Usiminas SA ADR (USNMY) CEO Sergio Leite de Andrade on Q2 2019 Results – Earnings Call Transcript

Usiminas SA ADR (OTC:USNMY) Q2 2019 Earnings Conference Call July 26, 2019 10:00 AM ET

Company Participants

Sergio Leite de Andrade – Chief Executive Officer

Alberto Akikazu Ono – Chief Financial Officer and Investor Relations Officer, Finance and Investor Relations Vice-President Officer

Miguel Angel Homes Camejo – Commercial Director Vice-President

Conference Call Participants

Thiago Lofiego – Bradesco BBI

Leonardo Corrêa – BTG Pactual

Daniel Sasson – Itaú BBA

Rafael Cunha – Credit Suisse

Antonio Heluany – Bank of America Merrill Lynch

Gustavo Allevato – Banco Santander, S.A.

Carlos de Alba – Morgan Stanley


Good morning, ladies and gentlemen, thank you for waiting, and welcome to Usiminas Conference Call t to discuss the Results of the Second Quarter of 2019. At the moment, all participants are connected on listen-only mode. And at the end of the presentation, there will be a Q&A session. [Operator Instructions]

This conference call is being recorded. And the presentation is followed by slide and is being transmitted simultaneously through the Internet at, where you can also obtain a copy of the release of the company. Participants who are listening in English can also post questions directly to the speakers.

Before proceeding, we would like to clarify that forward-looking statements made during this conference call regarding the company’s business prospects as well as projection, operational and financial targets related to their potential forecast are based on the management’s expectations relation to the future of Usiminas. These expectations are highly depended on the performance of the steel sector, the country’s economic situation and the situation of international markets and – are therefore subject to change.

With us today, we have the Executive Director of Usiminas, Mr. Sergio Leite, Chairman; Alberto Ono, Vice President of Finance and Investor Relations; Tulio Chipoletti, Industrial Vice President; Takahiro Mori, Vice President for Corporate Planning; Kohei Kimura, VP of Technology and Quality; Miguel Homes, Commercial Vice President; Carlos Rezzonico, Executive Director of Mineração Usiminas; Djalma Barros, Industrial Director of Soluções Usiminas; Heitor Takaki, Usiminas Mecânica, Executive Director; Bruno Paulino, Legal Director; Julio Arroyo, Director for Controllership; and Leonardo Karam, Investor Relations, General Manager.

Initially, Mr. Sergio Leite will make his initial remarks. Then Mr. Alberto Ono will present the results of the second quarter of 2019. At the end, all the officers will be available to answer the questions.

Now I will hand it over to Mr. Sergio Leite.

Sergio Leite de Andrade

Thank you very much, and good morning to everyone here. Thank you for participating in our conference of the second quarter of 2019. And we, in Brazil, are undergoing a very special moment in our story. As far as we’re concerned, the country is preparing itself for taking off a growth and we expect this to happen in the upcoming 12 months or the quickest possible.

During the first semester of the year, we realized intense activities within the preparation of the country for the world. The pension fund reform is ongoing. The tax reform is being discussed. A number of actions have been carried out in the industry. We would like to highlight economy, infrastructure, mines, energy, therefore, the country is getting ready to take off towards growth.

We had our first semester below our expectations with an economy that was practically stable to – in comparison to 2018. Today, we see good news regarding job generation. The growth of formal jobs there has – there we had over 400,000 new jobs during the year. Today, the [indiscernible] in a press conference announced the results of the first semester of 2019 and the prospects for the year of 2019.

Now regarding the first semester. We also observed a slight drop in the production of crude steel in Brazil. And according to the consumptions in Brazil for the year 2019, they will lower 5% to 2%. This is for the entire year of 2019. And this means that we, from the steel industry, expect the second semester slightly better than the first semester with growth of – production with growth of consumption in steel in Brazil at a level of 4.5% vis-à-vis the same period last year.

