2008 - ibhcayman.com.ve PDF/Informe Anual... · International Briquettes Holding, IBH is a world class company headquartered in Venezuela and consolidating companies engaged in the

2008AnnualR e p o r t

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AnnualR e p o r t

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Report submitted by the Board of Directors

of International Briquettes Holding (IBH)

to the Annual Shareholders’ Meeting

Contents

Board of Directors and Audit Committee 5

To our Shareholders 7

Financial Statements 19

Investor Relations 53

International Briquettes Holding, IBH is a world class company headquartered in Venezuela and consolidating companies engaged in the production of reduced iron briquettes used as raw materials for steel manufacturing. Its main clients are steel mills in Venezuela, the U.S., Europe and Asia. Venprecar, its subsidiary, operates a MIDREX technology plant with a production capacity of 900,000 metric tons per year, while Orinoco Iron S.C.S., a Venprecar subsidiary, has a FINMET technology plant with a production capacity of 2,200,000 metric tons per year. IBH also consolidates results for Operaciones RDI (the former Fior Plant, currently inactive) and Brifer (which, jointly with VAI, holds intellectual property rights on the FINMET®, technology).

OperacionesRDI

BRIFER

100%

0.01%98.93% 1.06%

100%

Others

Venprecar

Orinoco Iron S.C.S.

Shares in the market

CVG Ferrominera

OrinocoSIVENSA

IBH

18.29% 13.16% 68.55%

Participations reflected in this graph are direct and/or indirect. IBH, through IBH de Venezuela, C.A., owns 79.65% of Venprecar shares.

4

DirectorsBOARD OF

Auditors

First Statutory Auditor

Iris Campos

Alternate

José Enrique Requena

Second Statutory Auditor

Luisa Elena Tovar

Alternate

Martín González

External Auditors

José Antonio Apostólico

Espiñeira, Sheldon y Asociados, a Member of PriceWaterhouseCoopers

Oscar Augusto Machado

Chairman

Gustavo Machado

Carlos M. Áñez

Francisco Afonso García

José María Fragachán

Héctor J. Peña

Luis A. Romero M.

Alejandro Salcedo

Arnold Volkenborn

Executive President of IBH

Neil Malloy

International Briquettes Holding IBH Annual Report 2008 5

TO OUR Shareholders

6

Shareholders

During the 2008 fiscal year, IBH took

important steps toward securing financial

stability by significantly reducing its debt

to banks.

Having ended our fiscal year on September 30, 2008, and in compliance with legal and statutory regulations, the Company is pleased to submit to the consideration of its Shareholders the present Report and financial statements, along with the Report of the Statutory Auditor’s Report and the Report by the External Auditors.

1) Debt Reduction

During the 2008 fiscal year, IBH took important steps toward securing financial stability by significantly reducing its debt to banks, as reported in the press release published on July 1st, 2008. This debt reduction was achieved as a result of the convergence of various factors that include high briquette prices during the fiscal year, the exercising (by foreign banks) of certain liquid guarantees provided in loan contracts, the capital contributions from debt and securities proportionally made by the shareholders of IBH de Venezuela C.A., an IBH subsidiary, and the amendment and execution of the call option agreement on IBH de Venezuela C.A. for US$ 76.6 million, for which purpose IBH obtained a long-term loan from a Sivensa subsidiary in that amount.

At September 30, 2008 the balance of the IBH debt is US$ 41.3 million. This debt reduction was accomplished by IBH shareholders without dilution, with IBH additionally obtaining a 100% participation in the net worth of IBH de Venezuela C.A. by exercising the call option.


The average FOB price of the IBH briquette at the Port of Palúa reached US$ 410.09 per metric ton, a 73% increase over the price of US$ 236.80 per metric ton during the prior fiscal year.

2) International Market

Driven by global economic growth, particularly in Asian countries, the prices of briquettes and other metallics used as raw materials in steel manufacturing experienced sustained growth from September 2007 to July 2008. As a result of this momentum in the market, the average FOB price of the IBH briquette at the Port of Palúa reached US$ 410.09 per metric ton, a 73% increase over the price of US$ 236.80 per metric ton during the prior fiscal year.

Starting in the month of August, the effects of the financial crisis in the United States and its impact on markets worldwide led to a deceleration of the global economy that has brought about a decline in the prices of commodities, including reduced iron briquettes. Due to the fact that IBH markets its products under sales contracts that are subscribed approximately three months in advance, the drop in briquette prices did not impact the results for the fiscal year analyzed in this Report, which ended on September 30, 2008.

