Mineração Rio do Norte S.A. Financial Statements together with the Independent Auditor s Report

Transcription

1 Mineração Rio do Norte S.A. Financial Statements together with the Independent Auditor s Report December 31, 2011 and 2010

2 Contents Page Independent auditor's report 2 Financial statements 4 Notes to the financial statements for the years ended December 31, 2011 and 2010 (amounts expressed in thousands of US Dollars) 9

3 2 Independent auditor s report To the Board of Directors and Shareholders of Mineração Rio do Norte S.A. Porto Trombetas: 1. We have audited the accompanying balance sheet of Mineração Rio do Norte S.A. (the Company ) as of December 31, 2011, and the related statements of income, changes in shareholders equity and cash flows for year then ended (all expressed in U.S. Dollars). These financial statements are under the responsibility of the Company s Management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company as of December 31, 2010 were audited by other auditors whose report dated February 4, 2011, expressed an unqualified opinion on those financial statements and included and explanatory paragraph informing on its restriction of use. 2. We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 3. In our opinion, the financial statements referred to above, fairly present, in all material respects, the financial position of Mineração Rio do Norte S.A. as of December 31, 2011, and the result of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 4. The accompanying financial statements were prepared for the information and use by the Company s Board of Directors and for the purpose of inclusion in the financial statements of the Company s investors under the equity method of accounting and are not intended to be and should not be used by anyone other than these specified parties.

4 3 5. A significant portion of the Company s activities is concentrated in operations with its parent and affiliated companies (see Note 17). São Paulo, February 2, Grant Thornton Auditores Independentes Laércio Ros Soto Junior Partner - Assurance

5 4 Mineração Rio do Norte S.A. Balance sheets as of December 31, 2011 and 2010 (In thousands of US Dollars) ASSETS Notes Current assets Cash and cash equivalents 4 43,318 26,497 Accounts receivable - Related parties 17 44,608 55,844 Third parties - - 1,361 Inventory 5 22,063 20,338 Taxes recoverable 9 2,693 1,427 Escrow deposits 6 4, ,419 Other - 3,786 3,189 Total current assets 120, ,075 Noncurrent assets Fixed assets, net 7 530, ,246 Intangible assets, net 8 1,597 2,263 Other noncurrent assets Escrow deposits 6 82, Taxes recoverable 9 10,975 12,709 Deferred income taxes 14 41,758 19,654 Investments Other - 1,453 - Total noncurrent assets 669, ,392 Total assets 789,672 1,048,467 The accompanying notes are an integral part of these financial statements.

6 5 Mineração Rio do Norte S.A Balance sheets as of December 31, 2011 and 2010 (In thousands of US Dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Trade accounts payable - 29,456 27,796 Short-term debt 10 98, ,974 Payroll - 12,967 12,798 Dividends Payable 15 18,496 - Income tax and other taxes 11 6,011 6,877 Income taxes ,056 Provision for reforestation and mine closure 13 1,700 1,914 Other - 1,042 4,633 Total current liabilities 169, ,048 Noncurrent liabilities Long-term debt , ,651 Deferred income taxes 14 31,141 6,960 Income tax and other taxes Provision for contingencies , ,107 Provision for reforestation and mine closure 13 36,088 40,492 Other Total noncurrent liabilities 321, ,838 Shareholders' equity Preferred, no-par-value class A shares billion shares authorized, issued and outstanding - 54,622 54,622 Common, no-par-value shares billion shares authorized, issued and outstanding - 27,310 27,310 Retained earnings (losses) - Appropriated - 50,718 61,312 Not appropriated - (48,238) (59,816) Accumulated other comprehensive income - 214, , , ,581 Total liabilities and shareholders' equity 789,672 1,048,467 The accompanying notes are an integral part of these financial statements.

7 6 Mineração Rio do Norte S.A. Income statements for the years ended December 31, 2011, 2010 and 2009 (In thousands of US Dollars) Notes Operating revenues, net of discounts and returns Bauxite sales - related parties , , ,194 Bauxite sales - customers ,775 8, , , ,011 Taxes on revenues (57,373) (45,798) (57,346) Net operating revenues 436, , ,665 Operating costs and expenses Cost of bauxite sold - (361,770) (316,425) (251,505) General and administrative expenses 18 (11,553) (11,587) (10,973) Other 19 (3,235) 18,020 3,595 (376,558) (309,992) (258,883) Income from operations 59,957 62, ,782 Nonoperating income (expenses) Financial income 20 19,355 17,611 17,301 Financial expenses 20 (20,971) (21,296) (20,644) Tax litigation - interest - Law no /09 20 (12,832) (43,564) (96,339) Foreign exchange rate 20 (15,125) 5,719 37,813 (29,574) (41,530) (61,869) Income before income taxes 30,384 20,954 75,913 Income taxes Current 14 (19,390) (17,383) (55,151) Tax litigation - principal - Law no / (68,498) Deferred 14 8,485 (6,581) 56,418 Net income 19,479 (3,010) 8,682 Fair market value of derivatives - (745) Foreign currency translation adjustment gains (losses) - (44,441) 15, ,824 Total comprehensive income (25,707) 12, ,813 The accompanying notes are an integral part of these financial statements.

