~~~ (I

s?vu a;-;6- | RESTRICTED

Report No. PI- 10

RL'

This report s for official use only by the Bank Group and specifically authorized ornizationsor personL It may not be publed, quoted or cited without Bank Group authorization. TheBank Group does not accept responbity for the accuracy or completeness of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF

THE MBR IRON ORE PROJECT

MINERACOES BRASILEIRAS REUNIDAS S. A.

BRAZIL

June 16, 1971

Industrial Projects Department

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Currency Equivalents

Except where otherwise stated all figures are quotedin U.S. dollars (US$). The project cost estimate is shownin both US$ and New Cruzeiros (NCr$) of 1969.

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

Weights and Measures

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

1 Long Ton 1.016 Metric Tons1 Long Ton = 1.120 Short Tons1 Long Ton 2 2,240 Pounds1 Kilometer (Km) = 0.62 vales

Principal Abbreviations and Acronyms Used

MBR = Mineracoes Brasileiras Reunidas S.A.RFFSA = Rede Ferroviaria FederalCAEMI Cia. Auxiliar de Erapresas de MineracaoICO4 a Industria e Cozercio de M4inerios S.A.EEM = Empreendimentos Brasileiros de Mineracao S.A.CMN = Cia. de Mineracao NovalimenseSOMISA - Sociedad Mixta Siderurgia

Fiscal Year

April 1 - March 31

BRAZIL

APPRAISAL OF THE MBR IRON ORE PROJECT

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSION§ ............................ i

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

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

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

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

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

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

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

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

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

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

A. Revenues .......................................... 16B. Aguas Claras Operating Costs .......... .. ........... 17C. Profitability and Financial Position ............... 18D. 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 GOVERNMENTAND SHAREHOLDERS - SENSITIVITY ANALYSIS ............. ... 20

A. Internal Economic Return . . ......................... 20B. Beneflts to Government . . ................... 2 ...... 20C. Returns to MIBR Shareholders ........................ 21D. Split of Project Benefits . . .23E. Foreign Exchange Benefits . . 23F. Sensitivity Analysis. 24

VIII.AGREEMENTS REACHED DURING NEGOTIATIONS .... .............. 24

TABLES

1. Reconstructed Consolidated Income and Cash Flow Statements forAll Companies Being Merged into MBR (1966-1971).

2. Reconstructed Consolidated Balance Sheets for all Compaie BeingPlerged 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 Governmentat Ultimate Production Levels of 10 and 15 million Tons peryear.

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 perYear.

ANN EXES

1-1. MBR Ownership and Control1-2. ICOMI Financial Indicators1-3. Hanna Mining Company Financial Indicators 1960-702-1. Marketing Annex - The Outlook for Iron Ore2-2. Brazilian Iron Ore Production and Exports2-3. Trends in Japanese Ore Supplies3. The Mine3a. List of Major Units of Mining Equipment

Table of Contents (Cont'd)

3b. Mine Facilities Pictorial Flow Sheet4. Ocean Terminal5. Environmental Considerations6. Implementation Schedule7. Detail of Capital Investment8. Estimated Value of MBR equity as of March 31, 19719-1. Equipment to be Financed by World Bank9-2. Construction Materials to be Financed by World Bank9-3. Computation of Probable Foreign Exchange Content of

Internationally-Bid Civil Works That Can Be Financedby the Bank

10. Estimated Schedule of Disbursements11. Ore Sales12. Average Operating Costs for Aguas Claras Operations13-1. Sensitivity Analysis13-2. Notes to Sensitivity Analysis13-3. Cash and Profit Break-Even Prices at Constant Sales Level of

9 Million Tons per Year13-4. Cash and Profit Break-Even Sales Levels at Constant Ore Price

of US$8.38/Long Ton

Maps

1. General Location2. Ore Deposits in the Iron Quadrangle3. Location of Sepetiba Terminal

BRAZIL

APPRAISAL OF THE MBR IRON ORE PROJECT

SUMMARY AND CONCLUSIONS

i. Mineracoes Brasileiras Reunidas, S.A. (MBR), a private Braziliahcompany, has requested a Bank loan of US$50 million to cover one-third ofthe cost of a project to mine and export a minimum of 10 million tons ofiron ore per year beginning in late 1973 from a large deposit near BeloHorizonte in the State of Minas Gerais. Tht ore will be shipped over alargely existing railroad to a new marine ti!rminal some 640 km away to beconstructed on Sepetiba Bay, about 100 km west of Rio de Janeiro. Theterminal will be able to handle bulk ore vessels of up to 250,000 DWT,among the largest presently being built. Transport from mine to port willbe provided by the Federal Railways (Rede Ferroviaria Federal - RFFSA)which has requested another IBRD loan of US$46 million to finance part ofthe new rolling stock and spur lines needed to serve the MBR project. TheRFFSA loan is appraised in IBRD Report PTR-77a; the present report is con-cerned only with the appraisal of the loan to MBR for the mine and oceanterminal.

ii. The project sponsors are Cia. Auxiliar de Empresas de Mineracao(CAEMI), a private Brazilian holding company engaged primarily in mineralsdevelopment and steel production, and Hanna Mining Company of the U.S.,which also was a sponsor of the Alcominas Aluminum Project in Brazil, towhich the Bank made a loan of US$22 million in 1968 and which started op-erations in the fall of 1970 about on schedule and within budgeted cost.CAEZI, and therefore Brazilian nationals, will control MBR. Total initialMBR equity will be US$80 million, consisting of existing fixed assets val-ued at US$50 million and US$30 million in new cash investments by the spon-sors, a consortium of 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 bil-lion tons. Aguas Claras, the largest of 36 deposits in MBR's concession areaand the mine upon which the project is based, contains over 375 million tons(proven and inferred) of mineable hematite ore with an average iron contentof 68 percent. The deposit has been explored adequately, has very littleoverburden, and is well suited to the open-pit mining operation envisaged.Engineering design and project execution will benefit from the sponsors'experience with similar large-scale mining projects in the U.S., Canada andBrazil. Hanna will provide technical assistance at cost during the con-struction and operating phases. The ecological implications of the projecthave been examined in detail and it is judged that the project can be carriedout with minimum adverse effects on the regions surrounding the mine and oceanterminal, provided that certain precautions are taken.

- ii -

iv. Total project Costs are estimated at about US$143 million, withthe foreign exchange component varying between 45 and 52%, depending on thedegree of participation in procurement by Brazilian manufacturers and con-tractors. Project costs will be salit about evenly between the mine andthe terminal.

v. Financing requirements for the project are estimated at about US$155million, of which US$30 million will be financed by equity and the remainderby loans from IBRD (US$50 million), five Japanese trading companies (US$50 mil-lion), the Japanese Eximbank (US$7 million), and the U.S. Eximbank (US$18million). There will be no Brazilian loans made for the project, but theUS$50 million Japanese loan will be untied and can be used for expendituresin 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 usedfor equipment and construction materials procured worldwide rnd the remainderfor internationally-bid civil works and interest during construction on theBank 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 expectedto require free world production to increase by about 40 million tons eachyear throughout the 1970s. Over 70X of the project's initial annual outputof 10 million tons has been committed in long-term sales contracts with sixJapanese steel companies and another 20% to buyers in Europe and Argentina.While these arrangements provide a sound commercial base for the project,it should be noted that the project will be highly dependent on the Japanesesteel market. Because of the very good quality of ore that MBR has to offer,,both as to physical properties and chemical composition, it is anticipatedthat additional long-term contracts will be concluded prior to the projectstart-up and that the company will increase its annual production to 15million tons within the first five years of operations.

vii. On the basis of conservatively projected ore sales and prices andoperating costs, it is estimated that MHR's Internal financial return beforeincome taxes will be 19Z with a sales build-up to 10 million tons per annumor close to 25% if sales increase to 15 million tons annually within the firstfive years of operations as expected. The internal economic return of thecombined MBR and railway projects is expected to range from 18% at the lovorbuild-up level to 23% at the higher. Sensitivity tests on the impact ofvarious adverse circumstances indicate that the combined economic return isnot likely to drop below 13%, even with a combination of gradually increasingoperating costs and price erosion.

viii. Since ore reserves are ample and easily accessible, and miningcosts therefore can be determined with more than a normal degree of accuracyin what otherwise are inherently risky mining projects, only serious adversecommercial circumstances, such as the occurrence of severe recessions in thesteel industries of Japan and elsewhere, would endanger MBR's financialposition. Adequate protection of the Bank's loans to MBR and RFPSA isafforded (i) by the strong cash generating ability of the project itself;(ii) by a US$20 million shareholders guarantee to cover cost overruns and

- iii -

working capital requirements until such date as the project has demonstratedthet capacity to mine and siip ore at a rate above break-even; (iii) byliquidity protection provided through restrictions placed on MBR's abilityto declare dividends or reinvest surpluses in fixed assets; and (iv) by amortgage on MBR's assets that the Bank will hold.

ix. In developing one of Brazil's major and abundant resources, theproject is of high economic priority to the country. Average net foreignexchange benefits are expected to range from about US$50 million to aboutUS$74 million annually, depending on the ultimate level of sales. Over anassumed project life of 15 years, about 73% of net project benefits are ex-pected to accrue to the Brazilian Government through various direct taxesand reductions in Government subsidies to the Brazilian Railways. Another11% will accrue to Brazilian shareholders; thus about 84% of net benefitsare expected to remain in Brazil. In comparison with other mining projectsthat the Bank Group has assisted in the past, this is an unusually high re-turn 'o the country in which the mine is located.

x. The project provides a suitable basis for a Bank loan to MBR ofUS$50 million equivalent for a term of 15 years, including a grace period ofabout 3-1/2 years, with provision for accelerated repayment if dividends tothe sponsors surpass certain stipulated levels.

BRAZIL

APPRAISAL OF THE MBR IRON ORE PROJECT

I. INTRODUCTION

1.01 Mineracoes Brasileiras Reunidas S.A. (MBR), a private Braziliancorporation, has requested a Bank loan of US$50 million equivalent to coverone-third of the projected cost of an iron ore export project (known as theAguas Claras or MBR Project). The loan would be guaranteed by the BrazilianGovernment. A second Bank loan of US$46 million has been requested by theRede Ferroviarili Federal S.A. (RFFSA) to finance part of the railway facili-ties required to serve the MBR Project and estimated to cost approximatelyUS$113 million. The railway loan is appraised separately in IBRD AppraisalReport PTR-77a. 1/

1.02 The project sponsors, the CADII Group of Brazil and Hanna MiningCompany of the U.S., first approached the Bank for financing in 1965, andnumerous discussions took place over the next four years as the projectconcept evolved. Full appraisal by the Bank could not begin, however, untilmid-1970, when MBR reached agreement with RFFSA on a rail freight contractand signed a long-term ore sales contract with Japan. Appraisal missionsvisited MBR headquarters in Rio de Janeiro and the project sites near BeloHorizonte and on Sepetiba Bay (see Map 1) in June and October/November 1970and a special mission to consider the project's ecological implications wentto Brazil in January 1971. Throughout the appraisal period, MBR had con-current financial discussions with co-lenders in Japan and the U.S. thatresulted in firm commitments to cover required financing for the project.

1.03 This would be the second direct Bank loan to the industrial sectorof Biazil; the first was the Alcominas Aluminum Project (Loan 526-BR, January1968) 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, consisting ofMiessrs. Pigossi, Jaffe and Bosson of the Industrial Projects Department andMr. Bain of the Transportation Projects Department.

II. TIIE SPONSORS AND TIIE COlMPANY

2.01 The principal sponsors of the project are Cia. Auxiliar de Empresasde Mineracao (CAEMI), a Brazilian holding company, and Hanna Mining Companyof 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 amajor 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, incorporated in 1951, whoseprincipal activity is manganese ore mining and exporting in the State ofAmapa (N4orthern Brazil) carried out through Industria e Comercio de MineriosS.A. (ICOMI), owned 51% by CAEMI and 49% by Bethlehem Steel Corporation ofthe U.S. ICOMI also serves as CAEMI's principal vehicle for controllingvarious iron ore activities in the State of Minas Gerais, a speciality steelmill in the State of Sao Paulo, a plywood mill in Amapa, a shipping companywhich operates tugboats and ocean-going barges, and a company which carriesout mineral exploration and research. ICOMI is in a strong financial posi-tion, as indicated in Annex 1-2, which probably understates the company'snet worth considerably. Projections of ICOMI's future sales indicate thatCADII will receive at least US$2.5 million in annual dividends from ICOMIthroughout-the implementation period of the MBR project. CAE1I thereby willhave sufficient debt raising ability to allow the company to cover its obli-gations under the MBR Shareholders Agreement (Para. 5.08) to provide MBRup to US$10 million for cost overruns and initial working capital deficitsthat might be incurred. During loan negotiations, CAEMI agreed not to sellor otherwise encumber its shares in ICOMI throughout the period the Share-holders Agreement is in effect, thus protecting CAEMI's principal sourceof inccme.

B. St. John D'el Rey Mining Company

2.03 St. John D'el Rey is a British corporation that has been engagedin iron ore exploration and mining in Minas Gerais for over 40 years. Itsaffairs 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 sharesare held in the U.S. and U.K. by private and institutional shareholders.Only a small portion of the shares are traded regularly. St. John's prin-cipal 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 mostiiportant property is the Aguas Claras deposit, upon which the MBR Projectis based.

1'. Hanna Mining Company

.04 Hanna Mining Company and its subsidiary companies collectively arethe second largest producers of iron ore in the world, with operations inthe U.S., Canada, Australia, and South America. The company has shown strongfinancial growth over the past ten years, as indicated in Annex 1-3. Hannais responsible for the technical planning and execution of the MBR miningproject (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. Johnunder the Shareholders Agreement. Hanna is financially sound and hassufficient resources to cover such a guarantee.

-3-

D. Genesis of the Project

2.05 In 1965, CAEMI and St. John entered into an agreement establishingthe conditions under which they would consolidate their iron ore propertiesand operations in Brazil. An initial plan for exportation of pre from theAguas Claras reserve through a new terminal on Sepetiba Bay was approved bythe President of the Republic in December 1966. In April 1970 MineracoesBrasileiras Reunidas S.A. (MBR), the CAEMI subsidiary that will carry outthe project, signed a long-term contract with six Japanese steel companiesfor delivery of an aggregate of 105 million tons of Aguas Claras ore overa 16-year period. Finally, in July 1970 MBR entered into an agreement withRFFSA for rail transport from the mine site to the Sepetiba terminal, andBechtel Overseas Corporation cf the U.S. completed a study of the proposedproject, showing it to be technically and economically feasible. Theseactions provided a solid base ipon which financing for the project couldproceed.

E. The Borrower - MBR

1. Ownership

2.06 Following consolidation of the CAEMI and St. John assets,MBR will be jointly owned 51% by a holding company, EmpreendimentosBrasileiros de Mineracao S.A. (EBM) and 49% by St. John. EBM willin turn be owned 61% by CAEMI which will provide CAEMI with a 31.1%indirect share of MBR. The balance of EBMI ownership being held (20%)by a consortium of the six Japanese steel companies buying ore fromMBR and the five Japanese trading companies providing debt financefor the project, and (19%) by Universe Tankships, Inc. a Liberiansubsidiary of National Bulk Carriers, a U.S. shipping firm. Hannaowns 51.8% of St. John and has, therefore, a 25.4% effective shareof MBR. Annex 1-1 illustrates the pattern of ownership and controlfor MBR.

2.07 Effective ownership of MBR will be as follows:

% Ownership

EBM 51.0

CAEMI 31.1Japanese 10.2National Bulk Carriers 9.7

St. John D'el Rey 49.0

Hanna 25.4Minority Shareholders 23.6

-4-

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

2. Existing Equity

2.09 'i'he total cash investment of CAEMI and the St. John shareholdersin the assets being consolidated into MBR is US$29.9 million. The partnerehave agreed to value their respective properties at the time of merger onthe basis of the original cost of each plus interest at 6% per annum fromthe purchase date tuo to the merger date. This values existi1i equity atsomewhat more than US$50 million, tae figure the sponsors wilk use in thefirst consolidated balance sheet. it study undertaken by the Bank indicatesthat US$50 million represents the approximate present value eS anticipatedfuture MBR cash flows using a discount rate of 20%. This coetitutes a rea-sonable basis for acceptance of the proposed valuation (Anne- 8).

3. Past Financial Performance

2.10 Financial performance during the past 5 years of the various CAEKIand St. John iron ore operations being consolidated into MBR is summarizedbelow:

CAEMI and St. John Iron Ore OperationsConsolidated Financial Indicators

(US$ million)

Jan-March1966 1967 1968 1969 1970 1971 ft

Shipments (million LT) 2.2 1.9 1.8 1.8 2.4 0.6Gross Revenues 19.0 16.4 12.4 17.2 17.4 4.22Net Earnings (0.3) (0.8) (0.5) 0.4 1.2 0.2Cash Flow 0.7 0.3 0.5 1.3 2.1 0.5Quick 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 inr Tables 1 and 2, which split consoli-dated totals into CAEMI and St. John components. The statements show that,on their own, the existing operations have been only marginally viable formuch of the period. However, both groups have shown improvement during thelast two years and, had all of the operations been consolidated in a singletntity, it is likely that their overall performance would have been somewhatbetter than the above figures indicate. It also should be noted that Hanna'spurchase of St. John shares in 1958 was specifically aimed at development ofthe Aguas Claras deposit. The existing St. John operations, therefore, haveabsorbed some of the Aguas Claras development costs, a8d this has tended toredluce their apparent profitability.

III. WORLD IRON ORE MARKETS

A. General Background

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

3.02 The Bank's view is that world steel production, excluding Japanand the Asian centrally-planned countries (ACPC) 1/, can be expected to reach750 million ingot tons by 1980, in contrast with actual production of 474million tons in 1969. Japan's steel production, which amounted to 82 milliontons in 1969 and about 93 million tons in 1970, is predicted to reach 140million tons in 1975 and perhaps 200 million tons by 1980. It is anticipatedthat total world steel production (excluding the ACPC), will increase fromabout 556 million ingot tons in 1969 to 950 million tons in 1980.

3.03 Japanese crude steel production of 140 million tons in 1975 impliesa need for over 160 million tons of iron ore imports in that year. Of thisamount, about 140 million tons were contracted by the end of 1970, including7 million tons from MBR.

B. Brazilian Iron Ore Production

3.04 Because of its immense, high quality iron ore reserves, estimatedat over 30 billion metric tons, or 12% of known world reserves, Brazil israpidly developing into a major force in the world iron ore market (Annex2-2). In 1969, Brazil produced about 28 million tons of iron ore, equiva-lent to 4 percent of world production. During the same year, about 19 mil-lion tons were exported, or approximately 13 percent of total world exports.Companhia Vale do Rio Doce (CVRD), the Government mining company whichaccounts for 80 percent of Brazil's shipments overseas and is the fifthlargest iron ore exporter in the world, exported about 24 million tons in1970. CVRD is negotiating additional contracts with European and Japaneseconsumers and plans to expand shipments to over 40 million tons annuallyby 1975.

3.05 In addition, preliminary surveys of high grade deposits in theSerra dos Carajas region in the State of Para indicate reserves sufficientto justify large scale mining operations. A joint company set up by CVRDand a subsidiary of United States Steel Corporation is undertaking detailedexploration, which is expected to be completed by the end of 1971. If thedeposits are developed and contracts are secured, the venture probably willbe exporting an initial 30 million tons of ore per annum by the late 1970'sto 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 withdemand for the first time in more than 10 years. C.I.F. prices, which haddeclined by as much as 30 percent during the preceding 10 years or so as portfacilities were improved and ship sizes increased, rose by 8 percent at thebeginning of the year. Current trends indicate that the market situation -islikely to remain strong up to 1972-73, when a number of recently-startedprojects are due to come on-stream. Thereafter, price movements are lesspredictable and likely to be shaped primarily by trends in supply, handling,and ocean transport.4ion costs, as well as by the organizatiQ of world mar-kets. On balance, these factors are expected to keep average prices duringthe mid- and late-seventies in the neighborhood of recent levels, in actualterms. In real terms, however, prices may decline as much w Jy 10 percentduring this period.

3.07 Another factor of importance to price considerations is the practiceintroduced by the Japanese steel companies, which collectively are by far theworld's largest importers of iron ore, of concluding long-term ore purchasecontracts stipulating not only volumes but prices as well. This has led tothe adoption of similar contracts by the European steel companies. Since nwiron ore mines require increasingly large amounts of fixed investment, prim-arily due to high infrastructure costs associated with mine development, itis not likely that future projects will be undertaken without the assurancoeprovided 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 ithas been in the past.

3.08 Within the Japanese supply sphere (Annex 2-3), as with most of theworld market, the F.O.B. selling price of iron ore specified in individualcontracts is greatly influenced by iron content and chemical .ad physicalcharacteristics of the ore. In such respects NBR will enjoy several advan-tages over its competitors. First, it will produce a top-quality ore (68percent iron and low in phosphorus, silica, alumina and sulfur), the deoaadfor which will continue to increase as steel companies maintain their effoAwito improve blast furnace productivity, reduce the coke rate, and meet in-creasingly strict air pollution standards. The overall quality of the MERore probably will be superior to any other ore under contract to theJapanese steel mills. The combined silica/alumina content 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%, isthe lowest of all the contracted ores, a positive factor in view of Japan'sincreasing concern with sulfur-derived pollution. The typi.l sulfurcontent 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 majorityof the other ores. In addition to advantages stemming from the ore itself,the loading facilities proposed for tho Sepetiba terminal will accommodatethe largest ore carriers planned for the mid-70's and thus make transportcosts for MBR ore competitive with those of closer producers not yet equippedto lhandle such large ships.

-7-

3.09 These considerations have resulted in very favorable contract termsfor MBR. While MBR's selling prices will be influenced by worldwide move-ments in the price of iron ore over the long run, its competitive advantagesshould always enable it to receive close to the maximum prices offered at anygiven time.

IV. THE PROJECT AND ITS EXECUTION

A. The Mine - Aguas Claras

4.01 Full descriptions of the iron ore reserves and the proposedmining and ore preparation methods and facilities are given in Annex 3.

1. Ore Reserves

4.02 Following consolidation of the CAEMI and St. John iron ore operations,MBR will own properties covering an area of 45 square kilometers in the vicinityof Belo Horizonte in the State of Minas Gerais (see Map 2). These containreserves estimated at over 1.6 billion tons of high grade iron ore distributedin 36 deposits. Aguas Claras, the largest and highest grade deposit, containsover 375 million tons (250 million tons proven and the balance inferred) ofmineable open-pit hematite with a dry grade of 68 percent iron and very lowcontents of phosphorus, sulfur, silica and alumina. It will be the centerof MBR mining activities. The deposit has been thoroughly explored andsampled by means of tunnels, drilling and surface pitting and ore reserveshave been estimated conservatively. The orebody has sufficient proven re-serves to sustain a mining rate of 15 million tons of iron ore per yearfor 17 years.

2. Mining Plan