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3) Results for Fiscal Year

The financial statements for the 2007-2008 fiscal year presented in this Report show sales in the amount of US$ 687 million, compared to sales of US$ 459 million for the 2006-2007 fiscal year. In terms of metric tons, sales declined by 14% due to decreased production as a consequence of the dearth of raw materials (pellets and fines) which prevented the production of 126,072 metric tons by Venprecar and 45,744 metric tons by Orinoco Iron. This factor was offset by the significant increase in briquette prices.

The operating income for IBH was US$ 64 million 1, compared to the operating income of US$ 1.4 million for the prior accounting period. This improved performance was achieved despite higher raw material prices beginning in January 2008, which reached 66% for fines, 97% for lumps, and 87% for pellets. The improved operating results are primarily due to: i) higher briquette prices in the international market; ii) gains from Treasury operations; and iii) the additional

700

600

500

400

300

200

100

0

IBH SalesMillions of US dollars

2005 2006 2007 2008

438 424 459

687

1 The Report presented by the Board of Directors in the General Shareholders Meeting held on January 22, 2009, shows an operating income of US$ 109 million. This amount does not include US$ 45 million expenses corresponding to a provision for the appraisal of loans payable to related companies, which were presented in said Report as part of the financing costs.


income from the sale of US$ 21 million in subproducts, including pool mud, briquette chips and metallic fines, whose cost is for the most part absorbed by briquette production costs for previous years.

Total financial cost for the fiscal year was US$ 50 million 2, which is slightly lower than the US$ 51 million incurred during fiscal year 2007. This variation is mainly due to the net effect of the following items: i) the amortization of commissions in the amount of US$ 11.3 million associated with the debt reduction process, net of ii) the decrease in interest paid due to the reduction of the principal.

Taxes (income) for the fiscal year were US$ 65 million, compared to US$ 24 million in income during the 2007 fiscal year, a variation that is primarily due to the impact reflected in the financial statements in US dollars, of the difference between the variation of the exchange rate and inflation rate in Venezuela (overvaluation of the bolivar with respect to the US dollar) on the future depreciation of fixed assets for tax purposes, which resulted in a deferred income tax liability reduction for the same amount. It must be noted that despite the fact that IBH’s consolidated financial statements are prepared and presented in U.S. dollars, income tax returns for its Venezuelan subsidiaries are prepared in bolivares.

As a result of the above mentioned factors, IBH’s net profit for fiscal year 2007 was US$ 79 million, compared to a net loss of US$ 26 million for the prior 2007 accounting period.

2 The Report presented by the Board of Directors in the General Shareholders Meeting held on January 22, 2009, shows financing costs of US$ 95 million. Such amount includes US$ 45 million expenses corresponding to a provision for the appraisal of loans payable to related companies, which were presented in said Report as part of the operating income.

10

Venprecar Plant Performance Analysis

Production at the Venprecar plant during the 2008 fiscal period was 474,069 MT, 26% lower than the plant’s production during the 2007 fiscal period. This drop in production was primarily due to the substantial dearth of pellets in the domestic market and the difficulties to acquire pellets in the international market. Given the existing restrictions, IBH estimates monthly production at this plant will be 40,000 metric tons until March 2009.

The financial statements for the 2007-2008 fiscal

year presented in this Report show sales in

the amount of US$ 687 million, compared to

sales of US$ 459 million for the 2006-2007

fiscal year.

875

750

625

500

375

250

125

0

Venprecar Plant ProductionThousands of Metric Tons

2005 2006 2007 2008

760719

644

474


In order to streamline iron ore downloads at the plant, Orinoco Iron installed a second plow feeder at an investment of US$ 2 million.

Orinoco Iron Plant Performance Analysis

Production at the Orinoco Iron plant during fiscal year was 1,207,889 MT, 5% lower than the plant’s production in fiscal year 2007, which was 1,268,832 MT. This drop in production was primarily due to the dearth of iron ore during the first semester of the year, as well as to operational issues with briquetting machines. In order to streamline iron ore downloads at the plant, Orinoco Iron installed a second plow feeder at an investment of US$ 2 million. The company also developed plans to increase the reliability of briquetting machines and the hermeticity of ducts de-dusting system, and to upgrade other types of equipment such as ore screening shuttes and ball valves.