8 7 Mineração Rio do Norte S.A. Statements of changes in equity for the years ended december 31, 2011, 2010 and 2009 (In thousands of US Dollars) Class a preferred shares 54,622 54,622 54,622 Common shares 27,310 27,310 27,310 81,932 81,932 81,932 Appropriated retained earnings Legal reserve Balance as of January 1 61,312 58,671 42,853 Transfer from (to) unappropriated retained earnings (10,594) 2,641 15,818 Balance as of December 31 50,718 61,312 58,671 Income tax exemption reserve- Balance as of January ,196 Transfer from (to) unappropriated retained earnings - - (2,196) Balance as of December Total appropriated retained earnings 50,718 61,312 58,671 Unappropriated retained earnings Balance as of January 1 (59,816) (50,846) 46,474 Net income 19,479 (3,010) 8,682 Dividends approved (18,496) (3,319) (70,434) Minimum mandatory dividends - - (21,946) Transfer from (to) reserves 10,594 (2,641) (13,622) Balance as of December 31 (48,238) (59,816) (50,846) Accumulated other comprehensive income Balance as of January 1 260, , ,190 Fair market value of derivatives (745) Foreign currency translation adjustment gains (losses) (44,441) 15, ,824 Balance as of December , , ,321 Total shareholders' equity 299, , ,078 The accompanying notes are an integral part of these financial statements.

9 8 Mineração Rio do Norte S.A. Cash flow statements for the years ended december 31, 2011, 2010 and 2009 (In thousands of US Dollars) Cash flow from operating activities Net income 19,479 (3,010) 8,682 Adjustments to reconcile P&L to net cash provided by operating activities Depreciation and depletion 65,245 60,211 53,757 Provision for contingencies 92,271 (15,121) (1,609) Tax litigation - Law No /09 12,832 43, ,837 Deferred income taxes (8,485) 6,581 (56,418) Net book value of fixed assets retired Escrow deposits - accrued interest (17,099) (16,726) (15,684) Provision interest for reforestation and mine closure 3,383 2,960 2,268 Provision for contingencies - accrued interest - - Accrued interest and translation adjustments 656 (6,575) (44,238) Other - (160) (413) Decrease (increase) in operating assets Accounts receivable 6,949 (2,315) 39,451 Inventory (4,476) 3, Escrow deposits 73,104 (43) - Taxes recoverable (1,245) 6,002 1,324 Other (2,693) 915 (600) Increase (decrease) in operating liabilities Trade accounts payable 5,337 3, Payroll and related parties 1, Income tax and other taxes (7,796) (10,752) (11,936) Provision for reforestation and mine closure (3,168) (2,968) (2,299) Other (3,358) 1,084 2,649 Net cash provided by operating activities 232,758 70, ,262 Cash flow from investing activities Additions tofixed assets (140,619) (68,133) (51,882) Net cash used in investing activities (140,619) (68,133) (51,882) Cash flow from financing activities Borrowings 263, , ,408 Repayment of loans (339,567) (230,706) (114,669) Dividends paid - (26,146) (105,795) Net cash used in financing activities (76,018) 20,649 (99,056) Effect of translation adjustments on cash and cash equivalents 25,584 1,861 1,376 Increase (decrease) in cash and cash equivalents 41,705 24,953 (6,300) Cash and cash equivalents, beginning of year 1,613 1,544 7,844 Cash and cash equivalents, end of year 43,318 26,497 1,544 Supplementary disclosures of cash flow information: Cash paid during the year for Interest 18,961 19,089 18,527 Income taxes 15,227 27,570 62,075 Noncash financing activity Proposed dividends ,946 The accompanying notes are an integral part of these financial statements.

10 9 Notes to the financial statements for the year ended December 31, 2011 (In thousands of US Dollars) 1. Business A Mineração Rio de Norte S.A. (the Company ) is a Brazilian corporation owned by Vale S.A., Alcan Alumina Ltda, BHP Billiton Metais S.A., Companhia Brasileira de Alumínio, Alcoa Alumínio S.A., Norsk Hydro Brasil Ltda, Alcoa World Alumina LLC and Alcoa World Alumina Brasil Ltda (see Note 15). The Company is engaged in extracting, processing and selling bauxite ore. The Company sells almost all of its production to its shareholders and their related parties. Such sales are primarily governed by long-term contracts that establish annual quantities and similar sales terms for each shareholder. The quantities are confirmed annually and may vary slightly. Sale prices are calculated based on a price formula stipulated in the sales contracts. Accounts receivable from sales of bauxite ore are due in 30 days in average. Pursuant to the contracts, the price is based on a fixed amount calculated in a way as to preserve the Company s internal cash flow balance and two variables dependent upon the market price of alumina and aluminum. If for any reason the buyer is unable to take the annual minimum quantity stipulated in the contract, the Company will be entitled to offer the product to a third party for a floor price defined by the buyer, provided the price is not lower than 90% of the price set by contract. In this case, the buyer will reimburse the Company for the difference. Any unlifted tonnage which the Company is unwilling or unable to dispose of as aforesaid shall not be produced and shareholder shall pay the Company in respect of such unlifted tonnage a price equal to the sum of the base price and escalation adjustement prevailing at that time and, should there be any net savings resulting from not producing such unlifted tonnage, the Company shall pay to shareholder a rebate in an amount established by the Company at is sole discretion as corresponding to such net savings. As of December 31, 2011 sales to related parties represented approximately 99.8% (96.7% in 2010). As of December 31, 2011 the Company presents a negative working capital of US$ 48,525 mainly result from the financing obtained to provide the funds needed to open new mines. A Management based on the Company s business plan is convinced that the commercial operations that will be performed in the next years will be sufficient to fulfill its short-term obligations. Moreover, Management believes the Company s ability to provide cash allows it to renew shortterm loans or change them to long-term credit lines.