Usiminas is presenting to the market today the earnings result of the second quarter in a summarized way. What we can highlight is that, all our company, there were improvements. Regarding the results of the first quarter within our five companies, now in the case of the steel mills, the three major levels – levers of our business, we presented an improvement in comparison to the first question.

We increased our production. We also increased the total sale of our product. And we would like to highlight the domestic market and we increased our sales 7%. There was an increase in the average price around 3%. We also had a reduction of the cost of the product sold. Therefore, the main levers of our steel mills presented positive behavior.

Now with the consolidation of our final results, we also evolved our EBITDA of 18%. When we compare it to the first quarter of R$148 million, now we have an EBITDA of R$576 million. And we’re ready to raise our commitment to strongly work with all of you with the Usiminas companies regardless of the market scenario.

Although during the first semester of the year, our expectation is still have an improvement in the economy and the market. We also had on Monday, we received good news in changes of a change of buyers. There will be a 0.1 improvement in our GDP budget from 0.081 to 0.082.

Now what we want to see is the change in buyers. And we believe that in the upcoming weeks in Brazil, we will have prospective based on facts and true probability. And our commitment is to continue working to build the results on a daily basis. We want to have innovation in all our areas trying to improve all our processes. And to show results in first and foremost, to reassure the long-lasting performance of our company. When I say long-lasting is built, every day, every hour, and this is a very interactive job.

Thank you very much for your attention. Now, I will give the floor to Alberto Ono, our Finance VP.

Alberto Akikazu Ono

Good morning to everyone. Let’s go to Slide #2 to present our results. As Sergio already highlighted, we had an increase of 5% in our steel units, exceeding 1 million tons in the quarter, 7% growth in the domestic market. So we’ll reach almost 950,000 tons in turn of iron ore.

By and large, there was a drop of 7%. That was significant because of problems in the foreign market. The sales to the foreign market had a significant drop and the impact from sales because of logistics difficulties and this is reflected on our figures. But afterwards, all these problems were resolved.

Now when we talk about the consolidated EBITDA, the growth of 18%, we had a significant growth and improvement in margin in comparison to 10.6%. When compared to the first quarter and in terms of net income R$121 million, R$171 million as a result.

Now let’s go to the next result. Here we’re breaking up the four past quarters. Here we have – when we – regarding our operating result, there was a recovery of the fourth quarter. When we see the same non-recurrent effects and now we have R$576 million that is very similar to what we observed in the second quarter of last year.

Our next slide, we would like to show you the steel sales and also showing that the second quarter to 2018 to the end year, we had sales above 1 million tons per quarter.

Now our next slide, we will talk about the EBITDA in our steel unit. In case of our steel unit, we’re comparing the first quarter of 2019. There is an improvement of 34% in our EBITDA and totaling R$404 million vis-à-vis R$301 million, an improvement in margin, here 12% of margin vis-à-vis, almost 10%, slightly below 10% in the past two quarters.

And now when we go to the upcoming slide, we will talk about iron ore sales. This quarter presented a level very similar to the third quarter of 2018. With a different mix actually, here we can see that there was a drop in sales to steel mill units, a drop on foreign sales 21% and third parties increased 30%.

Now when we go to our next slide. Now talking about figures of Mineração Usiminas. Here we have the results. Despite the drop in volume, there is a significant growth in the EBITDA of Mineração Usiminas. This is 24% when we compare it to the first quarter. So we have a significant increase in margin, representing – this was because of the increase of prices. And during – and that started in the first quarter and continued during the third quarter.

Now on the next slide. Here we have the results of Soluções Usiminas. There was a significant increase in our EBITDA in this unit, 118% vis-à-vis the first quarter totaling R$37 million, with a margin of 4%. And here we’re totaling levels very similar to what we observed during the first and second – during the second and third quarter of last year.

And then last, here we have the evolution of the results of Usiminas Mecânica here. We can also observe that, within this quarter, Usiminas Mecânica, despite unfavorable conditions in the market in terms of demand, in terms of the infrastructure project, where we still were able to balance our company. In the last quarter, we were slightly negative in terms of EBITDA and now we’re slightly positive in terms of EBITDA. So we have improved even when we compared to the second quarter of last year.