1,400

1,200

1,000

800

600

400

200

0

Orinoco Iron Plant ProductionThousands of Metric Tons

2005 2006 2007 2008

1,279 1,280 1,269 1,208

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6) Operaciones RDI

Due to the need for substantial investments in equipment upgrades to ensure operational stability, the Operaciones RDI plant, formerly Fior, has remained inactive since October 2001. The company has conducted studies to evaluate an eventual restart of operations at this plant.

7) BRIFER

Brifer Internacional Ltd. (Brifer), which holds intellectual property rights on the “Fior Mejorado” or “Enhanced Fior” fluid bed iron fine reduction process, and, jointly with Voest Alpine Industrieanlagenbau (VAI), on the FINMET direct reduction technology, had no income from sales during the 2008 fiscal year.

8) Industrial Safety

Regarding the industrial safety area, all accident prevention indicators at Orinoco Iron and Venprecar, as well as indicators consolidated with contractors, exceeded the goals set for the fiscal year. With the participation of all workers, compliance with the program of shared accountability between companies and their contractors mandated by the Organic Law of Prevention, Conditions and Environment in the Workplace (Lopcymat) has been broadly met.


9) Litigation and Claims

The Company and its subsidiaries are not involved in any litigation, civil, fiscal, labor or mercantile claim that impacts or may materially impact its economic solvency or financial situation. For additional details about legal aspects, please refer to Note 20 of the Report of Independent Accountants and Consolidated Financial Statements.

10) Quality Management

In their ongoing efforts to promote high quality standards, the companies advanced the following phases in different applications endorsed by the International Standardization Organization:

Venprecar and Orinoco Iron have secured their recertification for the ISO 9001:2000 Quality System, which certifies that the company has consistently met quality standards applicable to its products and, in addition, has effectively managed its quality control system, which includes continuous improvement and quality assurance processes.

In recognition for its implementation of an Environmental Quality and Occupational Safety and Health Management system, Venprecar was awarded the “Quality Award for Bolivar State” in the Great Company Category, granted by Fundación Premio a la Calidad. This recognition is additional to the award in the same category received last year by Orinoco Iron.

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11) Social Responsibility

During the 2007-2008 fiscal year, IBH subsidiaries Orinoco Iron and Venprecar continued to advance a number of social programs benefiting workers, their families and the community at large. Highlights during the fiscal period include:

The scholarship program, which provides higher level education grants to workers enrolled in universities or college institutes subject to a satisfactory academic performance, continued to advance. The program now has 125 participants representing 13% of IBH’s work force who are benefiting from this initiative.

The Apprentice Training Program admitted 40 new youths, most of them coming from low income families.

The companies continued to sponsor cultural, sports and healthcare programs for workers and their families, including musical presentations at the facilities, participation in regional sport events, vaccination drives and illness prevention programs. Efforts continued in order to support the workers’ middle and high school children with scholarships and tutoring in physics, chemistry and mathematics. Many of these programs have been expanded to areas of the Puerto Ordaz community, which has also benefited from scholarships, vacation plans and preventive medicine drives.

Venprecar and Orinoco Iron have

secured their recertification for

the ISO 9001:2000 Quality System.


Integrated by qualified and experienced professionals from different business sectors, the Board of Directors is responsible for defining the corporate direction, as well as for overseeing and evaluating operational performance.

Further advancing its social responsibility program in indigenous communities, an initiative that has been carried out since 2006, during the fiscal year telecommunications and telemedicine equipment was installed at La Esperanza community in the Sifontes municipality of Bolivar Sate. This system will allow 10,000 residents from the Kariña, Pemón and Arawako ethnic groups to receive medical care. As part of this program, the companies also donated construction materials and equipment to the town of Urimán in Gran Sabana, where IBH has maintained a presence since 2006.

In coordination with the People’s Ministry for the Environment, IBH companies participated in various ecology-friendly activities such as the “Seed Collection Drive at Cachamay Park”, the planting of 2,000 trees on the highway to Ciudad Bolívar, and the Ecological Hike at La Llovizna Park.

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12) Corporate Governance

Pursuant to current standards and in accordance with best practices for corporate governance, the IBH Board of Directors has a majority of independent directors who do not serve in any administrative position. Integrated by qualified and experienced professionals from different business sectors, the Board of Directors is responsible for defining the corporate direction, as well as for overseeing and evaluating operational performance.

IBH has process control and supervision mechanisms in place to oversee the execution of plans approved by the Company’s shareholders and its Board of Directors, as well as to protect the interests of shareholders, employees, customers, creditors and the community at large. The members of the IBH Board of Directors are also the members of the Audit Committee. This Committee is responsible for ensuring that the business processes are aligned with the internal control system established by the Company and its subsidiaries, as well as for reviewing Financial Statements with External Auditors at the close of each fiscal year.