11 10 The Company manages its relations with the environment as a strategic factor, under the assumption of fully complying with the applicable legislation and internal guidelines and standards. It adopts a rigorous environmental management program as a means of minimizing the impacts caused by its mining operations, in conformity with ISO 14001, a certification that the Company was granted for both its industrial operations and the urban center of Porto Trombetas. The Company permanently monitors, performs revegetation, and develops seedlings and educational activities directed to its employees and to the community. 2. Basis of presentation The Company maintains its accounting records and prepares its primary financial statements in accordance with Brazilian accounting practices. The Company s functional currency that better reflects its operations is the Brazilian real. The following criteria for the translation of Brazilian Reais into U.S. Dollars have been applied to the Brazilian functional Reais basis financial statements: The United States dollar amounts (US$) result from the translation of the financial statements at the rates indicated below and are shown for equity method purposes of certain Company s investors. The translation was performed in accordance with the provisions of Statement of Financial Accounting Standards No. 52 ( SFAS 52 ) Foreign Currency Translation for nonhyperinflationary economies beginning December 1, The official selling rates of exchange to the United States Dollar were: R$ At December Average for the year 1,6750 1,7601 The Company maintains its accounting records in Brazilian currency and in the Portuguese language. The U.S. Dollar amounts for the years presented have been remeasured from the Brazilian currency amounts in accordance with the criteria set forth in Statement of Financial Accounting Standards No. 52 (SFAS 52). Since the beginning management had elected the US dollar as the Company s functional currency. However, during 2008, the Company s management changed the functional currency from the Brazilian real to the U.S. dollar. This change was effected in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation and was made taking in consideration the functional currency that better reflected the Company s operations, such as sales price and operating costs, the Company made the restatement the 2 years preceding. The amounts have been translated into U.S. dollars, for equity and consolidation purposes into the Company s Shareholder financial statements. The translation was performed in accordance with the standards set forth in SFAS 52, as follows: monetary assets and liabilities (i.e. cash, accounts receivable, accounts payable, etc.) were translated at the year-end exchange rate;

12 11 nonmonetary assets and liabilities (i.e. inventories, fixed assets, deferred charges, etc.) that, until 2005 were remeasured into U.S. dollars at the historical rate were translated into Brazilian reais as of January 1st 2006, at the exchange rate in effect, and from this period on, were added to/deducted from these balances in reais, and then translated into U.S. dollars at the exchange rate in effect at December 31, 2011 and 2010; shareholders equity balances (i.e. capital, additional paid-in capital, retained earnings, etc.) that were previously translated into U.S. dollars at the historical rate, were translated into Brazilian reais, as of January 1st, 2006 at the exchange rate in; all transactions, beginning from this on and thereafter, were recorded in Brazilian reais and translated into U.S. dollars using the exchange rate prevailing on the date of each transaction. Any exchange differences are recorded in a separate component of shareholders equity (accumulative other comprehensive income (loss)); income statement accounts continue to be translated from Brazilian Reais (R$) into U.S. Dollars (US$) using the monthly average exchange rates; revenues, expenses, gains and losses and cash flows were translated using the average monthly exchange rate prevailing during each year; and gains and losses arising from transactions denominated in currencies other than the Real are included in the income for the year the net effect of the exchange rate change on the net assets is recorded as foreign currency translation adjustment and is included in accumulated other comprehensive loss, a separate component of shareholders equity. Previously, the balance of the nonmonetary accounts were remeasured using historical U.S. dollars and gains and losses resulting from remeasurement of the monetary assets and liabilities were credited/charged to operations. 3. Summary of significant accounting policies Significant accounting policies used in the preparation of the financial statements are described in the following paragraphs 3.1. Cash and cash equivalents Cash and cash equivalents consist primarily of cash on hand, cash in bank accounts, and highly liquid financial investments with original maturities of three months or less when purchased. The carrying amounts of the Company s cash equivalents approximate their fair value Accounts receivable Accounts receivable are stated at estimated realizable values. An allowance for doubtful accounts is provided in an amount considered by management to be sufficient to cover future probable losses related to unsettled amounts.

