 23.9 23.3 24.1 25.5 25.8 25.8 27.1 29.0 28.4 28.4 29.1 33.7 385.7 0e F-Ooiani m: -dsation _ _ _ 6.1 12.1 12.1 11.9 31.6 12.1 12.1 10.7 10.1 10.4. 9.2 7.9 8.5 8.5 7.8 3.9 154.9

Tota; fuso -,rat-. frza operatkon - - - 1.2 3D.8 36.3 35.5 35.5 35.7 36.2 36.2 36.2 36.2 36.3 36.9 36.9 36.9 36.9 36.9 Sio.6 3b8m cqaF2C 2.3 7.0 20.7 ------30.0 IR loan _ 7.0 25.0 18.0 ______- 50.0 jqan'-- 1--- - 15.0 25.0 10.0 ------_ _ 50.0 J4parz^- L ,. - 2.0 3.0 2.0 - - - _ 7.0 U.S. i_ii - 5.0 10.0 3.2 _ _ _ - - _ - ______18.2

wda FU2L_.i;2.3 36.0 83.7 33L 30.8 36.3 35.5 35.5 35.7 36.2 36.2 36.2 36.2 36.3 36.9 36.9 36.9 36.9 36.9 695.8 4 ..io.-.0n a. oFPme Inmestrt in pird iaseti - 20.0 65.o 10.1 _------95.1 Renewalcf of t ------0.2 0.7 1.6 0.9 - 0.2 0.4 10.1 - 0.9 0.7 0.2 0.4 16.3 Or.- s Adn-c e9iticin 2.3 ------______2.3 Ad-mnjst,iton and P-npnrtirg e-p-aitares - 3.4 2.3 9.3 - - _ _ - ______15.0 inoete endPn,.sct uMag_int - 9.0 4.7 4.0o - ______17.7 innreose 1-L 'rrEmt asnete other than cadh: Sppro an d! sppues - 1.2 2.4 1.3 ------4.5 Iiin or, nvntorie- - - 11.7 09 5.6

F1mna1 chlarges: Interest d0rlig constrction - 0.7 5.7 h.9 - - - - _ _ _ _ -1.3 _ _ 1 Cd1tment Caiges - .4 o.4 ------______o.5 It.Lrvo IBIRD 1OlD ((ail. 0t gsorate fee) - - - 2.0 4.9 4.6 4. 4.0 3.7 3.3 2.9 2.5 2.0 1.5 1.0 0o.1 - _ 37.2 Interst i Japaneselon - - - 2.3 4.4 4.o 3.6 3.3 2.9 2.5 2.1 1.7 1.3 0.9 0.5 0.2 - - - 297 Iterest on J.A.S. Uk-lI loan - - - 0.3 0.5 0.5 0.5 o.4 0.4 0.3 0.3 0.2 0.2 0.2 0.1 0.1 - - - 4.0 Interei. on U.S. c-Iu loan - - - 0.7 1.2 1.1 1.0 0.8 0.7 o.6 0.5 0.3 0.2 - - - - 7.1 With-dning tas on iteet _ 0.3 o.6 0.5 0.5 0.5 0.4 0.4 0.3 0.2 0.2 0.2 0.1 - - - 4.2

Total _lh.a. erg- 1.1 6.4 10.8 11.5 10.7 10.0 8.9 8.1 7.0 6.0 1.9 3.9 2.7 1.6 0.7 - - - 94.3 Amr.isation f loan.: 1BS&lonw - - - - 2.7 2.9 3.2 3.4 3.6 3.9 4.2 L.5 L.8 5.2 5.6 6.o - - - 50.0 papinaeloan - - - 0.5 3.6 4.2 4.2 112 1.2 4.2 4.2 4.2 4.2 4.2 4.2 3.9 _ _ 5D.0 J.apanee j.I. loan - . - 0.1 0.5 0.6 0.6 0.5 0.6 0.6 0.5 0.6 0.6 0.6 o.6 o.6 - - - 7.0 ".s. ds- na - - - 0.9 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.1 - - - 18.2 .ct al .wrtlnatioo - - 1.5 8.6 9.5 9.8 9.9 10.2 10.5 10.7 21.1 11.4 11.1 10.4 10.5 - _ _ 12g 2

tax : - - e - - 0.3 2.0 2.1 2.6 3.3 3.7 3.9 6.0 8.2 8.3 8.5 8.7 10.1 67.7 Fd sDUsed 2.3 34.7 0.7 a _.8 1.0 320.2 20.3 21.5 22.0 a.o 20.0 19.9 19.6 29.9 20.2 20.4 9.2 8.9 10.5 444.1

Net CamhSopli for Year on Amas Clres Acount - 1.3 3.0 7.4 9.8 16.1 15.2 l111o 13.7 15.2 16.2 16.3 16.6 6.4 16.7 16.5 27.7 28.0 26.4 251.7 l-

Iotft ia1 Pxn.cts D&rtnD1t KW7 1971 MBRIRON ORE PEJBCT

'WOCTED CASHFWV STTEMNTS FOR COlMM IRON ORE OPERATIONS.Tni AWlS SALIIS-L-A ILUJPU TD 10 HILLION im PER YAR kin w1 xs.a= ill ivsnent)

Fiscal year me)iz JhPr 31, i 1 19731 19776 1978 1979 JA1981 1982 I 198 1 19867 188 1989 Total datim Oerations Only

Total SUipsnte (mi.lion log t ) 2.3 2-3 2.3 2.3 2.2 2.2 2.2 2.2 2.2 2.2 22.4 OPetig ru 17.9 18.8 20.9 20.i 19.3 184 I 18.6 18b6 18.6 190.8 (_) Total operltin costa 1b.64 16.3 17.1 174 16.3 15.7 15.7 15.7 1S,7 15.7 162.2 P.mftt h.Dbre iCmoi tax 1. 2.5 3.8 3.3 3.0 2.9 2.9 2.9 2.9 2.9 28.6 (Assume these operatiorm do not oonUtnz beyond 1980) (-I ne tax 0.5 0.8 1.1 1.0 0.9 0.9 0.9 0.9 0.9 0.9 8.8 Not Profit 1.0 1.7 2.7 2.3 2.1 2.0 2.0 2.0 2.0 2.0 19.8 (+)Dour.,8tiov and atsatLon 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 9.o Not Cssh eneratU - iUg Operatom 1.9 2.6 3.6 3.2 3.0 2.9 2.9 2.9 2.9 2.9 28.8 Agne C1are OnIp

Pfofit Before Inoe Tax ml ILeret - - - (4.9) 18.7 24.2 23.6 23.9 23.3 24.1 25.5 25.8 25.8 27.1 29.o 28.4 28.4 29.1 33.7 385.7 (K) Depredtion and aswt±zatLon - - - 6.1 12.1 12.1 11.9 11.6 12.4 12.1 10.7 104 104 9.2 7.9 8.5 8.5 7.8 3.2 154.9 Total Furds Gnemted from Onortom - - - 1.2 3D,8 36.3 35.5 35.5 35S7 36.2 36.2 36.2 36.2 36.3 36.9 36.9 36.9 36.9 36.9 540.6 (-) Inrm tax -- - - 0.3 2.0 2.1 2.6 3.3 3.7 3.9 6.o 8.2 8.3 8.5 8.7 (_) quipment rmewals 9.7 67.3 - - - - - 0.2 0.7 1.6 0.9 - 0.2 0.4 10.1 - 0.9 0.7 0.2 0.4 16.3 Nst Ceis Gnsration - Agms Clares - _ 1.2 3D.8 36.3 3,0 32.8 32.0 32.7 32.9 32.3 31.9 20.2 28.7 27.7 27.7 28.0 26.4 456.6 CcAlind Opertiom

Ist Cash Generation - Ca"n d OR 1.9 2.6 3.6 4.4 33.8 39.2 27.9 35.7 34.9 35.6 32.9 32.3 31.9 20.2 28.7 27.7 27.7 28.0 26.4 485.4 Itwest on lonWtea debt2/ - - - 5.7 115 10.7 10.0 8.9 8.1 7.0 6.0 4.9 3.9 2.7 1.6 0.7 - _- 81.7 Amortization of lans - - _ 1.5 8.6 9.5 9.8 9.9 10.2 10.5 10.7 11.1 11.4 11.1 10.4 10.5 - - - 125.2 (_) Total debt service - - - 7.2 20.1 20.2 19.8 18.8 18.3 17.5 16.7 16.0 15.3 13.8 12.0 11.2 - - - 20S.9 ( g)4 C1ara fLzmncizg 2.3 36.0 83.7 3).4.) ------_ _ - 156.4 (-) A4as Claras investnts3/ 2.3 34.5 80.9 36.6 0.9 - - - - - _ _55.2 - Armej Cash Suns1n 1.9 4.1 6.4 (5.0) 12.8 19.0 18.1 16.9 16.6 18.1 16.2 16.3 16.6 6.4 16.7 16.5 27.7 28.0 26.4 279.7 Cdulative Cash Sarolw 1.9 6.o 12.4 7.4 20.2 39.2 57.3 7h..2 90.8 108.9 125.1. l41.4 1Sd.O 164.4 181.1 197.6 225.3 253.3 279.7 Debt Serdice Covw*M/

CdosLOd PE Operations - - - 0.6 1.7 1.9 1.9 1.9 7 % 2.0 2.0 2.1 2.2 2,4 2.5 - - - Agan Clas 0n3 - - - 0.2 1.5 1.8 1.8 1.8 i.8 1.9 2.0 2.0 2.1 2.2 2.4 2.5 - - -

I/ After depletion. 7/ Including withholding tax on interest pqments to cormial banks. / bSRludng wrkisg cqsital (cash) but includiig c<_tment charges and inter-st during ccnstruct:on. i licding resnls exponditure fro calculations.

Isdustrial Projects Department May 1971 'SR LLN .. hi PFiJECT

'ROJECTED BALANCESdEETS FOh ODMdiNEu IitliNRE OCSRATI2N FY 1971-89 (USSeitlion e.pdvala.-t)T

Fiwcl Year Edhing Nrh 31, 1 197 9 9 i On8 1981 1972 1963 1937 198 19 8 9

Csb/ 2.3 6.2 12 . 8.6 14.5 16.3 13.9 12.9 12.4 11.6 10.8 10.1 9.4 7.9 6.1 5.1 5.0 5.0 5.0

Rece0ih1 1. 1.3 1.3 2.6 1 1 6.9 C.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 Iaun Ore In,eotoriao 1.3 1.3 1.3 6.o 6.9 6.9 0.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 suppliea 1.4 1.4 1.4 2.1 2.4 2.4 2. 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.1 2.4 2.4 2.4

TotsL Curo- As.ets 6. 10.4 16.8 19.6 29.9 30.5 30.1 29.1 28.6 27.d 27.0 26.3 25.6 24.1 22.3 21.5 21.2 21.2 21.2

Inreastents and .of.rred 1paenaes 2.6 2.6 2.6 2.6 4.9 19.3 33.1 43.9 54.1 64.9 74.3 82.8 90.9 64.9 84.2 82.2 90.2 97.8 100.2 3 GOss Fied Aset.s (Inl. Spre Psrts) 13.6 -od 102.2 112.6 112.6 112.6 12 .8 1-13.5 115.1 16.0 116.0 116.2 116.6 126.7 12S.7 127.6 128.3 128.5 128.9 Less: Depreciation 7.3 8.2 9.1 14.5 24.3 34.1 43.7 53.0 63.1 72.9 80.4 87.6 94.8 100.8 105.5 110.8 116.1 120.7 122.3

Met Fixed A-:et. 6.3 26.6 93.1 98.1 88.3 78.5 89.1 60.5 52.0 43.1 35.6 28.6 21.8 25.9 21.2 16.8 12.2 7.8 6.6

Pre-operating EV,enae

Fine deoelpjnt, aengieerig md 2.3 1h7 21.7 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.2 35.0 35.0 35.0 35.0 35.0 35.0 pro3oct m geent Intarest d coitmt dcarge - 1.1 7.4 12.6 12.6 12.6 }2.6 12.6 12.6 12.6 12.6 12.6 12.6 12.6 12.6 12.6 12.6 12.6 12.6 durirg onttractio. Laesr Anrtiration - - - 1.6 4.8 8.0 11.2 14.4 17.6 20.8 24.0 27.2 30-L. 33.6 36.o wu.0 43.2 '' 47.6

Rlet fre.operatirg &Penee 2.3 15.8 29.1 46.o 42.8 39.6 36.1 33.2 30.0 26.8 23.6 20.4 17.2 14.0 10.8 7.5 4.4 1.2 -

R_e-alnetion of Assets and 38.0 36.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0 38.0 36.3 38.0 38.0 38.0 38.0 38.0 38.0 XPi6ng Right. 2/ TOTAL ASSETS 55.5 93.2 179.6 204.3 203.9 205.9 206.7 20h.7 202.7 200.6 198.5 19fl. 19.0 186.9 176.5 166.0 166.0 166.o 166.0

LABIELTI0 S

Lccounts Payable and Short-term Loans 3.2 3.2 3.2 4.5 7.4 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 7.9 Current Portion of loog-tem Debt - - 1.5 8.6 9.5 9.8 9.9 10.2 10.5 10.7 11.1 11.4 11.1 _ 10.6 10.5 _- -

Total Current Liabiliti.e 3.2 3.2 4.7 13.1 16.9 17.7 17.8 18.1 18.4 18.6 19.0 19.3 19.0 18.3 18.4 7.9 7.9 7.9 7.9

Iorg-Te Debt: (les murrent purtion) br1ld Benk LoOn - 7.0 32.0 47.3 44.4 4i .2 37.8 34.2 30.3 26.1 21.6 16.8 11.6 6.0 - -_ - - Jap,neae Loan - 15.0 39.5 45.9 41.7 37.5 33.3 29.1 24.9 20.7 16.5 12.3 8.1 3.9 - - - - - U.S. abExik Loan 5.0 14.1 15.5 13.7 11.9 10.1 8.3 6. 4.7 2.9 1.1 . Japanese da k Loan - 2.0 h.9 6.4 5.8 5.2 4.7 4.1 3.5 3.0 2.1 1.8 1.2 0.6

Tota Laog-Term Debt _ 29.0 93.5 115.1 105.6 95.8 85.9 75.7 oS.2 51.5 43.4 32.0 20.9 10.5

Equty Candtai 2/W 52.3 59.3 80.0 80.0 80.0 80.1 80.0 80.0 3.1 0O.3 . bO.O80.2 81.: 80.0 .2 80.0 80.0 80.0 80.0 qetRin df ldCog _ 1.7 4LI (3.9) 1.4 2.3 0.3 - - - - ______Depl.tion rherse - 10.1 22.7 30.9 }. 1., 56.1 61.8 73 7 76-7.1 78.1 78.1 78.1 78.1

Net Worth 52.3 61.0 d4.4 76.1 81.4 92.4 103.0 110.9 119- 127.5 136.1 141.d ;,:. 158.1 156.1 158.1 158.1 158.1 158.1

TOTAL LIALBLIIES & EJUlTY 55.5 93.2 179.0 204.3 203.9 205.? 206.7 204.7 1 _.7 2iO.o 19d.5 1-o.1 14,.- 186.9 176.5 A66.0 166.0 166.0 166.0

Current Ratio') 1.5:1 2.8. --:1 0.7:1 1.0:1 1.n0l 2.0:1 l.e:2 .0:, .C:1 ..- : 1. - _.: I. r.7.1 .'.4:1 2.4 1 2.4:1 Qui.k Ratio C 1.0:1 2.3:; 3.0:1 0.8:1 1.2:1 1.2:1 1.2:1 1.1:1 1.:.1 2.9:1 .9_.:Li.d:l2. 1.51 1.5:1 1.5:. Long-Tere-. D:bt/.-'ty Ratio 2.0.100.0 3267 05.5.2.5 50.9:9.1 .5:5. :50:100.0 0.0:100.0

1/ BElarce h-eet for larch 31, 1971 corroponds vith that hon in TTble 2 -.copt that a..et write_-p (Note 3) io not includei 1' .he 1e:tor. 2/ Cash reqoirad to maintain a ourrent ratio of 1:1 in order to sati2fe dIvidend and inv-estoont remtrt-tiin 3/ Upon formation of th nev oo pny, the aosets and mineral right. of the csbin-d ooapadeo are to be re-oloe- to 11992 nilon e4.iraient vSe. iOr.. 2.00). Asoues faIl diridend payout, i.e. *11 net profits after taxeo e.d depletion on Agas Claras -cco-nt and net prfie oft-ar tax oithoot depletion for exieting oporationa, subject to liquidity re-trOition- outlined in Table 8. 5, Coh!.eiuopp'--' reoetirdbeouplusrsonentor o ,r--ded-be;000C00...... o.le...... hr..-t...,...h...... -2ht:C-n1 iet Si Coo! plus reaeloableo diaid3e by -ccoantt ro1aio-a-o slhr-t:rrn - ebl:': 'ho-rt: =-'- - :- ' : ' c.^ - -

Industril1 Projeota Departsent Juew 1971 )SR I.MN ORE PROJEC?

DL3TR33UTION OF FARNINOS FiDM A0IAS CLIARS OPRATION hAse PRO.JEtiz WITH0LWHIAPAE ro 10 IULLCIO rONS PFR ILtS (In U5$ sulions equivMlent)

Fiscal year ending Mearh 31, 1973 974 1975 1976 7 1978 1979 1980 1981 1982 198, 19834 1985 1986 1987 19 1989 Total AMs Clars Alone

Clative Cash S&rD1uS 1.3 4.3 (3.1/ 6.7 22.8 38.0 52.0 65.7 80.9 97.1 313.4 130.0 136.4 153.1 169.6 197.3 225. ) 51.7 - Nbt profit after tax - - (10.6) 7.2 13.5 13.3 13.0 13.1 14.5 16.2 17.2 18.0 18.4 19.2 19.4 19.9 20.i, 23.6 236.3 ) D letio alloance - - - - 10.1 12.6 8.2 8.2 8.4 8.6 8.7 8.8 4.5 - - - - - 78.1 Profit flidhLe for Divide.is) - - - - 0.7 4.8 4.9 6.1 7.6 8.5 9.2 13.9 19.2 19.4 19.9 20.4 23.6 158.2

Dividerds declared _ _ _ _ _ 0.7 4.8 4.9 6.1 7.6 8.5 9.2 13.9 19.2 19.4 19.9 20.4 23.6 158.2 COilative didids _ _ _ 0.7 5.5 10.4 16.5 24.1 32.6 41.8 55.7 74.9 94.3 114.2 134.6 158.2 -

CSlas e . ter Dirid - 1.3 3.3 (3.1) 6.7 22.8 37.3 46.5 55.3 64.4 73.0 80.8 88.2 80.7 78.2 75.3 83.1 90.7 93.5 -

C1acltive Cash 3uhrpl. Reio'esteds/' - - - - 9.9 24.8 35.0 44.3 54.2 63.6 72.1 80.2 74.2 73.5 71.4 79.5 87.1 89.9

broins fIR reiweeteut of cash surpluseeW - - - - - 1.0 2.5 3.5 4.4 5.4 6.4 7.2 8.0 7.47 7.3 r1 7.9 8.7 76.9 (-) Incom Tax - 30% - - - - - .3 0.8 1.1 1.3 1.6 1.9 2.2 2.4 2.2 2.2 2.1 2.4 2.6 23.1

Neti_ted additionl dividd - - - - - .7 1.7 2.4 3.1 3.8 4.5 5.0 5.6 5.2 5.2 5.0 5.5 6.1 53.8

Total Di,ldls Delared - - - - - 1.4 6.5 7.3 9.2 11.4 13.0 14.2 19.5 24.4 24.6 24.9 25.9 29.7 212.0

(-) Metribtion tax - 5% - -- - o.3 0.4 0.5 o.6 0.7 0.7 1.0 1.2 1.2 1.2 1.3 1.5 10.6 Groee B3ae for Distributi - - _ _ 1.4 6.2 6.9 8.7 10.8 12.3 13.5 18.5 13.2 23.4 23.7 24.6 28.2 201.3.

(-) th t#e54 - _ _ _ 0.3 1.4 1.6 2.0 2.5 2.9 3.2 4.3 5.3 5.4 5.5 5.7 6.6 46.7 (-) Penelty taxe'.- _ _ _ _ - - - 0.3 0.7 1.0 1.3 2.7 4.1 4.1 4.2 43.5 5.6 28.5 Total Uroetive Diidens 1.1 4.8 5.3 6.4 7.6 8.4 9.0 11.5 13.8 13.9 14.0 14.4 16.0 126.2

Split: To Brazilia 0._4 1.7 1.9 2.4 2.9 3.2 3.5 5.0 6.2 6.2 6.2 6.6 7.5 53.7 To 3t. Jeha - - - - 0.5 2.2 2.5 2.8 3.2 3.5 3.7 4.3 5.1 5.2 5.3 5.2 5.7 49.2 To Otbhr Joreigo - - - - - 0.2 0.9 0.9 1.2 1.5 1.7 1.8 2.2 2.5 2.5 2.5 2.6 2.8 23.3

Diroct Revenes to Cosurumet

Sole and Property, r-7e 7/ - - 0.3 1.6 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 28.5 IXnce Tax - Basc projecti - - - - - 0.3 2.0 2.1 2.6 3.3 3.7 3.9 6.0 8.2 8.3 8.5 8.7 10.1 67.7 Ine Tax - Reinvestment - - - - - 0.3 0.8 1.1 1.3 1.6 1.9 2.2 2.4 2.2 2.2 2.1 2.4 2.6 23.1 Distribution Tax ------0.3 0.4 0.5 0.6 0.7 0.7 1.0 1.2 1.2 1.2 1.3 1.5 10.6 Witbbodiag Tax - - - - - 0.3 1.4. 1.6 2.0 2.5 2.9 3.2 4..3 5.3 5.3. 5.5 5.7 6.6 3.6.7 Perety T------0.3 0.7 1.0 1.3 2.7 45.1 34.1 4.2 4.5 5.6 28.5 mareatee lee on 1BRDLoan _('.2 1.3 1.2 1.2 1.1 1.0 O.S 0.8 0.7 0.5 0.3 0.3 0.1 - - - 9.7

total Direct Coormont Revenues _ 0.5 2.9 3.1 4.0 7.5 8.1 9.5 11.4 12.8 13.7 18.7 23.2 23.2 23.4 24.5 28.3 214.8

Redaned Oowti. Subsidies to R1FBA _ - 3.0 6.7 6.1 6.5 6.5 6.7 6.9 7.1 7.2 7.4 8.4 9.8 10.1 10.1 10.1 11.3 123.9

Toa Goernment Ravn - _ 3.5 9.6 9.2 10.5 16.0 14.8 16.4 18.5 20.0 21.1 27.1 33.0 33.3 33.5 34.6 39.6 338.7

1/ Naxixa all able dividends after takin full depletion. Excludes dividends from profits on reinvestsent of cash surpluses. Dividends allowed only whore (i) all past deficits ha"e been recovered; ii) a current ratio of 1:1 is maintained after declaring dividend; and iii) legal reseree reqairement is satisfied (covered by debt service and depletion reserves). 3Cesb smplaes available for retnvesteent in fixed assets and prepayment of lcng-tem debt, excluding the cash balance required to maintain a current ratio of 1:1. Assus 10S average annual return on reinvested surplanes with one yer ag. :/ Rates vary by shareholder ategory: Breailian shareholdera - lS%of declared di-tionds standard rate o coolnattee shares- Foreign shareholders _ 2C% of declared dividends standard rate for non-resident shareholders) 6/ Applies to repatriation of capital by foreign shareholders. 7/ Prio Tle 3.