IBH complies with all shareholder reporting regulations as required by the National Securities Commission, timely informing shareholders about all events that are relevant for the organization and might eventually impact the company’s market value. As such, IBH makes quarterly and annual reports, news releases, announcements and other information materials available to shareholders through its website and through Planivensa, a Sivensa subsidiary, individually addresses investor needs.


13) Credit, Collections and Sales Policies

During the fiscal year one customer concentrated more than 20% of sales. The customer has been granted a credit term of up to 110 days.

14) Debt Currency Statement

The majority of the debt of IBH subsidiaries is denominated in U.S. dollars and is payable in bolivares at the official currency exchange rate effective at the time of billing. The financial debt of Venprecar is denominated in U.S. dollars.

15) Compensation for Directors and Executives

Pursuant to the requirements of the National Securities Commission of the Bolivarian Republic of Venezuela, we comply by informing that the contents of form CNV-FG-010 “Compensation Paid to Directors and Executives,” reflects payments in the amount of TWO MILLION THREE HUNDRED THIRTY-FOUR THOUSAND FOUR HUNDRED TWENTY-SIX BOLIVARES AND TEN CENTS (Bs. 2,334,426.10) during the fiscal year analyzed in this Report.

The Board of Directors

Caracas, November 20, 2008.

18

F i n a n c i a lStatements

Report of Independent Accountants and

Consolidated Financial Statements in U.S. Dollars,

Prepared in Accordance with International Financial

Reporting Standards (IFRS)

September 30, 2008

Independent Auditors’ Report 20

Consolidated Balance Sheet 22

Consolidated Income Statement 23

Consolidated Statement of Changes in Equity 24

Consolidated Cash Flow Statement 25

Notes to the Consolidated Financial Statements 26


Independent Auditor’s Report

To the Shareholders and Board of Directors ofInternational Briquettes Holding

Report on the consolidated financial statementsWe have audited the accompanying consolidated financial statements of international BriquettesHolding (IBH), which comprise the consolidated balance sheet as of September 30, 2008, and theconsolidated income statement, consolidated statement of changes in equity and consolidated cash flowstatement for the year then ended, and a summary of significant accounting policies and otherexplanatory notes.

Management’s responsibility for the consolidated financial statementsManagement is responsible for the preparation and fair presentation of these consolidated financialstatements in accordance with International Financial Reporting Standards (IFRS). This responsibilityincludes: designing, implementing and maintaining internal control relevant to the preparation and fairpresentation of consolidated financial statements that are free from material misstatement, whether dueto fraud or error; selecting and applying appropriate accounting policies, and making accountingestimates that are reasonable in the circumstances.

Auditor’s responsibilityOur responsibility is to express an opinion on these consolidated financial statements based on ouraudit. We conducted our audit in accordance with International Standards on Auditing (ISA). Thosestandards require that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in theconsolidated financial statements. The procedures selected depend on the auditor’s judgment, includingthe assessment of the risk of material misstatement of the consolidated financial statements, whether dueto fraud or error. In making these risk assessments, the auditor considers internal control relevalt to theentity’s preparation and fair presentation of the consolidated financial statements in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion onthe effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness ofaccounting policies used and the reasonableness of accounting estimates made by management, as well asevaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.

Espiñeira, Sheldon y AsociadosAvenida Principal de ChuaoEdificio Del RíoApartado 1789Caracas 1010-A VenezuelaTeléfono: (0212) 700 6666Fax: (0212) 991 5210www.pwc.com

1

OpinionIn our opinion, the accompanying consolidated financial statements present fairly, in all material respects,the consolidated financial position of International Briquettes Holding (IBH) as of September 30, 2008,and its financial performance and its cash flows for the year then ended, in accordance with InternationalFinancial Reporting Standards (IFRS).