13 Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company s financial statements include various estimates concerning the selection of useful lives of property, plant and equipment, accruals for contingencies, accrual for reforestation and closure of mines, and other similar evaluations. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Although these estimates are based on management s best available knowledge of current and expected future events, actual results could be different from those estimates Impairment of long-lived assets For long-lived assets, including property, plant and equipment, intangible assets, the Company evaluates the carrying value of the assets by comparing the estimated future cash flows generated from the use of the assets and their eventual disposition with the assets reported net book values. The carrying values of assets are evaluated for impairment when events or changes in circumstances occur, which may indicate the carrying amount of the assets may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed discounted future cash flows expected to be generated by such assets. Assets to be disposed of are reported at the lower of their carrying amount or fair market value less costs to sell. No impairment has been recorded in the accompanying financial statements for the years ended December 31, 2011 and Inventories Inventories are stated at the lower of average cost of acquisition or production, as compared to replacement cost or net realizable value. Cost is determined principally on the average cost method. Provision for obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts Transactions in foreign currencies The Company records transactions in foreign currencies (other than Brazilian reais, the Company s functional currency) using rates of exchange prevailing at the time of recording each transaction. Assets and liabilities denominated in foreign currencies are adjusted to reflect the year-end rate of exchange. The net gain/loss arising from receipt/payment or adjustment of foreign currency assets and liabilities is included in the accompanying statements of earnings.

14 Property, plant and equipment, at cost Property, plant and equipment are stated at cost of acquisition or construction, including qualifying interest cost incurred during the construction period of major new facilities, less accumulated depreciation. Depreciation is calculated under the straight-line method at annual rates based on the estimated useful lives of the assets mentioned at Note 7. The original costs of exploration and development of mineral reserves were capitalized. Depletion is calculated as a percentage of bauxite ore produced in proportion to estimated total reserves. Additional development costs to produce existing reserves are charged to production costs as incurred Intangible Represent original cost of acquisition of software less accumulated amortization Accrual for reflorestation The Company calculates its accrual for reforestation and closure of mines in accordance with ASC Topic 410, Asset Retirement and Environmental Obligations. Expenses associated with environmental remediation and closure of mines are recorded taking into consideration the following: expenses related to compliance with environmental regulations are capitalized in property, plant and equipment when incurred with a corresponding entry to accrual for reforestation and closure of mines; depreciation is based on the estimated period of production of ore; cost estimates are recorded considering the present value of liabilities, discounted at a long-term risk-free rate; cost estimates are revised yearly, with the consequent revision of the calculation at present value, adjusting assets and liabilities already recorded with a corresponding entry to operations Income taxes The provision for income taxes is calculated and recorded based on the taxable income for each year, adjusted in accordance with the tax legislation in effect. Income tax is calculated at the rate of 15% plus an additional 10% on taxable income that exceeds R$ 240 thousands. Social contribution is calculated based on taxable income at the rate of 9%. The Company accounts for income taxes under the provisions of ASC Topic 740 (SFAS No. 109), Accounting for Income Taxes, which requires the application of the comprehensive liability method of accounting for income taxes. SFAS No. 109 requires recognition of deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.

15 14 Deferred income taxes are provided based on the estimated future tax effects of temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced through the recognition of a valuation allowance, as appropriate, if, based on the weight of available evidence, it is more likely than not that the deferred tax asset will not be realized Provisions for tax, civil and labor risks Conditions may exist as of the date the financial statements, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be reasonably estimated, then the estimated liability is accrued in the Company s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed The company is party to a few lawsuits and administrative proceedings, as described in Note 12. Provisions are established for all of the risks referring to lawsuits that represent probable losses and estimated with a certain degree of reliability. The rating of the probability of loss includes assessing the evidence available, judicial hierarchy, judicial decisions available, most recent court decisions and their relevance in the legal system, as well as the rating issued by external legal advisors. Management believes such provisions for tax, civil and labor risks are correctly presented in the financial statements Finance lease The finance lease agreements are classified as such because the terms and condition of the lease agreement substantially transfer the risks and rewards of ownership of the asset to the leaseholder. Finance leases are capitalized in the balance sheet at the beginning of the lease at the lower amount between the fair value of the asset leased and the present value of the minimum payments of the lease. Each finance lease installment paid is partially allocated to liabilities and partially allocated to financial charges. The corresponding liabilities, net of financial charges, are classified in current and noncurrent assets according to the term of the agreement. Fixed assets acquired by means of finance leases are depreciated over the useful lives of the assets.