Irdustrial Projects Departaent June 1971 NOTES TO TABLES 3-8

MBR IRON ORE PROJECT

i4AJORASSUMPTIONS USED IN FINANCIAL PROJECTIONS FMRAGUAS CIARMS OPERATION

1. Sales Price and Revenues

A weighted average price of $8.38 per long ton of ore has been assuned throughout the projections. (See Annex l1l paragraph 1.01).

2. Inventories

Approximately one-fourth of inventories will be held at the mine and three-fourths at the terminal. The terminal stockpile capacity has been deteruined by mathematical optimization based on expected ship arrival frequencies. Inventories at the terminal will cover approximatelyseven weeks sales.

J. Accounts Receivable and Payable

Receivables are projected to follow the trend established by existing MBR operations and are projected at the level of 7% of annual revenues. Accounts payable are assumed to follow a similar historical trend and are estimated at 8% of annual operating costs.

4. Average Annual Operating Costs at 10 Million Long Tons Per Year

AnnualCost Unit Cost* ($ million) (T*/7 DirectCosts

Mine and preparationplant 11.6 1.16 Rail freight 26.2 2.62 Terminal 3.1 0.31 Mine development stripping 2.6 0.26

Totaldirect costs 43.5 4.35

IndirectCoats

Administration 1.5 0.15 Sole and property taxes (Note6) 1.9 0.19 Insurance 0.6 0.06 Depreciation(Note 5) 7.1 0.71 Amortization(Note 5) 3.2 0.32 Interest 5.7 0.57 Totalindirect costs 20.0 2.00

AverageAnnual Operating Costs 63.5 6.35

* Detailedbreakdowns in Annex 12 NOTES TO TABLES 3-8 Page 2 5. Depreciationand Amortization

(i) Depreciation figures are based on the following assumed asset lives:

Depreciable Life (yea rs )

Mine shovels and trucks 7 Blast hole drills 3 Small vehicles 5 Electrical distributionequipment 5 Preparation plant 10 Other mine equipment 5 Terminal equipment and facilities 15

Included in depreciation are annual charges on the following equipmert and facility renewals:

Total Cost over 15 Years ($ million)

Mine equipment 11.0 Terminal equipment 0.3 Tailings pond additions 3.0 Miscellaneous additions 2.0

Total 16.3

(ii) Amortization figures are based on the following expenditures incurred prior to start-up.and amortized over 15 years of operations:

Total Cost ($ ndillor S )

Owner's advance expenditures 2.3 Administration and pre-operating expenditures 15.0 Engineering and project management 17.7 Financial charges during construction 12.6

Total 47.6

Annual amortization over 15 years =

6. Taxes and Depletion

(i) Sole taxes are levied at a fixed rate of US Cents 17.4 per long ton of ore shipped, based on the minehead value. Property taxes are about US Cents 1.6 per long ton. NOTESTO TABIZS 3-8 Page 3

(ii) Income taxes are computed at the current rate of 30% of taxable income. The law allows a depletion deduction equal to 20% of the minehead val,ae of all sales during the first ten years of operations. The estimatedl depletion allowance for MBRat 10 million tons is computed in Table 4 and totals $78.1 million over ten years. This amount must be incorporated into the capital of MBRas a reserve and is not eligible for distribution as dividends. However, the shareholders of MBRare not required to take the full depletion allowance and therefore could distribute as dividends all or part of the assumed depletion reserve -- but only after paying a 30% income tax on the incremental amounts. Because they also would have to pay high taxes'on the dividends themselves, they should have substantial incentives to take the full depletion allowed, provided that attractive reinvestment opportunities exist in MBRitself. It has been assumed that they will choose to take the full depletion allowance and use it for expansion of production facilities and accelerated repayment of long-term debt. 7. Debt Service Debt service projections have been based on the following debt financing: (i) An IBRD loan of $50 million for 15 years, including 31 years grace, at 7.25% interest and 2.0% Braid-lian Government guarantee fee; with repaymnt of principal and interest in 24 equal semi-annual installments. (ii) A loan through five Japanese trading companies of $50 million for 15 years, including 2 years grace; US$30 million will come from the Japanese Eximbank, and US$20 million will come from Japanese comuercial banks. The effective rate of interest, including Brazilian withholding taxes on the comuercial portion, is about 9.6%. Principal repayments will be made in direct proportion to actual ore shipments to Japan under the ore contract with the Japanese steel companies (at the rate of approximately $0.60 per ton for the first 84 million tons of the total 15-year Japanese sales of 105 million tons), with minimwu annual payments beyond startup of $4.2 million, equivalent to the withholding rate on 7 million tons.

(iii) A Japanese Eximbank loan of $7 million for 15 years, including 2 years grace, at 8.0% interest, repayment to be effected in the same manner as for the other Japanese Loan. This loan is still to be negotiated. (iv) A U.S. Eximbank loan and guarantee of commorcial loans totalling $26.3 million,of which approximately$18.2 millionwill be used. The term will be 12½ years, including 2½ years grace, with an effective interest rate of about 7.5%. Loans are assumed to become effective on September 30, 1971, with principal repayments to begin between October 1, 1973 and March 31, 1974 for the Japanese Loans (proportional to shipments), on June 30, 1974 for the U.S. Eximbank, and on December 31, 1974 for the IBRD loan. 1)

1) These dates differ slightly from those used in the projections. NOTESTO TABLES3-8 page 4

Commitment charges of 3/4 of 1% on the undisbursed balances are assumed for all of the loans. Interest, withholding taxes, and commitment charges incurred during construction and totalling $12.6 million will be capitalized.

8. Existing Operations

Iron ore operations of the existing St. John D'el Rey and CAEMIproperties being consolidated into MBRwill oontinue to export through the Port of Rio de Janeiro until at least 1980. dile these are physically independent of the new Aguas Claras operation, they will be an important part of the financial structure of MBR. The sponsors expect these operations to generate cash surpluses during the Aguas Claras construction phase sufficient to cover initial operating losses from Aguas Claras. Their projections are shown in Table 6. }Revenue estimates are based on the following salea projections: Fiscal Year Ending National Average Projected March 31 Exort Sales Sales Total Sales Unit Price Revenue kLllion LT) (Rfl3Won LT)(Million LT) T17($) ($ Million) 1971 2.0 0.3 2.3 7.78 17.9 1972 2.0 0.3 2.3 8.19 18.8 1973 2.0 0.3 2.3 9.09 20.9 1974 2.0 0.3 2.3 9.09 20.9 1975 1.8 0.4 2.2 8.77 19.3 1976 1.7 0.5 2.2 8. 4 5 18.6 1977 1.7 0.5 2.2 8.)45 18.6 1978 1.7 0.5 2.2 8.45 18.6 1979 1.7 0.5 2.2 8.)45 18.6 1980 1.7 0.5 2.2 8.45 18.6

It has been assumed for purposes of the projections that these operations will not continue beyond 1980. 9. Distribution of Earnings

Maximumdividend payout has been assumed for Aguas Claras operations following maximum allowable depletion. Dividends are subject to the following restrictions:

(i) Dividends are payable only from net accumulated earnings. (ii) After dividenl pVm.am., aswh =vplwsa plus rewivables and inventories from the combized M operations not be greater than or oqual to aWcounts paYables; IUsbihort-tern debt, and the olleving year' I full interest and anorisatim parnts 0X long-tern debt. (if1111 orant ratio of 1:1). NOTESTO TABIES 3-8

(iii) Legal reserre requirements iuat be satisfied. Dividends from existing operations Mll be subject to the same restrictions. Dividends are subject to the following taxes:

(i) Distribution taxes of 5% of the deolared amounts, paid by MBR. (ii) withholding taxes on the distributed dividends, equal to 25% of the declarodamounfor foreign shareholders and 15% for Brasilian shareholders. (iii) Penaltytaxes on the amounts remitted overseas by foreign shareholders on those amount over and above 12% of invested capital. Rates range from 40% (12-15% portion) to 60% (over 25% portion). 10. Reinvestment of Surpluses Following maximum dividends as described above, it is assumed that remaining cash surpluses (depletion plus deproeiation) will be invested in plant expansion and accelerated repayment of long-term debt. The loan docu- ments require MBR to kmep a current ratio of 1:1 following such investment.

Industrial Projects Department June 1971

TABLE9

MBRIRON ORE PROJECT INERNAL FINANCIALRATE OF RETURNOF AGUASCIARAS OPRtATION BASEPROJOT WITHBalKS BUILDUPTO 10 MIILION TONSiPR 1WR (In US$ millions equiva1ent) Total Total ftnds Cash Flow Fiscal Year Initial! Generated After ending Inmestaunt Equipment from Income Income Period Maroh 31 Cost Renewals Operationsl/ Tax Tax

- _ TIT(F T 0 1971 2.3 ( 2.3) 1 1972 33.6 (33.6) 2 1973 74.4^ (74.4 3 1974 31.14Z 1.2 (30.2) 4 1975 0.9 30.8 29.9 5 1976 36.3 36.3 6 1977 0.2 35.5 0.3 35.0 7 1978 0.7 35.5 2.0 32.8 8 1979 1.6 35.7 2.1 32.0 9 1980 0.9 36.2 2.6 32.7 10 1981 36.2 3.3 32.9 11 1982 0.2 36.2 3.7 32.3 12 1983 0.4 36.2 3.9 31.9 13 1984 10.1 36.3 6.o 20.2 14 1985 36.9 8.2 28.7 15 1986 0.9 36.9 8.3 27.7 16 1987 0.7 36.9 8.5 27.7 17 1988 0.2 36.9 8.7 28.0 18 1989 0.4 36.9 10.1 26.4 Total 142.6 16.3 540.6 67.7 3114.0

Discounted Rate of Returnd - 18.8% before IncomeTax 17.5% after Incom Tax

1/ Includes total project costs minus financial charges during construction.

2/ Includes $2.0 million in working capital (cash) not directly reflected in Table 5. y Discounting to March 31, 1971.

4/ See Table 5 Industrial Projects Departaent May 1971 APfR MLN OtA PRNJECT

REJRN ON lWgmIMT FOR1s1R SRAR4NOLDMANJ bNMHILLN ODYVNENr

AT ULTlNa7E P!DIucTLiN LEVELSOF 10 ANU l5 IIILLIUN 7UNi F%R iEAH

arazi ..ir rein1tr ' St. John Del Rey Other Fcreign Sh reholdera All Shareholder. Total Invetamt S25 mtUlor, Total Inve.taent 140nillion Total ltm*etL,,nt n15illion Total ITve-tant o0 million Ie-l lIIn Governlent Now Irvestaont Ne loestant $15 Mdllion New Inwstnent S15 ilon NKw I--teest $30 mgllion m pnt milion F> heterr .:or =3 e J60.5 RtrexttlKturn or dreocua Netrn iffeoti o etro 0 on Fiasa.1 r_r DdlCrera- I,peeame L ieitrd.l' Investimnt 1 Retort, Eming Maroi31-, 12 Djidm`rZV loeoteent )lOlT 5 fI Investent'et 1- T! I W !!n!I5"T,10 snft NW

1974 , ------3.5 J . s 5.6 S:d 1975 . , ______9.6 9.6 19.3 15.9 1976 - 1.9 - 7.6 2.5 _ 6.2 - 0.9 - 6.0 - 5.3 - 6.6 9.2 l14.4 20.7 23.8 1977 0.4 2.3 1.6 9.2 0.5 2.9 1.2 7.3 0.2 1.3 1.3 8.7 1.1 6.5 1.4 8.1 10.5 18.1 22.1 29.9 1978 1.7 6.5 6.8 26.0 2.2 5.3 5.5 13.3 0.9 2.7 6.o 18.0 4.8 16.5 6.o 18.1 14.0 30.3 27.9 5o.o 1979 1.9 6.3 7.6 25.2 2.5 5.3 6.3 13.3 0.9 2.7 6.o 18.0 5.3 14.3 6.6 17.9 14.8 33.6 28.9 55.2 1980 2.4 6.7 9.6 26.8 2.8 5.5 7.0 13.6 1.2 2.8 8.0 18.7 6.4 15.0 8.o 18.8 16.4 35.0 31.2 57.9 1961 2.9 7.3 11.6 29.2 3.2 5.8 8.0 14.8 1.5 2.9 10.0 19.3 7.6 16.o 9.5 20,0 18.5 37.8 34.4 62.5 1932 3.2 7.8 12.A 31.2 3.5 6.1 8.8 15.3 1.7 3.0 11.3 20.0 8.4 16.9 10.5 21.1 20.0 39.5 36.7 65.3 1983 3.5 8.3 16.0 33.2 3.7 6.3 9.3 15.8 1.6 3.1 12.0 20.7 9.0 17.7 31.3 22.1 21.1 40.8 38.2 67.4 1981, 5.o 9.5 20.0 38.0 4.3 7.0 10.8 17.5 2.2 3.4 14.7 22.7 11.5 19.9 16.4 24.9 27.1 47.1 46.4 77.9 1985 6.2 10.5 24.8 42.o 5.1 7.6 12.8 19.0 2.5 3.7 16.7 24.7 13.8 21.8 17.3 27.3 33.0 53.0 53.9 87.6 1966 6.2 12.6 24.8 42.4 5.2 7.6 13.0 19.0 2.5 3.7 16.7 24.7 13.9 21.9 17.4 27.4 33.3 53.7 53.8 88.8 1987 6.2 10.7 2b.J 42.8 5.3 7.7 13.3 19.2 2.5 3.7 16.7 26.7 14.0 22.1 17.5 27.6 33.5 53.8 54.2 B8.9 1988 6.6 11.0 26.4 6. o 5.2 7.8 13.0 19.5 2.6 3.8 17.3 25.3 14.4 22.6 18.0 28.3 34.6 55.1 56.0 91.1 1989 7.5 12.0 30.0 48.o 5.7 8.3 14.3 20.8 2.8 3.9 18.7 26.0 16.0 24.2 20.0 30.13 39.6 59.7 62.3 98.7 Total 53.7 111.4 69.7 85.7 23.3 1:1.6 126.2 238.7 338.7 584.8 Avere. eul 1.1.9S 24.8% 6.98 11.9% 8.6S 15.4S return on total 8.8% 16.6S 32.95 53.7% s4mtmat orr la yomez

Av*raeeal nUA n/a 18.4% 31.7% 8.6% 15.b% 23.6$ retwn on ,e 46.2 32.9% 53.7% inotsrneet rrer 18 7mev.

DlenotAd return 6.2S 14.5t 1.75 7.2t 3.6% 9.8t n ttal inst_nt 3.7i 10.6t 19.55 28.3% er 18is ne

Disonted return n/S /a 10.62 18.41 3.6t 9.8% on nr invntsot - 12.8d 22.31t 19.5% 28.3 over 18 ysre lIhback period on n/a n/ 10.1 yre 6.8 yrs 13.9 yrs 9.b rmr in. esntre yrs 9.6 yrs 6.3 yrs 6.1 y.e 5.1 yr. in IT 1972

k*esvma _ma. dividnd pVa t and r_ittnce abroad of *11 net fuad on fo-nlm oharrhold-r a-co0ot-. zisoftide dinideado are net of 11 teas, inoludig diatribution), those on dividend., i.e. distribution ta (leoled on coqpay at tie of .dtheolding tae. (withheld fton all aber.oldeino' dide.nd. at aource - a-e Note 5 of Table 8) *nd penalty t. (.dthheld at morure on inmrm,ntal from roreign shareholders' reittancen abroad). A _usethat n depletion ia takn profita fro. exnxion sbove 10 mtillion ton par year. Thi. allot.. ioroasod di oideMnd. bht -rq at higher ni se-ti-r t-n r0t r.

2/ ir table 8. Inaladee direst Government re enuesfre all direot toe. levied on MB8Roai it, ehar-&older,, gt.nrate- ree on BRD loon to MR, and c..h br-efit. or subsidy1 paynents to !SA. Ltclodv al.1 indirect taeo.

Indoltrial Projst Departaent NV 1971 I. TABLE11

NBR IRON ORE PROJECT

ESTIMA7D SPLIT OF NET PROJECTBNWTS Fi 197289Y

10 millionL1 5om LTo . Cash A of dashc 7, Or Benefits Total Benefits Total ($ nI n) ($31n ) I. All Shareholders 126.7 27.2 238.7 29.0

(i) Brazilians(A E) 53.7 11.5 111.4 13.5 (ii) St. John D.l RaMy 49.7 10.7 85.7 10.4 (iii) Other Foreign 23.3 5.0 41.6 5.1

II. BrazilianGovernment?/ 338.7 72.8 584.8 71.0

III. TotalNot Cash Benefits 2465.4 100.0 823.5 100.0

(i) Total accruingto Brazil 392.4 84.3 696.2 84.5 (ii) Totalleaving Brazil 73.0 15.7 127.3 15.5

]6/ Net projeoct benefits(not cash benefits) are definedas the sum of maximum effective dividends in the hands of shareholders after all tame (inoluding those on dividends) plus all direot payments mad. to the Government over the life of the project plus cash benefits to RFFSA. Dividends to foreign shareholders are assumed to be remitted overseas in toto and thus represent not dividends after payment of penalty t on remittances over and above 12% of invested capital.

g( Includes all direct pymunts to the Oovernment resulting from MBR operations plus cash benefits accruing to RFFSAthrough net contri- butions to RFFSA overheads and, thereby, reduced Governmnt subsidies to RWFSA.

IndustrialProjects Department May 1971 MBR IROK '0RKPi0JEI7?

HgT7PI'RF.1IN FXOiAK3E gARNINGS FR08 AGUASCLRAS OPERAONS - BAS PROJEOTWITH SALESBUIIOUP TO 10 MILLIOKTONS PER YEAR

':qretructi-n Average for Period " p . r a t t o n s Operatiny Fisc.a joar ending K-h 31, 1971 - 1771. l71 l975 l376 1077 7h 197L I7 1961 19132 19613 19b28 1, 9 Poriod 6~'Mo.) 100 1. 110 1.0 1. millions/year) Production Rate (lMillion Long Tois) 2.9 9.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.D 10.0 Capital Inflows . IBi

Shore Capital 30.0 IBI Lon 50.0 Japanese Lo.ns 57.0 U.S. EX-Iu lan 18.2 155.2 Capital Inlw- IIFS

IBRD Loan 8277 U.S. k-lu Loan 2K.7 RFFSA/bra,il Gonvernt 7.2

Reene to Ma fro; Sle f .e 11.7 72.1 83.8 o3.8 83.8 83.8 83.8 33.8 83.8 b3,C 83.8 83.5 83.6 _.8 83.8 83.8 TOTALDmrse 229,6 21.7 72.1 83.8 83.8 113.8 83.8 113.3 83.8 83.13 83.8 03 113.8 83.8 113.1 83.5 83.8 _8141

Capital hpeoiiture - IDR

Fixed Assets and E7aip,rt boeyal (56 S FEC) 53.3 - - - 0.1 0.3 0.6 0.3 - 0.1 0.2 3.-J' - 0.3 0.3 0.1 0.2 Proope,atjig ipoas s'2 5 FM) 6. Ciraari,g and Prejet aonAgeeent(h3.5% FBC) 7.? Owwrs' Advancekpendit- and Increases in Supplies (32 S and 62.(% F"ESrespecti-:1y) 3.7 Interest ad Canitamt Cherge during Cortrwtion 12._ _

Sub-Total 83.7 _ - 0.1 0.3 o.6 0.3 - 0.1 0.2 3.9 C.3 0.3 0.1 0.2 0.1

Capital kpeoditwres - RrSA

Locoetives ed Frelg4 Care (100% FIE) 51.9 Civil Work (16.7% FM) 3.9 Buildings and ifpw,nt (60.5% EC) 7.8 bigiaeritz and Spervision f9.0% FSlC) o.5 Contingenies (55.7% F3C) 6.4 Intezst duoing Constzwtion 4.1 Sob-Total 74.6

Operating feinditures - MRI Direct Costs (21% FEC includes aim, plant and technical saintenwuce ad supplies) 0.92 2.9&/ 3.1 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.5 Administration (40S FEC inclules technical assistance) 0.3 o.6 o.6 0.6 0.6 0.6 0.6 0.6 0.6 o.6 0.6 0.6 0.6 0.6 0.6 o.6 0.6

Sub-Total 1.2 3.5 I.O .2 4.2 4.2 4,.2 4.2 4.2 4.2 4.2 L. 2 4.2 4.2 4.2 4.2 41.