4.03 Because the Aguas Claras orebody is massive and outcropping, itis well-suited to open-pit mining and has a very favorable stripping ratio.Conventional side-hill open-pit mining methods will be used, with ore andwaste drilled, blasted and loaded by shovels into trucks for haulage to theprocessing plant or waste dumps. Operating 6 days per week and 3 shiftsper day, the rate of mining initially will be about 12 million tons ofcrude ore per annum to produce 10 million tons of saleable ore. A listof the major units of mining equipment is shown in Annex 3a and a picto-rial 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 hydraulicclassification facilities. The design of the process plant and ore hand-ling facilities is based on data furnished by extensive laboratory and

-8-

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

4.05 Total initially-saleable production is expected to amount toabout 83 percent of the ore mined. The balance will consist of very finematerial (minus 100 mesh) that initially will be stored. The company isactively investigating the possibility of marketing this fraction, eitherin its natural state or as cold-formed pellets.

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 GuaibaIsland, 1,000 meters off-shore at the entrance of Sepetiba Bay and about100 km west of Rio de Janeiro. This site was selected after considerationof various alternative sites along the Brazilian coast, giving due weightto technical and economic factors, as well as the feasibility of transport(Annex 5). The terminal will receive and unload unit trains of iron ore,provide stockpiling facilities for a minimum of three grades of ore, andload ocean-going vessels up to the 250,000 DWT class. The island will belinked to the mainland by a steel piling railway trestle approximately1,740 meters long which will join with the existing railway whlch runsalong the northwest shore of Sepetiba Bay. A small causeway is to beconstructed from the island to connect with the trestle and to provideshelter 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 25million tons, and provision has been made in the terminal design for addi-tional facilities to meet that level. Adequate provisiOns have been madefor the supply of fresh water and electric power and the disposal of sewage.Additional facilities for the collection of oily wastes from the ore/oilcarriers loading at the terminal will be provided if they are demednecessary by studies to be undertaken during the next few months (Para.4.11). The existing approach channel to the terminal site will be dredgedto a depth of 22.5 meters and a width of 300 teters to accommodate bulkoil./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 existence and which is described in the RailwayReport.

C. Environmental Considerations

4.10 It should be possible to carry out the MBR project successfullywith minimum adverse environmental effects on the regions surrounding the

- 9 -

mine and ocean terminal. MBR is aware of the importance of this issue par-ticularly in view of the project's size, and the Company has agreed to takea number of steps to ensure that the project not only will meet current legalrequirements regarding environmental controls, but also that its actions willnot foreclose future options for non-industrial use of land and water in theregions of the project sites.

4.11 The Bank's study of environmental issues and the conclusions re-sulting therefrom are detailed in Annex 5. This investigation included aspecial mission to the Sepetiba terminal site comprising several special-ists in the field of ecology. The findings of this mission were discussedwith the project sponsors, and agreement was reached during negotiationsthat the execution and operation of the project would be carried out withdue regard to ecological and environmental factors. More specifically,MBR has agreed to prepare plans, acceptable to the Bank and the BrazilianGovernment, by the end of 1971 for protecting the waters in and aroundSepetiba Bay from pollution originating from vessels visiting the terminalor from on-shore wastes, and to carry out these plans, or acceptable al-ternatives, prior to completion of the project. In addition, MBR hasagreed to consult with the Bank prior to implementation of any plans toerect a pelletizing plant at Sepetiba Bay, should the Company's currentinvestigations of such a plant indicate that its location at the Bay wouldbe desirable. These restrictions should enable the Bank to take an activepart in any MBR planning and execution pertaining to those developmentsmost likely to affect the ecology at the terminal site.

4.12 At the mine and ore preparation plant MBR will undertake a numberof measures to control dust and to filter and purify water used in ore pro-cessing. The proposed methods appear satisfactory.

D. Construction Schedules

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

E. Management, Staff and Labor

4.14 Primary responsibility for engineering design and supervision ofthe project during the construction phase will lie with Bechtel OverseasCorporation of San Francisco, California, although some of the work will besub-contracted to engineering firms in Brazil. A contract for Bechtel'sservices has been drawn up and is satisfactory. It is anticipated thatBechtel also will be employed as Technical Adviser to RFFSA in the executionof the railway portion of the project, assuring close coordination of the to-tal project at the working level (Railway Report, Para. 4.09).

- 10 -

4.15 To provide for coordination of project implementation at thepolicy level, MBR and RFFSA have agreed to establish a joint management bodyconsisting of senior officials of both organizations who have authority totake specific actions necessary to keep the project on schedule.

4.16 Hanna has agreed to make available to MBR, at cost, advisoryservices on all technical and economic aspects of the project, and to pro-vide training of Brazilian personnel in the U.S. and Canada. The basic prin-ciples of the agreement appear satisfactory. Overall management controland responsibility for day-to-day operations will rest with experiencedBrazilian executives, most of whom are coming from CAEMI. MKR'e Presidentand chief administrative officer is Dr. Arnaldo Walter Blank, former Presi-dent of the Banco Central do Brasil, who has over 40 years of experience inBrazilian banking and financing. The Vice President responsSble for MBRoperations is Sr. Daniel G. Sydenstricker, former manager of ICOMI's man-ganese operations in Amapa and a Director of CAEMI.

4.17 Total staff and labor requirements at a production level of 10million tons per annum are estimated to be about 760 at the mine and 180at the terminal, most of whom will be Brazilian* filling new jobs createdby the project. Labor pools in the regions surrounding both activitiesare considered of sufficient size to satisfy all skilled and semi-skilledlabor requirements, although considerable training will be necessary. Laborrequirements during construction will be close to 1,500 people.

V. CAPITAL COSTS - FINANCIAL PLAN - PROCUREMENT

A. Capital CostS

5.01 The project cost estimate, based on a feasibility study undertakenfor MBR by Bechtel Overseas Corporation, is detailed in Annex 7 and sumar-ized below:

- 11 -

Project Cost Estimate

NCr$ millions US$ millionsForeign Local Foreign LocalCurrency 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

Engineering and Project 26.0 34.5 60.5 6.4 8.5 14.9Management

MBR Administration During 5.3 5.7 11.0 1.3 1.4 2.7Construction

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 - 12.6Construction

TOTAL FINANCING REQUIRED 350.7 279.8 630.5 86.4 68.8 155.2

5.02 The estimates are considered reasonable and reflect the combinedexperience of Hanna and CAEMI with similar large scale mining operations inCanada, the U.S., and Brazil, and their knowledge of the region where theAguas Claras mine is located. Total contingency 1/ and escalation allowancesof 8.2% and 9.3% respectively provide adequate protection against price in-flation and unexpected construction problems. A provision of US$3.3 millionto cover the possible cost of environmental protection facilities has beenincluded 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 civilworks contracts submitted to international competition will be supplied orcarried out by foreign firma. Brazilian suppliers and contractors are ex-pected to be competitive in several categories, so that actual foreign ex-change costs could be as low as US$63.9 million, or 45% of project costs.

1/ The overall contingency level has been determined by aggregating contin-gency requirements for individual cost components based on probabilitiesof quantity and price overruns assigned to each.

- 12 -

Possible increases in individual cost elements due to the 15% preferencethat will be given to Brazilian suppliers (Para 5.15) are adequatelycovered in the contingency allowance

B. Financing Plan

5.04 The financing plan is as follows:

Projected Financing Plan

US$ mili^on

Long-term Debt

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

125.2

New Equity

St. John 14.7CAEMI (EBM) 15.3

30.0

Total New Financing 155.2

5.05 At completion of the project and in accordance with the abovefinancing plan, MBR's pro-forma capitalization is expected to be approxi-mately as follows:

- 13 -

Pro-forma MBR Capitalization - September 30, 1973

US$ million US$ million %

Long-Term Debt 125.2 59.1

Equity:

New Equity 30.0Existing Equity (3/31/71) 5(0.0Retained 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 consolidation dateto 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$30million in new equity to MBR in the ratio of 51% (US$15.3) million) for CAEMIand 49% (US$14.7 million) for St. John. Of this new equity contribution, anestimated US$2.3 million in advance owners' expenditures were incurred priorto 1971 and approximately US$10 million in additional funds will be drawn downprior to effectiveness of the Bank loan to finance work that must be undertakenduring the interim period to keep the project on schedule. Common shares willbe issued for the US$30 million in new equity, and payment for these shareswill be made on a dollar-for-dollar basis with drawdown of the first US$30million on the Bank loan. CAEMI has arranged to finance all its new equitycontribution to MBR through sale of shares in the holding company, EBM, thatwill own 51% of MBR's shares (para. 2.06); US$8.2 million will come from theJapanese trading and steel companies for their 10.2% share of MBR and the bal-ance will be covered by Universe Tankships.

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

2. Shareholders Agreement, Security Agreement, Pledge Agreement

5.08 In addition to their obligations to provide US$30 million in newequity for the project, CAEMI and St. John have agreed to advance MBR up toan aggregate of US$20 million in additional funds to cover (i) possible costoverruns to complete the project; (ii) working capital deficiencies betweenthe 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 oreover a period of six continuous months (80% of initial capacity); and (iii)at the end of the fiscal year during which the above test has been satisfied,

- 14 -

additional working capital to increase, if necessary, current assets of MBRto a level at least equal to its accounts payable plus MBR's following year'sfull debt service (principal and interest). These funds must be advanced ina form and on terms satisfactory to the Bank, either as equity or as sub-ordinated loans that can be repaid only after certain liquidity restrictionsare met. CAEMI's portion of the shareholders' guarantee will be 51%, orUS$10.2 million, and St. John's will be 49%, or US$9.8 million. Hanna MiningCompany has agreed to provide unconditionally up to US$7.5 million to back upSt. John's obligations (the Security Agreement); and, in lieu of firm commit-ments for the remaining US$2.3 million St. John obligation, St. John hasagreed 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 thestandard interest rate plus a 2% Brazilian Government guarantee fee. Prin-cipal and interest will be in 24 equal installments beginning on December1, 1974, 14 months after the projected start of Aguas Claras operations.Provision has been be made for accelerated repayment of the Bank's loan inaccordance with the procedures set forth in Para. 7.08. From a securitystandpoint, the Bank loan will rank pari passu with other senior debt.

5.10 The five Japanese trading companies handling the long-term orepurchases from MBR will serve as the conduit for a loan to MBR of US$50million, comprising US$30 million from the Japanese Eximbank and US$20million from commercial banks. The loan agreement was signed in February1971. The effective interest rate is about 9.6%, including Brazilian with-holding taxes on the commercial portion. This loan will be secured by afirst mortgage on MBR's assets in which the Bank will share ari passu.The combined loan is for 15 years, with repayment of principal proportionalto ore shipped under the sales contract at the rate of U.S. Cents 60 perton for the first 84 million tons (representing about 12-1/2 years fortotal repayment). These amounts will be withheld in Japan from paymentsmade to MBR for the ore shipped.

5.11 MBR also is expecting to draw upon an additional US$7 million insupplier 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 usethese funds if the prices on Japanese equipment are competitive with alter-native sources.

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

1/ 50% will come from Eximbank itself, 50% from commercial banks withExiin guarantees.

2/ Representing local'currency loans guaranteed by Eximbank.

- 15 -

credits described above are used as intended, leaving a balance of aboutUS$8.1 million. The U.S. Eximbank loan will be for 12-1/2 years, ineludtilng2-1/2 years grace. The effective overall interest rate wll.l be about Li'.

5.13 With full utilization of the US$7 million in Japanese suppliercredits, the resulting US$8.1 million of uiused US Exim funds, plus the US$20million shareholders completion and working capital guarantee described above.will yield MBR up to US$28.1 million of contingency financing. This is con-sidered sufficient to cover foreseeable cost overruns within a reasonablerange of probabilities.

C. Procurement and Disbursement

1. Under the IBRD Loan

5.14 The categories of expenditure recommended for Bank finance are:

Recommended IBRD Procurement

Percent ofUS$ million Total Loan

(a) Equipment to be procured withinternational competitive bidding 25.4 51

(b) Construction materials to be procuredwith international competitive bidding 4.0 8

(c) Foreign exchange component of civilworks undertaken with internationalcompetitive bidding 12.6 25

(d) Unallocated amount available for ex-penditures for equipment, materialsor civil works 5.0 10

(e) Interest during construction on IBRDloan 3.0 6

Total IBRD Loan 50.0 100

5.15 Detailed breakdowns of categories (a) and (b) are shown in Annexes9-1 and 9-2. All goods and services financed under the proposed loan willbe acquired through international competitive bidding. The loan will fi-nance the c.i.f. imported cost of equipment and construction materials, up toUS$3 million of interest during construction on the loan and 54% of inter-nationally-bid civil works, such fraction corresponding to the estimatedforeign exchange component of those civil works contracts most likely toattract meaningful international competition (Annex 9-3). The foreign ex-change component of civil works hgs been estimated on the basis of an eval-uation of likely participation by Brazilian contractors. Actual Bank

- 16 -

disbursements for civil works expenditures are expected to represent no morethan one third of the total cost of all civil works in the project, includingthose to be bid only locally. This is close to the foreign exchange per-centage the Bank presently is using for disbursements of road and portprojects in Brazil. The disbursement rate for civil works will be the samewhether or not Brazilian contractors are chosen.

5.16 Brazilian manufacturers will be given a preference on internation-ally-bid equipment and construction materials equal to 15 percent, which islower than prevailing import duties. In all cases, the Bank will disbursethe full cost of such items even if they are won by Brazilian suppliers.Brazilian manufacturers are expected to be chosen for approximtely 15-20percent of total equipment purchases and up to 50 percent of the total forconstruction materials. The equipment component of US$25.4 minllion to befinanced by the Bank represents about 63 percent of projected overseasequipment purchases for the project.

5.17 To ensure that the project is kept on schedule the Bank agreedduring loan negotiations to recommend financing on a retroactive basis MBR'sactual cash outlays from June 1, 1971 for items that will be purchased inaccordance with the Bank's procurement guidelines. The total of such retro-active financing is not likely to exceed $800,000.

2. Under Other Financing

5.18 Out of total project expenditures of US$155.2 million, US$25.8million, or about 17X, will be tied to specific sources of finance. Alloverseas purchases of equipment not covered by the Bank loan will beobtained under the Japanese and/or U.S. Eximbank loans. Thes* goods areexpected to cost about US$17.6 million and will consist primarily ofitems that can be obtained on a tied basis in Japan and the U.S. at pricesreasonably competitive with world-wide sources. The U.S. Eximbank loan alsowill cover the estimated US$7.6 million cost of Bechtel's engineering andconstruction management contract.

5.19 The US$50 million loan from the Japanese trading companies willbe available for project expenditures anywhere in the world and will beapplied 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 MBRare presented in Annex 11.

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

- 17 -

Siderurgia (SOMISA) of Argent:.na (700,000 tons). Each of these contractsprovides for periodic renegotiation of the sales price on terms that arelikely to favor MBR. A further 700,000 tons annually will be reserved ini-tially for spot sales, following normal practice in the industry. It shouldbe noted that the overall project will be highly dependent on the Japanesesteel industry, which will purchase over 70Z of production rewulting fromdevelopment of the Aguas Claras mine.

6.03 Financial planning for the Aguas Claras operation has been basedon an assumed steady sales rate of 10 million tons per year. It is reason-able to expect that this level will be exceeded quickly and that sales fromthe Aguas Claras mine will rise to 15 million tons per annum within the firstfive years of operations.

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

6.05 While all of the projections have been based on prices and reve-nues FOB Sepetiba Bay, the Japanese and SOMISA contracts give HBR theoption to deliver 20% and 50X respectively of the total tonnages C & F thedestination port. It is likely that the British Steel Corporation contractwill contain a similar provision. MBR currently is investigating possibili-ties that are available for taking up these options, either by shipment inits own bottoms, probably through a subsidiary company, or by charter ar-rangements, and the sponsors feel they soon should be able to make an offeracceptable to the Japanese for C & F shipments beginning in 1975. The Bankwill be informed of these arrange'ents as they are finalized.

6.06 For purposes of projecting the financial condition of MBR as awhole, and not merely the Aguas Claras operation, it has been assumed thatthe iron ore operations of the existing St. John and CAEMI properties willcontinue to export at least 2.2 million tons of ore annually through thePort of Rio de Janeiro until 1980. Sales projections for these operationsare shown in Para. 9 of the Notes to Tables 3 to 8. These are consideredto be reasonable since the ores coming from the existing mines, like thoseof Aguas Claras, are of high quality and should remain in strong demand ifmarket conditions are as projected in Chapter III.

B. Aguas Clare Operating Costs

6.07 Projected operating costs for the Aguas Claraa mine are shown indetail in Annex 11. At the base production level of 10 million long tonsper year, they are expected to be as follows:

- 18 -

Projected Operating Costa for A&uas Claras Project

Percent ofUnit Costs at Sales Price10 million LTPY (US$8.38/LT

(US /LT)

Direct Costs (mine and terminal) 1.73 20.6Rail Freight 2.62 31.3Indirect Costs (includingaverage dqpreciation andinterest) 1.97 23.5

Average Annual Costs (beforeincome taxes) 6.32 75.4

6.08 These figures assume utilization of equipment and facilities atan average rate of 80%, leaving considerable room for decreaoee in unitcosts with improved operating efficiency. Like the capital cost estimatesdiscussed in Chapter V, they have been based on estimates by the sponsors,assisted by Bechtel Overseas Corporation and other consultants, and reflecttheir extensive experience with similar large-scale iron ore operations inCanada and the United States, in addition to their knowledge of Brazilianconditions. On the whole, the estimates are considered to be realistic.Except for depreciation and interest, all costs used in the projections havebeen escalated at an annual rate of 6% from 1970, when they were made, toMarch 1977, the end of the initial fixed price period under the Japanese oresales agreement. It can be expected that thereafter most inczases in op-erating costs can be offset by price increases negotiated periodically withthe major ore buyers generally following world inflation.

C. Profitability and Financial Position with Aguas ClaraProduction 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 ofUS$8.38 per long ton, and a constant price/cost relationship after 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 Total1974 1975 1976 1970 1980 1985 1989 1974-89

Total Shipments CMLT) 1.4 8.6 10.0 10.0 10.0 10.0 10.0 150.0Gross Revenues 11.7 72.1 83.8 83.8 83.8 83.8 83.8 1,257.0Before-Tax Profits (10.6) 7.2 13.5 15.0 17.1 27.4 33.7 304.0Income Taxes - - - 2.0 2.6 8.2 10.0 67.7Net Income (10.6) 7.2 13.5 13.0 14.5 19.2 23.6 236.3Cash Surplus after

Debt Service ( 5.0) 10.7 16.1 14.0 15.2 16.7 26.4 249.7

- 19 -

6.10 The projections assume that MBR wiLl elect to minimize its taxliabilities by taking up full depletion allowances, equal to 20% of mine-head value of all ore shipped during the first 10 years of Aguas Claras pro-duction. Projected depletion reserves will total US$78.1 million over thisperiod. By law this amount must be capitalized and thus becomes ineligiblefor dividends. The cash flow statements indicate cash surpluses on AguasClaras account in all but FY 1974, when losses from the first six months ofoperation will cause a short-term deficit. The total project cash flow dur-ing construction and operations, excluding financial charges and capital in-flows, is projected to be US$314.0 million, representing an internal finan-cial rate of return, after taxes, of 17.5%. The return before taxes isestimated at 18.8% (Table 9).

2. Debt Service Coverage

6.11 Projected cash flow statements for the combined operations of MBRare shown in Table 6. Long term debt service coverage is insufficient inFY 1974 only, rising to 1.7 times in the following year and then rangingfrom 1.9 to 2.5 times in subsequent years. The ratios for Aguas Clarasoperations alone are only slightly lower. The debt equity ratio, with awrite-up to US$50 million of existing assets being consolidated into MBR,decreases from about 60:40 at the beginning of Aguas Claras operations tobelow 30:70 after FY 1980.

6.12 Pro-forma balance sheets for MBR as a whole are shown in Table 7.The quick ratio (cash and equivalents divided by current liabilities) isprojected to increase from a low of 0.8:1 in FY 1974 to around 1:1 there-after, assuming maximum payout of dividends. Agreement was reached duringnegotiations to protect MBR's liquidity by disallowing dividends if, as aresult of such dividends, MBR's current ratio (defined as cash and equiva-lents plus inventories divided by current liabilities, including the follow-ing year's principal and interest on long-term debt) would drop below 1:1.In addition, it was agreed that investment of cash surpluses in flxed assetsabove US$2 million per annum would be subject to prior approval of the Bankor similar liquidity restrictions, except for necessary capitalized expen-ditures for renewals and replacements of existing assets.

6.13 Despite the healthy long term cash position projected for MBR, theinitial period of operation could find the company short of cash if thesponsors' expectations for existing operations, set forth in Table 6, arenot achieved. Even if they are, and these operations generate US$9.4 mil-lion in surplus cash during the PY 1972-74 period as projected, the cumula-tive net surplus for MBR as a whole at the end of the first six months ofAguas Claras operation still will be only US$7.4 million. The sponsors'forecasts for the existing operations assume profit and cash margins con-siderably in excess of past performance, which at most has yielded net annualcash generation of only US$2.1 million (Para. 2.10). They base their opti-mism on two factors: (i) increased prices achieved during the past yearthat appear likely to hold during the next 2-3 years and (ii) increasedoperating and administrative efficiency that will be attained through

- 20 -

consolidation of the various mines into a single company under one managementstructure. Even though these assumptions probably are valid, it may becomenecessary for MBR to call upon CAEMI and St. John (Hlanna) under the terms ofthe Shareholders Agreement and Security Agreement (Para. 5.08) to make up work-ing capital deficiencies during the initial operating period resulting fromany failure of the existing MBR operations to perform as expected. To al-low MIBR to respond to cash shortages that are only short-term in nature andtherefore do not require permanent advances from the shareholders, the Bankagreed during negotiations to allow the company to undertake unsecured short-term borrowings not exceeding US$4 million outstanding at any one time duringthe period the Shareholders Agreement is in effect and up to an aggregate ofUS$10 million thereafter. Further borrowings of any type without the priorapproval of the Bank will be restricted to US$7.5 million, and this amountwill be allowed only after the debt/equity ratio drops below 50:50. Theserestrictions, 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 toincrease by about one third with an increase in annual production from 10to 15 million tons. As a result, it is anticipated that margins will in-crease significantly and the internal financial return before taxes willincrease from 18.8% for the 10 million-ton project to 24.5% if the amuualsales buildup is to 15 sillion tons as expected.

VII. ECONOMIC JUSTIFICATION - RETURNS TO GOVERNMENTAND SHAREHOLDERS - SENSITIVITY ANALYSIS

A. Internal Economic Return