16 Other current and noncurrent assets and liabilities Assets are recognized in the balance sheet when it is likely that their future economic benefits shall inure to the Company and their cost of amount can be reliably measured. Liabilities are recognized in the balance sheet when the Company has a legal or constructive obligation as the result of a past event and it is likely that economic resources will be required to settle it. The Company accrues for liabilities for future compensation to employees for vacations vested during the year. They are increased, where applicable, of the corresponding charges and inflation or translation adjustments incurred. Provisions are recorded on the basis of the best estimates of the risk involved Revenues recognition Revenues from product sales are recognized when the related goods are shipped to the customer and the transfer of risks, rights and obligations associated with the ownership of products take place Comprehensive income (loss) The Company reports comprehensive income (loss) in accordance with ASC Topic 220 (SFAS No. 130) in the statements of income (loss), while accumulative other comprehensive loss is included in the statements of shareholders equity of the balance sheet. Comprehensive income consists of foreign currency translation adjustments Financial instruments and derivatives The carrying amount of the Company's financial instruments, which include cash equivalents, accounts receivables, accounts payable and current and long-term notes payable to banks, approximates their fair value at December 31, 2011 and Derivatives - the Company entered into a derivative transaction ( Swap ) in order to hedge its exposure to the interest rate ( LIBOR ). The Company does not enter into derivative transactions for trading purposes. Under ASC Topic 815 Derivatives and Hedging, the Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. Changes in fair value are recognized in earnings unless specific hedge criteria are met. ASC Topic 815 enables companies to designate qualifying derivatives as hedging instruments based on the exposure being hedged. These hedge designations include fair value hedges and cash flow hedges. Changes in the fair value of a derivative that is highly effective as, and is designated and qualifies as, a fair value hedge are recognized in earnings as offsets to the changes in fair value of the exposure being hedged. Changes in the fair value of a derivative that is highly effective as, and is designated as and qualifies as, a cash flow hedge are deferred in accumulated other comprehensive income and are recognized into earnings as the hedged transactions occur. Any ineffectiveness is recognized in earnings immediately. For the hedge contract, the Company provides formal documentation of the hedge and effectiveness testing in accordance with ASC Topic 815 and classified the open contracts as cash flow hedges.

17 Employee benefit plans The Company has a defined contribution plan covering all of its employees who meet age and services requirements Earnings per share Earnings per share are computed by dividing net income by the weighted average number of common and preferred shares (which are substantially common stock equivalents for earnings distribution purposes) outstanding during the periods. Recently issued accounting pronouncements The FASB recently issued a number of Statements of Financial Accounting Standards and interpretations; the standards and interpretations described below have not had or are not expected to have a material impact on the financial position and results of operations of the Company: Update No Compensation - Retirement Benefits - Multiemployer Plans (Subtopic ): Disclosures about an Employer s Participation in a Multiemployer Plan; Update No Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment; Update No Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (a consensus of the FASB Emerging Issues Task Force); Update No Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force); Update No Comprehensive Income (Topic 220): Presentation of Comprehensive Income; Update No Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs; Update No Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements; Update No Receivables (Topic 310): A Creditor s Determination of Whether a Restructuring Is a Troubled Debt Restructuring; Update No Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No Conclusion The Company is doing analyses to verify if these pronouncements have some impact on the Company s financial statements as of December 31, In the first analysis the Company believes that these pronouncements do not have significant impacts on the financial statements.

18 17 4. Cash and cash equivalents The balance of cash and cash equivalents includes cash and banks in addition to investments that are redeemable at any time without loss of the income earned, performed at top-tier financial institutions, as follows: 12/31/11 12/31/10 Cash 12 1,973 Time deposits (i) 43,306 24,524 Total 43,318 26,497 (i) Time deposits consist of Deposit Certificates at blue chip financial institutions in Brasil as follows: Financial Institutions 12/31/11 12/31/10 Banco do Brasil 3,737 - Bradesco 10,701 8,406 Itaú 10,659 - Votorantim 4,953 4,410 Westlb 13,256 11,708 Total 43,306 24,524 The yield of the investments are equivalent to 100% of the Interbank Deposit Certificate ( CDI ) rate, with maturity terms shorter than three months, and such certificates are immediately convertible to a known amount of cash, being subject to an insignificant risk of having their value changed. 5. Inventory As of December 31, 2011 and 2010 the inventory comprised: 12/31/11 12/31/10 Bauxite: Mined Crushed Washed 3,308 2,605 Wet domestic 2,536 3,615 Dried 542 1,248 7,286 8,964 Supplies 19,316 17,211 Provision for obsolescence (i) (4,539) (5,837) Total 22,063 20,338 (i) The table below shows the movement of the provisions for the obsolescence of materials: US$ Balance as of 12/31/2010 5,837 Additions 229 Reversals and decreases (963) Translation adjustments (564) Balance as of 12/31/2010 4,539

