Stock Review: Companhia Siderurgica Nacional

Posted by Tim

January 13, 2009

I have been a long time watcher of Companhia Siderurgica Nacional (SID: 21.97 -0.72 -3.17%), hereafter known as CSN. I owned the stock for a while in 2007 and sold for a nice profit. I thought the share price was to extreme in mid 2008, but now the shares are attractive again.

CSN is a Brazilian iron ore miner and steel producer. The majority of the revenues come from the sales of flat rolled steel. Also, the majority of revenues come from sales in Brazil. The company is hugely profitable with steadily growing revenues. For the 3rd quarter of 2008 the company reported revenues of R$4.0 billion and EBITDA of R$2.1 billion, both records. Here are some of the facts about the company (all from Q3 2008):

CSN generates 76% of their revenues from the sales of steel. This steel goes to the Brazilian automotive, agricultural machinery, appliance manufacture and construction industries.
Domestic sales were 88% of steel sales. CSN has 39% of the Brazilian steel market.
Of the steel exports 45% go to Latin America and 31% to Europe.
CSN owns the market niche of tin plate steel which is used for steel packaging. CSN has a 98% market share in that product in Brazil.
CSN owns it own iron mines of which most of the production goes to make the company’s steel.
Sales of iron ore accounted for 16% of revenues in the 3rd quarter of 2008. This was double the percentage of one year earlier.

There were a couple of interesting events in the 2nd half of 2008 that had a material affect on the company’s finances:

First, in the 3rd quarter the company took a R$1.3 billion loss on their rolling Total Return Equity Swap, which is based on the U.S. ADR price. The company initiated the swap in 2003 and had accumulated R$3.1 billion in profits on the swaps before the recent quarterly loss. Since the shares fell again in the 4th quarter, I would not be surprised to see another loss from this instrument on the next quarterly report.

Second, after the close of the 3rd quarter CSN made an agreement to sell a consortium of Japanese steel companies 40% of its iron ore mining subsidiary NAMISA for $3 billion (U.S. $). My math values the remaining 60% that CSN owns at $4.5 billion. NAMISA’s business plan has the mines producing 18 million tons of iron ore in 2009, increasing to 38 million tons in 2013. Company management has pointed out in several publications that NAMISA does not hold all of CSN’s mining assets.

CSN pay an annual dividend, usually in May. Their policy is to pay out at least 25% of the company’s net income. The $1.74 listed by Yahoo Finance as the dividend paid in 2008 appears to be the amount in Reals. Currency rates can have a big effect on the value of the U.S. ADRs. The dollar currently fetches about 2.3 Reals. If the Real weakens, i.e. more per $buck, the value of the U.S. ADR will fall. A strong dollar is hard on ADR values.

The bottom line is that CSN sells the majority of its production into the Brazilian economy, which is expected to continue growing. Exports offer the opportunity for additional profits when the rest of the world’s appetite for iron ore and steel increases. At the current share price I like the possibilities over the next couple of years.

Note: SID is a component of this site’s hypothetical Opportunities Portfolio. I currently do not hold a personal position.

View the full sid chart at Wikinvest