7.01 The internal economic return of the combined MBR (Aguas Claras)ancd Railway Project is projected to be 18.3% per annum with minimum salesbuildup to the base level of 10 million tons per annum and 22.8% if thebuildup is to 15 million tons. This range is considered to be satisfactoryin the Brazilian context. The assumptions behind the estimates are detailedin Annex 13-2. Non-economic costs incurred by MBR and RFFSA in the form ofd;-ect and indirect taxes have been subtracted from the operating coststreams. On the whole, the cost and benefit streams that have been used areconsidered to be conservative, thus tending to understate the actual economicreturns that are likely to be attained.

B. Benefits to Government

7.02 The estimated revenues that will accrue to the Brazilian Govern-inent over the life of the project assuming sales buildup to 10 million tonsare shiown in Table 8 and summarized below:

- 21 -

Benefits to the Brazilian Government

Accrued RevenuesD)uring 15-1/2 year Percent

Source of Revenues Operatint Period of Total(t1S$ millions)

Iaxes on I'roduction and Property 28.5 8.4Income Taxes 90.8 26.8Taxes on D)ividend Distributions 57.3 16.9Taxes on Earnings Remittances Overseas 28.5 8.4Covernment Guarantee Fee on IBRD Loan 9.7 2.9Keduced 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$585million (Table 10).

7.03 The Government's total newv investment in the combinedl project willconsist of 2IUSA's UF$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-iate sales buildup to10 and 15 million tons annually respectively.

7.04 The above revenue estitates do not include indirect taxes on tBRand RFFSA operating inputs, whiclh slhould yield US$70-SO million in addition-al Government revenues over the assumed 15-1/2-year operating period. Norclo they include the long-term indirect benefits that will accrue to therailway system through the plhysical and operational improvements made toaccommodate the MBR project.

C. 1'eturns to M1I'BR Shareholders

7.05 Projected distributions of earnings from thc Aguias Claras projectwith sales btilduitip to 10 million tons are slhowin in Table 8. It has been as-sur,ed thlat maximum possible divldendls will be paid otut, subject to the fol-lowing: restrictions, whlicli were agreed during negotiations:

(a) Divtdends can be paidl only fromn net accumulated earnings;

(b) Reserves of cash and equivalents for the wlhole of MER mustbe sufficient, after dlividends are declarecl, to cover accountspayable and total MBiP debt service req'iirements (principal andinterest) 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 tlhe projected 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$127 inil ion. hlieseL\ecelpt-S wi.ll almost double, to US$.239 million, if time ultimate annual saleslCvil reaclies 1.5 instead of only the b)aSiC 10 million.

7.07 'l'lie retLrns on Investment for thie various MBP, shareholders areshowni in 'ab Ibe 1 t and stimmnmarized belov,.:

Not Returus Lo iharehollder!

Brasilian Shareholdaers(CAEMt) St. Johni D'dl Hey Other Forelgn Shareholdorsi All ShareholdersTotal 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!!M10 t5fFrr l 5M--p-r -E&M9 ' 10) MM<p 15r. .i-T- Io RATPT 17Mor-

Average aninlualreturm on totalinvestrunt 11.9% 24.8% 6.9% 11.9% 8.6% 15.4% 8.8 16.6%

Ave r.lag ann ualreturni oni newinvestement /'a 'a/ 18.4% 31.7% 8.6% 15.4% 23.4% 44.2%

Discourntedt returnon total lInrest-Mont 6.2% 14J.5% 1.7% 7.2% 3.6% 9.8% 3.7% 10.4%

Discounte,l nttirtuon now Investcm,nt n/a nva 10.6% 18.MM 3.6% 9. d% 12.8% 22.3w

Ir,asinucli as thle original Investment of the sponsors in MBR is less thantlhe U"S$50 million value to be assigned to the MBR assets at the time of70loso lidation (Palra. 2.09), the rates of return on total investnient shownfor CAFMI andl St. Jolhni undlerstate the expected profitability of thleir in-vestments considerably. Conversely, the returns on new investment areovcrstatod 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 nott?\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 b, II \. Hc 1,. olillt of :;tlc ess. Because of PJSlK's considerab)l. cashthi,o..,',t this provi:;imn i:; not IikeI.y to restrict dividlendls to any signifi-

r .Z1,':\t [til it -oliolld, hlotwever, res is L 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 financial projections indicate that approximately 84-85X ofnet cash benefits accruing from the MBR project will flow to the Governmentand Brazilian shareholders (in the ratio of about 5 to 1). The total splitof such benefits is shown in Table 11 and summarized below:

Split of Net Project Benefits

Net Cash Benefits Percent of TotalRecipient 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 13.5St. John 49.7 85.7 10.7 10.4Japanese 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 important conclusions thatcan be drawn concerning this project: that by far the major portion of thebenefits flowing from exploitation of one of Brazil's most valuable resourceswill accrue to the nation itself. The outside investors will receive reason-able returns on their investments and technological inputs, but not at theexpense of a reasonable return to Brazil. Both the percentage of net projectbenefits remaining in Brazil and the Government share compare very favorablywith past projects of this type financed by the Bank. Furthermore, despitethe fact that Brazilian shareholders will own only 31% of MBR's shares, theywill receive approximately 45% of its effective net income distributions toprivate participants.

E. Foreign Exchange Benefits

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

- 24 -

F. Sensitivitv Analysis

7.12 An analysis of the sensitivity of the .'inancial and economic pro-jections to various adverse circumstances has been undertaken and is de-scribed in Annex 13. The tests indicate that the economic return of thecombined mine, port and railway project is not likely to drop below anacceptable level of 13%, even under the following severe circumstances:

(i) A 25% construction cost increase and a delay in initial rev-enues of one year; or

(ii) A combination of gradually decreasing real ore prices- (10%every 5 years) and increasing real operating costs for bothMBR and RFFSA (15% every 5 years).

Under such circumstances the internal financial return to MBR alone also canbe expected to remain at acceptable levels: 9% and 17% with annual produc-tion buildup to 10 and 15 million tons respectively.

7.13 The break-even analysis shown in Annex 13 indicates that with min-inium arnual sales of 9 million tons (somewhat below the amount presentlycovered under long-term contracts), ore prices could drop more than 15% forextended periods of time and not endanger HBR's ability to meet all of itscash obligations, including those to RFFSA. Similarly, if the ore price re-mains at least at its initial level of US$8.38 per ton, sales could drop25-30% below planned minimum levels for several years and still allow MBRto meet its cash obligations. It is concluded, therefore, that MBR's fi-nancial position will be strong enough to enable the company to withstandany adverse circumstances that 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 principalpoints:

(i) CAEMI and St. John each will undertake to provide up to US$10million to cover project cost overruns and working capitaldeficiencies during the startup period. These funds will beadvanced on terms satisfactory to the Bank, either as subordinatedloans or as equity. Hanna will guarantee unconditionally up toUS$7.5 million of St. John's obligation, with the balance to besecured by a pledge to the Bank of all of St. John's shares inMBR. CAEMI's obligation will be secured by a negative pledgeproviding that it will not sell, pledge or otherwise encumber itsshareholdings in its major subsidiary, ICOMI, during the periodthe Shareholders Agreement is in effect (Paras. 2.02 and 5.08).

- 25 -

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

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

(iv) Annual dividend payments in excess of US$7.5 million, averagedover three consecutive years, will be matched by prepayment ofsenior debt to the extent of such excess (Para 7.08).

(v) MBR investments in fixed assets above US$2 million per annumwill be subject to prior approval of the Bank or liquidity re-strictions, except for necessary capitalized expenditures forrenewals and replacements of existing assets (Para 6.12).

(vi) MBR may undertake short-term borrowings not exceeding US$4million outstanding at any one time during the period ofeffectiveness of the Shareholders Agreement and up to anaggregate of US$10 million thereafter. Medium- and long-termborrowings will be limited to the lesser of US$7.5 million oran amount that would increase the debt equity ratio to no morethan 50:50 (Para 6.13).

(vii) By the end of 1971 MBR will prepare plans, acceptable to theBank and the Government, for protecting the waters of SepetibaBay from pollution and will carry out such plans, or acceptablealternatives, prior to completion of the project. HBR will con-sult the Bank prior to implemention of any plans to erect apelletizing plant at Sepetiba Bay (Para 4.11).

8.02 Major conditions of effectiveness of the loan are the following:

(i) The reorganization of MBR to consolidate the various St. Johnand CAEKI properties shall have been completed and approved bythe Government.

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

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

(iv) All of the conditions of effectiveness for the Railway Loanshall have been met.

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

Industrial Projects DepartmentJune 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)

*o Tear 79 r December 31, 2961 1968Z9' 1969-1 _ 19703-/ Jan. 1. 7 to ab 31, 1971-St. Jduo 3t John St. JoS h St. Johnt St. Jons John

CAU4I D'el Rey CAEII D'el Rey CARNI D'el Rey CAEI D'el Rey CAM4I D'e1 Rey CADI D'el ReyPropwties 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 4166Cost 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 812Aazietrative Eapenmes 1,431 1 V 1,131 1,242 - 4/ 1,242 895 895 1,354 - Wt/ 1,3541 1,551 1 390 / 39Dqseciatim 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 385Other 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 353Taxes 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

CASH Fow /

Net Ernings 481 (801) (320) (595) (2411) (836) (426) ( 76) (502) 295 48 343 674 526 1,199 181 62 243Depreciati 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 arecosidered, 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

fECONiSTRUtCED CONSDLIDATKD -AIAN-CE SHFEETS FM LL COMPM IEl BEINO MMRED INTO MM11(Ir, US$ 000 equivalent)

Yeazl PLdlng Deceaer 31, 1966'- 1967- 98 1969-/ 1970.'- Mar.h 31. 19712St. 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 ReyASSTSP PropertiePropertal Properties Total Properties Properties Total Properties 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 1,300Supplies 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-oFixed 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 6,250Other 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 14,100fleserve. 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 12,256Accumulated 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 suchtransformati-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

ny 11

MBR IRON CRE PROJECT

PROJECRED INCO3tE SATJA{EIITS FOR AGQtS ClAUS OPERATIONBASE PfdJ1CT WITH SALES BUILDIP TO 10 MILLION TONS 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 10.0 151.9Increase in in.entories (mllion long tons) 1.5 0,4 _ - - - - - - - - - - - - - 1.9Total 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 11.6Rail 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 26.2Terminal 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 3.1Nine 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 2.0Increase 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 1.5Taxes - 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 1.9Ins;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 0.6Dprectaon 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 1.6Anort1zati 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., 7 - 18.1

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 07.7Add: 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 DepartmthRY 1971

MhA Ir)l? t,RE PROJECT

DEPLETIONJ AL1IANCE FOtl AGUAS CLARAS OPERATIONBASE 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.? 26.2Terminal

OperatlnglSost 1.2 2.7 3.C 3.1 3.' .1 ,.1 22 3.1 3.1 3.1Interest 2.7 5.4 5.0 4.7 4.2 3.8 3.3 2.8 2.3 1.8 1.3Lepreciation and Anortization2/ 2.9 5.7 5.7 5.6 5.5 5.o 5.7 5.0 h.o h.9 44.3

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

T^-al :educt_ons 11.6 39.5 4 3

.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)Cumrulative Le?letion _ 6.'5 14.6 22.7 r.0 '.1 h7.' 56".1 6

lh.8 73.6 78.1

-/ Arsuried equal to L 7% of total interest Da:nmerts. Basis is ratio of capital cost of terrir.al 'aci1'.t,es anc eqz:Q i.ent to si-ilar co:tts :>r a e.t us 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 DepartmentHay 1971

MBR IaDN ORE P20JSCT

PDJECTED 0AS3 FLOW ST T3JIFTS IOR AWAS CLARAS OlhUTON?SZIJU PR)C 10T XUXO 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 33.7 385.70e F-Ooian i 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 cqaF 2C 2.3 7.0 20.7 - - - - - - - - - - - - - - - 30.0IR loan _ 7.0 25.0 18.0 _ _ _ _ _ _ _ _ _ _ _ _ _ _ - 50.0jqan'-- 1--- - 15.0 25.0 10.0 - - - - - - - - - - - - _ _ 50.0J4parz^- L ,. - 2.0 3.0 2.0 - - _ _ - _ _ _ _ _ _ _ _ _ 7.0U.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 _- - - - - - - - - - - 95.1Renewal cf of t - - - - - - 0.2 0.7 1.6 0.9 - 0.2 0.4 10.1 - 0.9 0.7 0.2 0.4 16.3Or.- s Adn-c e9iticin 2.3 - - - - - - - - - - - _ _ _ _ _ _ 2.3

Ad-mnjst,iton and P-npnrtirg e-p-aitares - 3.4 2.3 9.3 - - _ _ - _ _ _ _ _ _ _ _ _ _ 15.0inoete end Pn,.sct uMag_int - 9.0 4.7 4.0 -o _ _ _ _ _ _ _ _ _ _ _ _ 17.7

innreose 1-L 'rrEmt asnete other than cadh:Sppro an d! sppues - 1.2 2.4 1.3 - - - - - - - - - - - - - - - 4.5Iiin or, nvntorie- - - 11.7 09 5.6

F1mna1 chlarges:Interest d0rlig constrction - 0.7 5.7 h.9 - - - 1 - _ _ _ _ _ _ -1.3Cd1tment Caiges - .4 o.4 - - - - - - - _ _ _ _ _ _ o.5It.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 - _ 37.2Interst i Japanese lon - - - 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 - - - 297Iterest 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 - - - 4.0Interei. 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 - - - - 7.1With-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

papinae loan - - - 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.0J.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 sD Used 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 Camh Sopli 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&rtnD1tKW7 1971

MBR IRON ORE PEJBCT

'WOCTED CASH FWV STTEMNTS FOR COlMM IRON ORE OPERATIONS .Tni

AWlS -L-A U SALIIS ILUJP TD 10 HILLION im PER YARkin 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 9.7 67.3(_) quipment rmewals - - - - - 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 - _- 81.7Amortization 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 DepartmentMay 1971

'SR LLN .. hi PFiJECT

'ROJECTED BALANCE SdEETS FOh ODMdiNEu Iit liNRE OCSRATI2N FY 1971-89

(USS eitlion 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 6.9Iaun 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 6.9suppliea 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

GOss Fied Aset.s (Inl. Spre Psrts) 13.6 3

-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.7 127.6 128.3 128.5 128.9Less: 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 35.0pro3oct 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 12.6durirg 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 38.0XPi6ng 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 7.9Current 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.O 80.2 81.: 80.0 .2 80.0 80.0 80.0 80.0qetRin df ldCog _ 1.7 4LI (3.9) 1.4 2.3 0.3 - - - - _ _ _ _ _ _ _

Depl.tion rherse - 76- 10.1 22.7 30.9 }. 1., 56.1 61.8 73 7 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 2.4:1Qui.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 _. :L 2.9:1 .9 i.d:l 2. 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-tiin3/ 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!.eiuo reoetirdbeouplusrsonentor o ,r--ded-be;000C00......o.le.......hr..-t...,...h................... pp'--' iet -2ht:C-n1Si Coo! plus reaeloableo diaid3e by -ccoantt ro1aio-a-o slhr-t:rrn - ebl:': 'ho- =-'- r : - - ' : ' c.^ - -t:

Industril1 Projeota DepartsentJuew 1971

)SR I.MN ORE PROJEC?

DL3TR33UTION OF FARNINOS FiDM A0IAS CLIARS OPRATIONhAse PRO.JEtiz AE WITH0LWHIAP 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 23.6 158.2COilative 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 -

C e Slas . 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 53.7To 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 49.2To 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 28.5IXnce 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 67.7Ine 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 23.1Distribution 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 10.6Witbbodiag 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 3.6.7Perety T- - - - - - 0.3 0.7 1.0 1.3 2.7 45.1 3 4.1 4.2 4.5 5.6 28.5mareatee lee on 1BRD Loan _('.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 serviceand 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 DepartaentJune 1971

NOTES TO TABLES 3-8

MBR IRON ORE PROJECT

i4AJOR ASSUMPTIONS USED IN FINANCIAL PROJECTIONSFMR AGUAS CIARMS OPERATION

1. Sales Price and Revenues

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

2. Inventories

Approximately one-fourth of inventories will be held at the mineand three-fourths at the terminal. The terminal stockpile capacity hasbeen deteruined by mathematical optimization based on expected ship arrivalfrequencies. Inventories at the terminal will cover approximately sevenweeks sales.

J. Accounts Receivable and Payable

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

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

Annual Cost Unit Cost*($ million) (T*/7

Direct Costs

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

Total direct costs 43.5 4.35

Indirect Coats

Administration 1.5 0.15Sole and property taxes (Note 6) 1.9 0.19Insurance 0.6 0.06Depreciation (Note 5) 7.1 0.71Amortization (Note 5) 3.2 0.32Interest 5.7 0.57

Total indirect costs 20.0 2.00

Average Annual Operating Costs 63.5 6.35

* Detailed breakdowns in Annex 12

NOTES TO TABLES 3-8Page 2

5. Depreciation and Amortization

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

Depreciable Life(yea rs )

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

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

Total Cost over 15 Years($ million)

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

Total 16.3

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

Total Cost($ ndillor S )

Owner's advance expenditures 2.3Administration and pre-operating expenditures 15.0Engineering and project management 17.7Financial 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 longton of ore shipped, based on the minehead value. Property taxes are aboutUS Cents 1.6 per long ton.

NOTES TO TABIZS 3-8Page 3

(ii) Income taxes are computed at the current rate of 30% oftaxable income. The law allows a depletion deduction equal to 20% of theminehead val,ae of all sales during the first ten years of operations.The estimatedl depletion allowance for MBR at 10 million tons is computedin Table 4 and totals $78.1 million over ten years. This amount must beincorporated into the capital of MBR as a reserve and is not eligible fordistribution as dividends. However, the shareholders of MBR are not re-quired to take the full depletion allowance and therefore could distributeas dividends all or part of the assumed depletion reserve -- but only afterpaying a 30% income tax on the incremental amounts. Because they alsowould have to pay high taxes'on the dividends themselves, they should havesubstantial incentives to take the full depletion allowed, provided thatattractive reinvestment opportunities exist in MBR itself. It has beenassumed that they will choose to take the full depletion allowance and useit for expansion of production facilities and accelerated repayment oflong-term debt.

7. Debt Service

Debt service projections have been based on the following debtfinancing:

(i) An IBRD loan of $50 million for 15 years, including 31 yearsgrace, at 7.25% interest and 2.0% Braid-lian Government guarantee fee; withrepaymnt of principal and interest in 24 equal semi-annual installments.

(ii) A loan through five Japanese trading companies of $50 millionfor 15 years, including 2 years grace; US$30 million will come from theJapanese Eximbank, and US$20 million will come from Japanese comuercialbanks. The effective rate of interest, including Brazilian withholdingtaxes on the comuercial portion, is about 9.6%. Principal repayments willbe made in direct proportion to actual ore shipments to Japan under theore 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 Japanesesales 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, including2 years grace, at 8.0% interest, repayment to be effected in the same manneras for the other Japanese Loan. This loan is still to be negotiated.

(iv) A U.S. Eximbank loan and guarantee of commorcial loans total-ling $26.3 million, of which approximately $18.2 million will be used. Theterm will be 12½ years, including 2½ years grace, with an effective interestrate of about 7.5%.

Loans are assumed to become effective on September 30, 1971, withprincipal repayments to begin between October 1, 1973 and March 31, 1974 forthe Japanese Loans (proportional to shipments), on June 30, 1974 for theU.S. Eximbank, and on December 31, 1974 for the IBRD loan. 1)

1) These dates differ slightly from those used in the projections.

NOTES TO TABLES 3-8page 4

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

8. Existing Operations

Iron ore operations of the existing St. John D'el Rey andCAEMI properties being consolidated into MBR will oontinue to exportthrough the Port of Rio de Janeiro until at least 1980. dilethese 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 surplusesduring the Aguas Claras construction phase sufficient to cover initialoperating losses from Aguas Claras. Their projections are shown inTable 6. }Revenue estimates are based on the following salea projections:

Fiscal YearEnding National Average Projected

March 31 Exort Sales Sales Total Sales Unit Price RevenuekLllion LT) (Rfl3Won LT)(Million LT) T17($ ) ($ Million)

1971 2.0 0.3 2.3 7.78 17.91972 2.0 0.3 2.3 8.19 18.81973 2.0 0.3 2.3 9.09 20.91974 2.0 0.3 2.3 9.09 20.91975 1.8 0.4 2.2 8.77 19.31976 1.7 0.5 2.2 8. 4 5 18.61977 1.7 0.5 2.2 8.)45 18.61978 1.7 0.5 2.2 8.45 18.61979 1.7 0.5 2.2 8.)45 18.61980 1.7 0.5 2.2 8.45 18.6

It has been assumed for purposes of the projections that theseoperations will not continue beyond 1980.

9. Distribution of Earnings

Maximum dividend payout has been assumed for Aguas Claras opera-tions following maximum allowable depletion. Dividends are subject tothe following restrictions:

(i) Dividends are payable only from net accumulated earnings.

(ii) After dividenl pVm.am., aswh =vplwsa plus rewivablesand inventories from the combized M operations not be greater than oroqual to aWcounts paYables; IUsbihort-tern debt, and the olleving year' Ifull interest and anorisatim parnts 0X long-tern debt. (if1111 orantratio of 1:1).

NOTES TO TABIES 3-8

(iii) Legal reserre requirements iuat be satisfied.

Dividends from existing operations Mll be subject to the samerestrictions.

Dividends are subject to the following taxes:

(i) Distribution taxes of 5% of the deolared amounts, paid byMBR.

(ii) withholding taxes on the distributed dividends, equal to25% of the declarod amounfor foreign shareholders and 15% for Brasilianshareholders.

(iii) Penalty taxes on the amounts remitted overseas by foreignshareholders 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 thatremaining cash surpluses (depletion plus deproeiation) will be invested inplant 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 DepartmentJune 1971

TABLE 9

MBR IRON ORE PROJECT

INERNAL FINANCIAL RATE OF RETURN OF AGUAS CIARAS OPRtATIONBASE PROJOT WITH BalKS BUILDUP TO 10 MIILION TONSi PR 1WR

(In US$ millions equiva1ent)

TotalTotal ftnds Cash Flow

Fiscal Year Initial! Generated Afterending Inmestaunt Equipment from Income Income

Period Maroh 31 Cost Renewals Operationsl/ Tax Tax- _ T IT(F T

0 1971 2.3 ( 2.3)1 1972 33.6 (33.6)2 1973 74.4^ (74.43 1974 31.14Z 1.2 (30.2)4 1975 0.9 30.8 29.95 1976 36.3 36.36 1977 0.2 35.5 0.3 35.07 1978 0.7 35.5 2.0 32.88 1979 1.6 35.7 2.1 32.09 1980 0.9 36.2 2.6 32.7

10 1981 36.2 3.3 32.911 1982 0.2 36.2 3.7 32.312 1983 0.4 36.2 3.9 31.913 1984 10.1 36.3 6.o 20.214 1985 36.9 8.2 28.715 1986 0.9 36.9 8.3 27.716 1987 0.7 36.9 8.5 27.717 1988 0.2 36.9 8.7 28.018 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 Income Tax17.5% 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 inTable 5.

y Discounting to March 31, 1971.

4/ See Table 5

Industrial Projects DepartaentMay 1971

APfR MLN OtA PRNJECT

REJRN ON lWgmIMT FOR 1s1R SRAR4NOLDM ANJ bNMHILLN ODYVNENr

AT ULTlNa7E P!DIucTLiN LEVELS OF 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 140 nillion Total ltm*etL,,nt n15 illion Total ITve-tant o0 million Ie-l lIIn GovernlentNow Irvestaont Ne loestant $15 Mdllion New Inwstnent S15 ilon NKw I--teest $30 mgllion m pnt J60.5 milionF> heterr or =3 .: Rtrexttl e Kturn or dreocua Netrn iffeoti o1 etro 0 Retort, onFiasa.1 r_r DdlCrera- I,peeame L ieitrd.l' Investimnt Djidm`rZV loeoteent )lOlT 5 fI 1- Investent'etEming Maroi 31-, 12 T! sn I W NW !!n!I5"T,10 ft

1974 , - - - - - - - - - - - - - - 3.5 J . s 5.6 S:d1975 . , _ _ _ _ _ _ 9.6 9.6 19.3 15.91976 - 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 29.91978 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 55.21980 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 67.41981, 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 77.91985 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 87.61966 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 88.81987 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 B8.91988 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 98.7Total 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 8.8% 16.6S 32.95 53.7%return on totals4mtmat orr

la yomez

Av*raeeal UA n n/a 18.4% 31.7% 8.6% 15.b% 23.6$ 46.2 32.9% 53.7%retwn on ,einotsrneet rrer18 7mev.

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

Disonted return n/S /a 10.62 18.41 3.6t 9.8% 12.8d 22.31t 19.5% 28.3on nr invntsot -over 18 ysre

lIhback period on n/a n/ 10.1 yre 6.8 yrs 13.9 yrs 9.b yrs 9.6 yrs 6.3 yrs 6.1 y.e 5.1 yr.rmr in. esntrein 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 those on dividend., i.e. distribution ta (leoled on coqpay at tie ofdiatribution), .dtheolding tae. (withheld fton all aber.oldeino' dide.nd. at aource - a-e Note 5 of Table 8) *nd penalty t. (.dthheld at morure from roreign shareholders' reittancen abroad). A _use that n depletion ia taknon inmrm,ntal 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 enues fre all direot toe. levied on MB8R oai it, ehar-&older,, gt.nrate- ree on BRD loon to MR, and c..h br-efit. or 1 subsidy paynents to !SA. Ltclodv al.1 indirect taeo.