19 18 6. Escrow deposits As of December 31, 2011 and 2010 escrow deposits were composed of: 12/31/11 12/31/10 Federal taxes on capital shares reduction transaction 86, ,419 Other Total 87, ,692 Current 4, ,419 Noncurrent 82, The movement for the year is as follows: Addition Reversal Interest Foreign exchange Total Federal taxes on capital shares reduction transaction (i) 380,419 - (298,224) 17,085 (12.412) 86,868 Other (144) 14 (23) 174 Total 380, (298,368) 17,099 (12,435) 87,042 (i) Federal taxes on capital shares reduction transaction. On April 16, 2003, the Company was assessed by the Federal Internal Revenue Service for taxes associated with a capital shares reduction that occurred on July 22, As required by Tax Authorities, in May 2003 the Company made a legal deposit in the amount of US$ 347,390 (includes financial interest), in order to challenge this claim in court. On May 27, 2009, Law No /09 was issued, establishing benefits for debt payment and rescheduling at the National Treasury Attorney General Office and the Brazilian Federal Revenue Service. On November 30, 2009, the Company elected to withdraw the lawsuit and filed with the Federal Revenue Agency at Santarém, State of Pará ( PA ) its registration in the program, recognizing in its books the allowance for settlement of the lawsuit (the appeals are supported by escrow deposits). On December 30, 2010, due to new understandings by the Brazilian Federal Revenue Service concerning the amount that is due, the Company completed the write-off of court deposit by US$ 43,564. On the 18th of July of 2011, His Honor Judge of the 22nd Federal Court decided to issue the withdrawal of deposit permit on behalf of MRN in the amount of US$ 165,744of which U$ 132,480was converted into income to the Federal Government, remaining in the Judicial deposit account the amount of US$ 86,868 adjusted for inflation until December 31, The release of such amount depends on the trial to take place of the appeal filed by the company regarding the correct application of the benefits of Law No /09.

20 19 7. Fixed assets Industrial and other Buildings Machinery and Mine Furniture Vehicles Construction installations and facilities equipment Railroads closure Mines and fixtures and ferries in progress Total Depreciation rate 5% a 10% 4% 10% 4% a 10% 3% at 33% 11% at 50% 10% a 20% 10% a 25% - - Balance as of 12/31/2010 Cost 541, , ,670 70,709 24,319 62,114 18, ,969 87,984 1,325,967 Depreciation/ depletion (317,657) (89,363) (212,302) (62,683) (4,605) (11,740) (13,050) (90,321) - (801,721) Net 223,730 33,540 60,368 8,026 19,714 50,374 5,862 34,648 87, ,246 Balance as of 12/31/2011 Cost 535, , ,332 60,560 20,919 56,607 17, ,391 84,751 1,302,342 Depreciation (314,354) (89,244) (198,582) (54,723) (4,625) (10,712) (12,342) (87,599) - (772,181) Net 221,380 58,708 41,750 5,837 16,294 45,895 4,754 50,792 84, ,161 Cost Industrial and other Buildings Machinery and Railroads Mine Mines Furniture Vehicles Construction installations and facilities equipment closure and fixtures and ferries in progress Total Balance as of 12/31/ , , ,670 70,709 24,319 62,114 18, ,969 87,984 1,325,967 Cost 47,194 36,991 7, ,542 1,414 30,944 6, ,042 Depreciation / Depletion - (180) - - (106) (207) - (493) Foreign exchange (52,847) (11,942) (39,196) (10,167) (3,400) (11,049) (3,124) (17,315) (10,134) (159,174) Balance as of 12/31/ , , ,332 60,560 20,919 56,607 17, ,391 84,751 1,302,342 Depreciation Industrial and other Buildings Machinery and Railroads Mine closure Mines Furniture Vehicles Construction installations and facilities equipment and fixtures and ferries in progress Total Balance as of 12/31/ ,657 89, ,302 62,683 4,605 11,740 13,050 90, ,721 Cost 21,031 3,160 20,024 2,027 1,192 2,513 1,403 13,300-64,650 Depreciation - - (151) - - (499) (104) (206) (960) Foreign exchange (24,334) (3,279) (33,593) (9,987) (1,172) (3,042) (2,007) (15,816) (93,230) Balance as of 12/31/ ,354 89, ,582 54,723 4,625 10,712 12,342 87, ,181 The balance of construction in progress refers to construction work and equipment relating to the Company s operations under final construction or assembly phase. 67% are investments in new mines.

21 20 a) Construction in progress is represented by the major projects: Projects 2011 Mine Opening Monte Branco 41,369 Mine Opening at the Bela Cruz Plateau 11,808 Construction of the Reservoir of Mining Waste 7,473 Changes in Screening and Refrigeration 2,370 Geological Research of the Plateau 2,245 Monte Branco s Licensing 1,907 CTLD Substitution Warning 1,726 Mine Drainage 1,166 Incinerator Acquisition and Installation 851 Environmental Compensation Monte Branco 830 Construction of New Landfill 811 Environmental Licensing Cruz Alta 754 Other projects 11,441 Total 84,751 The interest and inflation adjustments capitalized during the period the natural deposit of ore is exploited are recorded at acquisition or construction cost in the construction in progress. Capitalized in 2011 were U$ 3,372 (US$ 1,474 in 2010). 8. Intangible assets Amortization rate (%) Cost Amortization Net Cost Amortization Net Software 20 14,115 (12,518) 1,597 15,345 (13,082) 2,263 Total intangible assets - 14,115 (12,518) 1,597 15,345 (13,082) 2,263 Cost Amortization Balance as of 12/31/ ,345 Balance as of 12/31/ ,082 Cost 781 Cost 1,073 Depreciation - Depreciation - Foreign exchange (2,011) Foreign exchange (1,637) Balance as of 12/31/ ,115 Balance as of 12/31/ , Recoverable taxes 12/31/11 12/31/10 ICMS - State Value-Added Tax 8,222 7,320 PIS - Tax on Gross Revenues for the Social Integration Program 972 1,216 COFINS - Tax on Gross Revenues for Social Security Financing 4,474 5,600 Total 13,668 14,136 Current 2,693 1,427 Noncurrent 10,975 12, Short and long-term debit 12/31/11 12/31/10 Foreign currency 172, ,658 Local currency 75, ,967 Total 247, ,625 12/31/11 12/31/10 Current 98, ,974 Noncurrent 148, ,651 Total debit 247, ,625