Opwrating kpeniitures - RFFSA

Direct Costs (20.C% FEC) O S 1.9 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 Treck ihnewal (7.5% FEC) - 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Ol. 0.1 0.1 0.1 0.1 0.1 0.1

S.b-Total 0.5 2.0 2.2 2.2 7.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2

Debt Strlcr - I3R, 6.8 19.6 19.7 19.3 18.4 17.9 17.2 16.5 15.8 15.1 13.7 12.0 13.2 - - - 13.1 Debt Service - RFFSA 1.6 7.1 S." 0.3 9.3 8.1 7.9 7.7 776 6.4 5.0 4.7 1.7 1.7 3.5 6.6 Livideds: to St. John Shareholders - - - o.5 2.2 2.5 2.8 3.2 3.5 3.7 4.3 5.1 5.2 5.3 5.2 5.7 3.2 to other foreign breboldert _ _ _ 0.2 0.9 0.9 1.2 1.5 1.7 1.8 2.2 2.5 2.5 2.5 2.6 2.8 1.5

- - - *.7 3.1 3.1 4.0 4.7 5.2 5.5 6.5 7.6 7.7 7.8 7.8 8.5 4.7

TOTALOUTFLP 158.3 10.1 32.2 'I.6 34.8 36.5 36.4 35.1 3.3 35.1 34.6 36.9 31.0 358.65.31. 19.2 19.0 ...

NaT PORETONFTCRAE 513RPLDS 71.5 1.6 39.9 49.2 49.0 47.3 47.4 48.o 46.5 48.7 49.2 46.9 52.8 53.5 64.6 64.8 65.2 5o0o

1' ReplAcernt of ait wndolant equipecnt - y be sprr-d .- .1wer yearo. 2' Foretgn e.rcasnge cots of i-nmtory builduP (1 1 eiliion ovmr F7s 19'1-7) er nr',dI,l tn dlr-r1 costs.

Induatriol Projocts Depant- nt 1aY 1971 MlR IKIN 8t5 PROXCT

M12 ORION EMCHAME5R8R1113R3 FIAS A3UASCLARS OPERATIONS. aB5SIO*I PROJECSTaTH SAIi BUILDUPTO 15 WILL;l TOMl PERYEAR (US, million eq4vialntl

Constroctioo Ars-age for Period 0 P E Ri A T I 0 S Operating Fl.a year eod. tloch 31, Per 1 id 1976; 1977 197b I 0 11 1e2 37 195 1957 198 9 Pirion Prodnetim late 'Million LMagTons) 2.9 9.0 10.0 12.0 12.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 Capital Inflow M Shre Cpita 30.0 immLose ~~~~~~~~~~~~~~~~~~~~~50.0 J_nee loon 57.0 U.S. &-r, Loan ad 155.2

Casdal Infoi - 1113 IBM ri4f 46.0 U.S.ax-i loan 26,7 Otbtr Sourc 6.8 - - - - 13.61' - 79.5

Reven1 to PM from Sale of Ore - 11.7 72.1 83.8 99.5 99.5 121.8 1.2.8 12b.8 121.8 124.8 124.8 124.8 124.8 124.8 124.8 124.8 112.2 Total Inflom 234.7 11.7 72.1 83.8 99.5 113.1 12.8 321.8 124.8 124.8 124.8 124.8 124.8 121.8 ,124.8 124.8 124.8 112.2

Coital mditure - 1

Fied Assets d Equipnt Ranoel (56 %PC) 53.3 - - 2.4' 0.1 b.831 0.9 0.5 - 0.1 0.3 5.9V 0.5 0.4 0.2 0.3 1.1 Preperating I9me (M2 1 FdC) 6.b Awheri-3 and Ppo3i Hanagemet (43.5%FC) 7.7 Ome Ad.oe eNd Increuse in Supplies (32 % ad 62.5% PEC respectiely) 3 7 Inteat and Citment Charge dwutr Coetructimo 12.6

Su-Total 83,7

Cm1tal ksditur - 11tM

Lcoeaotives and Fright Care (100% FP) 56.6 - - - - 13.61. - ______- Civi Wws (26.7% FM) 3.9 Dldirge -d Iqip-nt (60.5% FSC) 7.8 hgsmarisg and Superwiston (9.0% FEC) 0.5 Conting cie (55.7% PBC) 6.4 rnteest during Ce.tructin 43

Sub-Total 79.5

Oeratirn kvenditurse - MR

1*.3 5.b 5.b 5A.b 5.b 5. 5.4. 5.. 5. 5.4 5.4 5.4 b.9 Direct Coats (2S FE - il amn, plant and trerinal maintennce nd supplies) - 0. 9 1/ 2.92/ 3.1 !.3 h jiroistrmio (40% FE - includes technical "sixtance) 0.3 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 o.6 o.6 o.6 o.6 0.6 0.6

Sub-Total 1.2 3.5 . O 1.9 .9 6.0 6.0 6.0 6.0 6.0 6.o 6.0 6.0 6.0 6.0 6.0 5.5

O2 timg 8*edlturss - RFFS3

Direct Coets (20S FE) _ 0.5 1.9 2.1 2.7 2.7 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.0 Track Re-1I ('.5% FMC) - - 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Sub-Total 0.5 2.0 2.2 2.8 2.8 3.b 3.b* 3. 3.4 3.4 3.4 3.4 3.b 3.4 3.4 3.4 3.1

D MEE-btR Ser ice - 6.8 19.6 19.7 19.3 18.4 17.9 17.2 16.5 15.8 15.1 13.7 12.0 11.2 _ 13.1 M_t_ Servt -_ 1.8 7.7 9.5 9.3 9.1 8.8 8.6 8.1 8.3 8.1 7.6 6.2 5.1 5.1 5.1 3.6 7.2 - - 2.5 2.9 5.3 5. 55 58 61 63 7. 76 1.6 .7 7.1 8. 7.2 Dividends:Ditied,Sl.5, -to r foreignSn'bodo- 20 1.8 2.7 2.73ldar 2.5 2.9 3.0 63 1 7.0 7:6 .. 71 7 7

- _- 3.4 4.2 8.0 8.0 8.3 8.7 9.1 9.4 10.4 11.3 11.3 11.4 11 .° 12.2 8.2

Total Outflor 163.2 10.3 32.5 41.21 40.6 61.6 45.0 44.0 43.0 b2.7 42.3 17.o 38.9 37.5 26.3 26.3 25.5 38.2

NET FOREIGNERCHURO S1UCPtS 71.5 1.4 39.3 42.6 58.9 51.5 79.c 60.8 81.8 82.1 82.5 77.8 85.9 87.3 98.5 98d5 99.3 71.0

I/ Purchos" of extra loccotives and rolling stock to axpand capcity to 15 dllion tons per annm. 2/ Imest_nt to expand im ar.d plnt capacity fine 10 million tooe/year to 12 million tons/year. 3/ Ineeteent to expand ine and plant capacity from 12 dllion tons/year to 15 million tons/year. R/eplacement of elm and plant equipaent which mybe spr~ead ower se,eral yal Foreign exchange cmto of inventwcy buildup (t1.3 millimonnea"r 7 1971-7r)w ainuded in irect cets.

Industrial Project. Departmeet May 1971

ANNEX 1-1

MBR IRON ORE PROJECT MINERACOES BRASILEIRAS REUNIDAS S.A.

OWNERSHIPANDCONTROL

CAEMI JAPANESE UNIVERSE HANNA OTHER (ANTUNES STADENG TANKSHIPS, MINING NON- GROUP) ~~~~~~COMPANIESIN.CMAY SHAREHOLDERS

61% 20% 19% 52% 48%

,I ...... i

ST. JOHN EBM D'EL REY MINING COMPANY

51%s 49%

June 1971 IBRD-5839(R)

ANNEX 1-1

MBR IRON ORE PROJECT MINERACOES BRASILEIRAS REUNIDAS S.A.

OWNERSHIPANDCONTROL

CAEMI JAPANESE UNIVERSE HANNA OTHER ANRTUNES(ANTUNESSTEEL TRADING & TANCI.PC,TNSISMNNGNON- MINN BRAZILIAN GROUP) ~COMPANIES IN.CMAY SHAREHOLDERS

61% 20% 19% 52% 48%

ST. JOHN EBM D'EL REY MINING COMPANY

5t % 49%

MBR

June 1971 IBRD-5839(R)

ANNEX 1-1

MBR IRON ORE PROJECT MINERACOES BRASILEIRAS REUNIDAS S.A.

OWNERSHIPANDCONTROL

CAEMI JAPANESE UNIVERSE HANNA OTHER (ANTUNESSTEEL & TNSISMNNGNON- GANTUNE)GROUP)Ni 5COMPANIES TRADING INCTANC.HICOMI I COMPANYANIN SHAREHOLDERSBRAZILIAN

...... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ttt.~~~~~ ~ ~~~ ~

......

619% 20% 1 9% 52% 48%

ST. JOHN EBM D'EL REY MINING COMPANY

51X% 49%

MBR

June 19711 June1971 18~~~~~~~~~~~~~~~~~IRD-5839(R)

ANNEX1-2

MBRIRON ORE PROJECT

INDUSTRIAE COMERCIODE MINERIOS S.A. - ICOMI

FINANCIAL INDICATORS1)

Fiscal Year ending March 31, 1969 1970 1971

($ million equivalent) Gross Operating Revenues 24.7 25.5 34.7 Net & Income 8.2 9.4 13.2 Cash Dividends - 1.8 2.9 Net Working Capital 0.7 0.3 4.0 Investments in Subsidiaries & Associated Companies 47.1 51.3 52.3 Net Fixed Assets 5.1 6.1 15.8 Total Shareholders Equity 47.7 55.2 65.5

Current Ratios 1.2:1 1.1:1 2.121 Long-Term Debt/Equity Ratio 9:91 4:96 9:91

1) Audited.

Industrial Projects Departme nt June 1971

ANINEX1-3

MBRIRON OREPROJECT

HANNANINING CCMPANY FINANCIAL INMCATORS 1960-1970

Fiscal Year ending Dec. 31, 1960 1965 1970 1960-70 (1 mil=on) - % Increase

Gross Operat g Revenues-/ 90.3 148.2 203.4 125 Net Income B 10.1 16.5 28.1 178 Cash Flow - 13.7 21.6 35.3 158 Net W,brkingCapital 24.7 51.9 74.1 200 Total ShareholdersEquity 96.3 147.3 226.2 135 Cash Dividends 2.3 4.3 11.4 396

Long-Term Debt/EquityRatio 0100 26:74 1288 -

1/ Excludes dividend income from subsidiaries.

2/ Consolidated.

3/ Net earnings plus depreciationand depletion.

IndustrialProjects Department May 1971

ANNEX2-1

MBRIRON OM PROJECT - MARKETING!NIXX

THE OUTLOOKFOR IRON OREY

1. Characteristics of the Iron Ore Market

1.01 Iron ore is used almost entirely for steelmaking; its importance, traditional and potential, therefore, needs hardly any emphasis. The iron ore market has certain distinct features, whiah are relevsat in assessing its future outlook. Moreover, the patterns of world production and trade have changed significantly over the last two deoades.

1.02 Until the early fifties, iron ore was produced primarily by the major steel producing countries. In 1950, for ecample, developed market econonD countries, whioh accounted for four-fifths of the world crude steel output 2/, produoed 72 pe:rcent of the world iron ore output (in iron content); the U.S.S.R. and Eastern 1Burope produced about one-fifth of both the world crude steel and the world iron ore output, and developing countries, ut..lic accounted for about 2 percent of global crude steel production, produced about 8 percent of the world iron ore output. By 1968, however, fully one- quarter of the world iron ore supply came from developing countries, roughly 80 percent of it being produced for export. Mirroring this structural shift in world production, plus the emergence of Australia as a majo' produo3r fAi exporter of iron ore in the mid-sixties, the iron ore self-sufficiency ratios of the major steel-consuming developed market econony countries rose as follows between 1960 and 1968:

Proportion of Consumption Imported (Percent)

1960 1968

Uni.ted States 31 37 EEC and United Kingdom 48 66 Japan 90 97

1.03 While iron ore imports into developed market economy countries from developing countries expanded by roughly 50 percent in the 1960-68 period, each of the above three principal regions have different import patterns, geographioallyand commercially, i.e. in terms of the conmon type of transaction. The United States obtains roughly 60 percent of its import requirements from Canada 20-25 peroent from Venezuela, and most of the remainder (15-20 peroent5 from Liberia and a few South American countries;

lJ Prepared by the Economics Department.

2J Unless otherwise specified, the term "world" in this annex includes the U.S.S.R. and Eastern Europe but excludes Asian-centrallyplanned countries, iron and steel statistios for which are scant. A'TRESX2 oa

1 imports from Australin are negligible. The mnajor 8uropean importers / purchase abouA',i percent of their imported ore within the region (from the miijor twe -urope n oroducers, namely, France and Sweden), 6-7 percent of `-"Otn ianada, and the blulk of the remainder (38-39 percent) from developing countries; 60 percent of this remainder comes from African-countries, one-third of it from Liberia alone. learly 30 percent of Japans s importe, as wellI as total requirements of iron ore (.Japanproduies only negligible ouantitie5 domesti.cal ly), however, come from Austral.ii, 12 peYert from 2mnada, the U.s., and Sout,h Africa, and the rest from a large number of developing countri-es. The major sluppliers to Japan among this group are Tndia2Peru, Chile, Maloysia and Brazil in that order.

.o4i (On1ya portion of internzitional trade in iron ore. is transacted -rj a "free Piarket" in so far as that term applies to a eystam of eihanges between -independent buyers and sellers on the basis of day-to_-day markset, CQnditions and prices. A substantial propo2rtion of,world trade is t'pw- 4determined."l Chief among transactions hich fall in this group ue -ship- i.-nts fror xninea (soetimes referred to as llcaptive,!mines"by the trade) to steel plants under coommonownership. In addition, a large and growing-proportion of iron ore trade is transacted under long4ven -contracts of up to 20 years duration. Generally, the principal benefits of sueh arrangements are assuring a market for all or-part of the supplir s output, on the-one hand, and a steady source of o3e for the steel imaker, on, the other, and in- sulating prices against short-term fluctuat-ions. Aooordingi oestitates by the UICITADSecretariat, roughly 95 percent :f U.$. iron ore t orts come :from 1eantive mines" abroad, mostly in Canada and Venezuela._/ Approximately 70 percent o;1 11.1.and -LC imports are obtained in the "free market." Qfver 9' percent oiotapan's requirements, however, a-re imr.tortod under long-tern-t contracts.3/ (Iverall,only about a third of :worldtrade in iron ore is transacted in aocordanee,with traditional trade practioes in a "free market.

1/ Austri3, Belgiwai-Imxembourg,the Fadedal "pubhlJ.cof Gvvany, the Netherlands and United Kingdom, in this oomputatiou. T D, Problems oP the Iron Ore Ngrkist,D/B/f*l/ron /T

Aiearnlr ) C pereent of Fastern E*ropeAs ir0onove impofts too we obtained undar it:tergoqvrzrental a&"angewttse, wh*oh are analogous to long-term orvntr:-e:-,s, maostly f-roii the Soviet Unien.

e.f 'Tne .c t, th L- such a large proportion of world trade is lp-deter-p-r min3d' Yloi.s uot nmeanthat the ircn ore market should be Tegarded as uzC)ori.petit,iv 4. The dqwnward rorlcetrand. over the last decadq,... would i;>2.nex.I r ule on this asaumption. 14hareiie, -n Cact,, intienie compe- t dtion, first to at-tract !iwestmiekn, than to conc:lude long4-enrcontractts, wzd finally, to sell in what mnay be *e*=ed the residual. 'free iaarket'. 'TUNCTA, Interlnational Action ornOMModities i'i light of 1ecent Oeve r) - en t2a: oTL o eThM / pl,199 p._3 AMirEX 2-1 Page3

2. Past Trends and Issues: An Overview

2.01 Though it faces sevreral problems, which are noted later, iron ore is no-ta "problemcommodity" in the commonsense of the term, i.e. as applied to some primarycommodities. *World requirementsand importdemand have been expandingquite rapidly;it faces no seriousthreat from substitutes;and, more importantly,its growthpotential is not stifledby an excessivelylow incomeelasticity of demand. NPr is it a commodityrin conflictwith the reqjuirementsof technologicnl.progress. Econom.cdevelopiment and i.ronand steel have moved and are likelyto continueto move together. Furthermore and renv3lrkably,during the last decade,iron ore has experienced two favorable and interrelatedtrends not sharedby many primarycommodities- (a) world trade h.as growni faster than world consumption, and (b) the share of less developed countries (IDC's)in world exports has expanded drawaticallyg as illustrated below: Volume (iron content) Growth i?ates i.,gn- .1yitoV5-MT-fo-= 1950 1957 1968 1966-68 1966-68 TR-licn-NeTrictons) praeWT

1V-orldconsumption 115.2 193.7 326.7 6.3 5.4 t4orldexports 21.8 64.1 138.0 11.4 8.0 .xportsof LDC's 6.2 27.8 65.6 14.8 9.0 Ratios (percent)

World exportsto world 19 33 42 consumption IDC exports to world exports 28 43 48

2.02 Changes in the relationships indicated by the above ratios have been brought about by several factors including the limitations of domestic iron ore supplies and deterioration in ore quality in some developed countries, the discovery and exploitation of high iron-content reserves in many developing countries, and sharp reductions in ocean transportation costs resultingf Crom the introduction of increasingly larger, special ore carriers, which broadened the sphere of viable, or economic imports beyond those from traditional suppliers. As noted earlier, these led to the accentuationof -theimport dependence in ore, of steel-consumingdeveloped market economy countries as a group. The notable beneficiaries of this trend wmong developing countries hlve been Brazil, Chile, India, Liberia and Mauritania, wiose combined exports of iron ore (in iron content) trebled between 1957 aind 1968. ;n.03lost striking, however, and of immense interest to the world iron .tndsteel community, have been the phenomennal and unabett,ed growth of steel product-ion, and therefore iron ore consumption, in Jap=n and the emergence o.l'Australia in the aecondhalf of the sixtiesas a iwior force,as supplier, in the world iron ore market. Japan'sorude steel outputhas expandedat ANNEX2-1 a more or loss steady rate of nearly 15 per3ent per annum since 1960. Australli pushed its exports of iron ore from negligible quantities in 1965 to 11 mil.ion tons (Fe content), or over 7 percent of world exports in 1968. Significantly, trade between the two countries expanded rapidly: by 19&c8, 90 percent of Australia's exports wen-t to Japan., and one-fifth ol' Jatvn 's import requirepents were met by Australia. The importance of this exchun-e in -the con text of the present annex is enhanced by the fact that Japan obtains most of its ore in the "free market, if largely from deve.oping countrles.

2.04 According to many observers, iron ore faces a number of problems, s at.tested to by the convening and proceedings of an international Ad Hoc ieeting on Iron Ore under the auspices of UNCTADin January 1970. In fact, ,,he agenda Lor this meeting, in which the Bank was representad, was devoted wholly "to identify the problems faced by the commodity" under the following headings: (a) investments, (b) ocean freight), (c) prices. The principal elements of the concern expressed on these subjects at the meeting, -ristly by 2?Tport,=nr ooiuntries, particularly the IDC's, can be summarizod as follows:

2.05 Investments. Recent structural changes in the world iron ore situation,Tsuch as E6e significant expansion of the volume of world trade, revolutionary developments in ocean transportation and ore handling, and new techniques in iron ore processing, iron-making and steel-mking neces- sitate very heavy investments by the countries concerned, in addition to the normal invsstments needed "in order to expand markets to secure new ousto- mers and to offset the deterioration in existing mine plants." Investrmnts should provide t"a reasonable return to producers which would cover: (i) remuneration for work perfornmed, (ii) repayment of capital an interest, and (iii) adequate recompense for the loss of non-renewable resources."

2,06 Ocean Freight. Importers and exporters have not shured in practice equitabl7y from cost-reducing advances in maritzim transport; "the aenerfit3 have accrued almost entirely to iwporters,' s-nc most of the export trade is conducted on an f.o.b. basl. Mov'eover, most, of the shipping space availnble for the transport of iron ore is under the oontrcl of iLnporters.

-7 Irices. Average prices, as measured by export unit values, hLve I ,Ts d downward trend since 1957, steeper for exports from deve- Loping countries than for those from developed countries., reduaing profits Wid tending to ddi3scourage invotment in the expansiojn of production as well ,1; c;1a23LT_losses in potential foreign exchange earnings. . (O8 !ot, a'.u participating countries, particularly importinC oountries, atreed with 'the ar3ove assesement or the supporti argu ts. 3pace doa not rerist .incussing or balanc.ing the diffring vie. may be noted,

1/ l'lora swnmary of the princ.pal argwmnts andLcounter-arg=vwts prose'nted, c;eeU;ICTAP ! t Of the Ad Hog. Deti on nCre TD/B/C.l/Iron Ore/l i?ebruary lcz 1970. ANNLC 2-1 Hage > however, that some of the above lproblemr'" have lost their urgency in recent months. Prices, for example, have moved up by about 10 percent since early 1970, following the steel boom associated with sharp demand growth ia Japan, revival of demand in Nestern Europe and the holding out of conswption in the U. 3 . in 1969 despitethe slow-downin the econonvr.Further conmnts on price trends are offered later. 2.09 By and large, the apparent concern of both exporting and import- ing countries in the future outlook for iron appears to arise not so much front a particularly Ien concern in anr one of the above problems or from fears of a chronic shortage or surplus in the long-run: it is generally recognized that demand mill continue to grow, though probably at a slower rate than in the past, and that exploitable world reserves are ample. itather, the concern seems to be prompted by the following two general considerationis. one, the recent and continuing rapid rate of change - in consumption patterns, trade patterns, transportation, technology, etc. - makes forw.ard planning highly complex; there tre innumerable factors, some highly technical, vich need to be taken into account. .urthermore, the vast ,anounts of investment required - for mines, ports and other infrastructure - enhance the importance of such planning and of ensuring profitable sales, or reviewing marketing strategy. In short, the countries concerned feel not threatened, but insecure. At the heart of the concern is al.so the issue of. sharing equitably between importers and exporters or aimong exporters the costs and rewards of expanded output and trade, progress in maritima transport, technological change, et.'

3. The Long-Term Outlook .. Problems and Approach 3.01 It is extrenely difficult to project wiorld demand for iron ore, e3pecially 10-15years ahead, with confidence for several reasons. A major (lifficulty arises from the very close and firm interrelation over time between production of steel (the principal iron ore constuning industry) and economic growth as measured, for exanaple, by growth in GDP: rather than facilitating the task of projection, this renders it more complex, for it requires reliable forecasts of economic growth for the principal steel- consuming regions or countries. A long-term steel forecast tends to be as good a9 the economic growth forecast on which it is based. In addition, while tho atatistical relationship between steel consumption and economic ,-rowth continues to hold strong in most observations, it can be argued con- vincingly that demand for steel can be influenced by the atructure of growth, i'l adtiLi.on to tho r,l. of growth, o.t. n econ*ry. Iajt Yu n 9oItTheiist,as hhi ra.jnrity of the final products mide from iron and steel. are dur,a.ble 0oo0(1, Uc cum).;ativo leveJ3: ol' consumption tmnd to I)( 1i.igh1, rclevnmb, .i..c. 1,;hc I uvul ol't a count-amrls 11steel took" becomos one of' tho cracial mneanures ol. U11Sitij Vied demaM(1!'or steel 'rhus, the role oa' the "steel ^3toc'cr?