Indoltrial Projst DepartaentNV 1971 I.

TABLE 11

NBR IRON ORE PROJECT

ESTIMA7D SPLIT OF NET PROJECT BNWTS Fi 197289Y

10 millionL1 5om LTo .Cash A of c dash 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. Brazilian Government?/ 338.7 72.8 584.8 71.0

III. Total Not Cash Benefits 2465.4 100.0 823.5 100.0

(i) Total accruing to Brazil 392.4 84.3 696.2 84.5(ii) Total leaving Brazil 73.0 15.7 127.3 15.5

]6/ Net projeoct benefits (not cash benefits) are defined as the sum ofmaximum effective dividends in the hands of shareholders after alltame (inoluding those on dividends) plus all direot payments mad.to the Government over the life of the project plus cash benefitsto RFFSA. Dividends to foreign shareholders are assumed to be re-mitted overseas in toto and thus represent not dividends after pay-ment of penalty t on remittances over and above 12% of investedcapital.

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

Industrial Projects DepartmentMay 1971

MBR IROK '0RK Pi0JEI7?

HgT7 PI'RF.1IN FXOiAK3E gARNINGS FR08 AGUAS CLRAS OPERAONS - BAS PROJEOT WITH SALES BUIIOUP TO 10 MILLIOK TONS PER YEAR

':qretructi-n Average forPeriod " 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 Poriod6~' 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 30.0IBI Lon 50.0Japanese Lo.ns 57.0U.S. EX-Iu lan 18.2

155.2Capital Inlw- IIFS

IBRD Loan 8277U.S. k-lu Loan 2K.7RFFSA/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

TOTAL Dmrse 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 0.2Proope,atjig ipoas s'2 5 FM) 6.

Ciraari,g and Prejet aonAgeeent (h3.5% FBC) 7.?Owwrs' Advance kpendit- and Increases in Supplies (32 S and 62.(% F"ES respecti-:1y) 3.7Interest 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) 51.9Civil Work (16.7% FM) 3.9Buildings and ifpw,nt (60.5% EC) 7.8bigiaeritz and Spervision f9.0% FSlC) o.5Contingenies (55.7% F3C) 6.4Intezst 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 3.5Administration (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 2.1Treck 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 - - - 13.1Debt Service - RFFSA 1.6 7.1 S." 0.3 9.3 8.1 7.9 7.7 7 76 6.4 5.0 4.7 1.7 1.7 3.5 6.6Livideds: 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

TOTAL OUTFLP 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 . 19.2 19.0 358.6 ...5.31

NaT PORETON FTCRAE 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 wnd olant equipecnt - y be sprr-d .- wer .1 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- nt1aY 1971

MlR IKIN 8t5 PROXCT

M12 ORION EMCHAME 5R8R1113R3 FIAS A3UAS CLARS OPERATIONS . aB5SIO*I PROJECST aTH SAIi BUILDUP TO 15 WILL;l TOMl PER YEAR(US, million eq4vialntl

Constroctioo Ars-age for

Period 0 P E Ri A T I 0 S OperatingFl.a year eod. tloch 31, Per id ; 1 1976 1977 197b I 0 11 1e2 3 7 195 1957 198 9 Pirion

Prodnetim late 'Million LMag Tons) 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 30.0imm Lose ~~~~~~~~~~~~~~~~~~~~~50.0

J_nee loon 57.0U.S. &-r, Loan ad

155.2

Casdal Infoi - 1113

IBM ri4f 46.0U.S. ax-i loan 26,7Otbtr 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 1.1Preperating I9me (M2 1 FdC) 6.bAwheri-3 and Ppo3i Hanagemet (43.5% FC) 7.7Ome Ad.oe eNd Increuse in Supplies (32 % ad 62.5% PEC respectiely) 3 7Inteat 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) 3.9Dldirge -d Iqip-nt (60.5% FSC) 7.8hgsmarisg and Superwiston (9.0% FEC) 0.5Conting cie (55.7% PBC) 6.4rnteest during Ce.tructin 43

Sub-Total 79.5

Oeratirn kvenditurse - MR

Direct Coats (2S FE - il am n, plant and trerinal maintennce nd supplies) - 0. 9 1/ 2.92/ 3.1 !.3 1*.3 5.b 5.b 5A.b 5.b 5. 5.4. 5.. 5. 5.4 5.4 5.4 b.9

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 btR Ser ice -MEE- 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 _ 1 3.1

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 7.2Ditied,Sl.5, Sn'bodo- - - 2.5 2.9 5.3 5. 55 58 61 63 7. 76 1.6 .7 7.1 8. 7.2Dividends: -to r foreign 3ldar 2 0 1.8 2.7 2.7 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 1 41.2 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 FOREIGN ERCHURO 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 yalForeign exchange cmto of inventwcy buildup (t1.3 millimonnea"r 7 1971-7r)w ainuded in irect cets.

Industrial Project. DepartmeetMay 1971

ANNEX 1-1

MBR IRON ORE PROJECTMINERACOES BRASILEIRAS REUNIDAS S.A.

OWNERSHIP AND CONTROL

CAEMI JAPANESE UNIVERSE HANNA OTHER(ANTUNES STADENG TANKSHIPS, MINING NON-

GROUP) ~~~~~~COMPANIES IN.CMAY SHAREHOLDERS

61% 20% 19% 52% 48%

,I i . .......

ST. JOHN

EBM D'EL REYMININGCOMPANY

51%s 49%

June 1971 IBRD-5839(R)

ANNEX 1-1

MBR IRON ORE PROJECTMINERACOES BRASILEIRAS REUNIDAS S.A.

OWNERSHIP AND CONTROL

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

61% 20% 19% 52% 48%

ST. JOHN

EBM D'EL REYMININGCOMPANY

5t % 49%

MBR

June 1971 IBRD-5839(R)

ANNEX 1-1

MBR IRON ORE PROJECTMINERACOES BRASILEIRAS REUNIDAS S.A.

OWNERSHIP AND CONTROL

CAEMI JAPANESE UNIVERSE HANNA OTHER(ANTUNESSTEEL & TNSISMNNGNON-

GANTUNE) TRADING TANC.HICOMI ANIN BRAZI LIANGROUP) N i 5COMPANIES INC I COMPANY SHAREHOLDERS

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

... .. . ......

619% 20% 1 9% 52% 48%

ST. JOHN

EBM D'EL REYMININGCOMPANY

51X% 49%

MBR

June 19711 June 1971 18~~~~~~~~~~~~~~~~~IRD-5839(R)

ANNEX 1-2

MBR IRON ORE PROJECT

INDUSTRIA E COMERCIO DE MINERIOS S.A. - ICOMI

FINANCIAL INDICATORS1)

Fiscal Year ending March 31, 1969 1970 1971

($ million equivalent)

Gross Operating Revenues 24.7 25.5 34.7Net & Income 8.2 9.4 13.2Cash Dividends - 1.8 2.9Net Working Capital 0.7 0.3 4.0Investments in Subsidiaries &Associated Companies 47.1 51.3 52.3

Net Fixed Assets 5.1 6.1 15.8Total 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 ntJune 1971

ANINEX 1-3

MBR IRON ORE PROJECT

HANNA NINING CCMPANYFINANCIAL 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 125Net Income B 10.1 16.5 28.1 178Cash Flow - 13.7 21.6 35.3 158Net W,brking Capital 24.7 51.9 74.1 200Total Shareholders Equity 96.3 147.3 226.2 135Cash Dividends 2.3 4.3 11.4 396

Long-Term Debt/Equity Ratio 0100 26:74 1288 -

1/ Excludes dividend income from subsidiaries.

2/ Consolidated.

3/ Net earnings plus depreciation and depletion.

Industrial Projects DepartmentMay 1971

ANNEX 2-1

MBR IRON OM PROJECT - MARKETING !NIXX

THE OUTLOOK FOR 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 ironore market has certain distinct features, whiah are relevsat in assessingits future outlook. Moreover, the patterns of world production and tradehave changed significantly over the last two deoades.

1.02 Until the early fifties, iron ore was produced primarily by themajor steel producing countries. In 1950, for ecample, developed marketecononD countries, whioh accounted for four-fifths of the world crude steeloutput 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 worldcrude steel and the world iron ore output, and developing countries, ut..licaccounted for about 2 percent of global crude steel production, producedabout 8 percent of the world iron ore output. By 1968, however, fully one-quarter of the world iron ore supply came from developing countries, roughly80 percent of it being produced for export. Mirroring this structural shiftin world production, plus the emergence of Australia as a majo' produo3r fAiexporter of iron ore in the mid-sixties, the iron ore self-sufficiency ratiosof the major steel-consuming developed market econony countries rose asfollows between 1960 and 1968:

Proportion ofConsumption Imported

(Percent)

1960 1968

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

1.03 While iron ore imports into developed market economy countriesfrom developing countries expanded by roughly 50 percent in the 1960-68period, each of the above three principal regions have different importpatterns, geographioally and commercially, i.e. in terms of the conmon typeof transaction. The United States obtains roughly 60 percent of its importrequirements from Canada 20-25 peroent from Venezuela, and most of theremainder (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 theU.S.S.R. and Eastern Europe but excludes Asian-centrally plannedcountries, iron and steel statistios for which are scant.

A'TRESX 2 oa

imports from Australin are negligible. The mnajor 8uropean importers 1 / pur-chase abouA ',i percent of their imported ore within the region (from themiijor twe -urope n oroducers, namely, France and Sweden), 6-7 percent of

`- "Otn ianada, and the blulk of the remainder (38-39 percent) from develop-ing 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 (.Japan produies only negligibleouantitie5 domesti.cal ly), however, come from Austral.ii, 12 peYert from2mnada, the U.s., and Sout,h Africa, and the rest from a large number ofdeveloping countri-es. The major sluppliers to Japan among this group areTndia2 Peru, Chile, Maloysia and Brazil in that order.

.o4i (On1y a portion of internzitional trade in iron ore. is transacted-rj a "free Piarket" in so far as that term applies to a eystam of eihangesbetween -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) tosteel plants under coommon ownership. In addition, a large and growing-pro-portion of iron ore trade is transacted under long4ven -contracts of up to20 years duration. Generally, the principal benefits of sueh arrangementsare assuring a market for all or-part of the supplir s output, on the-onehand, and a steady source of o3e for the steel imaker, on, the other, and in-sulating prices against short-term fluctuat-ions. Aooordingi oestitates bythe UICITAD Secretariat, roughly 95 percent :f U.$. iron ore t orts come:f rom 1eantive mines" abroad, mostly in Canada and Venezuela._/ Approximately

70 percent o;1 11.1. and -LC imports are obtained in the "free market." Qfver9' percent oi otapan's requirements, however, a-re imr.tortod under long-tern-tcontracts.3/ (Iverall, only about a third of :world trade in iron ore istransacted in aocordanee,with traditional trade prac tioes in a "free market.

1/ Austri3, Belgiwai-Imxembourg, the Fadedal "pubhlJ.c of Gvvany, theNetherlands and United Kingdom, in this oomputatiou.

T D, Problems oP the Iron Ore Ngrkist,D/B/f*l/ron /T

A iearnlr ) C pereent of Fastern E*ropeAs ir0on ove impofts too we obtainedundar it:tergoqvrzrental a&"angewttse, wh*oh are analogous to long-termorvntr:-e:-,s, maostly f-roii the Soviet Unien.

e.f 'Tne .c t, th L- such a large proportion of world trade is p-r lp-deter-min3d' Yloi.s uot nmean that the ircn ore market should be Tegarded asuzC)ori.petit,iv 4. The dqwnward rorlce trand. over the last decadq,... wouldi;> 2.nex.I r ule on this asaumption. 14hare iie, -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 orn OMModities i'i light of 1ecent Oeve r) -

en t2a: oTL o eThM / pl,199p._3

AM irEX 2-1Page3

2. Past Trends and Issues: An Overview

2.01 Though it faces sevreral problems, which are noted later, iron oreis no-t a "problem commodity" in the common sense of the term, i.e. as appliedto some primary commodities. *World requirements and import demand have beenexpanding quite rapidly; it faces no serious threat from substitutes; and,more importantly, its growth potential is not stifled by an excessively lowincome elasticity of demand. NPr is it a commodityr in conflict with thereqjuirements of technologicnl. progress. Econom.c developiment and i.ron andsteel have moved and are likely to continue to move together. Furthermoreand renv3lrkably, during the last decade, iron ore has experienced two favor-able and interrelated trends not shared by many primary commodities- (a)world trade h.as growni faster than world consumption, and (b) the share ofless developed countries (IDC's) in world exports has expanded drawaticallygas illustrated below:

Volume (iron content) Growth i?atesi.,gn- .1yi to V5-MT-fo-=

1950 1957 1968 1966-68 1966-68TR-licn-NeTric tons) praeWT

1V-orld consumption 115.2 193.7 326.7 6.3 5.4t4orld exports 21.8 64.1 138.0 11.4 8.0.xports of LDC's 6.2 27.8 65.6 14.8 9.0

Ratios (percent)

World exports to world 19 33 42consumption

IDC exports to world exports 28 43 48

2.02 Changes in the relationships indicated by the above ratios havebeen brought about by several factors including the limitations of domesticiron ore supplies and deterioration in ore quality in some developed coun-tries, the discovery and exploitation of high iron-content reserves in manydeveloping countries, and sharp reductions in ocean transportation costsresultingf Crom the introduction of increasingly larger, special ore carriers,which broadened the sphere of viable, or economic imports beyond those fromtraditional suppliers. As noted earlier, these led to the accentuation of-the import dependence in ore, of steel-consuming developed market economycountries as a group. The notable beneficiaries of this trend wmong deve-loping countries hlve been Brazil, Chile, India, Liberia and Mauritania,wiose combined exports of iron ore (in iron content) trebled between 1957aind 1968.

;n .03lost striking, however, and of immense interest to the world iron.tnd steel community, have been the phenomennal and unabett,ed growth of steelproduct-ion, and therefore iron ore consumption, in Jap=n and the emergenceo.l' Australia in the aecond half of the sixties as a iwior force, as supplier,in the world iron ore market. Japan's orude steel output has expanded at

ANNEX 2-1

a more or loss steady rate of nearly 15 per3ent per annum since 1960.Australli pushed its exports of iron ore from negligible quantities in1965 to 11 mil.ion tons (Fe content), or over 7 percent of world exportsin 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 thisexchun-e in -the con text of the present annex is enhanced by the fact thatJapan obtains most of its ore in the "free market, if largely from deve.opingcountrles.

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 UNCTAD in January 1970. In fact,,,he agenda Lor this meeting, in which the Bank was representad, was devotedwholly "to identify the problems faced by the commodity" under the follow-ing headings: (a) investments, (b) ocean freight), (c) prices. The prin-cipal elements of the concern expressed on these subjects at the meeting,-ristly by 2?Tport,=nr ooiuntries, particularly the IDC's, can be summarizodas follows:

2.05 Investments. Recent structural changes in the world iron oresituation,Tsuch as E6e significant expansion of the volume of world trade,revolutionary developments in ocean transportation and ore handling, andnew techniques in iron ore processing, iron-making and steel-mking neces-sitate very heavy investments by the countries concerned, in addition to thenormal invsstments needed "in order to expand markets to secure new ousto-mers and to offset the deterioration in existing mine plants." Investrmntsshould 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 prac-tice equitabl7y from cost-reducing advances in maritzim transport; "theaenerfit3 have accrued almost entirely to iwporters,' s-nc most of theexport trade is conducted on an f.o.b. basl. Mov'eover, most, of the ship-ping space availnble for the transport of iron ore is under the oontrcl ofiLnporters.

-7 Irices. Average prices, as measured by export unit values, hLveI ,T s d downward trend since 1957, steeper for exports from deve-

Loping countries than for those from developed countries., reduaing profitsWid 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 doanot rerist .incussing or balanc.ing the diffring vie. may be noted,

1/ l'lor a swnmary of the princ.pal argwmnts andL counter-arg=vwts prose'nted,c;ee U;ICTAP ! t Of the Ad Hog. Deti on n Cre TD/B/C.l/Iron Ore/l

i?ebruary lcz 1970.

ANNLC 2-1Hage >

however, that some of the above lproblemr'" have lost their urgency in recentmonths. Prices, for example, have moved up by about 10 percent since early1970, following the steel boom associated with sharp demand growth ia Japan,revival of demand in Nestern Europe and the holding out of conswption inthe U. 3 . in 1969 despite the slow-down in the econonvr. Further conmnts onprice 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 muchfront a particularly Ien concern in anr one of the above problems or fromfears of a chronic shortage or surplus in the long-run: it is generallyrecognized that demand mill continue to grow, though probably at a slowerrate than in the past, and that exploitable world reserves are ample.itather, the concern seems to be prompted by the following two general con-siderationis. one, the recent and continuing rapid rate of change - in con-sumption patterns, trade patterns, transportation, technology, etc. - makesforw.ard planning highly complex; there tre innumerable factors, some highlytechnical, 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, orreviewing marketing strategy. In short, the countries concerned feel notthreatened, but insecure. At the heart of the concern is al.so the issue of.sharing equitably between importers and exporters or aimong exporters thecosts and rewards of expanded output and trade, progress in maritima trans-port, 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 10-15 years ahead, with confidence for several reasons. A major(lifficulty arises from the very close and firm interrelation over time bet-ween production of steel (the principal iron ore constuning industry) andeconomic growth as measured, for exanaple, by growth in GDP: rather thanfacilitating the task of projection, this renders it more complex, for itrequires reliable forecasts of economic growth for the principal steel-consuming regions or countries. A long-term steel forecast tends to be asgood 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, ashhi ra.jnrity of the final products mide from iron and steel. are dur,a.ble0oo0(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 mneanuresol. U11S itij Vied demaM(1 !'or steel 'rhus, the role oa' the "steel ^3toc'cr?

1l, T'hle J 'ev,_ Ind. c1i'upoi.i ,i.on or .y;o o ' the sicel 3 tck has n. bWaring onthe nupply ot scrr) and, there fore, on the dem,rnd for pig-i.rorn n3so.

kllhr 24~X2

plus the ahility of otrong governmnts to inFluenco steel oppsu7ption throughinvestblt decisions imply that conoepto suoh as per oapita consunption,minirnLi requirements, s:aturation levels ete, - koy meiauures in po jooti.;s.gle:,.. 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 oreco11siupt 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 majorcou.=itrics, but this requixes vast resour¢eti. Sach exeraises au carriedout, 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 -tobuild on, and nriroOze the benefits of, this datailed wor}k whet is donebelow is, first, to arrivw ind.pndently at ta rougl tentative judCint ofthe i'uture trend i.n world demiud for onrde. stol. seaondl, to et Stato furcproi.Vct,in. ill tTi.pn, the largeot and miost dyn,=c iron ore xiport m;arket;:

.J-aly, bt-. D1>re darivi at a fia global eoatiz-to, to examine the iimLied.re3idual production for l-he world, axeluding Japan, in Dlght of Iinom stoelproduck ion plans iaid possibilities in other xegions, Attent,ion i; given Va 30to tie impl-ications of recent Japanese long-tor% oontraots.

1;. Dema;lnd Lor Steel

4.o. 'ilorlcd crucde steel production, whioh at the glo4 .10 and overInng periods coin be consiadered to be equivalent to consitption, expanded ata rate of :.6 nercent per annum betwmn 1950 and 1969p, aWat4 to an aveageannual inF rease of 5,7 persont in the index of world induat%41n. production

-Ps 10) 'rle growth ritea in atool prqcotion and the W.I,P, indexc inthe nore recent, 1959-69 period wre 6,2 po'cemt and 6,i p*Utlt, resptAstively. 'Takin- the i.I.P. index aa a p3 fow 40o gcrvea, #wwm2. eati-rttes of tile inooume el"astioity of wotid doan4 for cotvde sH41 wV 0 capputed,using both log-log and semi-1og eqations and obserrationn f;v tho p_Viods19,o-5, 1<5M.J-68 4nd 1929-69. The oeffieentq of determination (?2)orbt. Ioe r,l fed fro;1 ,966 to .289 (highest for thJ 1952)-69 peiodj Dog-,.og,nd loin?st Lor the 1955-68 perLod, sni4olo), and the *lastia@.y 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.:eL conaideration 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 tpv0ojectableno't on onr O;n .t.tci ti a.l, -1t J10e AUher, Qwnntitba4ve or qvitativ. rrttnn 3.

*kor rozrvle , u-Anu1o)-_Afl.Y a strong came ecf be mzu3e, 'i prior for worklxg--11, . dec3iiiri o1 elnstAcityo whih imUlies that sateae ¶tion Cow wi.th

indtistri-I nroduv.nirn, but with a gSro-ing lag, JAh somw to havw l, theexpAreience of the United "tat ever the laat 50 eaern, 1J4.e $:ognbi17that 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, _-1Page 7

in the pn.st, however, in view o:f thc rela-tive shonir-.ess o,& the er--odcons'dere-d here, the huge reservoir of deiwmd in developing countries, tlesurpr-isin-' dcyn:-uinsr 0- Tpanese demand, and the noten'i;-0l nced -Cor sockO-0IPzve3tnet.2 (housing, schools, etc.) even in the mora cleveJorneO.d coLuntries,t,cere do -not appear to be sufficient grounds for adhering rigidly to theconcept cf declinirnE elasticity. On the basis o,Z the constant elasticitiesprevf.lint- in the past 10-20 years and projections for ihe ;,.I.P. indexbs.;ed 0In recent GD)P projections ['or OECD countries by the SCT) Secretariv.t,estijmIaLors Or future world crude steel nroduction work out to 727-70 m,l3_lionmetric tons around 1975 aLnd 938-1,056 million tons .rounld 1)80. To guardagainst .' 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 bcaboutPercent. 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 pro-jections as follows. A comprehensive study of the tworld iron ore nv.rkutnrocpred by the IECE in 1.968 projected world crude steel. production in 1980at eJO million tons, i.e. lower than the esti:mrutes above.1/ It has beenirecognized by the ECS and the majority of experts since then, howiever, thatthe specific forecast -or Japan therein had, been grossly underestimated, the1900 estimate having been exceeded already in 1960. Another Uorecast placesworld 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 forecasta level of one billion tons for world crude steel production around 1980.Thus, our tentative projections are not significantly out of line with theseestir.!-tes.

14 .°l focusing on 0:p.panI, as .a result of the nhernomenaJ growth in hersteel industry, with output having quadrupled since 1260, this country hasbecome 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 productionin 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, hle Worl.d riarket Cor Iron Ore, 1968.

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

t , 1~"T P:tz.ioduces oni.: a mu)ll tion tons of iron ore, In grosos weight, alit,t,lc over one ncrcent c)f its requirerents. Production has beendeclining 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 ort',a iL world iron ore iriports over the same 8-year period.

4,0j The reasons for this remarkable experience in steel pr.oduction andrelated areas are varied and not all of them are linked to -the rapid groaw-ho0 the econony. Special contributing factors have been (a) the partlicularattention given to the location of new steel plants - in coastal areas ornear industrial complexes - to reduce freight costs; (b) extensive plantand equipment investments, with low construction costs; (c) economies ofscale through the construction of 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 indus-

trial 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 supp-lies of iron ore through long-term contracts.

hx.06 Projecting into the future, it is often held that the growth ofJapanese steel output is bound to slow down considerably in the years ahead.This is based on one or more of the follJowing argmients: (i) the economycannot continue to grow at very high rates indefinitely; (ii ) the elasticityof domestic demnd for steel is likely to be reduced as Japan approachets orreaches the U0 ". level of per capita consumption, (iii). bottlenecks willdevelop - in labor availability, coal supplies, etc.; (i3rV) steel exportsare unlikel,y to rise as rapidly as in the past.

4.. 07 IJhile these do indeed point to deceleration in growth rates inthe ;.ron and stee2 industry, they need not lead to too pessimistic expecta-tions. A priori, the strongest one amaong the above arguwents is the oneconcern3ng futuEre steel exports, in view of the growing restrictive attitudes.Coward imports on the part of the U.S.,, which already has a voluntary export-restraint agreemnt with Japan and severaJ Western L uropean 71Tpliers. 4ithre,rard to the other argumnts, it may be noted that the lowest grawth projec-

tivyl :r ~r apulls CrT)P over 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 have1 znenso hwelklog in roaids, housing., zndi othor pUiflic investment.!/ Con-sii irizovements in labor productivity anid economies in coke uise should

C se t,he nr'h<lo0m or Inlhor or coal shortage.

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 irn Franoe, 5.7 tons in the Federal Republic of Germanyand 9.0 tons in the U.S. It is generally acknlowledged that a country'sdemand t'or steel rises rapidly until the level of the steel stockreaches 5 tons per capita. (The Daiwa Invest=nt ,ionthly, TolWo,'lovember ]?1969, p.8).

AUnTNX 2-1page 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, i4hilethe elasticity nriy be reduced over the next 5-10 years, it is unlikely tobe lower than oree. As to the future level of GMP, exercises by private orpublic research units in Japan project average growth rates of 10.6-12.6percent per annum, while the OECD Secretariat has projected an annual increaseof 10 percent for the seventies., Accepting the lowest rate, 10 percent, forGDP growth and an income elasticity of demand of roughly one, Japan's domes-tic crude steel requirements hn 1980 work out to 170-175 million tons, com-pared to 61 mill ion in 1969.1' Assuding that steel exports, which doubledini the ]ast five years, grow at a rate somewhat lower than that of' worldsteel 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 worlddemand), Japanese steel exports are estimated to rise to about 25 milliontons by 1980. Thus, crude steel production may be in the neighborhiood of200 million tons around 1980, compared to an estimated level of 90-95 milliontons in 1970.