22 21 The foreign currency debt of US$ 172,248 (US$154,658 for December 31, 2010) represents, basically, the financing, in US Dollars, of the Company s expansion and advances on foreign exchange contracts for future export sales. The financing is summarized as follows: US$ Date Financial institution 12/31/11 12/31/10 Issuance Maturity Interest Westlb 33,368 60,051 02/ /2009 a 02/2013 LIBOR + Spread Bando do Brasil 37,820 52,133 06/ /2012 LIBOR + Spread Bradesco 18,071 18,629 05/ /2012 LIBOR + Spread Finem 22,857 23,845 03/ /2017 LIBOR + Spread Westlb 60,132-11/ /2016 LIBOR + Spread 172, ,658 The local currency debts are as follows: US$ Date Financial institution 12/31/11 12/31/10 Issuance Maturity Interest Finame 9,957 5,875 08/ /2015 TJLP + Spread Banco do Brasil - 75,151 04/ /2011 CDI + Spread Bradesco - 75,314 04/ /2011 CDI + Spread Bradesco - hedge / /2013 3,98% Finem 58,441 42,675 03/ /2017 TJLP + Spread Itaú Leasing 6, a 04/ a 04/2014 CDI + Spread 75, ,967 Bradesco Swap This contract is for a transaction to hedge the swap of its cash flow. See Note 21. Guarantees FINAME financing is guaranteed by the financed machinery. The exchange contracts are guaranteed by the exports receivables. The guarantees provided with respect to the local currency debts consist of promissory notes and machinery and equipment. The foreign currency debts are guaranteed by promissory notes issued by the Company. Westlb The contract of Westlb financing uses financial covenants to monitor the financial position of the Company. The covenants to be met by the contract are: a) relation between net debt with the EBITDA (calculated on the basis of the most recently ended four fiscal quarters) shall be less than or equal to 3.0; b) the EBITDA of MRN (calculated on the basis of the most recently ended four fiscal quarters) to net interest expense for such fiscal quarter shall not be less than 5.0. All covenants described above are calculated based on the financial statements of the Company. On December 31, 2011 the Company was in compliance with all covenants.

23 22 The long-term portion of the Company s debt outstanding as of December 31, 2011 falls due in the following years: Banco Bradesco (swap) FINAME FINEM Banco WESTLB Banco Itaú Total ,782 16,956 18,666 2,416 40, ,069 17,647 16,000 1,024 36, ,773 17,647 16,000-35, ,647 16,000-34, , ,470 Total 23 7,067 71,367 66,666 3, ,563 Westlb II On November 30, 2011, the Company obtained a new loan from Westlb in the amount of US$ 60 million to support the long-term investments to open new mines. 11. Income tax and other taxes As of December 31, 2011 and 2010 the income tax and other taxes were composed of: 12/31/11 12/31/10 Financial Compensation for Exploiting Mineral Resources ( CFEM ) payable 2,431 2,465 Social contribution levy under dispute PIS and COFINS payable 583 2,051 ICMS payable 1,298 1,041 Other taxes 1,699 1,320 Total 6,011 7,179 Current 6,011 6,877 Noncurrent Provision for contingencies As of December 31, 2011 and 2010 the provision for contingencies comprised: 12/31/11 12/31/10 Federal taxes on capital shares reduction transactions 82, ,568 CFEM 19,948 21,476 Labor indemnity Legal advisor fees 2,314 3,991 Total 105, , Summary Addition Reversal Utilization Interest Foreign exchange Total Civil claims 3,991 - (244) (1,326) 193 (299) 2,315 Tax claims 236, (1,141) (132,479) 13,268 (13,557) 102,752 Labor claims (76) - 5 (2) 13 Total 240, (1,461) (133,805) 13,466 (13,858) 105,079 The Company has lawsuits and administrative proceedings at courts and government agencies, from the normal course of its operations, mainly involving tax, civil and labor claims. The Company s management, based on information and assessments issued by its internal and external legal advisors, has recorded a provision for contingencies at an amount considered sufficient to cover losses rated as probable.