1l, T'hleJ 'ev,_Ind. c1i'upoi.i ,i.on or .y;o o ' the sicel 3 tck has n. bWaring on the nupply ot scrr) and, there fore, on the dem,rnd for pig-i.rorn n3so. ~X2kllhr 24 plus the ahility of otrong governmnts to inFluenco steel oppsu7ption through investblt decisions imply that conoepto suoh as per oapita consunption, minirnLi requirements, s:aturation levels ete, - koy meiauures in po jooti.;s.g le:,.. id -or 1'ood - tend to be loss relevant in the pre3ent ca:e, 3.0 It i.. possible, nevertheless, to exaiivino the outlook for iron ore co11siupt ion c ilplnrohesivcly by attempting, 'or e_vuipl o, to esti 1t;e the ,ro'wth pot_ent,i. ol steel-using secLors or indus.tries (automobi1e, ship- build:ing, coidstruc l-ion, etc. ) and their raw inatari;.l requirementa in major cou.=itrics, but this requixes vast resour¢eti. Sach exeraises au carried out, on a continuing basi;,, by the staff of the Monoj4Lc Ono;Lss9ion .fo 'aro-x,e (1?M), the Aiuropean EcoCn Cor=nlty's Seoretariat and bir stotl -terests and pl.o=ning autho.Ltie$s in indivdual courltriesa IT ordor -to build on, and nriroOze the benefits of, this datailed wor}k whet is done below is, first, to arrivw ind.pndently at ta rougl tentative judCint of the i'uture trend i.n world demiud for onrde. stol. seaondl, to et Statofurc proi.Vct,in. ill tTi.pn, the largeot and miost dyn,=c iron ore xiport m;arket;: .J-aly, bt-. D1>redarivi at a fia global eoatiz-to, to examine the iimLied. re3idual production for l-he world, axeluding Japan, in Dlght of Iinom stoel produck ion plans iaid possibilities in other xegions, Attent,ion i; givenVa 30 to tie impl-ications of recent Japanese long-tor% oontraots.

1;. Dema;lndLor Steel 4.o. 'ilorlcd crucde steel production, whioh at the glo4 .10 and over Inng periods coin be consiadered to be equivalent to consitption, expanded at a rate of :.6 nercent per annum betwmn 1950 and 1969p, aWat4 to an aveage annual inF rease of 5,7 persont in the index of world induat%41n.production -Ps10) 'rle growth ritea in atool prqcotion and the W.I,P, indexc in the nore recent, 1959-69 period wre 6,2 po'cemt and 6,i p*Utlt, resptAs tively. 'Takin- the i.I.P. index aa a p3 fow 40o gcrvea, #wwm2. eati- rttes of tile inooumeel"astioity of wotid doan4 for cotvdesH41 wV capputed,0 using both log-log and semi-1og eqations and obserrationn f;v tho p_Viods 19,o-5, 1<5M.J-684nd 1929-69. The oeffieentq of determination (?2) orbt.Ioe r,l fedfro;1 ,966 to .289 (highest for thJ 1952)-69 peiodj Dog-,.og, nd loin?st Lor the 1955-68 perLod, sni4olo), and the *[email protected] aoaffiaients varied from *-h to .98 (hi.ghest for the l956 perio4, 1 latg and low1 t ;or t'le iv;'lricd, salsl-alog), A 1.:eLconaideration in using theo latiorhi.p for etiattig 'utuLre leveJI s of ste.l cons.Wut;on ought te be ¶dm h of t.hm am tpv0ojectable no't on onrO;n .t.tci ti a.l, -1tJ10e AUher, Qwnntitba4ve or qvitativ. rrttnn 3. *korrozrvle , u-Anu1o)-_Afl.Ya strong came ecf be mzu3e, 'i prior for worklxg- -11, . dec3iiiri o1elnstAcityo whih imUlies that sateae¶tion Cow wi.th indtistri-I nroduv.nirn, but with a gSro-ing lag, JAh somw to havw l, the expAreience of the United "tat ever the laat 50 eaern, 1J4.e $:ognbi17 that world steel oonasi.ption iz the future Pwr indeed fil to rise an ;pidly

1hese ,rowth rates ae bawd an leAt.vaquove, g mstrie tr'ends, i.e. trends .fitted to the log=rithm of ta d.ata,. AJX"is0,_-1 Page 7

in the pn.st, however, in view o:f thc rela-tive shonir-.ess o,& the er--od cons'dere-d here, the huge reservoir of deiwmd in developing countries, tle surpr-isin-' dcyn:-uinsr 0- Tpanese demand, and the noten'i;-0l nced -Cor sockO-0 IPzve3tnet.2 (housing, schools, etc.) even in the mora cleveJorneO.dcoLuntries, t,cere do -not appear to be sufficient grounds for adhering rigidly to the concept cf declinirnE elasticity. On the basis o,Z the constant elasticities prevf.lint- in the past 10-20 years and projections for ihe ;,.I.P. index bs.;ed 0In recent GD)Pprojections ['or OECD countries by the SCT)Secretariv.t, estijmIaLors Or future world crude steel nroduction work out to 727-70 m,l3_lion metric tons around 1975 aLnd 938-1,056 million tons .rounld 1)80. To guard against .' possib2 e upward bias resultiing from . possible overestinmatioa ol' the :. . P. index growth, world steel production is tentatively projected, rauther, at 700-750 mill]ion tons and 900-1,000 nillion tons ;in 1)75 -ird 1900, r0spect5.vely. The i]iiplied growth rate from, 1069 to 1,.80 works out to bcabout Percent.ner annur, comparedi to 3.6 percent in 1950-39 wnd 6.1 percent in 195f9-69.

l.o03 The above tentative estlyna.tes compare with other i;ndependent projections as follows. A comprehensive study of the tworld iron ore nv.rkut nrocpred by the IECEin 1.968 projected world crude steel. production in 1980 at eJO million tons, i.e. lower than the esti:mrutes above.1/ It has beeni recognized by the ECS and the majority of experts since then, howiever, that the specific forecast -or Japan therein had, been grossly underestimated, the 1900 estimate having been exceeded already in 1960. Another Uorecast places world steel production .-t the end of -the decade at about 900 million t.ons. f7i.nally, two major steol companies in the U.S. are reported to have forecast a level of one billion tons for world crude steel production around 1980. Thus, our tentative projections are not significantly out of line with these estir.!-tes.

14.°l focusing on 0:p.panI, as .a result of the nhernomenaJ growth in her steel industry, with output having quadrupled since 1260, this country has become the world's third largest prodlucer of crude steel., after the U.3. *nd the U.S.S.R. hiaving accounted for about 26 percent of world production in J.,69. Japan is, too, one of the world's two largest exporters oC steel -nd steel. products, the otler one beiing the Federa. L'enublic of Germtrn, .uoplyinlrg 17 percent of total. exports from principal exporting countriess.2/ This malms it by far the world's largest importer of iron ore:3/ in 1968, it absorbed 28 percent of worJ.d imports. In addition, Japan has accounted .or 25 percent of the increment in world crude steel. output between 1960

/ Uniited T.tions, hleWorl.d riarket Cor Iron Ore, 1968.

2/ I i 19(9, T;_p:trlts steel exports wore equivalent to roughly one - Courth oi' its output.

t ,~"T1 P:tz.ioduces oni.: a mu)lltion tons of iron ore, In grosos weight, a lit,t,lc over one ncrcent c)f its requirerents. Production has been declining since 196.3. A1tlin 2T.x,-1

and 19638, 29 peroent, of the growth in apparent world consumption of iron ore, 31 percent of the -rowth in world steel. exports, and nearly I',) percent or t',a iL world iron ore iriports over the same 8-year period.

4,0j The reasons for this remarkable experience in steel pr.oduction and related areas are varied and not all of them are linked to -the rapid groaw-h o0 the econony. Special contributing factors have been (a) the partlicular attention given to the location of new steel plants - in coastal areas or near industrial complexes - to reduce freight costs; (b) extensive plant and equipment investments, with low construction costs; (c) economies of scale throughthe constructionof giant blast furnaces; (d) lower wage rates n those in competing industrial nations; (e) modern equipment:, such as .C cnojgen furnaces (ID converters), and technology; (f) efficient industrial organization with regard to the size of companies, intra-industry coope- ration, etc.; (g) ef:lficient utilization of raw materials leading, for example, to a substantial reduction in the coke ratio; and (h) ensuring adequa.te supplies of iron ore through long-term contracts.

hx.06 Projecting into the future, it is often held that the growth of Japanese steel output is bound to slow down considerably in the years ahead. This is based on one or more of the follJowingargmients: (i) the economy cannot continue to grow at very high rates indefinitely; (ii) the elasticity of domestic demnd for steel is likely to be reduced as Japan approachets or reaches the U0 ". level of per capita consumption, (iii). bottlenecks will develop - in labor availability, coal supplies, etc.; (i3rV) steel exports are unlikel,y to rise as rapidly as in the past.

4..07 IJhile these do indeed point to deceleration in growth rates in the ;.ron and stee2 industry, they need not lead to too pessimistic expectations. A priori, the strongest one amaongthe above arguwents is the one concern3ng futuEre steel exports, in view of the growing restrictive attitudes .Cowardimports on the part of the U.S.,, which already has a voluntary export- restraint agreemnt with Japan and severaJ Western Luropean 71Tpliers. 4ith re,rard to the other argumnts, it may be noted that the lowest grawth projec- tivyl :r ~rapulls CrT)Pover the next •-10 years is 10 percent per annTurl. A 'oW+!t 0o. thi.-s ordler simply cannot be achieved without further substantial rr in stee-T consumption. 1hurthemore, the coult,ry is believed 1 o have 1 znensohwelklog in roaids,housing., zndi othor pUiflicinvestment.!/ Con- sii irizovements in labor productivity anid economies in coke uise should C set,he nr'h

l 02l Th-ce -;icome el.asticity of demnnd For steel in Japan has beon

1! ,TJapants per capita "steel stock" in 1966 was estimated at 1.9 tons coIi- rared to 3.8 tons irnFranoe, 5.7 tons in the Federal Republic of Germany and 9.0 tons in the U.S. It is generally acknlowledged that a country's demand t'or steel rises rapidly until the level of the steel stock reaches 5 tons per capita. (The Daiwa Invest=nt ,ionthly, TolWo, 'lovember ]?1969,p.8). AUnTNX2-1 page 9

declining, though log-log equations give somewhat better statistical results (higher I-)-2 ) than seri-log equations. The average elasticity coefficients work out to 1.4 (log-log) and 1.17 (semi-log) for the 1955-69 period, i4hile the elasticity nriy be reduced over the next 5-10 years, it is unlikely to be lower than oree. As to the future level of GMP, exercises by private or public research units in Japan project average growth rates of 10.6-12.6 percent per annum, while the OECD Secretariat has projected an annual increase of 10 percent for the seventies., Accepting the lowest rate, 10 percent, for GDP growth and an income elasticity of demand of roughly one, Japan's domestic crude steel requirements hn 1980 work out to 170-175 million tons, compared to 61 mill ion in 1969.1' Assuding that steel exports, which doubled ini the ]ast five years, grow at a rate somewhat lower than that of' world steel consumption (to allow for the fact that demrand for steel in the U.S., the largest importer of steel from Japan, has been growing slower than world demand), Japanese steel exports are estimated to rise to about 25 million tons by 1980. Thus, crude steel production may be in the neighborhiood of 200 million tons around 1980, compared to an estimated level of 90-95 million tons in 1970.

1X.09 nThere is greater uncertainty concerning Japants crude steel production level around 1975, because of uncertainties regarding the tath of growth or cyclical developmentsin the economryover the next ten years.-ecent forecasts (as of the middle of 1970) by the Japanese steel industry place steel production in 1975 at around 160 million tons, and huge investments to reach this capacity level are reported. floreover, this figure implies iron ore requirements (in gross weight) of 170-180 million tons. According to one source, "for arrivals from 1973-74 fiscal year, Japanese integrated producers have already negotiatedlong-term contracts for some 132 million tons and with options for an additional 5j4nillion 2ons, this wi-l.raise its potential imports to a total of 186 million tons."2/ Tfhus, there is consi- deratble justification, apriori, to project a steel production level of at leastl350 mLillion tons ini1975,implying a faster expansion in the first half of the decade than in the 1975-80 period. fIore recent reports, however, indicate that the Japanese steel industry has revised its production forecast for 1975 downward, to 130 million tons. Though the finality of, or the reasons for, this revision are not entirely clezar, we haeve given it some weight by adopting r.figure between the two estimates, namely, 140 million tons.

4.io Tlleresidlu:0.- between the projections for worl) . steel production .ind I:apancse steel production arrived at above works out to ,'>40-600 million ho)s around 3.97') and 700-800 mi.llion tons around 1980. There is merit in

I/ Tt iinust be remembered that consumption figurus renfor to apparent con- sviapti.on of stool and steo:] products (production, plus or minus net trade) and include the steel content of indirect steel exports, such 'Ls machinery, motor vehicles, ships, etc No attempt could be made to ex-mmine the outlook For these separately.

2/ I.eta-l FBulletin, January 30, 1970. ANNEX 2_1 page 7 r

comparing these figures to independent estimates for the same area (world, excluding Japan) prepared by certain European inter-governmental organiza- tions such as the ECE, since the latter are based largely on detailed pro- Jections or estimates by official or industry sources in the individual countries concerned, which cannot be improved upon easily. The range of these estimates is 670-760 million tons of crude steel produetion for 1980. While the figures developed here (700-800 million tons) are somewhat higher, they are not significantly out of line and, in our judgment, do not imply a need to revise our estimates for world production.

5. Iron Ore iequirements

;.01 The derivation of demand for iron from steel production is a priori, rather simple, calling principally for a judgment on the future crude sreel/ pig-iren rati.o, which depends in turn on the level of scrap use. Projecting this ratio systenatically, however, has become an extremely comp3ex task as a result of recent technological innovations in steel-making, which vary from .zountry to cotuitry, the highly active) state of the scrap market, and of for- mal or informal national or internqtional regulations affecting scrap trade. The 11,'ISstaff, recognizing the crucial importance of the changeable relationship between crude steel production and pig-iron output in their study of the world iron ore market, are now engaged in a comprehensive study of the scrap market. lo more than an arbitrary assumption on this relationship can be made here, The average arude steel/pig-iron ratio for the world is projected at 72 percent, not significantly different than the average for the last l• years, or at the lower level of the ECE forecast of 7'?-75 percent, Assuming, further, a ratio of iron ore (in terms of iron content) to pig.iron output of 0.90-0.95:1,world iron ore requirements (in iron content) work nut to 450-510 million tons in 1975 and 580-680 million tons in 1980, compared to about 340 in 1968. It is difficult to convert these into gross tonnage, since the iron content of world ore rtroductionhas been changing; but it is quite likely that the ratio will rise in the years ahea4d as newly exploited reserves in Brazil, Australia, etc., have a high iron rwtio. .4orldiron ore requirementsin gross weight may be in the neighborhoodof o(Xlmillior tons around 1975 and over one billion tons around 1980, cmpared 1;o ;-tout 64C million in 1968.

T'urniig,g J;O import demand, the bulk of Japanese requirements are >5to1 he m-eJ throug ports, as Japan produces only negligibhle quanti - ties or iron ore, which are not likely to expand. For the other rmajor indus.T-i LJ atreus, nanely, the U.S., the U.K., and the european Coal and Steel Gonmunilty, we have adopted E;EGComnission estim-ates of the "import, balance," which assume that the donestic output of the three areas will -row by only 13 percent between 1968 and 1980, or conaiderably slower than consumption. Assuming, in addition, more or less arbitrarily, that imports by developing oountries would grow on the average by 1.5-2 million tons a vear, and Eastern E;uropean imports to expand by h0-50 percent in the next 1' years, world iron ore import requirements (in iron content) are projected at 250-J3rs milli-on tons in 198n, oompared to about 150 million in 1968. ANNWEX2-1 Page 11

5.03 The projections developed in this section and the implied growth rates are summarized below:

Actual Projected Growth Rates VMS 1975 19Y 3-968-h0 1968-75 (mil ion tons) (percent) a

Crude steel output 512 700-750 400-1,000.-8-5.7 4.6-5.6 Iron ore requirements. 341 450-510 580- 680 4.5-5.9 4.0-5.9 (Fe) Iron ore requirements n.a. (765-835) (085-1,1550) (gross) Iron ore imports(Fe) 349 220-240 250- 300 4.4-6.0 5.7-7.1 Iron ore imports n.a. (375-41.0 (425- 500) (gross)

.Japan

Crude steel output 67 140 200 9.5 12.2 Iron ore requirements 43 98 150 11.0 13.6 (Fe) Iron ore requirements (69) (160) (220) 10.2 13.6 (gross)

o),0} It should be emphasized tha.tbecause of the difficulty of projecting the weighted average iron content of future world ore production, the figures referring to gross weight are very rough estimates and are therefore shown in p-arentheses. In fact, they are almost certain to have an upward -ias, since the average metal content of iroziore produced is expecbed to rise, i.e. the volume of ore yielding a given amount of iron is lilcely to decline. Furthermore, as the estimates are shown in round figures, the ratios between crude steel. output and iron ore requirements and between gross weight and iron content are somewhat distorted. Finally, the year lO6A, rather than 1969, is shown for comparison, as figures for the latter ire not av-3iJ ible for each item. As all series seem t,o have expanded rapidly, faster than the trend in 1969, had it been possible to .ake this year as i base, the implied Cuture growth rates would he lower._l

'. J3upply aund. Prices

f*i.l1 It is appropriate in I ror ore to examine thn supp3y outl.ook nard 1-h- rpriceoutlook jointly, in view of the close interrolationbetwnen prices tad :ir.nveaIrkrtnt, Invenstaent'irid nutput,, and .vtilahililies - actual or

1/ IOr ex:nple, in 1[969world cruda steel production andiJapanese crude s-teel output ;rew by 8.2 percent and 22.4 percent, re3pectively. Japaneso production is estim.ated to have r.sen .. high. is 95 mil.lion tons, by as much as 16 percent in 1970. Afl 'kX 24-

ex7)ect,ed - -rnd prices. Unlike with other commodities, where an aggyregate app roach inay I)e adequdate, in iron ore t}le supply si- tu, tion needs to he ex;i- 1CO- .i *] co.'lury-'by-covitry, mine-by-mi.ne, or project-by-project. IJb,i .u!. Ge 'rA'l113c ron L' Aliat, theoretioally t1-;least, otio cannot or olwhiiV ;,t, tom ,s the possibility that a Ihi;i1 Coli tjt rruiy (i flc vr anc¶ bo] 'I oc injg Tirge reserves and becomne a major force in the market; the AMis3traliian e rperience j :i case in point. Such a comprehensive analysis could not be made at this stuige for the purpose of this exercise. The supply rf; tu¶tion is tierefore discussed in broad terms.

6. 82 iorld iron ore res;erves are undoubtedly ;npl.er and constitute no ku30 for co'ncern. floreover, est:.mates of the inventory of reserves, after .1lowing l'or depletion, have been increasing as a result of continuing dis- coveries, as illustrated below:

Reserves Potential Orese (gross weight, bill:Eon tons)

1954 estimate 85 2/ 1966 estimate 248 205

1/ "Potential ores are masses which, to be exploitabl.e, demand favorable technological, economic or local con- Iiitioonsthan those existing."

2/ Nlotincluded in the 195l survey.

6.03 The iCE studypublished in 1968 projected, on the baais of its own ;nalysis and estimates submitted by countries, a level of world iron ore production (in i.ron content) of 60-585 million tons in 1980, whdch falls siort of our dejuand projection by about 100 million tons. However, it is now clear that Australia's producti.on potential had been grossly under- estImated: between 1966 and 1968 Australian output rose from 7Al million .O'is (Fe) to nearly 15 million tons. Output is expected to treble, rather th::.'n clouble (as implied in the ECE study) by 1980. Austratlia's connitments iawder long-term contracts to Japan alone for 1975, wnount to 30-35 milJ.ion -onns (Yiecont.ent). 'rhere are reasons to BellIwm that past projections for -7' nnuntr:iesz (such as South Africa and Brail.) have been conservative also. Though little output growth for South Ufrica had been anticipated, t.his country hss been seeking a long-term contract for the sale of' 1- wn; ion tcns (gross weight.) to Japan annually for a period of 10 years. ''V.'tl ;t' correct-ing Cor these "underestimnationFs" does not, raise I&Cf's world ,;unpl.y prolioct.ion to the level of this paper's demad projection, there is '' reaso:i t) speculate that the additional supply needed will not be forth, Ou: ing, assumiLg no major deterioration in prices. In short, we do not "%3resee a ma;jor imbalance between capacity and demand one way or another - e"e requiring a significant adjusta*nt - around 1980.

Ni (In(in the other hand, there is some evidence that expectations con- eerning the rate of expansion in some coimtries or mines, or the activartion ANNEX2-1 Page 13 of certain new projects in the last 2-3 years have not materialized fully. A major Indian project was started at a smaller scale than planned. Another major project in Australia, one of the biggest in the world, has fallen behind schedule by more than two years. The reasons for this are numerous and include administrative delays, problems in financing, and greater concern in tying sales under long-term contracts. These are clearly interlinked: for example, the huge investments required (a large part for building and infrastructure) has induced entrepreneurs to seek secure partners or markets in advance. The role of price in this connection, if any is not clear. It cannot be concluded, however, that prices have been insufficiently attractive, since the last few years have seen too, the simultaneous expansion of production capacity in a number of countries.