1X.09 nThere is greater uncertainty concerning Japants crude steel produc-tion level around 1975, because of uncertainties regarding the tath of growthor cyclical developments in the economry over the next ten years.-ecentforecasts (as of the middle of 1970) by the Japanese steel industry placesteel production in 1975 at around 160 million tons, and huge investmentsto reach this capacity level are reported. floreover, this figure impliesiron ore requirements (in gross weight) of 170-180 million tons. Accordingto one source, "for arrivals from 1973-74 fiscal year, Japanese integratedproducers have already negotiated long-term contracts for some 132 milliontons and with options for an additional 5j4 nillion 2ons, this wi-l. raise itspotential imports to a total of 186 million tons."2/ Tfhus, there is consi-deratble justification, apriori, to project a steel production level of atleastl350 mLillion tons ini1975,implying a faster expansion in the first halfof the decade than in the 1975-80 period. fIore recent reports, however, in-dicate that the Japanese steel industry has revised its production forecastfor 1975 downward, to 130 million tons. Though the finality of, or thereasons for, this revision are not entirely clezar, we haeve given it someweight by adopting r.figure between the two estimates, namely, 140 milliontons.

4.io Tlle residlu:0.- between the projections for worl) . steel production.ind I:apancse steel production arrived at above works out to ,'>40-600 millionho)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 nettrade) and include the steel content of indirect steel exports, such'Ls machinery, motor vehicles, ships, etc No attempt could be made toex-mmine the outlook For these separately.

2/ I.eta-l FBulletin, January 30, 1970.

ANNEX 2_1page 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 individualcountries concerned, which cannot be improved upon easily. The range ofthese 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 aneed 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. Projectingthis ratio systenatically, however, has become an extremely comp3ex task asa 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,'IS staff, recognizing the crucial importance of the changeable relation-ship between crude steel production and pig-iron output in their study ofthe world iron ore market, are now engaged in a comprehensive study of thescrap market. lo more than an arbitrary assumption on this relationshipcan be made here, The average arude steel/pig-iron ratio for the world isprojected at 72 percent, not significantly different than the average forthe last l• years, or at the lower level of the ECE forecast of 7'?-75 per-cent, Assuming, further, a ratio of iron ore (in terms of iron content) topig.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 grosstonnage, since the iron content of world ore rtroduction has been changing;but it is quite likely that the ratio will rise in the years ahea4d as newlyexploited reserves in Brazil, Australia, etc., have a high iron rwtio..4orld iron ore requirements in gross weight may be in the neighborhood ofo(Xl millior tons around 1975 and over one billion tons around 1980, cmpared

1;o ;-tout 64C million in 1968.

T'urni ig,g J;O import demand, the bulk of Japanese requirements are1 >5to he m-e J throug ports, as Japan produces only negligibhle quanti -

ties or iron ore, which are not likely to expand. For the other rmajorindus.T-i LJ atreus, nanely, the U.S., the U.K., and the european Coal andSteel Gonmunilty, we have adopted E;EG Comnission 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 thanconsumption. Assuming, in addition, more or less arbitrarily, that importsby developing oountries would grow on the average by 1.5-2 million tons avear, and Eastern E;uropean imports to expand by h0-50 percent in the next1' years, world iron ore import requirements (in iron content) are projec-ted at 250-J3rs milli-on tons in 198n, oompared to about 150 million in 1968.

ANNWEX 2-1Page 11

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

Actual Projected Growth RatesVMS 1975 19Y 3-968-h0 1968-75

(mil ion tons) (percent)

a<orld

Crude steel output 512 700-750 400-1,000 .-8-5.7 4.6-5.6Iron 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 5.7-7.1Iron ore imports n.a. (375-41.0 (425- 500)

(gross)

.Japan

Crude steel output 67 140 200 9.5 12.2Iron 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.t because of the difficulty of projec-ting the weighted average iron content of future world ore production, thefigures referring to gross weight are very rough estimates and are thereforeshown in p-arentheses. In fact, they are almost certain to have an upward-ias, since the average metal content of irozi ore produced is expecbed to

rise, i.e. the volume of ore yielding a given amount of iron is lilcely todecline. Furthermore, as the estimates are shown in round figures, theratios between crude steel. output and iron ore requirements and betweengross weight and iron content are somewhat distorted. Finally, the yearlO6A, rather than 1969, is shown for comparison, as figures for the latterire not av-3iJ ible for each item. As all series seem t,o have expandedrapidly, faster than the trend in 1969, had it been possible to .ake thisyear 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 nard1-h- rprice outlook jointly, in view of the close interrolation betwnen pricestad :ir.nveaIrkrtnt, Invenstaent 'irid nutput,, and .vtilahili lies - actual or

1/ IOr ex:nple, in 1[969 world cruda steel production andi Japanese crudes-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.liontons, by as much as 16 percent in 1970.

Af l 'kX 24-

ex7)ect,ed - -rnd prices. Unlike with other commodities, where an aggyregateapp 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 olwhii V ;,t,

tom s , the possibility that a Ihi;i1 Coli tjt rruiy (i flc vr anc¶ bo] 'I ocinjg Tirge reserves and becomne a major force in the market; the AMis3tral iiane rperience j :i case in point. Such a comprehensive analysis could not bemade at this stuige for the purpose of this exercise. The supply rf; tu¶tionis tierefore discussed in broad terms.

6. 82 iorld iron ore res;erves are undoubtedly ;npl.e r and constitute noku30 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-Iiitioons than those existing."

2/ Nlot included in the 195l survey.

6.03 The iCE study published in 1968 projected, on the baais of its own;nalysis and estimates submitted by countries, a level of world iron oreproduction (in i.ron content) of 60-585 million tons in 1980, whdch fallssiort of our dejuand projection by about 100 million tons. However, it isnow 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 connitmentsiawder long-term contracts to Japan alone for 1975, wnount to 30-35 milJ.ion

-onns (Yie cont.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

ANNEX 2-1Page 13

of certain new projects in the last 2-3 years have not materializedfully. A major Indian project was started at a smaller scale thanplanned. Another major project in Australia, one of the biggest in theworld, has fallen behind schedule by more than two years. The reasonsfor this are numerous and include administrative delays, problems infinancing, 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 entrepreneursto seek secure partners or markets in advance. The role of price in thisconnection, if any is not clear. It cannot be concluded, however, thatprices have been insufficiently attractive, since the last few yearshave seen too, the simultaneous expansion of production capacity in anumber of countries.

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

(a) The trend in production and handling costs. There is nodoubt that the sharp decline in prices, in both actual and real terms,experienced in the last 10-12 years was induced or reflects partlysignificant reductions in costs. It is generally acknowledged that whilefurther reductions are possible, these are not likely to be as sharp asthose in the past, particularly for the world as a whole, cost-reducingnew technology having already spread more or less evenly among majorproducing countries. A key imponderable, is the effect of recent or newinvestment costs and of future interest rates on total costs.

(b) The trend in ocean transportation costs. Despite the sharpdecline in freight rates witnessed in recent years, there appears to befurther room for cost reductions in ocean transportation. Expansion ofvessel size and economies associated with efficient routing are continuingunabetted. Furthermore, new revolutionary techniques are in the drawingboard or on trial. The benefits of such developments may be shared moreequitably between importere and exporters than in the past. Some exporters,such as Brazil, are slowly building up their own fleets. In addition, somerecent long-term contracts stipulate the price for some quantities on anf.o.b. basis, and that of other quantities on a c & f basis, implying con-cern with the distribution of further economies in transport costs.

(c) The organization of the market and sales. A key issue isthe level of long-term Japanese-Australian contracts and their impact onthe market. It can be predicted that by 1975, Australia may supply orundertake to supply 40, perhaps up to 50, percent of Japan's iron orerequirements. As this level is approached, other exporting countries,anxious to secure markets, may accept lower prices. On the other hand,

A2hEJ 2-1Page 5 4

Aistralia and Japan may beomae progressively concerned with theirmitual inter-dependence in iron ore and, therefore, more interestedin tradng with other countries or in the "free market." Last butnot least, Western uropean mills, already ooncerned with Japan'sapetite for ore, may, and indeed are quite likel2y to, enter intolong.term purchase contracts. Among reoent developmenta indioativeof this possible trend are two recent medium-term contracts betweenthe Federal Republic of Germany and Greece with Australia, and alarge long-term contract between Rumania and India.

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

Economics DepartmentFebruary 1971

ANNEX 2-2

MBR IRON ORE PROJECT

BRAZILIAN IRON ORE PRODUCTION AND 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 Iatinoamrioanade Sidesragia, No. 125, September1970.

U.S. Department of the Interior -Minerals Yearbooks 1961, 1962 and1965 (for the first thxe exportstatistics).

Industrial Pro jects DepartmentJune 1971

ANNEX 2-3

MBR IRON ORE PROJECT

TRENDS IN JAPANESE IRON ORE SUPPLIES

Percentage ofTotal Iran Ore Purchases

Percentage of Contracted underTotal 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

North America 4.5 4.9

Others 9.8 2.0

Source: Iron Ore Import 1970, TEX Report.

1/ Note: Increasing dependence is being placed on Australianand South American sources. Brazil accounts for 70%of the South American increase, with MBR and CVRDaccounting for 40% and 60% respectively of theBrazilian increase.

Industrial Projects DepartmentJune 1971

ANNEX 3

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 thevicinity of Belo Horizonte in the State of Minas Gerais. They cover anarea of 45 square kilometers within the Quadrilatero Ferrifero. The com-pany's properties contain reserves estimated at 1,612 million tons of highgrade iron ore distributed in 36 deposits; about 46 percent of the reserveshave been proved and indicated by 12.7 km. of tunneling, 15.2 km. of drill-ing and pitting and the remainder inferred from geologic mapping.

1.02 Aguas Claras is the largest and highest grade deposit owned bythe company and will be the center of initial mining activities. It islocated some 10 km. southeast of Belo Horizonte. The orebody containsover 375 million tons of minable open pit hematite ore with a dry grade of68.0 percent iron, of which more than 250 million tons are proven. Thiswas determined by 3.8 km. of tunneling, 5.9 km. of drilling and 0.4 km. ofpitting.

Geology

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

1.04 Most of the exposed portions of the orebody are capped by a mate-rial locally known as canga, which is a ferruginous conglomerate composed ofrubble derived mechanically from the iron formation firmly cemented togetherinto 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 materialfor the rail loop.

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

L.07 The ore mineral is predominantly hematite, while gangue consistsmainly of quartz and clay minerals. Hematite is both granular and speculari-tic and occurs in compact, platey and powdery varieties. It is commonlyfine-to-medium grained; in general, the finer the grain size, the harderthe ore.

ANVNEX 3Pa-ge 2

;xploration

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

To date Aguas Claras orebody has been mapped in detail and testedmainly on cross-sections 100 meters apart with 50 drill holes, 31 adits, 4d-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-meterintervals for chemical and structure testirxg. Sludge and core from drillhclas were sampled and chemically analyzed generally in 3-meter intervals.All told 4,174 samples were collected and 37,177 analyses, specifically foriron, phosphorus and silica content but also in some instances for otherchemical constituents, performed. Check analyses were carried out by inde-pendent laboratories in the United States which confirmed those performedin Brazil.

1 ].0 The chemical analysis program showed that the iron content of theore varied narrowly between 67.2 and 68.2 percent with a weighted average of68.0 percent. The phosphorus content averaged 0.051 percent, silica 0.52percent and alumina 0.92 percent with only minor variations between the hardand soft ore types.

1.11 Concurrently and continuing to date, a substantial field and labo-ratory investigation has been carried out on the structure and physicalcharacteristics of the ore to determine what size products will be producedby the different, ore types found in the deposit. On the basis of these teststhe proportions of the three types of ore which will be sold were determinedticr ooltows:

Coarse ore - minus 2 inch plus 1/2 inch 15 percentFellet ore - minus 1 inch plus 1/4 inch 23 per-centSinter feed - minus 1/4 inch and containing not

more than 20 percent minus 100mesh material 62 percent

Total 1(X) percent

1.12 The total product is expected to amount to about 83 percent ofthe ore mined and the balance will be minus 100 mesh fines that will bestored in fines ponds. MER is actively investigating the suitabilityof this fine ore for pelletizing.

Mu*SX 3Page 3

Open Pit Reserves

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

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

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

lining dilution Norinal

Structure After passing through 8 inch crusher

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

1.14 MAeasured ore has been projected up to 50 meters on strike and downdin rrom an ore intersection in a tunnel or drill hole. The projected dis-tance is not over 25 meters when measuring ore blocks on end-sections, closeto faults or where isolated drill holes are involved. Indicated ore is orelying within the projected ore zone which extends beyond the limits of themneasured ore for a .urther distance of up to 50 meters, as determined bygeological evidence. Inferred ore is ore based on geological projectionsor judgment and includes the ore lying below the level or beyond the hori-zontal limit of the indicated ore.

1.15 On this basis the reserve of measured ore is 152 million tons or40.2 percent of the potential minable reserves, which are estimated to be378.4 million tons down to a pit level of 8;0 meters. Of the measured ore77.8 million tons, or 51.3 percent, was proved by tunneling and 74.0 milliontons, or 48.7 percent, by drilling. These tonnages correspond to 20.6 per-cent and 19.6 percent of the potential minable reserves.

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

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 23.5r(1c;WT! hard 65,030 17.2 9.3 5.2 2.7 45.2 22.0 32.8U'[ediur sort 4G,2l0 12.2 i4.7 4.8 2.7 52.4 2h.r, 23.13ort or granular 235,288 62.2 12.7 28.4 21.1 35.b. 27.4 37.2Ftlat 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

AVNEX 3Pa.ge J4

rThe stripping ratio, based on volumetric c.iJ.culation, i.s 0.18cubic 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)erdand the proposed equipment comprises standard components. The processingp'.nt is designed to produce blast furnace ore in two size ranges, minus 2inch plus 1 inch and minus 1 inch plus a inch and a sinter fines productt -& is essentially minus V inch plus 100 mesh. Consideration is also beingven to the utilization of the minus 100 mesh fraction as a feed for pel]e-

tiizing operations.

Previous Investigations

2*02 0O1 the basts of a classification test program on a large samp.eof Aguas Claras fines crried cut at Hanna's Hibbing Research Labotatoryjlinnesota, in 1965 it was determined that a suitable sinter fines productcontaininfg less than 20 percent minus 100 mesh could be produced utilizinga sT)iral classitier.

2.Oj In 1969 samples of unwashed and washed minus '- inch Aguas Glarasfines were sent to a number of JaiDanese steel mills and one large U,.3. steelcompany for s3inter investigations, These tests showed that classifiedAguas 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'esent inthe Aguas Claras deposit to the classification process a pilot screening andc:i ssification nlart was constructed for this purpose at the nearby Ii.tuda.n.ina. ()le of the miain features of the test program now under way is findinga use efor the riiLinus 100 mesh spiral classifier overfl3ow fraction as a pelletfoed material * This material which amounts to 17 percent of the crude feedis currently regarded as tailings. Test results obtained to date indicatetlat sinpJ.e desliming in a cyclone classification circuit reduces the aluminaand 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.r Pig :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. Design and JIining Qperations

.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.nirig opera-Jn,s wiill ;)e simnil:ir to thoso used in r1os;t open pits Lhroughouh the world:-mndi wacto will. li drill-ed a.nd blastod and loaded by clectric shovels into

.rc:; .i.'or haul tge Lo the plant or waste dumps.

AMT1rbX 3Page

3.02 As ore mining proceeds) the overlying wiaste Will concurrently bereimoved. 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:e d as waste and will be trucked to dumps located close to the deposit.

3.03 *vs stated 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 under-

taken 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 orewil]. be delineated far enough ahead to deternine where the mining shovelsshould 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 crudeore 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 wiC J. varyaccordinr to the nnture of the material encouvntered. Tlaul roads will be 70feet wide to accoziaodate large hauling units and will he maintained at simpercent Zrade. Steeper grades will be avoided in the early years, becausethey 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 removedprior to the commencement of ore production. This preproduction strippingprogram is designed to develop roads and benches to allow access to suffi-c:ient ore of the various types required to produce the desired blend. Ini-tially contrq-ioYrs' equipment will be used, but this will he replaced by 11BR Isown equipment ordered for the project as and when it is delivered and assem-bled.

4lning Equipment

3 .u Targe sca:c equipsent, has been chosen Cor the min.ing operation inorder {.o reduce as Car as possible the uniL handling costs. For ore mining,tfiz large shovels are considered the m:nimum for reliability and blendingnurn)oses. *ith initial mining at an annual rate of approxin:intelyy 12 nillionIoTng 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 ato mrni.ne. "or ore h1u0l0ae, l(X-tort electric wheel trucks were chosen as a

m:.i ch 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'L their greatcr i,,-neuverabh1lity. Trucks

o, '.-ton capacitY have boen se)ectod to mratch these shovel s.

AM\TEX 3

3.09 Experience with similar ore at other locations indicates that9-7/8 inch rotary drills will be the best selection for ore production.

3.10 . fuJl list of the proposed mining equipment .is given 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 sale-able 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 downhillfromn the orebody writh the primary crusher founded 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 niiig to a mint%..=.

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

4.04 Stockpiling and rail loading facilities, as well as complete main-tenance, support and administrative facilities are also included. The rail-road 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 in13elo Ilorizonte and vicinity.

Access

4.o6 The systam for ore shipping is based on the unit train concept iniw;hich the cars are loaded and unloaded without uncoupling. Lo.ading is accom-plished while the train is moving. This system requires a loop in which thetrain can turi around without uncoupling the locomotive. The area insidethe loop wil1 contain the maintenance shop, office, laboratory and carrep.d.r.

1t.0Y Access to the mine will be along the existing access road whichwill he upgraded and widened.

ie \re -r_paration Plant

flencral

5.01 'PThe Aguas Claras ore is fairly constant in chemical composition,but varies physically. Primarily hematite, it ranges from material which ishard, massive amd thickbedded to that which is soft and friable. Ac6ordingly,plaLt l.'eed and thus the ratio of the three products will vary somewhat witht 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 3Page 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 capa-city will be provided in the form of a stockpile between the primary andsecondary 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 designare based on data collected from metallurgical testing carried out by MBR.The secondary crushing plant and the screening and washing plant are designedto accommodate future expansion.

Crushing

5.04 The 60-inch gyratory primary crusher will be capable of handling20 million tons per annum. The high first cost of primary crushing plantsand the relatively small increment in cost of a unit to handle the largertonnage is the reason for this. The plant is designed with two dumping posi-tions for 100-ton rear dump trucks. Product size will be nominally minus8 inch.

5.05 From the surge pile the ore will be reclained and conveyed to thesecondary 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 stan-dard cone crusher to produce a minus 2-inch product.

3creening and Washing

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

5.07 Wet screening with spray water wash was selected as the best wayto make the two coarser separations. Alternative methods were examined, butwere found to be less applicable for this size range.

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

Tailings Thickening

1,.g 'The function of this section of the plant will- be to reclaim thewater from the dilute fines leaving the screening and washing section. Thiswill lIc done in cyc)ones and a thickener. The overflow from the thicknessw-0l1 11o rocycled to the screening and clashifying section, wi le the under-flow will go to the fines disposal pond.

ANNX 3Page o

6. Cre Handling Facilities

Ore Stockpile

6.01 The stockpiles are designed to hold one week's supply of each mate-rial. This is considered to be the minimum requirement haring regard to thelogistics of coordinating the mine, the railroad and the terminal.

6.02 Three rail mounted stackers will 2eceive the three products fromthe ore sizing plant and will stack them simultaneously. The layout designof the piles allows for future expansion. Provision for draining the waterfrom the ore stockpiles and reclaiming it will be made.

stockpile Reclaim and iailroad Car Loading

6.03 Two crawler mounted bucket Wheel reclaimers will be proTided toreclaim ore from the stockpiles and load it into ore cars. Only one reclaimerwill be operated at any one time, while the other will act as a standby andthus provide a high degree of reliability in the loadout operation. Thedesign loadout rate is 4,,000 long tons per hour.

6.04 Loading will take place while the train moves. The loading systemconsists essentially of a loadout conveyor, equipped with weigh scale anddischarging to a shuttle conveyor. As the ore flows into the car, the weighscale will record the weight and give a signal at a predetermined point.The official weight of the car widll be 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 repairshop and stores. There will be fabricating, welding, machine and electricalshops. Space is reserved for an engine repair shop. Engines will initiallybe sent to Sao Paulo for repair until such time as crew of meChanics istrained 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 gallonsper minute. This is the quantity of water lost in the tailings, ore stock-piles and in the ore shipped, during a long dry spell with dry ore froi themine :)id no reclaim Crom the fines pond.

ANTCX 3Page 9

8.02 The process water will be obtained from a reservoir to be con-structed on the lower reaches of Cardoso Creek, near Nova Lima. The reser-voir, with a capacity of 800,000 cubic meters, will be forned by the con-struction of a concrete gravity dam. A pumping station below the dam willconvey 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 wellnorth of the loop area.

Power Supply

8.04 Power supply to the main substation will be via a 69KV overheadcircuit by CEMIG from their Nova Lima substation approximately 5 milesdistance.

8.05 The peak demand of the Aguas Claras mine facilities is expected tobe L1,000 KW with 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, transportationand marine terminal operations will be provided through a combination ofgovernment-owned and operated facilities and MBR-owned and operated inter-nal cormuunications aystems.

Industrial Projects DepartmentJune 1971

AN'EX 3a

LIST OF MAJOR UNITS OF MINING EQUIPMENT

2 10 cubic yard electric shovels

3 6 cubic yard electric shovels

1 33 cubic yard diesel shovel

1 100-ton electric wheel rear dump trucks

15 50-ton rear dump trucks

2 9-7/8-inch rotary drills

6 6--inch down-the-hole drills

2 3k-,-inch air drills and compressors

Dozers, graders, water trucks, loaderand other mobile equipment to serviceand support the operation.

Industrial Projects DepartmentJune 1971

MlNERACOES BRASILEIRAS REUNIDAS, S.A. AGUAS CLARAS PROJECT

MINE FACILITIES PICTORIAL FLOWSHEET

LEGEND

@ X WLL r Y t SoLlDS0~~~~~~~~~~~~~~~~~~~~~SOLID',

ELECTRIC ~ ~ ~ -PIAR FO

DRILL ~ ~ ~ ~ LPR~AELfULPGPM ~~WATER

OLPAP TRLJCK HOVEL ELO~~~~~~~~~~~~~~~~~~~~~~~~IWSHEET B.ASIS = 12 , O0 LT PY OF ORE

A00 TON END f fi j SENCH 10M HIGH MINING AND PRIMARY CRUSHING 6000 HRS. PER YEAR

SECONDARY CRUSHING, SIZING, AND

WASHING 6500 HRS. PER YEAR

Y60$ P RtA ty PRODUCT P 10,000,000 LT PY

) ( CRUSHER | sMAJOR PRODUCT -TPY

EEOUIPMNT INITIAL FUTURE

< BSELT 1- -__ITEM I_, 00000 15,000,000 20,000

APRON ,ODOSURGE ;P;LE | 100 L. TONS LIVE60" PRIMARY I I

APRON URGE PILE ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CRUSHER

FEEDER 100 L. TON LIVE B'-0 EODR

EELT ~~~~~~~~SURGE BIN 3' 6 6

ARN CONVEYO APONSCREENS - ----

| FEEDERS1 -C -dJSAR FEEDERS _ _ 0R7' SECONDARY I 2 2

FEDR ,R, ,R6Y! 1 I . CONE CRUSHER

/V/IBRATISCREEN G jEMERGENCY DISTRIBUTION S 6'14' SIZING 5 ° 10

SCREENS 'STOCKPiLE .~~~~~~~~~~~~~~~SCREENS_- B j T84 SPIRAL

-9-s9 CLASSIFIER I . _2