24 23 Provisions for contingencies formed by the Company: Civil claims Such provisions include lawyer fees of all cases in which loss is not rated as probable. Tax claims The Company is disputing in court the controversial part of applying tax benefits of Law No /09 concerning its Capital Decrease proceeding and such amounts have been accrued. Details about that proceeding are described in Note 6. There are also amounts, on account of the CFEM, that are questioned by the DNPM under the allegation that the Company unduly deducted expenses from its tax base. Labor claims Presently, there are only two labor claims, the chances of success of which are rated as remote and its impacts are accrued in the amount of US$ 13. Possible contingencies The contingencies as of December 31, 2011 and 2010, rated as possible losses are not recorded in the financial statements and are presented as follows: 12/31/11 12/31/10 Civil claims 2,897 2,143 Labor claims 923 2,124 Tax claims 50,665 44, Provision for reforestation and mine closure The Company s asset retirement obligations primarily relate to the obligation to restore forest cut during the bauxite ore exploitation process. The following summarizes the activity of the asset retirement obligations for 2011 and 2010: 12/31/11 12/31/10 Beginning of the year 42,406 36,996 Translation impact (4,833) 2,129 Additions to fixed assets - 3,289 Expenses Interest incurred during the period 3,383 2,158 Interest settled during the period (3,168) (2,968) End of the year 37,788 42,406 Current 1,700 1,914 Noncurrent 36,088 40,492

25 24 In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (ASC Topic 410), Accounting for Asset Retirement Obligations ( ARO ). ASC Topic 410 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and related asset retirement costs. It requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is recorded, the entity capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company s asset retirement obligations primarily relate to the obligation to restore forest cut during the bauxite ore exploration process. Therefore, the Company booked the accrual for reforestation costs to reflect in the balance sheet the estimate of future disbursements at present value related to the deforested area. This accrual is classified in current liabilities, amounting to US$ 1,700 (US$ 1,914 on December 31, 2010), and in the non-current liabilities, US$ 36,088 (US$ 40,492 on December 31, 2010). In 2010, after reviewing the mine closure plan, the Company recorded in its fixed assets the amount of US$ 3,289 related to the exploration on new areas that will have to be restored. In 2011 the Company maintained the plan, for this reason no fixed assets was recorded. 14. Income taxes Income taxes in Brazil comprise the corporate income tax ( IRPJ ) and the social tax on net income ( CSLL) - which is an additional federal income tax for social security purposes. The current statutory rates are 25% for the IRPJ and 9% for the CSLL, resulting in a composite rate of 34%. The Company is granted a reduction in federal income tax on varying levels of production arising from mining operations. The IRPJ and the CSLL incurred in December 2011 and 2010 were calculated as follows: IRPJ CSLL Total IRPJ CSLL Total Income before income taxes 30,384 30,384-20,954 20,954 - (%) Federal income tax benefit (charge) at statutory rate (7,596) (2,735) (5,239) (1,886) Tax reconciling items: Income tax exemption Tax incentives - Law No /09 (3,208) (1,155) - (12,699) (4,572) - Permanent differences 1,972 1,003 - (199) (96) - Income taxes in statements of income (8,018) (2,887) (10,905) (17,410) (6,554) (23,964) Current (14,257) (5,133) (19,390) (12,571) (4,812) (17,383) Current tax litigation- Law No / Deferred 6,239 2,246 8,485 (4,839) (1,742) (6,581)

26 25 The amounts of deferred IRPJ and CSLL tax liabilities, recorded in the financial statements, derive from the temporary differences on the inflation adjustments of judicial deposits (Note 6) to be paid in case the ongoing actions are successful and to the amounts referring to the provisions for contingencies added to the calculation of the above taxes. The amounts disclosed in the balance sheets are the following: 12/31/11 12/31/10 Assets Temporary differences of contingencies and other items 122,816 57,806 Tax rate 34% 34% Total deferred income taxes 41,758 19,654 Liabilities Financial income on escrow deposits 91,592 20,472 Tax rate 34% 34% Total deferred income taxes 31,141 6, Shareholders equity a) Capital stock As of December 31, 2011 and 2010, the Company s capital was held as follows: Millions of shares 2011 Common (*) % Preferred (*) % VALE S.A , ,0000 Alcan Alumina Ltda , ,7500 BHP Billiton Metais S.A , ,9500 Companhia Brasileira de Alumínio , ,7500 Alcoa Alumínio S.A , ,8075 Alcoa World Alumina LLC , ,0000 Norsk Hydro Brasil Ltda , ,0000 AWA Brasil Ltda , , , ,0000 (*) Millions of shares. Both common and preferred shareholders are entitled to receive an annual dividend on net income of 6% of the amount of their shares. b) Dividends The amount of dividends which may be remitted abroad is limited to the balance of the retained earnings account, per the Company's books in local currency. The articles of incorporation guarantee compulsory dividends to shareholders at each fiscal year of 6% of the adjusted shareholders equity, under article 202 of Law No /76. The Board of Executive Officers, after establishing the compulsory Reserves, is recording the amount of U$ 18,496 as dividends payable in liabilities. No withholding tax is payable on distribution of profits earned as from January 1, 1996