Now, we will talk about other financial indicators. We will see Slide 11. Here we can see our evolution in our working capital, consolidated working capital. Therefore, there had been significant improvement. This is R$500 million and we’re above R$4.2 billion. And this is a result of greater volumes in the quarter at higher prices, and it also increased our accounts receivable.

But the pressure of the cost of raw material, notably, [ph] iron ore and also the cost of slabs. And this is why there was a reasonable increase in our working capital. When we observe on the upcoming slide, the steel inventory, we can see that there was a slight drop here. Therefore, we can also see that, that is not the stock volume, but yes, the financial impact of the cost.

Now, when we go to the next slide. Here we can see our cash position and indebtedness. So we continue R$5.5 billion at the end of the second quarter, but the drop in cash position around R$500 million, that is the result of the pressure of our working capital. So this is practically what happened. There was a greater investment in terms of working capital during this quarter.

Now, the next slide. Here we have the evolution of our invest – of our CapEx. Now during this quarter, we exceeded the R$100 million. But as we announced during the morning, we are reviewing the guidance of the year for investments because of delays in the environmental licensing of dry piling project as well. The – there was a slower, a lower rhythm regarding the evolution of the upcoming projects, mainly in the steel unit. Therefore, we – so we are reviewing our guidance from R$1 billion to R$100 million.

And here, at last, I would like to highlight a number of things. Number one, we have been upgraded from our credit rating agencies global and national. This is a result, of course, of our bond issuance operation, as you already know, are the venture. We issued R$750 million that were used for payment to development banks and Brazilian debenture holders and creditors.

With this, we were able to attain more CapEx flexibility and see the exclusion of cash sweep and release of real mortgage guarantees. I believe that it is obvious regarding our debt. This happened during the third quarter, but now there’s a new level in terms of the liquidity and expectation of amortization of the company for the future.

With this, I end my presentation and we are at your disposal to answer questions.

Question-and-Answer Session


Ladies and gentlemen, we will initiate the Q&A session. [Operator Instructions] We would like to remind you that this conference call is only for investors and market analysts. Should journalists have questions, please send it to the Investor Relations of Usiminas through 31-3499-8118, or the following e-mail, Our first question from Thiago Lofiego from Bradesco BBI.

Thiago Lofiego

Good morning, and thank you for taking my questions. Could you talk about the price and premium prospect in the Mexican market in the short-term? When we see the second semester, you will have another blast furnace. So this means that you will produce more coils. So I believe that your production of product has increased. So what do you expect for the premium dynamic initially? Do you believe that it is reasonable for wait – to wait for a negative scenario due to the demand that isn’t high?

And the second question would be the new galvanized light. When will this project be approved and what will be the size of this business?

Sergio Leite de Andrade

Thiago, when we talk about price prospects or perspectives, in terms of price for the third quarter, for us, according to ourselves, we still expect in the total mix to have an average price of 2% to 3% increase. Now regarding the premium. This vary. This also laid throughout the quarter.

Nevertheless, today, what we can already observe is a premium regarding imported material and it is around 4%, or 5%, okay? No. This is due to the variation of the price of the coil abroad and also depends on the exchange, the variation in the exchange rate. And during the past week, there was an appreciation of real and this also affects the calculation in terms of premium. We still have a positive result. This would be around 4% and 5%. Therefore, and we don’t see perspective of negative premiums for the time being, but everything will depend on the market situation.

Thiago Lofiego

Could you also – what about these 4% and 5% of premium that you just mentioned? Do you consider this drop of price that was observed recently? And it was 5% more or less yet?

Sergio Leite de Andrade

Now, this is regarding this week, okay?

Thiago Lofiego


Sergio Leite de Andrade

Alberto, can you hear me?