~~~~~ ~~~250'9 THIKENR!2

\ t ,i ~~~~~~~~7' STANDARD LINE S 5LNS i_0 , 3

CONE CRUSHER LINE 4 C 2

L 3LINE 23

5 - BELT FEEDERS LINE I

SPRAY WATER

SCREEN.

STACKERS 3W ~~~~~~~~~~~~~~~~~~-YCLONES TPCLLN

92 BELT CONVEYRTPCLLN122C -37A -TOTAL oF 5sLiNES

STACKER 19246 5Z 3 6

SHUTTLE COARSE ORE LSIIER 2 C O07N Ig 1_9

STORAGE CONVEOR 29, 000 LTO STACKER CONV 8ER 7 A P FEED

BINS COARSE PELET SINTER T 5 LTTEA. RE ORE ORE

3-APRON L1

FEEDERS 2 - 3UCKET WHEEL RECLAIMERS SINTER ORE

B LT SCSLE ~ ~ 'HTILETHICKENERSHUTTLE -IVE 2-SUTTL OLowPLUMPS PIA

C0ONV'YOR 2-SHUTTC E EL. 790 M_ 3L0P FINES POND

CA S C_ EL. 960 M

II M2@ ATERIIREC-LAIM

PROCESS CESS WATER PUMPS z

WATER X

RESERVOIR 8RD 5557 Wl

ANNEX 4

OCEAN TERMINAL

1. General

1.01 The Sepetiba Terminal, which will be located in Gualba Islandoffshore from Ponta de Santo Antonio, is designed to receive and unloadunit trains of iron ore, to provide stockpiling facilities for a minimumof three grades of ore and to load, initially, ocean-going vessels up tothe 250,000 DWT class. In the second stage program, additional channeldredging will permit vessels of greater capacity to be handled at theterminal.

1.02 The layout provides for initial stockpiling of 1,500,000 tons ofore and allows expansion of the storage yard to stockpile 4,700,000 tons.The stockpile capacity providing for uninterrupted shiploading is basedon several considerations which could lead to interruptions in the uniformflow of product from the mine to vessel. These include railroad delaysdue to slides and washouts during the rainy season, derailments, unexpectedmine production delays, strikes, weather conditions at sea which coulddelay shipping, and the inevitable variations in scheduling of vesselsdue to factors beyond the control of MBR. A special study was carriedout by the sponsors at the Bank's request to determine the optimum stockpilesize.

1.03 Additional engineering investigations, particularly concerningfoundation data, are now underway and will be completed before finalizingthe terminal arrangement. These include a seismic survey to better definesub-surface conditions, current and wave studies, additional soil boringsand pier design studies. Areas requiring further consideration includedetermination of the orientation and type of pier, the design of retainingdikes, and the optimal stockpile location. Arrangements have been madefor MBR to inform the Bank of the results of these studies as they arecompleted.

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 Grandeand Sepot.iba Bay and runs between Ilha Grande and the continent. Availapblenaval hydrographic charts and additional surveys indicate that this channelwill require no dredging for depths to 19 meters. Dredging in certainsegments of this channel will provide the required 22.5 meters (MLWS) dredgeddepth and a bottom width of from 350 meters to 600 meters.

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

2.03 A wave study conducted in July 1969 indicates that the onlysignificant waves penetrating to the terminal site will be from a southerlydirection. The Ilha Grande offers protection against waves generated bythe mnost serious polar invasions which, in this area, penetrate 'rom west

ANNEX 4Page 2

southwest and southwest with velocities up to 25 knots. A wave generatedby 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 ofapDroximately one meter high. The frequency in this direction is 10 to20 percent (depending upon the month) but the percentage of winds above15 knots is a small fraction of this frequency.

2.04 Tides measured at the island during a limited period of investi-gation 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 utilizedin developing the conceptual designs outlined herein. These data includehydrographic charts, contour maps prepared from aerial photography, fieldcontrol for the topographic mapping, subsurface investigation and weatherand tide data. Subsurface investigations have included 17-borings in water,45 auger holes on land, 12 test pits and 41 wash borings in the approachchannel. A second program of soil borings was started in September 1970and will be finished in 1971. This added information is required toestablish the final channel alignment and cost and the alignment anddesign of the pier.

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

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

2.08 Adequate navigation aids including radio communication will beinstalled. It is anticipated that approximately 30 buoys and severalranges will be required to mark the main channel. Approval by the BrazilianNavy 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'o pxrovide the necessary berthing assistance for ore ships, fourtugs 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 tosupport the shipping operation.

3. Sit rearation and Land Fill

3.01 An area of approximately 330,000 square meters will be required forthe first stage of the terminal, requiring approximately 1,600,000 cubicmeters of dredged sand fill material, 600,000 cubic meters of rock fordikcs and riprap, and 600,000 cubic meters of compacted fill. Rock for con-struction of Cue dike and for shore protection will be obtained from exca-vation on the iTland. The sand fill within the dikes will be dredged fromborrow areas :an Sepetiba Bay and adjacent borrow sources, or it will berock excavat£ed from the site area.

ANNEX 4Page 3

4. Pier

L.n1 The pier structure will be approximately 440 meters long and27 meters wide, and water depth of 27 meters at the berth will permitdocking of ships up to 300,000 nWT on the seaward side and up to 100,000DWT on the landward side.

4.02 A steel piling pier with a concrete dock on which a shiploaderwill travel is proposed. Final design and alignment await the completionof additional soil borings. Adequate fendering will be provided. Theshiploader will have a rated capacity of about 10,000 long tons per hourand will be capable of loading ships on either side of the pier.

4.03 The deck will accommodate one traveling shiploader and a lanefor small trucks. Limited boring data to date (two borings under pier)indicate loose sandy material overlying firm residual soils and bedrock.

4.04 Final choice of the type of pier depends on the results ofadditional foundation boringu and detailed comparison of alternates.

5. Railroad Access Trestle

5.01 The access trestle will be approximately 1,740 meters longconsisting of 58 thirty-meter spans. The structure will consist of steelpilings supporting steel girders.

5.02 Five borings along the planned alignment indicate loose to firmsands of varying thickness overlying firm residual soils and bedrock. Itis planned that piling will be jetted through the sandy material anddriven to refusal into the residual soils.

5.03 The bridge will include a special 40-meter span for passage ofsmall boat traffic. A 600-meter long rock causeway will connect thetrestle to Guaiba Island.

6. Ore Unloading, Stockpiling, Reclaim and Shiploading

6.01 Ore will be received in trains consisting of from 76 to 125solid bottom ore cars of 95 metric tons capacity equipped with rotarycouplings. The locomotives that power the train will position thefirst car in a single rotary dumper and thereafter an automatic carpusher will position the train to dump successive cars. The cars willremain coupled during damping at the rate of 37 per hour, or 3,500long tone per hour (LrPH). The car dumper structure has been designedfor a tandem rotary dumper, with the second dumper to be installedin the future.

6.02 Ore will be drawn from the dumper hopper by a 60-inch manganesesteel apron feeder and discharged to a 54-inch belt conveyor. This willdischarge to a 5LI-inch transfer conveyor, which will traverse the endof the storage area and discharge the ore to either of two 60-inchreversible stockline conveyors. The two stacker-reclaimers will straddlethene conveyors. The conveyors will discharge to the stacker-reclaimerboom conveyor via a collapsible tripper during staclcing of the ore intostockpiles.

AMEX 4Pa-ge- 4

6.03 The stacker-reclaimers will be rail-mounted bucket ieel machineswith 47 meter booms. The wheel will be byauseed for staekin and the boombelt reversed for reclaiming.

6.o0l Ore mill be reclaimed at an average rate of 6,50Q LTPH for eachmachine and 'will discharge from the staclcer-reclaimer boom conveyor to the60-inch reversible stocklinet conveyor. A 60-inch reclaim t.ansfer conveyorand a 60-inch surge bin feed conveyor will deliwr the owe to a 1,600 LTsurge bin.