6.o5 In 1969, supply had difficulty in keeping up with demand for the first time in more than 10 years. Prices, which had declined by as much as 30 percent in real terms in the preceding 10 or so years, rose by 8 percent in early 1970. It is reported that contract prices of Swedish ores in the Western European markets, applying to shipments in 1970-71, were raised by about 10 percent recently. The market situation is likely to remain strong up to 1972-73, when recently started projects are completed and others reach full prodaction in a number of countries, particularly Australia and Brazil. The price trend thereafter is less certain and will be shaped primarily by the following forces:

(a) The trend in production and handling costs. There is no doubt that the sharp decline in prices, in both actual and real terms, experienced in the last 10-12 years was induced or reflects partly significant reductions in costs. It is generally acknowledged that while further reductions are possible, these are not likely to be as sharp as those in the past, particularly for the world as a whole, cost-reducing new technology having already spread more or less evenly among major producing countries. A key imponderable, is the effect of recent or new investment costs and of future interest rates on total costs.

(b) The trend in ocean transportationcosts. Despite the sharp decline in freight rates witnessed in recent years, there appears to be further room for cost reductionsin ocean transportation. Expansion of vessel size and economies associated with efficient routing are continuing unabetted. Furthermore, new revolutionary techniques are in the drawing board or on trial. The benefits of such developments may be shared more equitably between importere and exporters than in the past. Some exporters, such as Brazil, are slowly building up their own fleets. In addition, some recent long-term contracts stipulate the price for some quantities on an f.o.b. basis, and that of other quantitieson a c & f basis, implying concern with the distributionof further economies in transport costs.

(c) The organizationof the market and sales. A key issue is the level of long-term Japanese-Australian contracts and their impact on the market. It can be predicted that by 1975,Australia may supply or undertake to supply 40, perhaps up to 50, percent of Japan's iron ore requirements. As this level is approached,other exporting countries, anxious to secure markets, may accept lower prices. On the other hand, A2hEJ 2-1 Page 5 4

Aistralia and Japan may beomae progressively concerned with their mitual inter-dependence in iron ore and, therefore, more interested in tradng with other countries or in the "free market." Last but not least, Western uropean mills, already ooncerned with Japan's apetite for ore, may, and indeed are quite likel2y to, enter into long.term purchase contracts. Amongreoent developmenta indioative of this possible trend are two recent medium-term contracts between the Federal Republic of Germany and Greece with Australia, and a large long-term contract between Rumania and India.

6.06 On balance, these developments are more likely to keep prices in the mid and late seventies on the average in the neighborhood of recent levels, in actual terms, than to either lower or raise them significantly. In real terms (in 1969 dollars), however, prices may decline by about 10 percnt, but not nqch more.barring unforeseen techno'logical innovations or international market-regulating arrangements.

Economics Department February 1971 ANNEX 2-2

MBRIRON ORE PROJECT BRAZILIANIRON ORE PRODUCTIONAND EXPORTS

Production Exports (millions of long tons ) 1960 9.; 5.0 1962 10.5 7.5 1964 16.7 9.6 1966 24.4 11.5 1967 22.3 13.2 1968 24.3 .7 1969 27.6 18.9

Source: ILAFA - Revista Iatinoamrioana de Sidesragia, No. 125, September 1970.

U.S. Department of the Interior - Minerals Yearbooks 1961, 1962 and 1965 (for the first thxe export statistics).

Industrial Pro jects Department June 1971

ANNEX2-3

MBR IRON ORE PROJECT

TRENDS IN JAPANESE IRON ORE SUPPLIES

Percentage of Total Iran Ore Purchases Percentage of Contracted under Total Iron Ore Imports Long-Term Contracts Supply Region in 1970 for 1975 3/

Australia 34.3 46.1 south America 20.6 31.3

India and Goa 18.2 10.1

Africa 12.6 5.6 NorthAmerica 4.5 4.9 Others 9.8 2.0

Source: Iron Ore Import 1970, TEX Report. 1/ Note: Increasingdependence is being placedon Australian and South American sources. Brazil accounts for 70% of the South American increase, with MBR and CVRD accounting for 40% and 60% respectively of the Brazilianincrease.

Industrial Projects Department June 1971

ANNEX3

MBR IRON ORE PROJECT

THE MINE

1. Iron Ore Reserves

Introduction

1.01 The iron ore deposits and mines owned by MBR are located in the vicinity of Belo Horizonte in the State of Minas Gerais. They cover an area of 45 square kilometerswithin the QuadrilateroFerrifero. The company's properties contain reserves estimated at 1,612 million tons of high grade iron ore distributed in 36 deposits; about 46 percent of the reserves have been proved and indicated by 12.7 km. of tunneling, 15.2 km. of drilling and pitting and the remainder inferred from geologic mapping.

1.02 Aguas Claras is the largest and highest grade deposit owned by the company and will be the center of initial mining activities. It is located some 10 km. southeast of Belo Horizonte. The orebody contains over 375 million tons of minable open pit hematite ore with a dry grade of 68.0 percent iron, of which more than 250 million tons are proven. This was determinedby 3.8 km. of tunneling, 5.9 km. of drilling and 0.4 km. of pitting.

Geology

1.03 The geology of the regicn is described in Geological Survey Pro- fessional Paper 641-A, U.S. Departmentof the Interior, dated 1969 entitled Physiographic,Stratigraphic and Structural Development of the Quadrilatero Ferrifero, Minas Gerais, Brazil. Caue Itabirite (iron formation) of Precam- brian Age is the host rock for the Aguas Claras deposit. The orebody is a tabular lens striking N1-450E for 3,000 meters and outcropping at an elevation of between 1,240 and 1,350 meters along the Serra do Curra ridge. It dips 300 to 600 southeast.

1.04 Most of the exposed portions of the orebody are capped by a material locally known as canga, which is a ferruginousconglomerate composed of rubble derived mechanically from the iron formation firmly cemented together into a hard matrix.

1.05 The hanging wall is partly weathered phyllite, which is an argil- laceous rock intermediate in metamorphic grade between slate and schist. The footwall is moderately hard canga which is suitable for fill material for the rail loop.

1.06 The horizontal width of the orebody increases from about 40 meters at the ends to a maximum of 480 meters toward its central portion. The tested vertical depth from the highest outcrop of hematite to the deepest ore intersection is 477 meters (1,565 feet).

L.07 The ore mineral is predominantlyhematite, while gangueconsists mainly of quartz and clay minerals. Hematite is both granular and speculari- tic and occurs in compact, platey and powdery varieties. It is commonly fine-to-medium grained; in general, the finer the grain size, the harder the ore. ANVNEX3 Pa-ge2

;xploration

1.08 ThE basic exploration philosophy has been to use tunneling mainly for obtaining representative samples for testing. Drilling was used to supplement the tunnel results, detormine geological contacts and probe the orebody at depth. The grade and s-vructure of the ore to be mined during the early life of the mine are based primarily on tunnel data. These will provide a means of closely controlling grade and structure as the mine benches are developed.

To date Aguas Claras orebody has been mapped in detail and tested mainly on cross-sections 100 meters apart with 50 drill holes, 31 adits, 4 d-ifts and 50 pits with a total penetration of 10.1 kIn.

Sampling and Testing

1.09 The adits were sampled by continmous channeling broken into 3-meter intervals for chemical and structure testirxg. Sludge and core from drill hclas were sampled and chemically analyzed generally in 3-meter intervals. All told 4,174 samples were collected and 37,177 analyses, specifically for iron, phosphorus and silica content but also in some instances for other chemical constituents, performed. Check analyses were carried out by independent laboratories in the United States which confirmed those performed in Brazil.

1 ].0 The chemical analysis program showed that the iron content of the ore varied narrowly between 67.2 and 68.2 percent with a weighted average of 68.0 percent. The phosphorus content averaged 0.051 percent, silica 0.52 percent and alumina 0.92 percent with only minor variations between the hard and soft ore types.

1.11 Concurrently and continuing to date, a substantial field and laboratory investigation has been carried out on the structure and physical characteristics of the ore to determine what size products will be produced by the different,ore types found in the deposit. On the basis of these tests the proportions of the three types of ore which will be sold were determined ticr ooltows:

Coarse ore - minus 2 inch plus 1/2 inch 15 percent Fellet ore - minus 1 inch plus 1/4 inch 23 per-cent Sinter feed - minus 1/4 inch and containing not more than 20 percent minus 100 mesh material 62 percent

Total 1(X)percent

1.12 The total product is expected to amount to about 83 percent of the ore mined and the balance will be minus 100 mesh fines that will be stored in fines ponds. MERis actively investigating the suitability of this fine ore for pelletizing. Mu*SX 3 Page 3

Open Pit Reserves

1.13 The reserves of open pit ore in the Aguas Claras deposit have been estimated on the basis of the following criteria:

Crude cutoff A minimum iron content of 64h on a dry basis and a maximum phosphorus content of 0.12!

Tonrnage factor 3.6 tons/cubic meter for hard and soft/mixed types of ore

lining dilution Norinal

Structure After passing through 8 inch crusher

Lowest pit elevation 820 meters (between 420 and 530 meters below the present ridge line).

1.14 MAeasuredore has been projected up to 50 meters on strike and down din rrom an ore intersection in a tunnel or drill hole. The projected distance is not over 25 meters when measuring ore blocks on end-sections, close to faults or where isolated drill holes are involved. Indicated ore is ore lying within the projected ore zone which extends beyond the limits of the mneasured ore for a .urther distance of up to 50 meters, as determined by geological evidence. Inferred ore is ore based on geologicalprojections or judgment and includes the ore lying below the level or beyond the horizontal limit of the indicated ore.

1.15 On this basis the reserve of measured ore is 152 million tons or 40.2 percent of the potential minable reserves, which are estimated to be 378.4 million tons down to a pit level of 8;0 meters. Of the measured ore 77.8 million tons, or 51.3 percent, was proved by tunneling and 74.0 million tons, or 48.7 percent, by drilling. These tonnages correspond to 20.6 percent and 19.6 percent of the potential minable reserves.

1.16 A breakdown of potential minable reserves by ore type is shown below:

Potential Minable Reserves

; 1 Or Type of Ore Wu,nti.Ly Total P,-11 +10lM -lOO0I0 Meas. Inm. Inf. (thousand (Percent)

!Hard,mnssive 28,379 7.5 5.8 1.4 0.4 47.6 28.9 23.5 r(1c;WT!hard 65,030 17.2 9.3 5.2 2.7 45.2 22.0 32.8 U'[ediursort 4G,2l0i4.7 12.2 4.8 2.7 52.4 2h.r, 23.1 3ort or granular 235,288 62.2 12.7 28.4 21.1 35.b. 27.4 37.2 Ftlat ore 3,452 0.9 0.6 0.2 0.1 47.4 38.6 14.0

Totaql 378,359 100.0 33.1 ho.0 26.9 1O.2 26.j 33.5 AVNEX3 Pa.ge J4

rThe stripping ratio, based on volumetric c.iJ.culation, i.s0.18 cubic meter of waste per totn of crude, or 0.26 cubic yird per long ton. L ' itaJ.Thrgy

-troduction

2.01 Processing the Aguas Claras ore will consist of crushing, screen- iing and clcssification. The technology for this operation is wel] establish)erd and the proposed equipment comprises standard components. The processing p'.nt is designed to produce blast furnace ore in two size ranges, minus 2 inch plus 1 inch and minus 1 inch plus a inch and a sinter fines product t -& is essentially minus V inch plus 100 mesh. Considerationis also being ven to the utilization of the minus 100 mesh fraction as a feed for pel]e- tiizingoperations.

PreviousInvestigations

2*02 0O1the basts of a classificationtest program on a large samp.e of Aguas Claras fines crried cut at Hanna's Hibbing Research Labotatoryj linnesota,in 1965 it was determined that a suitable sinter fines product containinfgless than 20 percent minus 100 mesh could be produced utilizing a sT)iralclassitier.

2.Oj In 1969 samplesof unwashedand washed minus'- inch Aguas Glaras fines were sent to a number of JaiDanese steel mills and one large U,.3. steel company for s3inter investigations, These tests showed that classified Aguas Claras fines were well suited to the production of sinter.

Current Test Program

2.04 To deternine the response of the various types of ore p3'esentin the Aguas Claras deposit to the classificationprocess a pilot screening and c:i ssificationnlart was constructed for this purpose at the nearby Ii.tuda .n.ina.()le of the miainfeatures of the test program now under way is finding a useefor the riiLinus100 mesh spiral classifier overfl3owfraction as a pellet foed material* This material which amounts to 17 percent of the crude feed is currently regarded as tailings. Test resultsobtained to date indicate tlat sinpJ.e desliming in a cyclone classification circuit reduces the alumina and phosphorus present in this fraction to acceptable levels. The deslimed .linU.s.100 mnesh fraction will subsequently be tested winth respect to fil-ter- Ln{- hindli.rPig :d palletizing characteristics to determine its sui,.':illtiy -!s pell vL fooid imiterial. The data generated from this pilot plarib opera- :.1: wil. boe 'v-..1 ble ror the final. design of the Aguas Claras washin plant.

) . 'n fllflPl,

Pji. Designand JIiningQperations

.01. The Agua5'o:larts orebody is mi.ssive and outcropping. It can thero- .ar.rho re-dily nwhri.ped anLd prepired for open pit raining. l.nirigopera- Jn,s wiill ;)esimnil:ir to thoso used in r1os;topen pits Lhroughouh the world: -mndiwacto will.li drill-ed a.nd blastod and loaded by clectric shovels into .rc:; .i.'orhaul tge Lo the plant or waste dumps. AMT1rbX3 Page

3.02 As ore mining proceeds) the overlying wiaste Will concurrently be reimoved. approximately six months in advance of ore min-Lng. FTater-lal contain- 4nn less than 64 percent iron or more than 0.12 percent phosphorus is classi- f:ed as waste and will be trucked to dumps located close to the deposit.

3.03 *vsstated above, exploration of the deposit has shown it to be ,'hirl.v uniform in grad.e and to contain a minimal amount of internal waste. kut bec'iuse the ore consists of hard and soft portions, mining will be undertaken 3electively to insure that the proper proportions of hard and soft ore -.re supplied to the plant to produce the desired proportions of saleable ore. 3y stripping the waste 6 months in advance of mining, sampling blast holes .nd perCormirng additional exploratory drilling, the various types of ore wil].be delineated far enough ahead to deternine where the mining shovels should be stationed to produce the prescribed mix of ore types.

3.O4 Miining will initially be at the rate of 11.9 mLillion tons of crude ore per aznnum to produce 10 million tons of sal .eable ore.

3.0. V ining benches will be a minimum of ten meters high. Fina l pit sl.o3es will be 1:1, except in the phyllite material., whiere slopes wiCJ. vary accordinr to the nnture of the material encouvntered. Tlaulroads will be 70 feet wide to accoziaodate large hauling units and will he maintained at sim percent Zrade. Steeper grades will be avoided in the early years, because they are considered potentially dangerous for laden trucks travelling down-

Oit fevelopment

3.0)) Approxcim't.ely 2 .3 million cubic meters of waste will be removed prior to the commencement of ore production. This preproduction stripping program is designed to develop roads and benches to allow access to suffi- c:ientore of the various types required to produce the desired blend. Ini- tially contrq-ioYrs'equipment will be used, but this will he replaced by 11BRIs own equipment ordered for the project as and when it is delivered and assem- bled.

4lningEquipment

3 .u Targe sca:c equipsent, has been chosen Cor the min.ing operation in order {.o reduce as Car as possible the uniL handling costs. For ore mining, tfiz large shovels are considered the m:nimum for reliability and blending nurn)oses. *ith initial mining at an annual rate of approxin:intelyy 12 nillion IoTng t,wri. per year, 1.0 cubic yard shovels are require-d. i'aectric shovels .trc cho.;(n, a, they !ire more readily available in this size range; they are 'I,so more eCCicieniU .ncl a suitable source of'elecLric nower is available at o mrni.ne. "or ore h1u0l0ae, l(X-tort electric wheel trucks were chosen as a m:.ich 1'1)r -thle 1( cubIic yard shovels. These are the largest and most erCi- ciolt. units with a proven record in iron ore mining.

NI)( ,^'or tre str.ippiin,rg operal,ion smal:ler eloctr-ic shovels or six cubic -,rd.'d ca.v-cill ril.l. be used because oP'Ltheir greatcr i,,-neuverabh1lity. Trucks o, '.-ton capacitY have boen se)ectod to mratch these shovel s. AM\TEX3

3.09 Experience with similar ore at other locations indicates that 9-7/8 inch rotary drills will be the best selection for ore production.

3.10 . fuJl list of the proposed mining equipment .isgiven in ALnnex 3a. 4. 'Lne Facilities

Introduction

1t.01 The Aguas Claras mining, ore preparation and rail loading racili- ties are designed for an initial production of 10 million long tons of saleable ore per {mnum. [he expansion of production to greater tonnages in the -15ure has been a basic consideration throughout all phases of planning. The mine facilities will be located near the center and downhill fromn the orebody writh the primary crusherfounded on ore near the contact. The rexmainder of the facilities are located downhill and beyond the limit. of the orebody. This location holds haul distances during all stages of :ill niiigto a mint%..=.

4.03 The processing plant incorporates crushing, screening and classi- .ication operations to produce blast furnace ore in two-size ranges and a sinter fines product.

4.04 Stockpiling and rail loading facilities, as well as complete maintenance,support and administrativefacilities are also included. The railroad loop turnaround in the mine area is a part of the mine facilities.

4)W.05 It has been asswumd that all operating personnel will live in 13elo Ilorizonte and vicinity. Access

4.o6 The systamfor ore shippingis based on the unit trainconcept in iw;hichthe cars are loadedand unloadedwithout uncoupling. Lo.adingis accom- plishedwhile the trainis moving. This systemrequires a loop in which the traincan turi aroundwithout uncoupling the locomotive. The area inside the loop wil1 containthe maintenanceshop, office, laboratory and car rep.d.r.

1t.0Y Accessto the mine will be alongthe existing access road which will he upgraded and widened. ie \re -r_paration Plant flencral

5.01 'PTheAguas Claras ore is fairly constant in chemical composition, but varies physically. Primarily hematite, it ranges from material which is hard, massive amd thickbedded to that which is soft and friable. Ac6ordingly, plaLt l.'eed and thus the ratio of the three products will vary somewhatwith t iLLe. In general, the equipment selected has about 20 percent excess capa- ei t.y hich should take care of any irregularities in the feed. XkM X 3 Page 7

5.02 The sizing process will consist of primary crushing,screening, secondary crushing, final screening and washing, and hydraulic classifi- cati.on. The wash water will be recovered in a fines thickener. Surge capacity will be provided in the form of a stockpile between the primary and secondary crushers to permit uniform feed to the secondary crusher and down- stream sections. The proposed process flow-sheet is shown in Annex 3b.

Equipment sizing and the material balance used in the plant design are based on data collected from metallurgical testing carried out by MBR. The secondary crushing plant and the screening and washing plant are designed to accommodate future expansion.

Crushing

5.04 The 60-inch gyratory primary crusher will be capable of handling 20 million tons per annum. The high first cost of primary crushing plants and the relatively small increment in cost of a unit to handle the larger tonnage is the reason for this. The plant is designed with two dumping positions for 100-ton rear dump trucks. Product size will be nominally minus 8 inch.

5.05 From the surge pile the ore will be reclained and conveyed to the secondary crusher feed bin. After passing over a vibrating screen to elimi- nate the minus 2-inch fraction, the feed will pass through one 7-foot standard cone crusher to produce a minus 2-inch product.

3creening and Washing

5.06 The secondary crusher plant product will be distributed over 5 screening plant bins. Each bin will have about one-half hour's supply of feed and will service a screening and washing line. The coarse and pellet ore products will be made here. The undersize from the screens will go to the spiral classifiers,where the sinter feed will be separated from the fines.

5.07 Wet screeningwith spray water wash was selected as the best way to make the two coarser separations. Alternative methods were examined, but were found to be less applicablefor this size range.

5.08 The selec-tion of spiral classifiers for the 100-mesh separation was made from many possible methods. The major deciding factors were first cost, ease of operation, maintenance cost and sharpness of the separation.

Tailings Thickening

1,.g 'The function of this section of the plant willbe to reclaim the water from the dilute fines leaving the screening and washing section. This will lIcdone in cyc)ones and a thickener. The overflow from the thickness w-0l1 11o rocycled to the screening and clashifying section, wi le the under- flow will go to the fines disposal pond. ANNX 3 Page o

6. Cre Handling Facilities

Ore Stockpile 6.01 The stockpiles are designed to hold one week's supply of each material. This is considered to be the minimum requirement haring regard to the logistics of coordinating the mine, the railroad and the terminal. 6.02 Three rail mounted stackers will 2eceive the three products from the ore sizing plant and will stack them simultaneously. The layout design of the piles allows for future expansion. Provision for draining the water from the ore stockpiles and reclaiming it will be made. stockpile Reclaim and iailroad Car Loading 6.03 Two crawler mounted bucket Wheelreclaimers will be proTided to reclaim ore from the stockpiles and load it into ore cars. Only one reclaimer will be operated at any one time, while the other will act as a standby and thus provide a high degree of reliability in the loadout operation. The design loadout rate is 4,,000long tons per hour. 6.04 Loading will take place while the train moves. The loading system consists essentially of a loadout conveyor, equipped with weigh scale and discharging to a shuttle conveyor. As the ore flows into the car, the weigh scale will record the weight and give a signal at a predetermined point. The official weight of the car widllbe reeorled by a track scale. 7. Ancillary Facilities

Maintenance Shop 7.01 A fully equipped maintenance shop will be provided. This will =include facilities for truck and crawler equipment repair, a general repair shop and stores. There will be fabricating, welding, machine and electrical shops. Space is reserved for an engine repair shop. Engines will initially be sent to Sao Paulo for repair until such time as crew of meChanics is trained on the job. Laboratory and Others 7?.CI A sample preparation and analytical laboratory, fuelling station, c-zpiosives store and an emergency ore car maintenance shop will be provided. 8. Utilities

:.4ater 8.01 The make-up water demand of the plant is estimated at 2,200 gallons per minute. This is the quantity of water lost in the tailings, ore stockpiles and in the ore shipped, during a long dry spell with dry ore froi the mine :)id no reclaim Crom the fines pond. ANTCX3 Page 9

8.02 The process water will be obtained from a reservoir to be constructed on the lower reaches of Cardoso Creek, near Nova Lima. The reservoir, with a capacity of 800,000 cubic meters, will be forned by the construction of a concrete gravity dam. A pumping station below the dam will convey the water to the plant through a 14-inch diameter pipeline approxi- rntel,y 3.6 km. long.