Alberto Akikazu Ono


Sergio Leite de Andrade

I’m going to complement today the level of parity is around 5% and 6%. But all the world steel industry is receiving pressure to increase price. We, in Brazil, are not in good situation. What we want to do is to look for an improvement in price. Regardless of the international situation, we have had very strong movements in local currency in the past 60 days.

We’re going to monitor the situation of our current currency and the international prices. And we can expect the hike in prices because of the logo margins of the worldwide steel industry and iron ore is lower. We can expect a new way, but increases during the third quarter.

Now regarding parity. We have always informed that our strategy is to be in a level between 7% and 10%. And we believe that this is very reasonable for the Brazilian market outside of this level. We will do what is necessary to maintain ourselves within this level of parity.

Thiago Lofiego

Okay. Thank you very much.

Sergio Leite de Andrade

Now regarding the new galvanization lineup, when we continue carrying out our studies, and within our product – the project, we’re following the market. And we’re working to – and we want the Board to analyze this project in the upcoming 12 months. This is our focus today.

Thiago Lofiego

Thank you very much.


Our next question from Leonardo Corrêa, BTG Pactual.

Leonardo Corrêa

Good morning, Sergio and Ono, and thank you for taking my question. Well, my first question regarding market share. In our analysis here, we basically concluded that Usiminas gained and recovered a bit of market share in the domestic market during the third quarter. And please correct me if I’m wrong, but the volume of Usiminas grows 7% in the domestic market.

And when we see the ADR data, the figures were slightly below. But if I imagine that Usiminas made a great effort on the commercial side in order to recover their market share throughout this quarter. And now my question is, if you are more aggressive in terms of prices than in the past? So this is my first question.

Another point just something that I would like to go from – regarding your last answer. Are you expecting a price carryover for the third quarter, that would be around 2% and 3%? Therefore, you’re expecting an increase in price – average price per ton in the domestic market between 2% and 3%? And what happens regarding cost?

What is your expectation of cost increase per ton during this quarter? Because we would like to understand the cost pressure that all the steel industry is suffering well during this quarter. There was a relevant increase in the slab. I would just like to equate this mathematics – this increase and I would like to better understand the cost trend.

And my last point regarding working capital. Alberto, you mentioned in a number of moments during your presentation the working capital and as a matter of fact, it was absorbed more cash. How does this sustain itself? Because we’re seeing a weaker market and this is clear. And there have been some changes regarding the price of raw material. So before the situation, what will be the trends during the second semester regarding working capital? Will you recover the zero? I would like to confirm this with you?

Sergio Leite de Andrade

Leonardo, regarding your first question, I would like to clarify the following point. The target of Usiminas is to follow the evolution of the market when we assert longer periods of six months to one year. We can observe our success regarding our targets. Now it is clear that Usiminas will continue being the market leader of flat steel in Brazil.

Now on the other side, I wouldn’t talk about aggressiveness. I would say that we are committed with our customers and the partner sectors of our long-term. We’re not only talking about prices, service development, product connectivity with customers, a number of strategic – strategies to maintain the leadership that we have had throughout the years in Brazil.

Now regarding the average price for the third quarter. You are correct. When you talk about 2% and 3% of the average price, this forecast would be maintaining the current situation of the price if we maintain the current price. During the third quarter, the average price will be between 2% and 3% above the average price of the second quarter.

As I mentioned, the beforehand in our view, all the worldwide steel industry is being pressured to the increase – to increase the prices at the national and at the international level.

Alberto Akikazu Ono

Leonardo, now let’s talk about costs now. What we can see here, as you already observed in our release, there was an increase of production cost of the first quarter to the second quarter. And this increased our production cost, of course, will affect because of the sold product of the third quarter. Now we calculate that it will be 3% and 4%. This will be the increase.

So it’s 3% and 4% the cost of sold product. And this is one of the drivers. As Miguel already mentioned, it – this doesn’t normally happen to us. This is happening throughout the world. And what we have is a greater margin recovery, because the increase of prices, because of pressure on costs. Although within our current prices, we see that there’s increase in [indiscernible]. There is increase in price of 2% and 3%.