6.o5 An automatic sampling system will take a out por:odioally foranalysis of structure and moisture otents an well &a to pz'o,ide samplerfor chemical analysis.

6.06 The surge bin will be desiped to regulato the flow to t4e hipand allow for shiploader movements of several minutes dation without stop-ping the reclaim operation. Ore vill be drai from the biA by an 84-inchmanganese steel apron feeder and dLscharged to a 60-inch surge bin dischargeconveyor, which is reversible.

6.07 Ore being loaded on ships will discharge from the 60-inch piertransfer 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 whichvill transfer the ore to the ships. Sach shiploader will havr a rated capa-city of 7,000 LTPH.

.ot0 The xonveyorB will be designed for 120 percont oe thir ratedcarrying oapacity. Standardisation and interchangeability of drive modulesare a pri:me design consideration.

6.09 Promision for future expansion will be made,, S iting of a aeoondcar dumper, ixtension of the tm initial etaockr-feeder conhvmyvr to aboutdouble their initial length and the addition of a third st4aimr-f*der con-veyor A.t_ associated stacker-reclaimer. A second shiploading syst4M Willbe added including conveyor train, surge bin and shiploa4r. A this stagei.re W:Lll be received at 7,000 LTPH and loaded at 1,SOo LTPR.

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 atocklinesvo two !haloaders.

. Utlitties

7.01 Ai.quate arrangemets for fresh water, sewage nd service powersi>tpply hafve been made, subJect to the possible d for *Ai&tonal facilitiesas 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-busto be "'a.-ted by the terminal.

ANNEX 4page 5

7.0' To support the train unloading, stacking and shiploading opera-tions, auxlliary mobile equipment will be required. It wil]. be used to

maintain equipment, roads and grounds, haul supplies, transport personnelanrd shuttle empty and full ore cars as required.

8. Electrical

8.01 The aggregate electrical load for the Guaiba Island terminal faci-lity 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 con-trol room will be located near the surge bin and sampling house. Adequate

fail-safe systems will be included.

Transportation Projects DepartmentNay 1971

ANNEX 5

MBR IRON ORE PROJECT

ENVIRONENTAL CONSIDERATIONS

A. At the Sepetiba Terminal Site

1. The Bankts inquiries and on-site studies regarding environmentalissues at the Sepetiba terminal have been concerned with assuring (i) thatthe choice of Sepetiba Bay over other potential locations is based onsound technical, economic and environmental considerations; and (ii) thAtall steps will be taken at the tenninal site to prevent or largely mini-mize water pollution and other potential threats to the environment. Bothare of considerable importance since Sepetiba Bay, up until now, has beenuntouched by major industry and is primarily a recreational and commercialfishing area. Over the years various plans have been drawn up for develop-ment of industry in the region surrounding the Bay, but none to date havebeen carried forward. Thus, the MBR project will represent a step in anew direction for the area and it is important that future options fornon-industrial use of Sepetiba Bay not be foreclosed by development of theproject.

Selection of the Sepetiba Bay Site

2. MBR's decision to use a site within Sepetiba Bay for the MBR oceanterminal resulted from studies which began in 1958 of a number of alterna-tive sites along the Brazilian coast. These studies were intended to locatea protected site on deep water where large, modern bulk vessels could beaccommodated and efficient and economical rail transportation could be pro-vided 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 mostadvantageous means of ore transport frcmn the mine area. This portion ofthe Brazilian Railway System was operating substantially under capacity,but, with broad gauge, was capable of development into a heavy tonnagecarrier to meet the requirements of major iron ore transportation. Whilethis conclusion regarding rail transport '.ndicated a need to use an oceanterminal site in the general vicinity of Rio de Janeiro, a survey of otherpossible locations was undertaken over several hundred miles of the Brazil-ian coast. The results of this survey led to the recommendation that theSepetiba Bay area, with its natural protection, deep water and accessibilityfor the Central do Brasil would provide the most appropriate location forthe terminal.

4. The Port of Rio de Janeiro itself was rejected as a potential siteon the grounds that both the Port, with its limited draft conditions andinadequate loading facilities, and the railroad lines leading to the ?ortthrough the city, were already highly congested and therefore could not lendthemselves to adaptation for efficient motemenL of the large shipments to bemade by MBR. Other sites were rejected on account of their inaccessibility

ANNEX 5

for rail transport or need for extensive har,)or facilities that wouldhave been far more expensive than those proptwed at Se*tiba.

5. The Fort of Tubarao near Vitoria, through which the GovernmentMining Compary, CVRD, presently is exporting over 20 minlion tons of ironore per year, more recently was eliminated from consideration on twocounts. First, the CVRD-owned rail line, extending from their mine north-west of Belo Horizonte to Tubarao, already is used to capacity and willbe expanded to increase CVRM Is ultimate export capacity to over 40 milliontons annually. Once the CVRRD export targets are reached, there will belittle excess capacity on the route, so that MBR still would have to pro-vide an additional, totally new line at very high cost if it wished to useTubarao as its terminal site. The second, and perhaps more important,reason was that the Japanese steel mills, which buy a large portion ofCVRD's ore and also will purchase ore from MBR, pzpressed unwillingnessto have all of their Brazilian ore supplies go through a single port.

6. On these bases it can be concluded that from an overall eoonomicand technical point of view, Sepetiba Bay represents the most appropriatesite for the MBR ocean terminal, even though this means utilizing a rela-tively untouched coastal area. MBR's choice of this site has beenapproved by the Brazilian Government.

dosed Environmental Protection at Sepetiba Bay

7. Since bulk oil/ore carriers will be used for a large portion ofMBH ore shipments, the danger that oil slops might be discharged fromthese vessels into Sepetiba Bay is a major problem that must be dealt witheffectively. Carriers that have discharged oil, and subsequently are totako on ore at Sepetiba from MBR, normally will have cleaned their tanksprior 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 athreat to comiarcial fishing and recreational facilities in the area. IntUhe past suecx slops usually have been disoharged at sea prior to arrivalat. 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 -ort, wre 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 ie s request.Wis suestiont 1i presently being examined by MBR, and agreement was reachediuring 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) disposalof soli.d waste and sewage originating at the terminal, and (iii) dealingwith acci6anr-i oil spills and minindzing the effect of any such spills thatmight occur .. uia terminal or its immdiate vicinity. MR has agreed that

ANNIX 5Page 3

after discussion of these plans with the Bank and the Government, itwill implement the plans, or acceptable alternatives, prior to completionof the project.

9. Since ore will arrive at the terminal with considerable moisturecontent, having been dedusted during preparation at the mine (see below),there is not expected to be a dust problem when the ore cars are dumpedat the terminal. Even so, the car dumping facility will be designed toallow the addition of commercially available dust collectors if theyprove necessary. The dumped products will be conveyed and stacked in amanner similar to that used at ths mine. The ore storage piles areexpected to turn over every sixty days, but if surface moisture evaporatesto 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 conveyedto the shiploader will be in a moist condition, so that no dust problemsare expected at the transfer points involved in this operation. All con-veyors operating over the sea, and the shiploaders themselves, will bedesigned to prevent spillage of solids into the water.

11. The terminal marine equipment necessary for assisting vesselswhile passing the approach channel, as we!.l as during berthing and deberth-ing operations, will consist of 4 tugboats and a few work and utilityboats. MBR has indicated that it will exert all efforts and disciplineto avoid oil spilling by such vessels and to comply with Brazilian law andregulations regarding ocean pollution.

12. MBR also has given the Bank assurances that the physical design ofthe terminal facilities on Guaiba Island and the trestle connecting theisland with the mainland will be carried out in a manner that will minimizetheir visual impact.

13. An environmental hazard not covered by the steps described above isthat MBR may wish at some point to construct a pelletizing plant at or nearthe terminal to process fines material shipped from the mine (Para. 4.05).While MBR s economic incentives to construct such a plant might be consider-able, the potential for ecological damage due to possible sulfur emissionsand dust problems could be substantial unless adequate precautions aretaken. It was agreed during negotiations, therefore, that MBR would notconstruct such a plant without prior consultation with the Bank.

B. At the Mine Site

14. Viasits by Bank staff to the existing MBR mining operations nearBelo Horizonte have demonstrated the company's own interest in environmertalcontrol. The procedures described below for dust and water pollution con-trol at the new Aguas Claras operation already are carried out at the exist-ing mines, exoept on a somewhat smaller scale, and have proven very success-ful.

15. Dust created by the Aguas Claras mining operations is not expectedto cause major problems. Blasting will create a oonsiderable amount ofdust and fly-rook for a momentary period, but will take place so inf--squently

ANNEX 5PagN 4

as to be negligible. Drills will be equipped with dust oollectors andcan be considered dust-free. Traffic on haul roads may raise dust, butthis 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 acrushing plant which will be equipped with a fan drawing air from thecrusher dump pocket and from hoods at the crusher and apron feeder dis-charge to a dust collector. If necessary, water sprays will be used onthe feeder discharge and the ore conveyor. The ore from the crusherwill be stored in an open pile by means of a boom stacker and watersprays will be used to control dust. This stockpile will retain ore foronly a few hours so that the ore will not have a chance to dry out beforeit is reclaimed by either of two apron feeders located underneath thepile whioh will be fitted with water sprays to allay dust. The crude orethen will be conveyed to bins which will be enclosed and connected to adust collector.

17. Tailings from the processing plant will consist of fine hematitesand and slimes. This slurry will be sent to cyclones to remove the finesand. The cyclone overflows will go to a thickener, the overflow ofwhich will be returned to the process plant. The underflows of the cy-clones and the thiokener will be sent to a tailings pond in a valleybelow the plant, formed by constructing an earthen dam. A polyelectrolyteJqrocculate will be added either to the thickener feed or to the tailingspond feed to the extent necessary to keep the effluent from the tailijngspond clear. Tailings pond water will be further clarified by, passagethrough a filtering dam and will be recycled back to the prooessing plant.

18. The ore products will be conveyed to a storage area prepared witha system of underdrains covered with canga. This system will remove thedrainage water whioh will flow down to the process water reservoir. Theproducts mill be reclaimed with a bucketwheel excavator which will diginto the pile and mix the underlying damp material with any dry surfacematerial so that the train loadout will not have a dusting problem. Pilesin 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.'-1 e 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 atthes:r base, These also will drain to the reservoir. Fu\rthermore, thenkdyliite c.j".s will be especially designed to minimize the area exposed to-: o ae vatesr. Any muddiness that may ocour in the runoff and the drains t.reans i.s expecpted to be deposited by siltation in the process waterre serroir.

ANNEX 5Page 5

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

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

lndustrial Projects DepartmentTune 1971

MBR IRON ORE PROJECTIMPLEMENTATION SCHEDULE

1970 1971 1972 1973

:Al SO|D J |FIMIA|M|J| A I|| J |F |M|A|MJJ|| ONDJF|S|| IMINE FACILITIES AND III 111111111111111111111111111111111111 IIPREPARATION PLANT -

MI'NE ELECTRICAL SUPPLY 1 111111

MINE WATER SUPPLY 111111111111111111111111111 III 8uJ I

PROCESS WATER AND IIIIIIIIIIIIIIItII IlIllilIlliITAILINGS DAMS O

MINE BUILDINGS 11111111111111111111111 _Z

TERMINAL FACILiTIES L011111111111111111 -11 o

AND DREDGING _

F- ~~0PIER, CONVEYOR TRESTLEAND RAILWAY BRIDGE m 1 _0 Isis

TERMINAL ELECTRICAL SUPPLY

TERMINAL WATER SUPPLY 11111111111111111111111 __II_

`LWMINAL BUILDINGS

mxIIIItJIiIIIlliIIiiIiltillhIIIIItIIIiIIIl EN G I NE ER I N G

F M-X&X 3=12S fN mmE! k{lam F C O N S TR U C I O N IBRD 5577

ANNEX 7

MER IRON ORM PROJECT

DETAIL OF CAPITAL INiESTMENT(In US$ 000 equivalent)

Foreign LocalCurrency Currency Total

1/I. Owners' Advance Expenditures (1969-70)

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

Total advance expenditures 821 1,458 2,279

II. Mine Equipment

Min);g shovels 2,631 541 3,172Hatilage trucks 4,883 671 5,554Blast hole drills 1,259 113 1,372SMaU trucks and cars _ 460 460Electrical distribution equil4wnt - 451 451Other mining equipu nt 613 49 662

Total mine equipment 9,386 2,285 11,671

III. tMiine Facilities

Office building and equipment 50 322 372Repair shop and equipment 281 1,1442 1,723Laboratory and equipment 12 50 62Other buildings and equipment - 199 199Electrical power facilities 150 214 364Utilities and oormmnication 107 761 868Railroad 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 ,880Site preparation (2 million ou. m.) ,614 141437 ,0

Developuent stripping (2.3 million ou. m.) 985 1,943 2,928Mine mgt. and development drilling 845 845 1,690

Total pre-operating 3,915 5,665 9,580

ANNEX 7

Foreign I.alOurraM C urr" Total

V. Preparation Plant

Excavation and plant sit. - 1,592 1,592Primary crusher 1,393 1,760 3,153ore stockpile and reclaim 111 367 478seoondary oruAher 424 698 1,122Ore sizing plant 131 976 1,107stockpile, reclaim, and loadout

facilities 3,932 1,1450 5,382Tails 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 2,538Sandfill 1,154 6&6 1,800Construction and installation 1,000 1,589 2,589Railway access bridge 2,964 836 3,600Conveyor trestle and pier 4,780 1,720 6,5OOFerry and tug dock - 47 47Dredging 1,924 756 2 ,680Oxe handling equipnt and

installation 5,O12 1,725 6,767Conveyors 2,502 459 2,961Water and electrical aystem 414 2,332 2,7146Tugs and utility boats 2,300 308 2,608Temparary construction 530 2, 784 3,314Shop and miscellaneous equipmnt 100 521 621011 slops facilities (tentative) 3,000 300 J,300

otitsl tarminal 27,271 15,000 42,271

_;# 'k MBR Admiastration

Ad1miIsLration during conatruction 772 1s277 2,049Insur uece 500 100 600

ToUai admini3tration 1,27;e 1,377 2,649

ANNEX 7Page 3-

Foreign LocalCumrency Currency Total

X. Engineering and Projeot Management

Mine equiprent 180 260 440Mine facilities 390 520 910Pre-operating expenses 590 780 1,370Preparation plant 2,100 2,900 5,000Terminal 3,116 4,064 7,180

Total engineerinr' and 6,376 8,524 14,900management

X2. Working Capital

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

Total working capital 3,988 7,662 11,650

XII. Escalation 2

Advance expenditre s - - -Mine equipment 531 183 714Mine facilities 27 680 707Pre-operating expenditures 475 688 12163Preparation plant 225 19863 2,088Tailings pond dam 104 60 1614Process water dam 300 378 678Terminal equipment and facilities 3,029 2,895 5,924MBR administration - - -

Engineering and project management 714 716 L1,430Working capital 284 48 332

Total escalation 5,689 7,511 13,200

XIII. Contingency 3/

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

Total contingency 5,874 5,821 :iL695

ANNE 7Page 4

Foreign LdcalGerrengy Orrency Total

TOTAL PROJECT COSTS 73,714 68,842 142,556

XaV. Interest and Cozmitment Chargesduring Construction 4/ 12,600 - 12,600

TOTAL FINANCING 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 anti-cipated dates when firm contracts will be signed for provisionof the specific goods and services.

3/ Bechtel has calculated project contingenoies using computerizadrisk analysis. The basic cost oouponents of each-eatimate havebeen segregated and probabilities of overruns applied to eachbased on various assumptions pertaining to uncertainties indesign and price (materials and labor), The various componentshave been combined in a mathematical equition showing the totalproject cost as the sum or product of the various aost cdMpo-nents. This equation then has been entered irfto a 'Monte Carlosibuulation program generating over 2,000 probable cost varia-tions. From this has been obtained a probability distributionwhich 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 coveringany total cost overrun.

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

Industr.i Projects DepartmentJune 19-71

MBR IRON ORE PROJECTESTIMAED VALUE OF IIITG MBR EQUITY AS OF MARCH 31, 1971

(in US$ illions equivalent)

EmLstingFiscal year Auas Claras Operation Spns Sponsors' CcObined 20% Discounted

ending Gross Opsrat Incom zquipaent Dobt Not Cash Equity Not Cash Discount CashMarch 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 6.71976 83.8 47.5 3.2 - 20.2 3.0 3. 0& /.2.9 .40 5.21977 99.5 52.4 4.o 0.3 19.8 2.9 _ 25.9 .33 8.51978 99.5 52.10.l4 0.9 18.8 2.9 5.53/ 14.4 .28 4.01979 124.8 63.7 10.5 2.1 18.3 2.9 - 33.1 .23 7.61980 124.8 63.7 11.0 1.2 17.5 2.9 - 34.3 .19 6.51981 124.8 63.7 12.0 - 16.7 - - 32.4 .16 5.21982 12h.8 63.7 12.7 0.3 16.0 -- 32. .13 h.21983 124.8 63.7 13.2 0.5 15.3 - - 32.1 .U1 3.51984 124.8 63.7 15.4 1.3.5 13.8 - - 18.4 .09 1.71985 124.8 63.7 17.2 - 12.0 - - 31.9 .08 2.61986 124.8 63.7 17.4 1.2 11.2 - - 31.3 .06 1.91967 124.8 63.7 17.5 0.9 - -_42.7 .05 2.11988 124.8 63.7 18.0 0.3 _- - 42.8 .05 2.11989 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 VALUJE OF MBR EQUITI 52.3

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

Indu3trial Projecti DepartmentI)V 1Q

1

ANNEX 9 -1

MBR IRON ORE PROJECT

EQUIPMENT TO BE FINANCED Br WORID BANKON BASIS On PELIMINARYf JSTIMUTOS

(T-I US$ thousands equivalenIT

Item Cost2/

(1) Rubber tired bulldozers 334(2) D7 Class bulldozers 186(3) D8 Class bulldozers 104(4) 3 CY front end loader 73(5) 6&'1 Blast 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) Bridge cranes 245(11) Conveyors, belts and miscellaneous 2,303(12) Dust collectors 23(13) Water pumps 195(14) 7' Cone crusher 332(15) Vibrating screens 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 utility boats 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 DepartmentJune 1971

ANJ 9-2

MBR IRON ORE PROJECT

CONSTRUCTION MATERIALS TO BE FINANCED BY iORLD BAIiKON 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 DepartmentJune 1971

ANNEX 9 -3

MBR IRON ORL PROJECT

COMPUTATION OF PROBABLE FOREIGN EXCHANGE CONTENTOF INTERNAMIONALLr-BID CIVIL WORKS THAT CAN B FINACE BY THE BAK

ON bIS- OF PRELIMINAI ESTIMATES

ForeignContract Packages To Be Let tocal Foreign Total ExchangeUnder World-Wide Competitin !Cot Cos Costs/ costs Portion

(In-= millions equieIii't) (percent)Mine

Site preparation 1,964 1,588 3,552 45Mine access roads .477 742 1,219 61Inner-mine roads and drainage 926 331 1,257 26Tailings pond dam 517 650 1,167 56Process 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 53Sand fill 1,157 1,191 2,348 51Dredging 987 2,509 3,496 72Railway access bridge 1,610 1,839 3,449 53Conveyor 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 theBank, are most likely to attract meaningful international competition.

-/ Assuming that 50% of each oontract package idll be won by Brazilianfirms except: Dredging-100% foreign; Inner-nine roads and drainage-100% Brazilian. Foreign exchange components therefore do not agreeentirely with Annex 7 in vhioh foreign exchange estimates were based onthe assumption that Brazilian contractors and suppliers would be lessoompetitive, thus indicating the maximum foreign exchange outflow likelyto be incurred during construction. Here an attempt has been made tokeep the foreign exohange.component to the lowest likely level so as toassure that the fraction of civil works ultimately financed by the Bankdoes not exceed actual foreign exchange expenditures.

3/ Including contingencies and escalation.1/ Approximately 33% of total projeot civil works.

Industrial Projects DepartmentJune 1971

ANNEX 10

MBR IRON ORE PROJECT

ESTIMATED SCHEDULE OF DISBURSEMENTS

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

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

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

Jue17

1973/74 September 1973 6.0 4.0December 1973 3.0 1.0March 1974 1.0June 1974

10.0

Expected Date of Loan Effectiveness - September 30, 1970

Closing Date - December 30, 1976

Industrial Projects DepartmentJune 1971

ANNEX 11

MBR IRON ORE PROJECT

ORE SALES

1. Ore Sales Contracts

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

below:

MBR Long-Term Sales(wet long ton basis)

Average AnualF.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 mS mil- T Cui3-

lion lion) lion lion) lion lion)LT) LT) LT)

Japanese SteelCompanies 1/ 8.16 1.0 8.2 6.2 50.6 7.3 59.6

British SteelCorporation 8.37 0.3 2.5 1.1 9.2 1.3 10.9

Sociedad MixtaSiderurgia 10.50 0.3 3.2 0.7 7.4 0.7 7.4Argentina(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 KabushikiKaisha (16.4%), Sumitomo Metal Industries (16.4%), Kawasaki SteelCorporation (16.4%), Kobe Steel Corporation (2.2%), Nisehin SteelCompany (2.2%).