8.03 Potable water for the plant will be supplied from a flowing well north of the loop area. Power Supply

8.04 Power supply to the main substationwill be via a 69KV overhead circuit by CEMIG from their Nova Lima substation approximately 5 miles distance.

8.05 The peak demand of the Aguas Claras mine facilities is expected to be L1,000 KWwith a daily average demand of 9,000 KW. The prime contribu- tors to the high instantaneous peak demand wlll be the electric ming shovels. Communications

8.o6 Communications for the coordination of the mining, transportation and marine terminal operations will be provided through a combination of government-owned and operated facilities and MBR-ownedand operated internal cormuunications aystems.

Industrial Projects Department June 1971

AN'EX3a

LIST OF MAJOR UNITS OF MININGEQUIPMENT

2 10 cubic yard electricshovels

3 6 cubic yard electricshovels

1 33 cubic yard dieselshovel 1 100-tonelectric wheel rear dump trucks

15 50-tonrear dump trucks

2 9-7/8-inchrotary drills

6 6--inchdown-the-hole drills 2 3k-,-inch air drills and compressors

Dozers, graders, water trucks, loader and other mobile equipment to service and support the operation.

Industrial Projects Department June 1971

MlNERACOESBRASILEIRAS REUNIDAS, S.A. AGUAS CLARASPROJECT MINE FACILITIESPICTORIAL FLOWSHEET

LEGEND

ELECTRIC~ ~ ~ -PIAR FO

LPR~AELfULPr Y t SoLlDS0~~~~~~~~~~~~~~~~~~~~~SOLID', @ X WLL DRILL~ ~ ~ ~ GPM ~~WATER B.ASIS= 12 , O0LT PY OF ORE OLPAPTRLJCK HOVEL ELO~~~~~~~~~~~~~~~~~~~~~~~~IWSHEET MINING AND PRIMARYCRUSHING 6000 HRS. PERYEAR A00 TON10MEND HIGH f fi j SENCH SECONDARYCRUSHING, SIZING, AND WASHING6500 HRS. PERYEAR PPRODUCT 10,000,000 LTPY Y60$PRtA ty | sMAJOR PRODUCT -TPY ) ( CRUSHER EEOUIPMNTINITIAL FUTURE -__ITEM I_, 00000 15,000,00020,000 BSELT< 1- PRIMARY I I APRON;P;LE,ODOSURGE L. TONS| 100 LIVE60" APRON URGE PILE ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CRUSHER 100 L.TON LIVE B'-0 EODR FEEDER 3' 6 6 EELT BIN ~~~~~~~~SURGE - ---- ARN CONVEYO APONSCREENS SECONDARY0R7' I 2 2 | FEEDERS1 FEEDERS _-C _ -dJSAR FEDR,R, ,R6Y! 1 I . CONE CRUSHER

5 ° 10 DISTRIBUTION S 6'14' SIZING G jEMERGENCY B j T /V/IBRATISCREENSCREENS'STOCKPiLE 84.~~~~~~~~~~~~~~~SCREENS_- SPIRAL

CLASSIFIER I . _2 -9-s9 ~~~250'9THIKENR!2 ~~~~~ i_0 , 3 LINE S5LNS \ t ,i ~~~~~~~~7'STANDARD C 2 CONE CRUSHER LINE 4

L 3LINE 23

5 - BELT FEEDERS LINE I SPRAY WATER

SCREEN.

STACKERS3W ~~~~~~~~~~~~~~~~~~-YCLONES TPCLLN 92 BELTCONVEYRTPCLLN -TOTAL oF 5sLiNES 122C -37A STACKER 19 246 5Z 3 6 C LSIIERO07N 2 1_9Ig SHUTTLE COARSE ORE STACKER CONV 7 8ER A FEEDP STORAGE CONVEOR 29, 000 LTO BINS COARSEPELET SINTER TLTTEA. 5 RE ORE ORE L1 3-APRON FEEDERS 2 - 3UCKETWHEEL RECLAIMERS SINTER ORE SCSLE 'HTILETHICKENER B LT ~ ~ PIA SHUTTLE-IVE 2-SUTTL OLowPLUMPS 3L0P FINES POND C0ONV'YOR2-SHUTTC E EL.790 M_ EL. 960M C_CAS

M2@ATER II IIREC-LAIM z PROCESS CESSWATER PUMPS X WATER 8RD 5557 Wl RESERVOIR

ANNEX 4

OCEAN TERMINAL

1. General

1.01 The Sepetiba Terminal, which will be located in Gualba Island offshore from Ponta de Santo Antonio, is designed to receive and unload unit trains of iron ore, to provide stockpiling facilities for a minimum of three grades of ore and to load, initially, ocean-going vessels up to the 250,000 DWT class. In the second stage program, additional channel dredging will permit vessels of greater capacity to be handled at the terminal.

1.02 The layout provides for initial stockpiling of 1,500,000 tons of ore and allows expansion of the storage yard to stockpile 4,700,000 tons. The stockpile capacity providing for uninterrupted shiploading is based on several considerations which could lead to interruptions in the uniform flow of product from the mine to vessel. These include railroad delays due to slides and washouts during the rainy season, derailments, unexpected mine production delays, strikes, weather conditions at sea which could delay shipping, and the inevitable variations in scheduling of vessels due to factors beyond the control of MBR. A special study was carried out by the sponsors at the Bank's request to determinethe optimum stockpile size.

1.03 Additional engineeringinvestigations, particularly concerning foundation data, are now underway and will be completed before finalizing the terminal arrangement. These include a seismic survey to better define sub-surface conditions, current and wave studies, additional soil borings and pier design studies. Areas requiring further consideration include determination of the orientation and type of pier, the design of retaining dikes, and the optimal stockpile location. Arrangements have been made for MBR to inform the Bank of the results of these studies as they are completed.

2. Guaiba Site Conditions

2.01 Guaiba Island is located near the entrance to Sepetiba Bay, alongside a deep natural channel which connects the Baia de Ilha Grande and Sepot.iba Bay and runs between Ilha Grande and the continent. Availapble naval hydrographic charts and additional surveys indicate that this channel will require no dredging for depths to 19 meters. Dredging in certain segments of this channel will provide the required 22.5 meters (MLWS) dredged depth and a bottom width of from 350 meters to 600 meters.

2.02 The island is hilly, and mountain counterfortspenetrate into the sea. Sandy beaches lie between these counterforts. A land area of 579,700 square meters on the south and east side of the island was purchased by MBR for the marine terminal. The property is located about 1,800 meters from the continent shorelineand about 1,000 meters from Guaibinha Island.

2.03 A wave study conducted in July 1969 indicates that the only significantwaves penetrating to the terminal site will be from a southerly direction. The Ilha Grande offers protection against waves generated by the mnost serious polar invasions which, in this area, penetrate 'rom west ANNEX4 Page 2

southwest and southwest with velocities up to 25 knots. A wave generated by winds blowing from the south at 25 knots, which is rather unusual, would reach the south side of Guaiba Island as a wave two meters high; 20 knot winds from a southerly direction would generate waves of apDroximately one meter high. The frequency in this direction is 10 to 20 percent (depending upon the month) but the percentage of winds above 15 knots is a small fraction of this frequency.

2.04 Tides measured at the island during a limited period of investigation are on the order of one meter with a maximum of about two meters.

2.05 A considerable amount of site data have been collected and utilized in developing the conceptual designs outlined herein. These data include hydrographic charts, contour maps prepared from aerial photography, field control for the topographic mapping, subsurface investigation and weather and tide data. Subsurface investigations have included 17-borings in water, 45 auger holes on land, 12 test pits and 41 wash borings in the approach channel. A second program of soil borings was started in September 1970 and will be finished in 1971. This added information is required to establish the final channel alignment and cost and the alignment and design of the pier.

2.06 The 40-kilometer sailing line and approach channel from Laje Branca in Baia da Ilha Grande to Guaiba Island will have a minimum depth of 22.5 meters. Depthsfrom Laje Branca to the Atlantic range upward from 25 meters.

2.07 Approximately 8 kilometers of the channel will require dredging of an estimated 5,400,000 cubic meters of bottom material (not including the allowance for overdredging).

2.08 Adequate navigation aids including radio communication will be installed. It is anticipated that approximately 30 buoys and several ranges will be required to mark the main channel. Approval by the Brazilian Navy will be secured and the new channel will be marked on charts and pub- lished in Notices to Mariners.

2.09 Radar equipment will be provided on the pier to monitor the dock- us: speed of vessels and permit better control of the berthing operation.

I-) T'opxrovide the necessary berthing assistance for ore ships, four tugs of 35 toii bollard pull have been included in the estimates. In addition, three work boats, one launch and two utility boats have been provided to support the shipping operation.

3. Sit rearation and Land Fill

3.01 An area of approximately 330,000 square meters will be required for the first stage of the terminal, requiring approximately 1,600,000 cubic meters of dredged sand fill material, 600,000 cubic meters of rock for dikcs and riprap, and 600,000 cubic meters of compacted fill. Rock for construction of Cue dike and for shore protection will be obtained from excavation on the iTland. The sand fill within the dikes will be dredged from borrow areas :an Sepetiba Bay and adjacent borrow sources, or it will be rock excavat£ed from the site area. ANNEX 4 Page 3

4. Pier L.n1 The pier structurewill be approximately440 meters long and 27 meters wide, and water depth of 27 meters at the berth will permit docking of ships up to 300,000 nWTon the seaward side and up to 100,000 DWTon the landward side.

4.02 A steel piling pier with a concrete dock on which a shiploader will travel is proposed. Final design and alignment await the completion of additional soil borings. Adequate fendering will be provided. The shiploader will have a rated capacity of about 10,000 long tons per hour and will be capable of loading ships on either side of the pier. 4.03 The deck will accommodateone travelingshiploader and a lane for small trucks. Limitedboring data to date (two boringsunder pier) indicate loose sandy material overlying firm residual soils and bedrock. 4.04 Final choice of the type of pier depends on the results of additional foundation boringu and detailed comparison of alternates. 5. Railroad Access Trestle 5.01 The access trestle will be approximately1,740 meterslong consisting of 58 thirty-meter spans. The structure will consist of steel pilings supporting steel girders. 5.02 Five borings along the planned alignment indicate loose to firm sands of varying thickness overlying firm residual soils and bedrock. It is planned that piling will be jetted through the sandy material and driven to refusal into the residual soils. 5.03 The bridgewill includea special40-meter span for passageof smallboat traffic. A 600-meter long rock causeway will connect the trestle to Guaiba Island. 6. Ore Unloading, Stockpiling, Reclaim and Shiploading

6.01 Ore will be received in trainsconsisting of from 76 to 125 solid bottom ore cars of 95 metric tons capacity equipped with rotary couplings. The locomotives that power the train will position the first car in a single rotary dumper and thereafter an automatic car pusher will position the train to dump successive cars. The cars will remain coupled during damping at the rate of 37 per hour, or 3,500 long tone per hour (LrPH). The car dumper structure has been designed for a tandem rotary dumper, with the second dumper to be installed in the future.

6.02 Ore will be drawn from the dumper hopper by a 60-inch manganese steel apron feeder and discharged to a 54-inch belt conveyor. This will discharge to a 5LI-inchtransfer conveyor, which will traverse the end of the storage area and discharge the ore to either of two 60-inch reversible stockline conveyors. The two stacker-reclaimerswill straddle thene conveyors. The conveyors will discharge to the stacker-reclaimer boom conveyor via a collapsible tripper during staclcingof the ore into stockpiles. AMEX 4 Pa-ge-4

6.03 The stacker-reclaimers will be rail-mounted bucket ieel machines with 47 meter booms. The wheel will be byauseed for staekin and the boom belt reversed for reclaiming.

6.o0l Ore mill be reclaimed at an average rate of 6,50Q LTPH for each machine and 'will discharge from the staclcer-reclaimer boom conveyor to the 60-inch reversible stocklinet conveyor. A 60-inch reclaim t.ansfer conveyor and a 60-inch surge bin feed conveyor will deliwr the owe to a 1,600 LT surge bin.

6.o5 An automatic sampling system will take a out por:odioally for analysis of structure and moisture otents an well &a to pz'o,ide sampler for chemical analysis. 6.06 The surge bin will be desiped to regulato the flow to t4e hip and allow for shiploader movements of several minutes dation without stop- ping the reclaim operation. Ore vill be drai from the biA by an 84-inch manganese steel apron feeder and dLscharged to a 60-inch surge bin discharge conveyor, which is reversible.

6.07 Ore being loaded on ships will discharge from the 60-inch pier transfer conveyor to the shiploader feed oonveyor and to the shiploader. 'The belt tripper is integral with the shiploader. The 38-meters telescop- ing, luffing, slewing boom on the shiploader will carx7 the conveyor which vill transfer the ore to the ships. Sach shiploader will havr a rated capacity of 7,000 LTPH. .ot0 The xonveyorBwill be designed for 120 percont oe thir rated carrying oapacity. Standardisation and interchangeability of drive modules are a pri:me design consideration.

6.09 Promision for future expansion will be made,, S iting of a aeoond car dumper, ixtension of the tm initial etaockr-feeder conhvmyvr to about double their initial length and the addition of a third st4aimr-f*der conveyor A.t_ associated stacker-reclaimer. A second shiploading syst4M Will be added including conveyor train, surge bin and shiploa4r. A this stage i.re W:Lll be received at 7,000 LTPH and loaded at 1,SOoLTPR.

t> !-ItiLately it will be poasible to deliver ore from both oar dupers %:1 a t.Le stockline and simultareouasl.y reclaim from two otber atocklines vo two !haloaders. . Utlitties 7.01 Ai.quate arrangemets for fresh water, sewage nd service power si>tpply hafve been made, subJect to the possible d for *Ai&tonal facilities as desei f)ed in the ecological discuussion of Para. 4.32. Ton houses for ~stervis:ry personnel will be built. All other of the 180-man labor force ill roietde in nearby villages and commute to the site by a aall rail-bus to be "'a.-ted by the terminal. ANNEX4 page 5

7.0' To support the train unloading, stacking and shiploading operations, auxlliary mobile equipment will be required. It wil]. be used to maintain equipment, roads and grounds, haul supplies, transport personnel anrd shuttle empty and full ore cars as required.

8. Electrical

8.01 The aggregate electrical load for the Guaiba Island terminal facility is expected to have the following characteristics:

- Connected horsepower 6,800 - Hourly average demand, kW 5,703 - Monthly billing 15-minute demand, kW 6,000 - Power factor for billing purposes, percent range 95-100 - Instantaneous peak demand, kW 6,300 - Daily load factor, maximum, percent 95 - Weekly and monthly load factor, percent range 10-30

8.02 Arrangements have been made with the Furnas for an adequate supply of electric power.

8.03 The entire conveyor system between the railroad dump pocket and the shiploader will be controlled from a central graphic panel. The control room will be located near the surge bin and sampling house. Adequate fail-safe systems will be included.

Transportation Projects Department Nay 1971

ANNEX5

MBR IRON ORE PROJECT

ENVIRONENTAL CONSIDERATIONS

A. At the Sepetiba Terminal Site

1. The Bankts inquiries and on-site studies regarding environmental issues at the Sepetiba terminal have been concerned with assuring (i) that the choice of Sepetiba Bay over other potential locations is based on sound technical, economic and environmental considerations; and (ii) thAt all steps will be taken at the tenninal site to prevent or largely minimize water pollution and other potential threats to the environment. Both are of considerable importance since Sepetiba Bay, up until now, has been untouched by major industry and is primarily a recreational and commercial fishing area. Over the years various plans have been drawn up for development of industry in the region surrounding the Bay, but none to date have been carried forward. Thus, the MBRproject will represent a step in a new direction for the area and it is important that future options for non-industrial use of Sepetiba Bay not be foreclosed by development of the project.

Selection of the Sepetiba Bay Site

2. MBR's decision to use a site within Sepetiba Bay for the MBR ocean terminal resulted from studies which began in 1958 of a number of alternative sites along the Brazilian coast. These studies were intended to locate a protected site on deep water where large, modern bulk vessels could be accommodated and efficient and economical rail transportation could be provided from the mine site.

3. A survey of inland rail transportation facilities indicated that, of the existing routes, those of the Central do Brasil offered the most advantageous means of ore transport frcmn the mine area. This portion of the Brazilian Railway System was operating substantially under capacity, but, with broad gauge, was capable of development into a heavy tonnage carrier to meet the requirements of major iron ore transportation. While this conclusion regarding rail transport '.ndicated a need to use an ocean terminal site in the general vicinity of Rio de Janeiro, a survey of other possible locations was undertaken over several hundred miles of the Brazil- ian coast. The results of this survey led to the recommendation that the Sepetiba Bay area, with its natural protection, deep water and accessibility for the Central do Brasil would provide the most appropriate location for the terminal.

4. The Port of Rio de Janeiro itself was rejected as a potential site on the grounds that both the Port, with its limited draft conditions and inadequate loading facilities, and the railroad lines leading to the ?ort through the city, were already highly congested and therefore could not lend themselves to adaptation for efficient motemenL of the large shipments to be made by MBR. Other sites were rejected on account of their inaccessibility ANNEX5

for rail transport or need for extensive har,)or facilities that would have been far more expensive than those proptwed at Se*tiba. 5. The Fort of Tubarao near Vitoria, through which the Government Mining Compary, CVRD,presently is exporting over 20 minlion tons of iron ore per year, more recently was eliminated from consideration on two counts. First, the CVRD-ownedrail line, extending from their mine northwest of Belo Horizonte to Tubarao, already is used to capacity and will be expanded to increase CVRMIs ultimate export capacity to over 40 million tons annually. Once the CVRRDexport targets are reached, there will be little excess capacity on the route, so that MBRstill would have to provide an additional, totally new line at very high cost if it wished to use Tubarao as its terminal site. The second, and perhaps more important, reason was that the Japanese steel mills, which buy a large portion of CVRD's ore and also will purchase ore from MBR, pzpressed unwillingness to have all of their Brazilian ore supplies go through a single port.

6. On these bases it can be concluded that from an overall eoonomic and technical point of view, Sepetiba Bay represents the most appropriate site for the MBRocean terminal, even though this means utilizing a relatively untouched coastal area. MBR's choice of this site has been approved by the Brazilian Government.

dosed Environmental Protection at Sepetiba Bay

7. Since bulk oil/ore carriers will be used for a large portion of MBHore shipments, the danger that oil slops might be discharged from these vessels into Sepetiba Bay is a major problem that must be dealt with effectively. Carriers that have discharged oil, and subsequently are to tako on ore at Sepetiba from MBR, normally will have cleaned their tanks prior to arrival at Sepetiba and therefore must find some means of dispos- inig of the resulting mixture of oil, water and detergents used in cleaning. If discharged in or near the Bay, these slops, which are toxic, would be a threat to comiarcial fishing and recreational facilities in the area. In tUhepast suecx slops usually have been disoharged at sea prior to arrival at. tlhe destination port. In the fiuture, however, as national and interna- +lonal t.gWat.ions on oil pollution are strengthened, it is likely to become -,m..-;essary for the slops to be held until arrival of the vessel at the dles-

is. La4.n wre-ort, they then can be pumped ashore to a slop tank or .: w: svilclity for safe handling. j'. 1It iS not possible at this time to make a definite judgment whether ,ueh rAs}hore facilities will be necessary at bepetiba Bay or an alterna- V ,e arragement will prove sufficient. However, at ies request .Wissuestiont 1i presently being examined by MBR, and agreement was reached iuring negotit.afiion that, by the end of 1971, MBR would pipare plans, tvasonab4yL a>'.-epLable to the Bank and the Brazilian Goverment, for &u)dealin w iA oil slops from ships calling at the terminal, (ii) disposal of soli.d waste and sewage originating at the terminal, and (iii) dealing with acci6anr-i oil spills and minindzing the effect of any such spills that might occur .. uia terminal or its immdiate vicinity. MR has agreed that ANNIX5 Page 3

after discussionof these planswith the Bank and the Government,it will implement the plans, or acceptable alternatives, prior to completion of the project. 9. Since ore will arriveat the terminalwith considerablemoisture content, havingbeen dedustedduring preparation at the mine (seebelow), there is not expected to be a dust problem when the ore cars are dumped at the terminal. Even so, the car dumping facility will be designed to allow the addition of commercially available dust collectors if they prove necessary. The dumped products will be conveyed and stacked in a manner similar to that used at ths mine. The ore storage piles are expected to turn over every sixty days, but if surface moisture evaporates to a point where dust becomes a problem, the piles will have to be sprayed.

10. The ore that will be reclaimed from the stockpiles and conveyed to the shiploader will be in a moist condition, so that no dust problems are expected at the transfer points involved in this operation. All conveyors operating over the sea, and the shiploaders themselves, will be designed to prevent spillage of solids into the water.

11. The terminal marine equipment necessary for assisting vessels while passing the approach channel, as we!.l as during berthing and deberth- ing operations, will consist of 4 tugboats and a few work and utility boats. MBRhas indicated that it will exert all efforts and discipline to avoid oil spilling by such vessels and to comply with Brazilian law and regulations regarding ocean pollution. 12. MBRalso has given the Bank assurances that the physical design of the terminal facilities on Guaiba Island and the trestle connecting the island with the mainland will be carried out in a manner that will minimize their visual impact. 13. An environmental hazard not covered by the steps described above is that MBRmay wish at some point to construct a pelletizing plant at or near the terminal to process fines material shipped from the mine (Para. 4.05). While MBRs economic incentives to construct such a plant might be considerable, the potential for ecological damage due to possible sulfur emissions and dust problems could be substantial unless adequate precautions are taken. It was agreed during negotiations, therefore, that MBR would not construct such a plant without prior consultation with the Bank. B. At the Mine Site 14. Viasits by Bank staff to the existingMBR mining operations near Belo Horizonte have demonstrated the company's own interest in environmertal control. The procedures described below for dust and water pollution control at the new Aguas Claras operation already are carried out at the existing mines, exoept on a somewhat smaller scale, and have proven very success- ful. 15. Dust created by the Aguas Claras mining operations is not expected to cause major problems. Blasting will create a oonsiderable amount of dust and fly-rookfor a momentary period, but will take place so inf--squently ANNEX5 PagN 4

as to be negligible. Drills will be equipped with dust oollectors and can be considered dust-free. Traffic on haul roads may raise dust, but this will be minimized by frequent sprinklLng. The main access roads, and roads around offices and shops will be paved.