Well, what we are observing here are possibility of a grade, hike in prices within the market, not only now because domestic reason, but because the price of raw material is increasing for everyone.

Now regarding working capital. You know that there was great pressure during this quarter. So from here on – or at least during the third quarter, we’ll continue at the level that we have already observed. Well, unfortunately, we will have a long cash position because of the raw materials.

Until the moment, there are no trends to drop the prices regarding iron ore. Now when this happens, the effect will be contrary, but we’re not observing this for the time being. So, at least, if the price of iron ore does increase so much, because it cost around $120. Our working capital will continue at the same level that we observed during the second quarter of 2019.

Leonardo Corrêa

Thank you very much. It’s pretty clear.


Our next question comes from Daniel Sasson, Itaú BBA.

Daniel Sasson

Okay. Good morning to everyone. Thank you for taking our questions. My first question would be regarding demand. We saw an increase of 7% in the domestic market. Could you – what is the actual improvement in demand a sector that is showing that they are recovering more strongly? And what is the restocking effect there? During the first quarter, you talked about strong restocking, especially in distribution? This was during the first quarter.

If you could elaborate on what is the recovery of demand? What is restocking? How was this restocking in the strong performance within the domestic market? And now moving as strong, we saw the recovery of some buyer plant during the semester. Could you elaborate also on this ramp up if the production volume is aligned with your expectation? Before the ramp up, can we work with the guidance of around 800 million tons of iron ore this year? These are my questions.

Miguel Angel Homes Camejo

Now regarding demand and stocks, what we can say that the division stocks according to the – in the report shows us that for the fifth consecutive month, the expectation of the institute is a drop of 2.5% of June, a downturn, which is the natural stock level between 3 and 3.5 months.

Therefore, regarding the results during the second quarter, we don’t see an increase in stock. What we did observe is that in some sectors, in addition to distribution, there was – it was strong adjustment during and then it wasn’t done during the second quarter and yes, the first quarter. Therefore, the results show demand and non-recovery of stock now. There is still a downturn of our stock in the first semester.

So the expectation of 3%, 3.5%, I believe that these are reasonable levels of stock for the market expectation. Now on the other side, what is positive here is that, there will be a change in the growth expectations, as Sergio mentioned at the beginning of the call. For the first time during the six months of the year, there is a recovery of a GDP and also the industrial sector and consumption are also recovering because of the Brazilian economic situation and political situation.

Daniel Sasson

Thank you, Miguel.

Sergio Leite de Andrade

Daniel, regarding [indiscernible]. After a bit of junior event, all the licenses are taking longer than what it was taken in the past and it’s longer than what we expected. So there are delays because of this.

Now regarding to Samambaia Plant that was impacted by the situation. Samambaia will be totally operational by August 15. And this will allow us to increase the production more or less 3.5 million tons between the increase of pellet feed and concentrate.

And now regarding our sales. For 2019, today, we have a plan, the calculation of 9 million tons in sale with a production of approximately 8 million tons. It will depend on the licenses that have to be approved for a number of plants that are paralyzed. But this is our projection for the year 2019.

Daniel Sasson

Thank you very much.


Our next question from Rafael Cunha, Credit Suisse.

Rafael Cunha

Good morning to everyone. Thank you for taking questions. My question is about our CapEx. I would like to better understand the CapEx review for R$800 million and you talked about the delay in the steel project. I would like to know from you, if you could tell us how this impacts the revamp of the blast furnace.? And how is this connected to steel and to the blast furnace? And maybe if you could clarify what the CapEx plan will be for the upcoming years? This will be point number one.

And number two, a follow-up regarding iron ore. Is there still an update regarding the sale of a stake of MUSA. And if it’s not sold, what is going to happen to the mine? Could you update us regarding the break-even here?

Alberto Akikazu Ono

Hi, Rafael. When we talk about CapEx, this drop a significant part is due to the delay of the July project. This is a project that was calculated R$140 million and it would become operational during the first semester of 2020. Great part of the CapEx would be realized this year.

