National Steel Company (Companhia Siderúrgica Nacional, CSN) — 2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020; filed April 12, 2021. This is an annual report, not a standalone 2020 Q4 report. Financial statements are audited and prepared under IFRS, in Brazilian reais (R$); amounts below are generally R$ millions unless noted.
Business context
CSN is a Brazilian integrated steel and mining group operating in steel, mining, logistics, cement and energy. Its operations span Brazil, Germany and Portugal, with steel sales and iron ore exports also serving international markets. In February 2021, subsidiary CSN Mineração completed an IPO; that event occurred after the reporting date.
Financial results and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | 30,064 | 25,436 | +18.2% |
| Gross profit / margin | 10,939 / 36.4% | 8,173 / 32.1% | Margin +4.3 percentage points |
| Operating income / margin | 5,714 / 19.0% | 3,542 / 13.9% | +61.3% |
| Net income | 4,293 | 2,245 | +91.2% |
| Net income attributable to CSN | 3,794 | 1,789 | +112.1% |
| Adjusted EBITDA | 11,501 | 7,251 | +58.6% |
| Cash from operating activities | 9,577 | 4,872 | +4,705 |
| Capital expenditures | 1,684 | 2,214 | −24.0% |
Adjusted EBITDA is a non-IFRS measure and should not be treated as a substitute for net income or operating cash flow. IFRS EBITDA was R$8,136 million, compared with R$4,964 million in 2019.
- Revenue drivers: Steel revenue rose 19.0% to R$16,603 million, with sales volume up 2.8%. Mining revenue rose 26.5% to R$12,683 million, primarily on higher iron ore prices and currency effects, despite iron ore sales volume falling 19.2% to 31.2 million tons. Average Platts iron ore prices increased 16.6% to US$108.9/dmt.
- Profitability: Gross profit rose as revenue growth outpaced cost growth. Operating income also benefited from lower selling expenses and lower idle-capacity costs than in 2019. Other operating expenses increased to R$3,270 million, including R$1,951 million of realized cash-flow hedge losses.
- Cash and debt: Cash and cash equivalents were R$9,945 million at year-end, versus R$1,089 million a year earlier. Total debt was R$35,271 million, including R$4,126 million current and R$31,144 million non-current debt; gross debt was 3.13 times equity. Gross debt less cash was approximately R$25,326 million, before considering other financial investments.
- Liquidity: Current assets were R$23,386 million and current liabilities R$14,726 million. Operating cash flow increased substantially; financing activities provided R$1,185 million in 2020, compared with R$3,789 million used in 2019.
- Other balance-sheet items: Total assets were R$63,002 million and equity R$11,252 million. Deferred tax assets were R$3,875 million, with recognition dependent on future taxable profits.
Material changes versus 2019
- Revenue, operating income and net income all increased; earnings benefited from stronger iron ore prices, steel pricing and the weaker real against the U.S. dollar.
- Steel gross profit increased to R$2,432 million from R$986 million. Mining gross profit increased to R$7,151 million from R$5,631 million.
- Cash from operations nearly doubled, while year-end cash increased by R$8,856 million. Debt increased from R$27,967 million to R$35,271 million, reflecting new borrowing, accrued charges and currency effects despite debt repayments.
- Cash-flow hedge losses recognized in other comprehensive income and realized in earnings were unusually large. Other comprehensive income was negative R$3,154 million, principally reflecting hedge accounting, and reduced equity attributable to CSN owners.
- CSN’s Brazilian steel operations temporarily idled Blast Furnace 2 from June to late November 2020 amid weak demand; Blast Furnace 3 supported production during the stoppage. The company reported no material impairment from COVID-19.
Outlook, risks and unusual items
- Outlook: Management generally expected demand conditions to improve in 2021 as the global economy recovered, with steel and iron ore prices plateauing after their sharp 2020 increases. The filing provides no specific earnings or revenue guidance.
- Going concern and refinancing: Management’s cash-flow projections through February 2022 depend on meeting production, sales-volume and pricing targets and refinancing debt. The filing says CSN expected to repay about R$4.2 billion in 2021 and describes continued leverage reduction and debt reprofiling as important. Management concluded adequate resources were available, but the conclusion is conditional on those assumptions and financing actions.
- Post-year-end financing and capital actions: In January 2021, CSN extended US$79 million of export prepayments from 2022 to 2023 and repaid R$315 million of export credit notes due in 2021. It also repurchased R$391 million of debentures in February. CSN Mineração’s IPO raised R$1,346 million net for the subsidiary and generated R$3,211 million of proceeds from CSN’s secondary share sales; CSN’s stake fell from 87.5% to 78.2%.
- Major exposures: Approximately 71.7% of year-end debt was U.S.-dollar-denominated or linked to the U.S. dollar. Risks include exchange-rate volatility, steel and iron ore price cycles, dependence on Chinese demand, raw-material costs, Brazilian economic and political conditions, and COVID-19 uncertainty.
- Contingencies: CSN disclosed a R$12.7 billion tax assessment concerning the alleged capital gain on the Namisa transaction, assessed by the company as a possible loss and not provisioned. Other large tax disputes are also described. CSN Mineração reported a confidential arbitration initiated in January 2021 involving an alleged US$1.0 billion default under iron ore supply agreements; CSN disputes the allegations. Separately, CSN guaranteed R$2,279 million of TLSA borrowings and debentures, and the Transnordestina railway project faces funding, regulatory and concession risks.
- Environmental and operational risks: The filing describes ongoing environmental proceedings and stricter mining-dam regulation. CSN reported that CSN Mineração had dry-filtered and stacked all its tailings since January 2020, while continuing plans to decommission inactive dams. The reported environmental-liability provision was R$193 million; asset-retirement obligations were R$611 million.
- Audit and controls: Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. The auditors identified TLSA investment recoverability and realization of deferred tax assets as critical audit matters, and noted material uncertainty around TLSA’s ability to obtain required project funding; no related adjustments were included in the financial statements.
Important facts for investors to verify
- Confirm the 2021 debt maturity and refinancing schedule, liquidity after the CSN Mineração IPO, and whether anticipated asset sales or other deleveraging measures were completed.
- Assess sensitivity of earnings and cash flow to iron ore prices, Brazilian real depreciation, Chinese demand and the company’s substantial foreign-currency debt.
- Review the status and potential financial effects of the Namisa tax assessments, the US$1.0 billion arbitration, environmental claims and the TLSA/FTL concession proceedings.
- Test assumptions underlying deferred tax asset recoverability and TLSA investment valuation, highlighted by the auditors as areas involving significant judgment.
- Track delivery volumes, costs and funding for CSN Mineração’s expansion plan; the stated target of up to 108 million tons of annual processing capacity by 2033 is a capacity ambition, not a production forecast.
- Check the approved dividend allocation: the filing proposed a 2020 mandatory dividend of R$901 million, or about R$0.653 per share, subject to shareholder approval.