16. The mined ore will be transferred by truck from the mine to a crushing plant which will be equipped with a fan drawing air from the crusher dump pocket and from hoods at the crusher and apron feeder discharge to a dust collector. If necessary, water sprays will be used on the feeder discharge and the ore conveyor. The ore from the crusher will be stored in an open pile by means of a boom stacker and water sprays will be used to control dust. This stockpile will retain ore for only a few hours so that the ore will not have a chance to dry out before it is reclaimed by either of two apron feeders located underneath the pile whioh will be fitted with water sprays to allay dust. The crude ore then will be conveyed to bins which will be enclosed and connected to a dust collector.

17. Tailings from the processingplant will consist of fine hematite sand and slimes. This slurry will be sent to cyclones to remove the fine sand. The cyclone overflows will go to a thickener, the overflow of which will be returned to the process plant. The underflows of the cyclones and the thiokener will be sent to a tailings pond in a valley below the plant, formed by constructing an earthen dam. A polyelectrolyte Jqrocculate willbe added either to the thickener feed or to the tailings pond feed to the extent necessary to keep the effluent from the tailijngs pond clear. Tailings pond water will be further clarified by,passage through a filtering dam and will be recycled back to the prooessing plant.

18. The ore products will be conveyed to a storage area prepared with a system of underdrains covered with canga. This system will remove the drainage water whioh will flow down to the process water reservoir. The products mill be reclaimed with a bucketwheel excavator which will dig into the pile and mix the underlying damp material with any dry surface material so that the train loadout will not have a dusting problem. Piles in longer atorage during the dry season will be sprinkled periodically. 'll#cucketwheel excavators will discharge to conveyors and thence to bins,

0) tadars, t. shuttle oonveyors, and to a continuously moving train. .irg .i ro expected to be objectionable at these transfer points.

Tho water supply will come from a reservoir below the plant which .n.'-1e te natural runoff behind a dam. Because water is to be with-

.r.... with , product and by evaporation, this reservoir will have no ;etw exvept when natural runoff exceeds the owm-lative process re- .;:4rements s6nce the last rain. To minimize erosion in the mining and .pr.ossing gsreas, cuts will be fitted with lined ditches at the top and at thes:r base, These also will drain to the reservoir. Fu\rthermore, the nkdyliite c.j".s will be especially designed to minimize the area exposed to -: ae o vatesr. Any muddiness that may ocour in the runoff and the drain s t.reans i.s expecpted to be deposited by siltation in the process water re serroir. ANNEX5 Page 5

20. Sanitary waste from the ore preparation plant will go to a septic tank Which will discharge to a tile drainfield. Sanitary waste from the other facilities will go to an aeration type sewage treatment plant sized for 650 people.

21. MBR has indicated to the Bank that it plans to take appropriate steps to control erosion at the mine site through reforestation and other such methods. These also will minimize the visual impact of alterations to the terrain that will be caused by the maining operation. The City of Belo Horizonte itself will not view any such effects since it faces the opposite side of the mountain from that being mined.

lndustrial Projects Department Tune 1971

MBR IRON ORE PROJECT IMPLEMENTATION SCHEDULE

1970 1971 1972 1973 :AlSO|D J |FIMIA|M|J| A I|| J|F |M|A|MJJ|| ONDJF|S|| I MINE FACILITIESAND III 111111111111111111111111111111111111II PREPARATIONPLANT -

MI'NE ELECTRICALSUPPLY 1 111111 MINE WATERSUPPLY 111111111111111111111111111III 8 uJ I PROCESSWATER AND IIIIIIIIIIIIIIItII IlIllilIlliI TAILINGS DAMS O

MINE BUILDINGS 11111111111111111111111 _Z

TERMINALFACILiTIES L011111111111111111o -11 AND DREDGING _ F- ~~0 PIER, CONVEYOR TRESTLE AND RAILWAY BRIDGE 1 _0 m Isis

TERMINAL ELECTRICALSUPPLY

TERMINALWATER SUPPLY 11111111111111111111111 __II_

`LWMINALBUILDINGS xm IIIItJIiIIIlliIIiiIiltillhIIIIItIIIiIIIl EN G I NE ERI N G FM-X&X 3=12S fN mmE!k{lam F CO N STR U C I ON IBRD5577

ANNEX 7

MER IRON ORMPROJECT

DETAIL OF CAPITAL INiESTMENT (In US$ 000 equivalent)

Foreign Local Currency Currency Total 1/ I. Owners' Advance Expenditures (1969-70)

Transportation contract 31 128 159 Terminal and other approvals 7 64 71 Sales negotiations 62 121 183 Finance negotiations 269 340 609 Preliminary design and engineering 87 723 810 Feasibility report 20 82 102 Engineering contracts 345 - 345 Total advance expenditures 821 1,458 2,279

II. Mine Equipment Min);g shovels 2,631 541 3,172 Hatilage trucks 4,883 671 5,554 Blast hole drills 1,259 113 1,372 SMaU trucks and cars _ 460 460 Electrical distribution equil4wnt - 451 451 Other mining equipu nt 613 49 662 Total mine equipment 9,386 2,285 11,671

III. tMiineFacilities Office building and equipment 50 322 372 Repair shop and equipment 281 1,1442 1,723 Laboratory and equipment 12 50 62 Other buildings and equipment - 199 199 Electrical power facilities 150 214 364 Utilities and oormmnication 107 761 868 Railroad yard - loop track 1.0 359 489 Total mine faoilities 730 3,-347 4,077 IV. Pre-Operating Expenses (Mine) Temporary construction and services 440 1,440 ,880 Site preparation (2 million ou. m.) ,614 141437 ,0 Developuent stripping (2.3 million ou. m.) 985 1,943 2,928 Mine mgt. and development drilling 845 845 1,690 Total pre-operating 3,915 5,665 9,580 ANNEX7

Foreign I.al OurraM Curr" Total

V. Preparation Plant Excavation and plant sit. - 1,592 1,592 Primary crusher 1,393 1,760 3,153 ore stockpile and reclaim 111 367 478 seoondary oruAher 424 698 1,122 Ore sizing plant 131 976 1,107 stockpile, reclaim, and loadout facilities 3,932 1,1450 5,382 Tails disposal and water reclaim 221 976 ls197

Total plant 6,212 7,819 14,031 VI. Tailings Pond Dom 560 330 890

VII. Process Water Dam 1,620 2s014.3 3,663 VIII. Torminal Eguipmnt and Facilities Compaoted fill and dikes 1,56i 977 2,538 Sandfill 1,154 6&6 1,800 Construction and installation 1,000 1,589 2,589 Railwayaccess bridge 2,964 836 3,600 Conveyor trestle and pier 4,780 1,720 6,5OO Ferry and tug dock - 47 47 Dredging 1,924 756 2 ,680 Oxe handling equipnt and installation 5,O12 1,725 6,767 Conveyors 2,502 459 2,961 Water and electrical aystem 414 2,332 2,7146 Tugs and utility boats 2,300 308 2,608 Tempararyconstruction 530 2,784 3,314 Shop and miscellaneous equipmnt 100 521 621 011 slops facilities (tentative) 3,000 300 J,300 otitsl tarminal 27,271 15,000 42,271

_;#'k MBRAdmiastration Ad1miIsLration during conatruction 772 1s277 2,049 Insur uece 500 100 600 ToUai admini3tration 1,27;e 1,377 2,649 ANNEX7 Page 3-

Foreign Local Cumrency Currency Total X. Engineering and Projeot Management

Mine equiprent 180 260 440 Mine facilities 390 520 910 Pre-operatingexpenses 590 780 1,370 Preparationplant 2,100 2,900 5,000 Terminal 3,116 4,064 7,180 Total engineerinr' and 6,376 8,524 14,900 management

X2. Working Capital

Spare parts 2,700 400 3,100 Initialsupplies - 950 950 Iron ore inventoriee 1,288 4,312 5,600 Cash - 2,000 2,000

Totalworking capital 3,988 7,662 11,650 XII. Escalation2

Advanceexpenditre s - - - Mine equipment 531 183 714 Mine facilities 27 680 707 Pre-operating expenditures 475 688 12163 Preparation plant 225 19863 2,088 Tailings pond dam 104 60 1614 Process water dam 300 378 678 Terminal equipment and facilities 3,029 2,895 5,924 MBR administration - - - Engineering and project management 714 716 L1,430 Working capital 284 48 332 Total escalation 5,689 7,511 13,200 XIII. Contingency 3/

Advance expenditures - - - Mine equipment 770 100 870O Mine facilities 100 330 430 Pre-operating expenditures 587 848 1,1435 Preparation plant 200 961 1,161 Tailings pond dam 71 42 113 Process water dam 206 260 466 Terminal equipment and facilities 3,239 1,961 5,200 MBR administration 101 110 211 Engineering and project management 600 728 1,328 Working capital - 481 481

Total contingency 5,874 5,821 :iL695 ANNE 7 Page 4

Foreign Ldcal Gerrengy Orrency Total

TOTALPROJECT COSTS 73,714 68,842 142,556 XaV. Interest and Cozmitment Charges during Construction 4/ 12,600 - 12,600 TOTALFINANCING REQUIRED 8155_ 68,842 15,156

1/ Owners' advance expenditures 1ncurred prior 'to the,,end of 1970.

2/ In each category capital cobts have been escalated it 8%p.a. from the time of Bechtel's estimates (June, 1970) to the anticipated dates when firm contracts will be signed for provision of the specific goods and services.

3/ Bechtel has calculated project contingenoies using computerizad risk analysis. The basic cost oouponents of each-eatimate have been segregated and probabilities of overruns applied to each based on various assumptions pertaining to uncertainties in design and price (materials and labor), The various components have been combined in a mathematical equition showing the total project cost as the sum or product of the various aost cdMpo- nents. This equation then has been entered irfto a 'Monte Carlo sibuulation program generating over 2,000 probable cost variations. From this has been obtained a probability distribution which depicts the probability of various underruns tnd over- riw.e,. The final contingency figures chcsen represent the -;>: which, in aggregate, have a 60% probability of covering any total cost overrun.

1h./ .ITnwe.st during construction includes $Q.5 million in withholding taxes paid on interest paymnt pertaining-t tob& comercial portions of the U.S. and Japanese loans..

Industr.i Projects Department June 19-71 MBR IRON ORE PROJECT ESTIMAED VALUEOF IIITG MBR EQUITY AS OF MARCH31, 1971 (in US$ illions equivalent)

EmLsting Fiscal year Auas Claras Operation SpnsSponsors' CcObined 20% Discounted ending Gross Opsrat Incom zquipaent Dobt Not Cash Equity Not Cash Discount Cash March 31 Revenues cost -p Taxes Reneval Service Generation Outlays Flow Factor Flow

1972 - 1.9 7.0 5.1 .83 (4.2) 1973 - _ _ _ _ 2.6 20.7 (18.1) .69 (12.5) 1974 11.7 10.5 _ _ 7.2 3.6 - (2.4) .58 (1.4) 1975 72.1 41.3 - 20.1 3.2 _ 13.9 .48 6.7 1976 83.8 47.5 3.2 - 20.2 3.0 3.0& /.2.9 .40 5.2 1977 99.5 52.4 4.o 0.3 19.8 2.9 _ 25.9 .33 8.5 1978 99.5 52.10.l4 0.9 18.8 2.9 5.53/ 14.4 .28 4.0 1979 124.8 63.7 10.5 2.1 18.3 2.9 - 33.1 .23 7.6 1980 124.8 63.7 11.0 1.2 17.5 2.9 - 34.3 .19 6.5 1981 124.8 63.7 12.0 - 16.7 - - 32.4 .16 5.2 1982 12h.8 63.7 12.7 0.3 16.0 -- 32. .13 h.2 1983 124.8 63.7 13.2 0.5 15.3 - - 32.1 .U1 3.5 1984 124.8 63.7 15.4 1.3.5 13.8 - - 18.4 .09 1.7 1985 124.8 63.7 17.2 - 12.0 - - 31.9 .08 2.6 1986 124.8 63.7 17.4 1.2 11.2 - - 31.3 .06 1.9 1967 124.8 63.7 17.5 0.9 - -_42.7 .05 2.1 1988 124.8 63.7 18.0 0.3 _- - 42.8 .05 2.1 1989 124.8 63.7 19.6 0.5 - - - 41.0 .04 1.6

I. Discounted Present Value of Future Net Cash Flow 45.3

II. Estimated Cash Value of Surface Land Ouned by Group - 27,648 ha. 5.5

III. Estimated Cash Value of Cultivated Eucalyptus Forest 1.5

ESTMuTED TOTAL VALUJEOF MBR EQUITI 52.3

1/ Excluding depreciation and interest. TO T/ Expansion to 12 million tons from retained earnings. 37 Expansion to 15 million tons from retained earnings.

Indu3trial Projecti Department 1 I)V 1Q

ANNEX9 -1

MBR IRON ORE PROJECT

EQUIPMENTTO BE FINANCEDBr WORIDBANK ON BASIS On PELIMINARYf JSTIMUTOS (T-IUS$ thousands equivalenIT Item Cost2/

(1) Rubbertired bulldozers 334 (2) D7 Class bulldozers 186 (3) D8 Class bulldozers 104 (4) 3 CY front end loader 73 (5) 6&'1Blast hole drill 921 (6) 3½" Air drill 145 (7) 45 Ton mobile crane 129 (8) 60" x 89" Gyratory crusher 643 (9) Apron feeders (various) 641 (10) Bridgecranes 245 (11) Conveyors, belts and miscellaneous 2,303 (12) Dust collectors 23 (13) Water pumps 195 (14) 7' Cone crusher 332 (15) Vibratingscreens 117 (16) Belt feeder 36 (17) Screw classifiers 190 (18) Thickener mechanism 172 (19) Cyclones 51 (20) Chlorinator 7 (21) Tripper and traveling stacker 1,0o45 (22) Bucket-wheel reclaimer (crawler) 1,713 (23) Railroad car puller 54 (24) Track scale 149 (25) Miscellaneous mechanical equipment 170 (26) Communication equipment mine and terlnual 283 (27) Shiploader 1,390 (2b) Rotary car dumper 1,051 (29) Bucketwheel stacker-reclaimer 4,528 (30) D8 Class bulldozer 113 (31) Front end loader 73 (32) Locomotive and railroad cars 420 (33) Tugs 2,000 hp 3,257 (34) Launch,work and utilityboats 186 (35) Apron feeders 237 (36) Dust collectors 11 (37) Pumps 12 (38) Office and shop equipment(mine and terminal) 1,734 (39) Elect. and instru. equip. (mine and terminal) 2,088 Total 25,361

1/ Including escalation and contingency.

LndusLrial Projects Department June 1971 ANJ 9-2

MBR IRON ORE PROJECT

CONSTRUCTIONMATERIALS TO BE FINANCEDBY iORLD BAIiK ON BASIS OF PRZJJIJAR ISTIMAT (In VS$ thioiwands equivalent)

item cost

(1) Struotua sAwl 400

(2) Steel plate vork 69

(3) Pipe, valves, fittings 607

(4) Wire and cable 1,330

(5) Rails (for mine and terminal) 400

3,366

Escalation 417

Contingency 290

Total 4$073

Ind.i trial Projects Department June 1971 ANNEX 9-3

MBR IRON ORL PROJECT

COMPUTATIONOF PROBABLEFOREIGN EXCHANGE CONTENT OF INTERNAMIONALLr-BIDCIVIL WORKSTHAT CANB FINACE BY THE BAK ON bIS- OF PRELIMINAI ESTIMATES

Foreign Contract Packages To Be Let tocal Foreign Total Exchange Under World-Wide Competitin !Cot Cos Costs/ costs Portion (In-= millions equieIii't) (percent) Mine

Site preparation 1,964 1,588 3,552 45 Mine access roads .477 742 1,219 61 Inner-mine roads and drainage 926 331 1,257 26 Tailings pond dam 517 650 1,167 56 Process water dam 3,201 1,606 4,807 33

Total mine 7,085 4,917 12,002 41

Terminal

Site preparation 1,745 1,974 3,719 53 Sand fill 1,157 1,191 2,348 51 Dredging 987 2,509 3,496 72 Railway access bridge 1,610 1,839 3,449 53 Conveyor trestle and pier 3,268 5,210 8,478 61

Total terminal 8,767 12,723 21,490 62

GRAND TOTAL 15,852 17,640 33.492 5 W

1/ This list includes only those paokages that, in the judgment of the Bank, are most likely to attract meaningful international competition. -/ Assuming that 50% of each oontract package idll be won by Brazilian firms except: Dredging-100% foreign; Inner-nine roads and drainage- 100% Brazilian. Foreign exchange components therefore do not agree entirely with Annex 7 in vhioh foreign exchange estimates were based on the assumption that Brazilian contractors and suppliers would be less oompetitive, thus indicating the maximum foreign exchange outflow likely to be incurred during construction. Here an attempt has been made to keep the foreign exohange.component to the lowest likely level so as to assure that the fraction of civil works ultimately financed by the Bank does not exceed actual foreign exchange expenditures. 3/ Including contingencies and escalation. 1/ Approximately 33% of total projeot civil works.

Industrial Projects Department June 1971

ANNEX10

MBRIRON ORE PROJECT

ESTIMATEDSCHEDULE OF DISBURSEMENTS

(US$ million) Fiscal Quarter Ending Estimated Estimated year DTiaursemret Amount Undisbursed

1971/72 September 1971 - 50.0 December 1971 3.0 47.0 March 1972 4.0 3.0 June 1972 5,0 3B.0

1972/73 September 1972 5.0 33.0 December 1972 7,0 26.0 March 1973 8.0 18.0 June 1973 8.0 10.r Jue17

1973/74 September1973 6.0 4.0 December 1973 3.0 1.0 March 1974 1.0 June 1974 10.0

Expected Date of Loan Effectiveness - September 30, 1970

Closing Date - December 30, 1976

IndustrialProjects Department June 1971

ANNEX11

MBR IRON ORE PROJECT

ORE SALES

1. Ore Sales Contracts

1.01 MBR has signed three long-term sales agreements, as summarized below:

MBRLong-Term Sales (wet long ton basis)

Average Anual F.O.B. Oct.73-Mar.74 Apr.74-Mar.75 from APr1i 75 Buyer Price Sales Revenues Sales Revenues SeI RevenusE

- /LTT(U$ m7iI- (mil-(C mSmil- T Cui3- lion lion) lion lion) lion lion) LT) LT) LT)

Japanese Steel Companies 1/ 8.16 1.0 8.2 6.2 50.6 7.3 59.6

British Steel Corporation 8.37 0.3 2.5 1.1 9.2 1.3 10.9

Sociedad Mixta Siderurgia 10.50 0.3 3.2 0.7 7.4 0.7 7.4 Argentina (SOMISA)

Total 8.38 1.6 13.9 8.0 67.2 9.3 77.9

1/ Nippon Steel Corporation (4 6 .4% of total), Nippon Kokan Kabushiki Kaisha (16.4%), Sumitomo Metal Industries (16.4%), Kawasaki Steel Corporation (16.4%), Kobe Steel Corporation (2.2%), Nisehin Steel Company (2.2%).

1.02 The Japanese agreement, which was approved by the Brazilian Government in December, 1970, covers sales of 105 million dry tons at the basic rate of 7 million dry tons (7.3 million wet tons) per annum and extnds through March 1989. 1.03 The British Steel Corporation contract has not been drawn up, but a basic agreement has been signed defining the sales terms and providing for final agreement during 1971. The contract will be of unlimited duration, with provision for termination by either party, upon two years notice, after 1986. Total sales over the minimum agreement period wiUl be approximately 17 million tons at the basic rate of 1.3 million tons per annum. ANNEX 11 Page 2

1.04 The Argentine Contract is an extension of an existing agreement between CMN, a St. John D'el Rey subsidiary (Para. 2.03), and SOMISA by which :60,000 tons of ore are shipped annually through the port of Rio de Janeiro. The sponsors plan to shift most of this tonnage, plus the additional 250,000 tons provided in the new contract, to the new terminal a' Sepetiba. The contract extends until the end of 1975, with provision for a five-year extension at the same basic rate of 700,000 tons per annum. To the extent that this arrangement is not as firm as the Japanese and British contracts, the minimum long-term sales base for NBR can be considered 8.6 million tons, comprised of sales to the latter two only.

1.Ov The Japanese contract provides for periodic revision of the ore pr-ce in light of changing iron ore market conditions. Negotiation of the first revision will take place in mid-1976 and the new price will go into effect in April 1977, with subsequent revisions every four years thereafter for the life of the contract. The agreed price range for each revision period is 16% above or 4% below the standard price that applied in the previous period, except for the final period when the range is plus or minus 1!%. Over the 151-year contract life, the price can be increased by as much as 56% but cannot be reduced by more than 23%. In addition, the mechardics set forth for the price revisions make it likely that the price paid by the Japanese will rise faster or fall slower than long-term changes iii world market prices. The overall effect on MBR promises to be very favorable, allowing them to recoup, at least in part, any real operating cost increases that might be incurred.

1.o6 Both the SONISA and British Steel agreements provide for price revision every two years, the allowable range for the former being 5% above or below the price applicable to the previous period. The range for the British Steel contract has not been specified yet, but is likely to be similar.

1.07 The Japanese and SCQISA contracts allow the buyers, at their option, to vary actual off-take in any one year by plus or minus 10%, pro viding cilztableprior notice is given to NBR. A similar arrangement is exFected for the British Steel contract. .*03 In the Japanese case, however, the buyer cannot reduce the quantity -ieaa-edbvy mcre than an aggregate of 15% in any two years of each four-year *.t4 .a(i.e. rt, to 10 % in one year and 5% in the next). In addition, the jua-:ty of decrease must be made up within the same four-yearperiod so that ,the agre_ate taken over four years remainsthe same as it would have been if the buyer's option had not been exercised. Thus, over the life of the roject, there tan be no gross revenue reductions due to demand fluctuations, barring Force Majeure.

1 C09 During the first two full years of production,April 1974-March 1976, t-heVlapanes have been given a further concession,allowing them to reduce osf-take b) 300,000 tons per annum, but only on the conditionthat the reductionwiil be made up by 1980.