1.02 The Japanese agreement, which was approved by the BrazilianGovernment in December, 1970, covers sales of 105 million dry tons atthe basic rate of 7 million dry tons (7.3 million wet tons) per annumand 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 providingfor final agreement during 1971. The contract will be of unlimitedduration, with provision for termination by either party, upon two yearsnotice, after 1986. Total sales over the minimum agreement period wiUlbe approximately 17 million tons at the basic rate of 1.3 million tonsper annum.

ANNEX 11Page 2

1.04 The Argentine Contract is an extension of an existing agreementbetween CMN, a St. John D'el Rey subsidiary (Para. 2.03), and SOMISA bywhich :60,000 tons of ore are shipped annually through the port of Riode Janeiro. The sponsors plan to shift most of this tonnage, plus theadditional 250,000 tons provided in the new contract, to the new terminala' Sepetiba. The contract extends until the end of 1975, with provisionfor 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 andBritish contracts, the minimum long-term sales base for NBR can be con-sidered 8.6 million tons, comprised of sales to the latter two only.

1.Ov The Japanese contract provides for periodic revision of the orepr-ce in light of changing iron ore market conditions. Negotiation of thefirst revision will take place in mid-1976 and the new price will go intoeffect in April 1977, with subsequent revisions every four years thereafterfor the life of the contract. The agreed price range for each revisionperiod is 16% above or 4% below the standard price that applied in theprevious period, except for the final period when the range is plus or minus1!%. Over the 151-year contract life, the price can be increased by asmuch as 56% but cannot be reduced by more than 23%. In addition, themechardics set forth for the price revisions make it likely that the pricepaid by the Japanese will rise faster or fall slower than long-term changesiii world market prices. The overall effect on MBR promises to be veryfavorable, allowing them to recoup, at least in part, any real operatingcost increases that might be incurred.

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

1.07 The Japanese and SCQISA contracts allow the buyers, at theiroption, to vary actual off-take in any one year by plus or minus 10%,pro viding cilztable prior notice is given to NBR. A similar arrangement isexFected for the British Steel contract.

.*03 In the Japanese case, however, the buyer cannot reduce the quantity-ieaa-ed bvy 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, thejua-:ty of decrease must be made up within the same four-year period so that

,the agre_ate taken over four years remains the same as it would have beenif the buyer's option had not been exercised. Thus, over the life of theroject, 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-he Vlapanes have been given a further concession, allowing them to reduceosf-take b) 300,000 tons per annum, but only on the condition that thereduction wiil be made up by 1980.

1. if Ove- the long term, volume variations of the type described aboveare unlike!y to have any great effect on the financial condition of MBR,particular!yL since any decreases under the Japanese contract, which is by

ANN .11Page 23

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

2. Spot Sales

2.01 MBR plans to reserve at least 700,,000 wet long tons of annualproduction for spot sales so as to take advantage of the most favorableworld market conditions existing at any one time. It is not an-,4cipatedthat it will have any trouble disposing of those amounts, assuming, ofcourse, stability in the world iron ore market. Together with the salesalready fixed under contract, spot sales will bring total annual salesup to the initial target level of 10 million tons.

3. Sales bbxpansion Beyond 10 Million Tons per Annum

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

3.02 Initial sales expansion is expected to occur in two ways. Firstis the sale of minus 100 mesh fines (pellet feed) that will be producedat the rate of approximately 1.9 million tons for every 10 million tonsof product. As indicated in Annex 3, these fines will be stockpiledinitially; but it is anticipated that they eventmally mill be sold,either as fines or as cold-bonded pellets. Assuming the former case, anFOB sales price of $7.00-7.50 per ton is probable, yielding NBR as imchas $:3-14 million in additional revenues. Because these fines will beproduced anyway, the incremental costs of their sale will consist onlyof rail freight and handling costs at the mine and terminal. Profit mar-gins, therefore, will be very high, giving NBR substantial incentives tobegin fines sales as soon as possible.

3.03 Further sales increases during the early stages are anticipatedfrom improved utilization of equipment and personnel. The sponsors expectto be able to increase total production to 15 million tons per annum, in-cluding fines, with only a small increase in fixed investment. Theresulting effects on projeot profitability are examined in Annex 13.

4. Sales Coiiissions

4.o0 Eeropt for the Japanese ore contract, MBR sales receipts wiLl bechanneled through one or more off-shore subsidiaries which will act assales agents on behalf of the Brazilian company. This is the practLeecurrently being followed by the individual companies being oonsoliQatedinto 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 toBrasil. Th awUbt withheld allot cowrage of out-of-"~ ovumsales expenditure., including paymnt to indvidaal agenrs in thecountries In th Sales origizate. Suh a----r_te hav to beapproved by the Brasilian echange control authoritles, givig dqiet.protection to the B&4ts, ioUrosts,

Industrial Projects DeparthentJune 1971

NBR IRDN CRE PROJECT

AVERAGE OPERATING CCB TS FOR AGUAS CLIRAS OPERATIONS'BASE EROJECT WITH SALES BUILDUP TO 10 MILLION TONS PER YEAR

(In US$ millions equivalent)

Administration Freight Annualerating Maintenance and Supervision Taxes & Total Total Grand Unit

Labor Supplies Labor Suplies or upplies Insurance Labor Supplies Total Cost

Mining 0.2 4.6 0.1 1.0 0.1 - - 0.4 5.6 6.o o.60

Ore Preparation 0.2 3.4 0.1 0.1 - - 0.4 3.4 3.8 0.38

Technical Assistance-/ - - - 0.3 - - 0.3 - 0.3 0.03

Y:ine and Plant Administration .- 0.8 0.7 - 0.8 0.7 l. 0.15

Total Mine and Preparation Plant O.lh 8.o 0.2 1.0 1.3 0.7 - 1.9 9.7 11.6 1.16

Development Stripping 0.1 2.2 0.1 0.2 - - - 0.2 2.4 2.6 0.26

Rail Freight - - -- - 26.2 - - 26.2 2.62

Terminal Operation 0.3 1.5 0.1 0.2!J 0.4 0.6 - 0.8 2.3 3.1 0.31

Administration - Rio - - - - 0.8 O.1h - 0.8 o.4 1.2 0.12

Administration - Cleveland - - _ _ 0.3 _ - 0.3 _ 0.3 0.03

Sole and Property Taxes _ - _ _ - _ 1.9 - 1.9 0.19

Insurance - - - 0.6 - - 0.6 0.06

Total Operating Cost Excluding o.8 11.7 0.4 1.4 2.8 1.7 28.7 I.o 14.8 47.5 4.75

Depreciation and Interest

1/ All estir3a½ee have been escalated at 6% per vear from January 1, 1970 to thp end of the initial price period of the Japanese ore contract, i.e. in ?arch

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 that

are incurred, thus keeping the relationship of prices arni costs constant. The average prices shown above do not apply to the buildup period when

unit costs are somewhat higher.2/ Maintenance supplies included in operating costs.3/ Estimtated direct costs and overheads payable to Hanna Mining Company through Technical Assistance Agreement for 75 rima-months of on site assistance

per year.Id Dredging. All other maintenance expenses included in operating costs.7/ Estimated paynent for saaes, engineering, research, geological and financial assistance from Cleveland-based Hanna Mining Company staff.

Industrial Projects DepartmentMay 1971

AEX 1.3-1

1BR IRON OR3 PROJECT

SNSITIVITY ANALYSS

1. Eoonoudo and Fiacil Rot=ns

1.01 A lseitivity anayis ha been carried out to determine thelikely effects of certain changes in the level of sales, ore prices, andvarious cost categories on tbe finaicial return to MBR and the internaleconamic return of the combned MBR and railway project, The resultsindicate that even widr severe asswptions, the overall rates of returnto NBR itself and the econoW of Brasil should remain at aoceptablelevls. ohe projected effects of the assumd ircstances on MBR'sinternal finrac return (before incm tams) and the internal economicreturn of the combined project are amwurisod below:

Sumur of Sensitiity Analsis

Interxal Rates of Return10TI 12 MM 15

Coabined BM Cambined la Combined mBRCase Econamic Financial Economic Financial Economic Financial

A. Base projeot 18.3 18.8 20.9 22.3 22.8 24.5

B. Construction costsup 25% and revnuosdelayed one year 12.9 13.2 15.0 16.3 16.7 18.3

C. Avg. ore prices up25% 25.1 29.0 27.8 32.4 29.7 34.5

D. Avg. ore prioesdowl 25% 10.2 4.2 12.8 8.7 114.7 11.2

E. MBRRFFSA operatingcosts 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 up15% 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

ANNEX 13-1Page 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 ofthe changes are denominated in the same constant value dollars that are usedin the base projections. It also has been assumed that the rail freight ratewhich is fixed in dollar terms under the formula agreed bebween MBR andRFFSA, will be adjusted periodically to compensate RFFSA for any erosion inits real revenues caused by dollar inflation. Therefore, the real cost ofrail freight is assumed to remain constant.*

1.03 As the summary indicates, the effects of an increase in the scaleof operations from 10 to 12 million tons per year are more pronounced thanare those of a further increase to 15 million tons. This is particularlyevident under the various assumptions of inoreased costs or decreased prices.It occurs because, as assumed in the analysis, the major portion of the in-crease to 12 million tons will come from sales of fines that are by-productsof the mining process. Since the costs of mining and processing these finesalready have been absorbed in the costs allocated to the first 10 milliont,nni the ineremental expense of shipping them will be relatively low.Although unit costs can be expected to continue downward as production in-creases further, the effect on project returns will be less pronounced sinceadditional mining and processing costs will be involved. On average, with a5C% increase in production from 10 to 15 million tons, total operating costsshould increase by no more than one-third. Since operating margins at thehigher tonnages will be considerably greater than at 10 million tons, theproject should become less vulnerable to swings in prices or costs as theproduction level increases.

1.04 If changes in real costs and prices occur, they probably will doso gradually, as has been assumed in Cases F and G, where the rates used arethe maximum considered likely. In Case H, a cocbination of both decreasingprices and rising costs is assumed. Despite the cost/price squeeze, thereturns remain at aoceptable levels, except at 10 million tons where MBR'sfinancial return of 9.2% indicates only marginal operations, even though theconbined economic return remains above 13%.

2. Break-Even Anauis

2.01 2.nnex 13-3 examines the situation where ore prices would fall, butM,.IRIt pirsert long-term contract would be honored so that the minimum saleslttvei in any one year would be 9 million tons., It is shown that the pricecould fall to as low as US$7.00 per ton for extended periods of time duringthe first six years of operations, or more than 15% below expected minimumlevels, and still enable MBR to meet all of its cash obligations, includingthose to RFTSA. After 1980, the break-even price decrease.s gradually belowUS$7,00 on both cash and profit accounts.

it see para. 4,32 of Railway Report

ANNEX 13-1page- 3

2.02 Annex 13-4 indicates what might happen if prices would remainconstant at US$8.38 per ton but sales would fall due to strikes, naturaldisasters, or other causes that might prevent MBR from shipping plannedtonnages. Here the cash break-evwn point for anmual sales, assuming fullpayments to RFFSA, in accordance with the provisions of the rail freightcontract,* ranges from 7.0-7.5 million tons during the first four years ofoperation, and then falls gradually thereafter. It is concluded, there-fore, that tonnages could decrease 25-30% below planned minimum levels forextended periods of time during the early years, and by even greateramounts after 1978, and probably not impair MBR's ability to meet itsobligations.

Industrial Projects DepartmentJune 1971

* If shipments by rail decrease below 9 million tons in any year, MBR willbe required to pay RFFSA the charges that would have been incurred at the9 million ton level, less out-of-pocket costs saved by RFFSA for any reduc-tion in actual shipments below that level.

ANNEX 13-2

1BR IRON ORE PROJECT

NOTES TO SENSITIVIT! ANALYSIS

Ceneral

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

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

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

(iv) Economic costs have been used to the extent practicable inthe economic analysis. On t7he IIR segment, 25% of the cost of manufacturedoperating and maintenance supplies has been estimated as a minimum level ofindiroct taxation, consisting of tariffs on imported items and value-addedand excise taxes on domestic production. These taxes have been subtractedfrom the operating cost stream for purposes of the economic analysis. Inaddition, sole and property taxes incurred at the mine, plus all incometaxes, have been treated as cash inflows. On the RFFSA segment, indirecttaxes equivalent to 44% of fuel costs have been subtracted from the coststream (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 relatively small. For both the MTR and RFFSAportions, all capital inputs are considered to be duty free and labor costsfrom the financial analyses are taken to represent true economic costs.On the whole, the estimates of indirect taxes are conservative, thus tend-ing to understate the economic returns.

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

(vi) MBR operating costs do not include rail freight charges.

ANNEX 13-2Page 2

Case A

(i) Sales buildup

Fiscal year ending Buildu to Ultimate Sales ofMarch 31:, 1 2 TF 15 IT?Y

~O%1(Mllion IT)

1974 (6 months) 2.9 2.9 2.91975 9.0 9.0 9.01976 ]10.0 10.0 10.01977 10.0 12.0 12.01978 10.0 12.0 12.01979-89 10.0 12.0 15.0

(ii) Rase prices

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

10.0 10.0 0 8.3812.0 10.4 1.6 8.291.50 13.4 1.6 8.32

*Assumes regular ores 4 $8.38/LTpellet 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.wayRleport, corrected -for effects of 3-month differences in fiscal years; iORcosts according to Table 3 of this reportb.

(b) At 12 million tons per year:

Ttailway costs accordingcl to Ta.ble 12 of rZailiwayorL, similirly corrected (including increased investment for rollingol a.d track renewals).

MBR costs assume additional investment of $3.0mdllion in FY 1.976 For rpellet feed (fines) handling equipmnent ancd only uinorincreases 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 fromwsL5te mrateri.ils that are produced anyway -- approxi..ml,ely 1.9 million tonsor' fines are produced for every 10 million tons of regular ores). In addi-tion, increased sales of regular ores amounting to 1o00,000 tons per annwun.ire assumed t.o result from improved utilization of equiprent, with onl,Zsml .ircreases in total operating costs. On average, total 14BR, operatinrcosts (includi nrg overheads) at 12 mi . ll.on tons arc estimated to be In.'.

mrc.ater th,kn at 10 million tons.

ANNEX 1?-2Page 3

(c) At 15 million tons per year:

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

MBR costs assume additional investment of $5.5million for mine equipment and inventories needed for increased sales ofregular ores from 10.4 to 13.4 million tons per year. Fines sales remainat 1.6 million tons as above. Unit operating costs decrease considerablydue to increased utilization of initial investment. The effect of newequipment on total operating costs is small. On average, total operatingcosts (including overheads) at 15 million tons are estimated to be one-thirdgreater than at 10 million tons.

Case 13

This assumes that project construction costs for both the 1SR andrailway segments would increase by 25% and that initial project revenueswould be delayed by one year, as would subsequent expansions to 12 and 15million tons. 1Ihile some increases or delays might be contemplated, anextreme 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 levelsassumed in Case A are considered unlikely, particularly in light of the largeportion of total sales already covered by long-term contracts at fixed pricesin the early years. The cases are shown here, however, to demonstrate thepro'ect's sensitivity to extreme price variations. The economic return ofthe project as a whole is shown to be less sensitive to ore price changesthan is the financial return to MBIR.

Case E

This case would only arise in the event that operating costs forboth MBRt and the railway proved to be grossly underestimated, an improbableevent. Both economic and financial returns are shown to be comparativelyinsensitive to such changes in operating costs.

Case F

This case assumes that real ore prices would decrease at a compoundaniu a]. 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 decreasethought likely during the early years of operation (see Para. 3.09). Fort,hi case, this rate o1f decrelase i3 assumied to continue for the full projec-tion period. As an indicator of the effect of possible fLture trends, sucha gradual decrease is :i more realistic worst-case assumption than the incre-inettLl price drop postulated in Case D.. Barring a serious recession in the

ANNE 33-2FZ9ge 4

iron ore market, average real ore prioes are unlikely to decrease fasterthan the rate used in this case. The figures indicate that the effect ofsuch a gradual price decrease on both financial and economic returnsprobably wuld be considerable, although still not enough, in itself, toseriously, undermine the viability of the project.

Came G

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

Case R

The case ombines the effects of both the gradually decreaingreal prios asmd in Case F and increasd reel operating costs of Case G0both being worst oases. The result is to lower oBR s financial return sig-nificantly, particularly at 10 million tons per annum vhere magins arelower, and to decrease the economic return of the project as a whole by alesser 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 DepartmentJune i9771

MBR IRON ORE PROJECT

CASH AND PROFIT DREAKEVEN PRICESAT CONSTANT SALES LEVEL OF 9 MILLION TONS PER YEAR

7.50 F - -T .-. ,, -1 --- -

7.00

6.50

LUw 6.00

5.50Li

- PROFIT BREAK - EVEN5.00; 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 PROJECTCASH AND PROFIT BREAK-EVEN SALES LEVELSAT CONSTANT ORE PRICE OF $8.38/ LONG TON

8.0 I I I

17.0 '75 anmnm ___'77 '78 '79 '80 '8_'8_'8_'8 _ '8_'6_'7_'8_'9_'0

0Y0

600

6.0

LU.

__ 5.0

zLU

4.0u-i

PROFIT BREAK - EVEN3.0~ 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° , ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~40 f

t t BRAZIS TUBARA) 2

\~~~~~~~~~~~~~~~~~~~EPRT SAT . NCIHe

) 4 X X ANESOw ~~~~~~~~~~~~~~~~~~ITABIRA STATE OF MNAGUAG CLARAIS

I / / / g DVA ERA )AL /W / ~~~~~~~~~~BELO HR ZOg |0._

/ + zINHOcxi s v-__ -_____ j STAtE lTING A

AL / \ 9 ~~~~~~~~~ITABIRITO R01 OF VIMORIA

- DEJAEROMIEACE SBANTOIRS RUDA N.A

> / \ \ t~~~~~~~~.BURNIER ESITO5NO/ Nt / ~~~~~SEE MAP 2 J OQIM MURTINHO 0 >

\ / ~~~~~~~~~CONS. LAFAIETE <

STATE E OF AINAS ; GERAIS A POE

I \ tARBACENA G LOATLogend

/ \ I / e~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~XISTING RAILRkOAS

--A. aSANTOS DUMONT P it++++ OPOSeD RAILROADS

. j \ \ < 6 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~EXISTING HIGHWAYS

- / - ANDRELANDIA CAJUIZ DE FORA 0 M0 -io 20 2

*~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ A 1SAE Lo MORE EV ACUAIO

-220' OF /R,)OUOTE 22*-

-22° / . _vf ~~~~~~~~~~~~~~RIO DE JANEIRQ/^

( / . w.- mRE~~~~~~ ~ ~ ~~~~~~~~~~~S RIOS /

SANTS - 4M A' RUC BRAZIL -

APRL 11 MINERACES BRASILEIRAS REUNIDAS S.A.[ z ;JLREIS g MAP~~~~~~3 STi TE OF GUANABARA AGUAS CLARAS PROJECT

STT s S^ AULO ^ SEPETIBA TERMINAL GNRlLCTOSAO PAULO

GEEA LOCATO

t ,'t ~~~~ATLANTIC OCEAN Mf

,),)3 o~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 50 100= 22 0

v w X r \ 44e 42 KiLos*eTERs44 4 >

APRIL 1971 IR 25

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

BRAZIL

MINERACOES BRASILEIRAS REUNIDAS S.A. L t BIRA

AGUAS CLARAS PROJECT )

ORE DEPOSITS IN THE IRON QUADRANGLE N PASIANO

PI MBR OPERATIONS ROCAS ERA

o TOWNS

* VILLAGES

* OPERATING MINES

O OTHER MINES LE AD

IRON ORE DEPOSITS

LAGOONS & DAMS CNAE

ROADS

_.-.-~--.--RAILROADS ICA

0 5 10 15 .. ;O... 2,-PROPOSED RAILROADS 5 OVA LiM SAOsS BARo s 10 IS 20 2s so * B TM "tOAL 50.<ARAEARBARA

Kilometers

o 5 ,_ ,> =t,5 10 20 30 ERDA

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

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

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

Tt &ORUMEA RELO N ENTE

L IJACEAR

1* ' . x- _ __ ^ / yJOAGUIM MURTINHO

APRIL 1971 IBRD 3296R

iKA TO BELO HORIZONTE

44I & AGUJAS CLARAS 4'3 Log.nd

1N -H-/-APERI- ! ! 8 8 | | | | | | JAPERIRAILROADS

(SINGLE TRACK)

N f-h\----W11 -It - RAILROADS (MULTIPLE TRACK)

-SAO PAULA

........ RAILROADS PROPOSED

ZONE (URBAN AREA)

- - - - - - STATE BOUNDARIES

4 ,/~~~~~~~~~~~~~~~~~~~~/ ~~~~~~Ig HIGHWAYS

22A45 RIRAO DAS LAJES

23COROA t a 0 0

~ A

i SEPETIR< :y U A TERMIN * AR I

~.A-MARiNE ACCESS IR~<

) _ , 5~ f4NBARAZI L

7 ROUTE J-A 3_AEG - 3GAURATRAADtEU $C MINERACOES BRASILEIRAS REUNIDAS S.A.

R i, A AT L ANIC r0 c AGUAS CLARAS PROJECT

05 10P E5T0I 10

. 440 1 5 0 5 5 43-30' LOCATION OF SEPETIBA TERMINAL2

~~~Kilom.t.vs hAl.,s

0

APRIL 1971

IBRD 3297R RA