As it has been explained, we are – it’s taking a long time to receive environmental licenses. So the expectation of the project is that, it will become operational at the end of 2020. So this will basically delays this project minimum one semester or two quarters. But the trend is – could be higher. This is why the disbursement of R$140 million that was going to take place of 2019 was transferred to 2020. This is reason number one.

Now the second question that you answered was, we’re talking, in the case of the steel, there was a delay in our projects, it’s not the blast furnace project. The blast furnace project this year was a – had a very small volume because we just started. Therefore, the expectation of the blast furnace wasn’t going to have great disbursement and things are according to expectations. I’m actually talking about other projects that are underway in the steel units.

Now iron ore. Before giving the floor to Carlos, we can talk about the divestment of Mineração Usiminas This is an ongoing process, but still slow after everything that happened after [indiscernible]? No, we have no news for the time being unfortunately for you.

Now speaking about Mineração Usiminas. Today, we are doing new productions. We’re talking about the first 10 years with iron ore and then we would have another stage. And I believe we will not have any problems until 2050.

Now MUSA. Now regarding MUSA stake and the prices that we imagine here. We could talk about a $55 level because of the drop of premiums of high-quality products that fundamentally are what we are exporting today.

Rafael Cunha

Okay. Thank you very much.


Our next question comes from Antonio Heluany, Bank of America.

Antonio Heluany

Good morning to, everyone, and thank you for taking my questions. And Sergio, could you give us an update regarding the discussions that you have with the new government. There would be import tariffs were discussed and then they said that this wasn’t going to hear what IABr is negotiating with a government? And what things are they discussing that can result in an improvement next year?

And, Alberto, two follow-ups. One regarding the slab. Although we see the price of iron ore at a high level, the slab price is at a level – is $420. This is the export price. When can this benefit your margin? And another question regarding liability management that after the bond issuance, you pay the more expensive, that’s the ones that were renegotiated in 2015. How much improvement can we expect in terms of your debt after you amortize this part?

Sergio Leite de Andrade

No, regarding the interaction of IABr with the Brazilian government, we have interacted through our coalition and also Brazil move it. And last year, we named it industrial coalition. And this coalition gathers a number of very important sectors, the Brazilian transformation industry and currently we present 50% of the GDP of the transformation industry. We’re talking about a number of sectors as we have talked to the Brazilian government since the period of the government transition.

So we already started talking with the transition team with President [indiscernible] and we started negotiating with them during the last quarter. Last year and during the first semester, we had more intense conversation. Since the beginning, our position before the Federal government and all their team was highly respected.

What we talked about is the recovery of the Brazilian economic situation and there are a number of levers here. We believe that we have to reactivate the industry of civil construction. This lever is very important, because it generates jobs in large scale.

Now also actions within infrastructure and also export is an impact lever, because the transformation industry in Brazil, in most of its segment, and installed capacity use between 60% and 70%. This provides the transformation industry. But our perspective of increasing this production in almost 50%. without the need of our investments of the transformation.

The industry is prepared to recover the growth in Brazil. And the Brazil – and the government is working along these lines. In infrastructure, a number of projects are being implemented. The new gas market is very important. In the middle term for our growth, the second point that we set forth that is important for us is the support from the industrial correlation, because we need a labor and the pension fund reform.

The pension fund reform was approved by Congress at least the first time – at least at the first level. So the pension fund reform is gaining momentum in terms of discussion. Another point that we set forth to the government is the economic liberalization in the international trade.

We’re in favor of liberalization, meaning the case of Brazil, we have to do it after we collect all the asymmetry. We have a number of asymmetry of tax level, financial cost level and in the infrastructure of Brazil, that take away all our international competiveness.

We do not have in the case of the industry and going to talk specifically about the steel industry. The steel industry does not have any type of government subsidies. We – and we work with international prices. So – and when we talk about asymmetries, we’re talking about trade with China.