1.if Ove- the long term, volume variationsof the type describedabove are unlike!y to have any great effect on the financial conditionof MBR, particular!yLsince any decreasesunder the Japanese contract,which is by ANN .11 Page 23

far the ast 1mportant, at be made up ia later years. 2. Spot Sales

2.01 MBRplans to reserve at least 700,,000 wet long tons of annual production for spot sales so as to take advantage of the most favorable world market conditions existing at any one time. It is not an-,4cipated that it will have any trouble disposing of those amounts, assuming, of course, stability in the world iron ore market. Together with the sales already fixed under contract, spot sales will bring total annual sales up to the initial target level of 10 million tons. 3. Sales bbxpansion Beyond 10 MillionTons per Annum

3.01 MBRsales from the Aguas Claras mine are expected to exceed 10 million tons not long after the beginning of operations. Preliminary discussions have been held with French and Italian companies on sales to each country of 500,000 tons per annum under 12-year contracts. Consum- mation of these agreements is expected during 1971. In addition, the Japanese steel companies have indicated to MBRthat they wish to shar in any expansion of production. No proportions have yet been indicated, but with the Japanese buyers also being shareholders in MBR, inoreases in their future off-take are expeoted to be substantial.

3.02 Initial sales expansion is expected to occur in two ways. First is the sale of minus 100 mesh fines (pellet feed) that will be produced at the rate of approximately 1.9 million tons for every 10 million tons of product. As indicated in Annex 3, these fines will be stockpiled initially; but it is anticipated that they eventmally mill be sold, either as fines or as cold-bonded pellets. Assuming the former case, an FOB sales price of $7.00-7.50 per ton is probable, yielding NBR as imch as $:3-14 million in additional revenues. Because these fines will be produced anyway, the incremental costs of their sale will consist only of rail freight and handling costs at the mine and terminal. Profit margins, therefore, will be very high, giving NBR substantial incentives to begin fines sales as soon as possible. 3.03 Further sales increases during the early stages are anticipated from improved utilization of equipment and personnel. The sponsors expect to be able to increase total production to 15 million tons per annum, including fines, with only a small increase in fixed investment. The resulting effects on projeot profitability are examined in Annex 13. 4. Sales Coiiissions

4.o0 Eeropt for the Japanese ore contract, MBR sales receipts wiLl be channeled through one or more off-shore subsidiaries which will act as sales agents on behalf of the Brazilian company. This is the practLee currently being followed by the individual companies being oonsoliQated into MBR. According to the sponsors, up to 3% of sales receipts normally are taken by the off-shore ocmpazy, and the balance is trawf.rrd to Brasil. Th awUbt withheld allot cowrage of out-of-"~ ovum sales expenditure., including paymnt to indvidaal agenrs in the countries In th Sales origizate. Suh a----r_te hav to be approved by the Brasilian echange control authoritles, givig dqiet. protection to the B&4ts, ioUrosts,

Industrial Projects Departhent June 1971 NBR IRDN CRE PROJECT

AVERAGEOPERATING CCB TS FOR AGUASCLIRAS OPERATIONS' BASEEROJECT WITH SALESBUILDUP TO 10 MILLIONTONS PER YEAR (In US$ millions equivalent) Administration Freight Annual erating Maintenance and Supervision Taxes & Total Total Grand Unit Labor Supplies Labor Suplies or upplies Insurance Labor Supplies Total Cost

6.o o.60 Mining 0.2 4.6 0.1 1.0 0.1 - - 0.4 5.6 3.8 0.38 Ore Preparation 0.2 3.4 0.1 0.1 - - 0.4 3.4 - 0.3 - 0.3 0.03 Technical Assistance-/ - - - 0.3 - 0.8 0.7 l. 0.15 Y:ine and Plant Administration .- 0.8 0.7 - 9.7 11.6 1.16 Total Mine and Preparation Plant O.lh 8.o 0.2 1.0 1.3 0.7 - 1.9 0.2 2.4 2.6 0.26 Development Stripping 0.1 2.2 0.1 0.2 ------26.2 - - 26.2 2.62 Rail Freight 3.1 0.31 Terminal Operation 0.3 1.5 0.1 0.2!J 0.4 0.6 - 0.8 2.3 - 0.8 o.4 1.2 0.12 Administration - Rio - - - - 0.8 O.1h - 0.3 _ 0.3 0.03 Administration - Cleveland - - _ _ 0.3 _ 1.9 - 1.9 0.19 Sole and Property Taxes _ - _ _ - _ 0.6 - - 0.6 0.06 Insurance - - - 14.8 47.5 4.75 Total Operating Cost Excluding o.8 11.7 0.4 1.4 2.8 1.7 28.7 I.o Depreciation and Interest i.e. in ?arch been escalated at 6% per vear from January 1, 1970 to thp end of the initial price period of the Japanese ore contract, 1/ All estir3a½ee have that 1976. Tt is Issurned in the finsnc l przjections that afttr FY 1976 ou prices will be renegctiated sc as to reccup any real cost incresses to the buildup period when are incurred, thus keeping the relationship of prices arni costs constant. The average prices shown above do not apply unit costs are somewhat higher. 2/ Maintenance supplies included in operating costs. of on site assistance 3/ Estimtated direct costs and overheads payable to Hanna Mining Company through Technical Assistance Agreement for 75 rima-months per year. Id Dredging. All other maintenance expenses included in operating costs. Company staff. 7/ Estimated paynent for saaes, engineering, research, geological and financial assistance from Cleveland-based Hanna Mining

Industrial Projects Department May 1971

AEX 1.3-1

1BR IRON OR3 PROJECT SNSITIVITY ANALYSS

1. Eoonoudoand Fiacil Rot=ns 1.01 A lseitivity anayis ha been carriedout to determinethe likely effects of certain changes in the levelof sales, ore prices, and various cost categories on tbe finaicial return to MBRand the internal econamic return of the combned MBRand railway project, The results indicate that even widr severe asswptions, the overall rates of return to NBRitself and the econoW of Brasil should remain at aoceptable levls. oheprojected effects of the assumd ircstances on MBR's internal finrac return (before incm tams) and the internal economic return of the combined project are amwurisod below:

Sumur of Sensitiity Analsis

InterxalRates of Return 10TI 12 MM 15 Coabined BM Cambined la Combined mBR Case Econamic Financial Economic Financial Economic Financial

A. Base projeot 18.3 18.8 20.9 22.3 22.8 24.5 B. Construction costs up 25% and revnuos delayedone year 12.9 13.2 15.0 16.3 16.7 18.3 C. Avg. ore pricesup 25% 25.1 29.0 27.8 32.4 29.7 34.5 D. Avg. ore prioes dowl 25% 10.2 4.2 12.8 8.7 114.7 11.2

E. MBRRFFSAoperating costs up 25% 16.0 15.5 18.7 19.5 20.7 21.7 F. Ore prices down 10% every 5 yr.. 15.0 13.0 17.7 17.1 19.5 19.3 G. Operating costs up 15% every 5 yrs. 16.7 16.7 19.5 20.6 20.9 22.8 H. Combination F and G 13.1 9.2 15.9 14.4 17.7 16.7 ANNEX13-1 Page 2

1.02 The various tests that ha.ve been ran are described in Annex 13-2. Real costs and prices have been used throughout the analysis, so that all of the changes are denominated in the same constant value dollars that are used in the base projections.It also has been assumed that the rail freight rate which is fixed in dollar terms under the formula agreed bebween MBRand RFFSA, will be adjusted periodically to compensate RFFSA for any erosion in its real revenues caused by dollar inflation. Therefore, the real cost of rail freight is assumed to remain constant.*

1.03 As the summary indicates, the effects of an increase in the scale of operations from 10 to 12 million tons per year are more pronounced than are those of a further increase to 15 million tons. This is particularly evident under the various assumptions of inoreased costs or decreased prices. It occurs because, as assumed in the analysis, the major portion of the increase to 12 million tons will come from sales of fines that are by-products of the mining process. Since the costs of mining and processing these fines already have been absorbed in the costs allocated to the first 10 million t,nni the ineremental expense of shipping them will be relatively low. Although unit costs can be expected to continue downward as production increases further, the effect on project returns will be less pronounced since additional mining and processing costs will be involved. On average, with a 5C%increase in production from 10 to 15 million tons, total operating costs should increase by no more than one-third. Since operating margins at the higher tonnages will be considerably greater than at 10 million tons, the project should become less vulnerable to swings in prices or costs as the production level increases.

1.04 If changes in real costs and prices occur, they probably will do so gradually, as has been assumed in Cases F and G, where the rates used are the maximum considered likely. In Case H, a cocbination of both decreasing prices and rising costs is assumed. Despite the cost/price squeeze, the returns remain at aoceptable levels, except at 10 million tons where MBR's financial return of 9.2% indicates only marginal operations, even though the conbined economic return remains above 13%. 2. Break-Even Anauis

2.01 2.nnex 13-3 examines the situation where ore prices would fall, but M,.IRItpirsert long-term contract would be honored so that the minimum sales lttvei in any one year would be 9 million tons., It is shown that the price could fall to as low as US$7.00 per ton for extended periods of time during the firstsix years of operations, or more than 15% below expected minimum levels, and still enable MBR to meet all of its cash obligations, including thoseto RFTSA. After 1980, the break-even price decrease.s gradually below US$7,00on both cash and profit accounts.

it see para. 4,32 of Railway Report ANNEX13-1 page-3

2.02 Annex 13-4 indicates what might happen if prices would remain constant at US$8.38 per ton but sales would fall due to strikes, natural disasters, or other causes that might prevent MBR from shipping planned tonnages. Here the cash break-evwn point for anmual sales, assuming full payments to RFFSA, in accordance with the provisions of the rail freight contract,* ranges from 7.0-7.5 million tons during the first four years of operation, and then falls gradually thereafter. It is concluded, therefore, that tonnages could decrease 25-30% below planned minimum levels for extended periods of time during the early years, and by even greater amounts after 1978, and probably not impair MBR's ability to meet its obligations.

Industrial Projects Department June 1971

* If shipments by rail decrease below 9 million tons in any year, MBR will be required to pay RFFSA the charges that would have been incurred at the 9 million ton level, less out-of-pocket costs saved by RFFSA for any reduction in actual shipments below that level.

ANNEX 13-2

1BR IRON ORE PROJECT

NOTESTO SENSITIVIT! ANALYSIS

Ceneral

(i) Internal financial return calculations are solely for MBR, and not RFFSA, the financial apeots of vihich are discussed in the Railway Report.

(ii) Financial returns to 131R are before income taxes but after payment of direct taxes at the mlne (sole and property) and indirect taxes on operating inputs. Before income tax figures have been used to avoid com- plications in the sensitivity analysis eue to the effects of depletion allowances.

(iii) Internal economic return calculations are for the comiiMned project comprised of the MBR segment (mine and terminal) and the railw-ay (RFF3A) segment. Changes in the rail freight rate paid by MBRdo not affect the economic return, but only the respective financial positions of the two project entities.

(iv) Economic costs have been used to the extent practicable in the economic analysis. On t7heIIR segment, 25% of the cost of manufactured operating and maintenance supplies has been estimated as a minimum level of indiroct taxation, consisting of tariffs on imported items and value-added and excise taxes on domestic production. These taxes have been subtracted from the operating cost stream for purposes of the economic analysis. In addition, sole and property taxes incurred at the mine, plus all income taxes, have been treated as cash inflows. On the RFFSA segment, indirect taxes equivalent to 44% of fuel costs have been subtractedfrom the cost stream (fuel costs being the largest component of rail operating costs). No attempt has been made to estimate other indirect taxes on RFFSA costs, which are considered to be relativelysmall. For both the MTR and RFFSA portions, all capital inputs are considered to be duty free and labor costs from the financial analyses are taken to represent true economic costs. On the whole, the estimates of indirect taxes are conservative,thus tending to understate the economic returns.

(v) Heal costs are u3ed throughout thie sensitivity analysis attl al I channgea in costs or benefits represent real changes, with monetary correctlJons a] ready included.

(vi) MBRoperating costs do not include rail freight charges. ANNEX13-2 Page 2 Case A

(i) Sales buildup

Fiscal year ending Buildu to Ultimate Sales of March 31:, 1 2 TF 15 IT?Y ~O%1(Mllion IT)

1974 (6 months) 2.9 2.9 2.9 1975 9.0 9.0 9.0 1976 ]10.0 10.0 10.0 1977 10.0 12.0 12.0 1978 10.0 12.0 12.0 1979-89 10.0 12.0 15.0

(ii) Rase prices

Ultimate Sales Regular Ores Pellet Feed Avg. Trice-9 (11til-lion LT/yr) (MilIon T,,T/yr)(Mil]ion T.T/yr) ($/LT)

10.0 10.0 0 8.38 12.0 10.4 1.6 8.29 1.50 13.4 1.6 8.32 *Assumes regular ores 4 $8.38/LT pellet feed A .$7.55/LT

(ii.i) Base costs (economic and financial)

(a) At 10 million tons per year:

llailway costs according to Table 13 of 1aial.way Rleport, corrected -for effects of 3-month differences in fiscal years; iOR costs according to Table 3 of this reportb.

(b) At 12 million tons per year:

Ttailway costs accordingcl to Ta.ble 12 of rZailiway orL, similirly corrected (including increased investment for rolling ola.d track renewals).

MBR costs assume additional investment of $3.0 mdllion in FY 1.976 For rpellet feed (fines) handling equipmnent ancd only uinor increases in total operating costs over those at the 10 mill.ion totn leveL. (Sales of' pellet -f'eed are merely the realization of potent,ial revenues from wsL5te mrateri.ils that are produced anyway -- approxi..ml,ely 1.9 million tons or' fines are produced for every 10 million tons of regular ores). In addition, increased sales of regular ores amounting to 1o00,000 tons per annwun .ire assumed t.o result from improved utilization of equiprent, with onl,Z sml .ircreases in total operating costs. On average, total 14BR,operatinr costs (includi nrg overheads) at 12 mi. ll.on tons arc estimated to be In.'. mrc.ater th,kn at 10 million tons. ANNEX 1?-2 Page 3 (c) At 15 million tons per year:

Railway costs according to Annex 6 of Railway Report, similarly corrected (including further increased investment for rolling stock and track renewals);

MBR costs assume additional investment of $5.5 million for mine equipment and inventories needed for increased sales of regularores from 10.4 to 13.4 milliontons per year. Fines sales remain at 1.6 milliontons as above. Unit operatingcosts decrease considerably due to increasedutilization of initial investment. The effect of new equipmenton total operating costs is small. On average,total operating costs (including overheads) at 15 million tons are estimated to be one-third greater than at 10 million tons.

Case 13

This assumes that project constructioncosts for both the 1SR and railway segments would increase by 25% and that initial project revenues would be delayed by one year, as would subsequentexpansions to 12 and 15 million tons. 1Ihilesome increases or delays might be contemplated,an extreme situation such as that assumed here is considered unlikely.

Cases C and D

Average real ore price changes of plus or minus 25% from the levels assumed in Case A are considered unlikely, particularly in light of the large portion of total sales already covered by long-term contracts at fixed prices in the early years. The cases are shown here, however, to demonstrate the pro'ect's sensitivity to extreme price variations. The economic return of the project as a whole is shown to be less sensitive to ore price changes than is the financial return to MBIR.

Case E

This case would only arise in the event that operating costs for both MBRtand the railway proved to be grossly underestimated,an improbable event. Both economic and financialreturns are shown to be comparatively insensitiveto such changes in operatingcosts.

Case F

This case assumes that real ore prices would decrease at a compound aniua]. rate of 2.1% per annum beginning in the second year of operations. This rate is equivalent to a drop of 10% every L years, the maximum decrease thought likely during the early years of operation (see Para. 3.09). For t,hi case, this rate o1fdecrelase i3 assumiedto continue for the full projection period. As an indicator of the effect of possible fLture trends, such a gradual decrease is :i more realistic worst-case assumption than the incre- inettLl price drop postulated in Case D.. Barring a seriousrecession in the ANNE 33-2 FZ9ge4 iron ore market, average real ore prioes are unlikely to decrease faster than the rate used in this case. The figures indicate that the effect of such a gradual price decrease on both financial and economic returns probably wuld be considerable, although still not enough, in itself, to seriously, undermine the viability of the project.

Came G

Rather than the incr_ental oost inrease assumed in Case E, it is more likely that real operating oosts would increase gradully over the life of the project; due, for example, to wes rising faster than labor productivity. The increaas is not 4.ikely to be more than 15% every five years, equialent to the amnual compoud rate of 2.8% which is smsd bhre. Ag4in, the project's financial and ecoonioc returns aro to be fairly insensitive to sch operating cost incroass.

Case R

The case ombines the effects of both the gradually decreaing real prios asmd in Case F and increasd reel operating costs of Case G0 both being worst oases. The result is to lower oBR s financial return significantly, particularly at 10 million tons per annumvhere magins are lower, and to decrease the economic return of the project as a whole by a lesser amount. A combination of the two factors to thi.s extre is unlikely. i0en so,, the reulting economic returns would not be intolerable, although )BR could find itself in financial difficulties during ths later years, par- ticlarly if sales have not increased above 10 millio tons per yer.

industrial Projects Department June i9771 MBR IRON ORE PROJECT CASHAND PROFIT DREAKEVEN PRICES ATCONSTANT SALESLEVEL OF9 MILLIONTONS PER YEAR 7.50 F - -T .-. ,, -1 --- -

7.00

6.50

LU w 6.00

5.50 Li

- PROFITBREAK - EVEN 5.00; CASH BREAK-EVEN -

1974 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 YEAR IBRD 5788

MBR IRON ORE PROJECT CASHAND PROFIT BREAK-EVEN SALESLEVELS ATCONSTANT OREPRICE OF $8.38/ LONG TON 8.0 I I I

0Y0

600 6.0

LU. __ 5.0 z 17.0 '75 anmnm '78 '79 '80 '8_'8_'8_'8 ___'77 _ '8_'6_'7_'8_'9_'0 LU

4.0 u-i

PROFITBREAK - EVEN 3.0~ mmm CASH BREAK-EVEN z

1974 '75 '76 '77 '78 '79 '80 '81 '82 '83 184 '85 '86 '87 '88 '89 190 YEAR IBRD 5787

u° , ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~40f

TUBARA) 2 t t BRAZIS

) 4 X X ANESOw ~~~~~~~~~~~~~~~~~~ITABIRA STATE OF MNAGUAG CLARAIS / I / / / g DVA)AL ERA HR ZOg |0._ W / ~~~~~~~~~~BELO\~~~~~~~~~~~~~~~~~~~EPRT . SAT NCIHe

STAtE lTING A +/ zINHOcxi s v-__ -_____ j R01 OF VIMORIA AL / \ 9 ~~~~~~~~~ITABIRITO N > / \ \ t~~~~~~~~.BURNIER ESITO5NO/ 0 > t / ~~~~~SEEMAP 2 J OQIMMURTINHO < \ / ~~~~~~~~~CONS.LAFAIETE

STATE ; GERAIS E OF AINAS A POE

LOATLogend I \ tARBACENA G RAILRkOAS / \ I / e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~XISTING DUMONT Pit++++ OPOSeD RAILROADS --A. aSANTOS HIGHWAYS . j\ \ < 6 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~EXISTING SBANTOIRSRUDA 20 N.A 2 - DEFORA DEJAEROMIEACE 0 M0 -io - / - ANDRELANDIA CAJUIZ MOREEV ACUAIO *~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ A 1SAE Lo OF /R,)OUOTE 22*- -220' -22° / . _vf ~~~~~~~~~~~~~~RIO DE JANEIRQ/^ / ( / . w.- mRE~~~~~~ RIOS ~ ~ ~~~~~~~~~~~S

BRAZIL - SANTS- 4M A' RUC MINERACES BRASILEIRASREUNIDAS S.A. APRL11 PROJECT [z ;JLREIS g MAP~~~~~~3 STiTE OF GUANABARA AGUASCLARAS GNRlLCTO STT sS^ AULO ^ SEPETIBATERMINAL GEEA LOCATO SAOPAULO

Mf t ,'t ~~~~ATLANTICOCEAN 0 ,),)3 o~~~~~~~~~~~~~~~~~~~~~~~~~~~~50 100= 22 4 KiLos*eTERs44 > v w r X \ 44e 42 IR 25 APRIL 1971

. % JA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~SICAT-AS

BRAZIL MINERACOES BRASILEIRASREUNIDAS S.A. L t ) BIRA AGUAS CLARASPROJECT ORE DEPOSITSIN THE IRON QUADRANGLE N PASIANO

ERA PI MBROPERATIONS ROCAS o TOWNS

* VILLAGES * OPERATINGMINES LE AD O OTHER MINES IRON ORE DEPOSITS

LAGOONS & DAMS CNAE ROADS ICA _.-.-~--.--RAILROADS OVA LiM SAOsS BAR 0 10 5 15 .. ;O... 2,-PROPOSED RAILROADS 5 TM"tOAL 50. =t,5 ERDA

i tA~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~BIRIT ? E M E . . . % T ~ ~

1t\ Nxttt 8~~ R A Z I L - /; *S X\t ,*\

. b i oS 5 ~~~~~~~BRAIAGEAIS

Tt&ORUMEA RELO N ENTE

L IJACEAR

^1* / ' . x- _ __ yJOAGUIM MURTINHO APRIL 1971 IBRD 3296R

TO BELOHORIZONTE Log.nd iKA & AGUJASCLARAS 4'3 44I (SINGLETRACK) | 8 -H-/-APERI-8 ! ! | | | | | 1N JAPERIRAILROADS -It - RAILROADS(MULTIPLE TRACK) N f-h\----W11 ...... RAILROADSPROPOSED (URBANAREA) -SAO PAULA ZONE ------STATEBOUNDARIES ~~~~~~Ig HIGHWAYS 4 ,/~~~~~~~~~~~~~~~~~~~~/

LAJES 22A45 RIRAO DAS

~ A t a 0 0 23COROA

I i SEPETIR

10 05 E5T0I10P _ ) L f4NBARAZIIR~< 5~ , REUNIDASS.A. ACCESS $C MINERACOESBRASILEIRAS ~.A-MARiNE - 3GAURATRAADtEU 7 ROUTE J-A 3_AEG CLARASPROJECT AT L ANIC r0 c AGUAS R i, A OF SEPETIBATERMINAL2 5 43-30' LOCATION 5 0 5 0 . 440 1 ~~~Kilom.t.vs hAl.,s RA IBRD 3297R APRIL 1971