China, today is a very strong player in the international trade scenario. China is not a market economy. They don’t remunerate like the major worldwide economies. They provide a great number of subsidies, the economy and the Chinese industry. The owner is the state not only the central power, but the provinces in terms of international trade-ins and balances.

Now the United States is facing on balancing trade matters. And the government was very sensitive in all of these points. And we believe that the government wants to recover the growth of the economy, but they want to eliminate some into – many asymmetries in the Brazil industry. We export taxes, for example.

In the case of the steel industry, when we analyze having said that it would be a cumulative taxes not recovered. Our industry is at a 7% level. We believe that it should be 5% below the non-recoverable tax. It was 3%, it was 2% in the past.

So we have had frequent meetings with all the agents of the federal government and I highlight Minister [indiscernible] was in the Institute of Brazil. The Brazilian coalition last week met with Minister [indiscernible], we’re interacting and this interaction has been very positive in order to build a Brazil that according to the industry, that Brazil that has to grow the Brazil that generates jobs and that will resolve the problems.

We have to drop the unemployment level that now is about 12%. Antonio, regarding your question. In terms of slabs, during the second quarter, there was a trend to price stock. And in our case, this will impact the production cost of the third quarter. So the expectation is to – we drop around the cost of acquired slabs well, for the third quarter would be around 10%. Therefore, there is a drop in the cost of slabs and now the production costs during the third quarter will be more reflected in our COGS on the fourth quarter.

Now, I bet we have released a new guidance that already reflects then you come back with a new view of that company in terms of what we will have in financial expensive from here on and it is available for you to see.

Antonio Heluany

Thank you very much.


Our next question from Gustavo Allevato, Santander Bank.

Gustavo Allevato

Good morning I have two questions regarding your steel units. I would like to better understand the evolution of the production cost connected to raw material in addition to slabs for the third quarter, because there is a high price of iron ore, and there is a high of the consolidated production when you compare second and third quarter, or do you believe that the drop of the price of slabs will offset the increase some other costs? What do you expect for the second semester in the third quarter and after a high of 7%. If you could elaborate on this?

Sergio Leite de Andrade

Gustavo, regarding the production costs. For the third quarter, we expect our production cost that is stable and will be a drop in the price of the slab. But on the other side, this – there will be an increase of the price of the iron ore that’s – that happened during the second quarter and part of the third quarter.

In July, there was some increase in prices and this will be reflected. The general production costs and this is balanced and the expectation is that, we will have a stable cost when we compare to the second quarter.

Regarding the volume of the second semester, now based on the report date issued by also Brazil, our expectation is that, it will be slightly superior to the first semester. But the third quarter will be very similar to what we saw during this quarter.

Gustavo Allevato

Just a follow-up. You said CPE [ph] is stable quarter-on-quarter and well COGS. When will you have a high or higher level in comparison to the second quarter?

Alberto Akikazu Ono

I think I already answered this question. This would be around 3% and 4%.

Gustavo Allevato

Thank you very much.


Our next question from Carlos de Alba, Morgan Stanley.

Carlos de Alba

Good morning to everyone. Thank you for taking our question. I would just like to follow-up on the Mineração Usiminas. I would like to better understand what are the necessary license to initiate Mineração less the operation? And for Samambaia, do you still need a license – operational license?

And my second question would be regarding the volume. This would be 9 million tons of iron ore sales. I would like to know that your assumption for – to restart this operation is 9 million, which is right?

Sergio Leite de Andrade

To start a plan that you don’t only need the license of the plant. But if you do not have the license to operate a dam, the plant cannot start working. Our plant – we have no problems regarding the licensing of the plant there. We need other licenses in the mining industry that impacts the Samambaia Plant.

Now, your second question about the 9 million tons. They are – and also [indiscernible]. That is three, four years, and we’re trying to attain this license for the month of August. And we have mine and plants in Minas Gerais.


As we have no further questions, we bring this conference to an end. Should you have questions, we – IT team is at your disposal. We would like to thank all of you for your participation, and have a good afternoon.