Espiñeira, Sheldon y Asociados

José Antonio Apostólico B.CPC 18575CNV A-859

Caracas - VenezuelaNovember 20, 2008

2

Consolidated Balance SheetSeptember 30, 2008 and 2007

(Thousands of U.S. dollars) 2008 2007

Assets Current assets Cash (Notes 4 and 19) 63,439 12,686 Accounts receivable (Notes 5, 13 and 19) 78,902 97,187 Related companies (Note 9) 19,840 176 Inventories (Note 6) 72,720 30,507 Advances to suppliers 6,098 1,098 Prepaid expenses and other current assets (Note 13) 1,126 5,444

Total current assets 242,125 147,098

Property, plant and equipment, net (Notes 10 and 11) 1,167,430 1,197,165 Other assets 11,811 7,295

Total assets 1,421,366 1,351,558

Liabilities and EquityCurrent liabilities Short-term loan with related companies (Note 9) 15,328 - Accounts payable Suppliers (Note 19) 106,476 51,913 Shareholders and related companies (Note 9) 53,341 30,831 Profit sharing, vacations and other personnel accruals 13,464 10,283 Other liabilities and accruals (Notes 12 and 20) 22,126 4,835

Total current liabilities 210,735 97,862

Long-term loan being restructured and other (Note 11) - 362,828 Long-term loan with related company (Note 9) 26,009 - Accrual for employee termination benefits, net of advances to employees of US$32,483,284 (US$25,233,912 in 2007) 15,231 15,931 Deferred income tax (Note 13) 80,339 172,942 Other long-term liabilities and accruals (Notes 7 and 12) 28,428 47,300

Total liabilities 360,742 696,863

Equity Capital stock 201 201 Share premium 107,202 228,735 Revaluation of fixed assets 182,080 172,045 Net effect of combination (merger) of subsidiaries 176,229 176,229 Difference between fair value and cost of shares of subsidiary 491,073 191,784 Retained earnings (deficit) Legal reserve 6,093 6,093 Available (deficit) 62,864 (153,237) Minority interests 34,882 32,845

Total equity 1,060,624 654,695

Total liabilities and equity 1,421,366 1,351,558

The accompanying notes are an integral part of the consolidated financial statements

22

International Briquettes Holding IBH and its Subsidiaries(A majority-owned subsidiary of Siderúrgica Venezolana “Sivensa”, S.A.)


Consolidated Income StatementYears ended September 30, 2008 and 2007

(Thousands of U.S. dollars, except weightedaverage of outstanding shares) 2008 2007

Net salesExports (Note 5) 533,077 349,153 Local (Note 9) 132,188 90,432 Sales of subproducts (Note 5) 21,320 19,555

686,585 459,140

Cost of sales (Notes 9 and 17) (574,291) (440,097)

Gross income 112,294 19,043

General and administrative expenses (Note 17) (44,242) (35,552)

Other operating income, net (Note 17) (4,284) 17,866

Operating income 63,768 1,357

Interest and other financial expense (Notes 7, 11 and 18) (49,654) (51,293)

Income (loss) before tax 14,114 (49,936)

Income tax (Note 13) 65,236 23,582

Net income (loss) 79,350 (26,354)

Attributable to IBH shareholders (Note 14) 78,455 (25,732)Minority interests 895 (622)

79,350 (26,354)

Net income (loss) per share 3.988 (1.324)

Weighted average of outstanding shares 19,897,520 19,897,520

International Briquettes Holding IBH and its Subsidiaries

23

Consolidated Statement of Changes in EquityYears ended September 30, 2008 and 2007

Difference Net effect of between fair

Revaluation combination value and Retained earningsof fixed assets (merger) cost of shares (deficit)

Capital Share (Notes 2-f and of subsidiaries of subsidiary Legal Available Total Minority (Thousands of U.S. dollars) stock premium 10) (Note 8) (Note 11) reserve (deficit) equity interests Total

Balances at September 30, 2006 201 228,735 37,432 176,229 191,784 6,093 (141,814) 498,660 27,180 525,840

Net loss for 2007 - - - - - - (25,732) (25,732) (622) (26,354)

Change in revaluation (Notes 2-f and 10) - - 134,613 - - - 14,309 148,922 6,287 155,209

Balances at September 30, 2007 201 228,735 172,045 176,229 191,784 6,093 (153,237) 621,850 32,845 654,695

Net income for 2008 - - - - - - 78,455 78,455 895 79,350

Partial offsetting of deficit (Note 14) - (121,533) - - - - 121,533 - - -

Difference between fair value and

cost of shares of subsidiary (Note 12) - - - - 299,289 - - 299,289 - 299,289

Change in revaluation (Notes 2-f and 10) - - 10,035 - - - 16,113 26,148 1,142 27,290

Balances at September 30, 2008 201 107,202 182,080 176,229 491,073 6,093 62,864 1,025,742 34,882 1,060,624


24


Consolidated Cash Flow Statement Years ended September 30, 2008 and 2007


Cash flows from operating activitiesNet income (loss) 79,350 (26,354)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Provision for accounts receivable from shareholder 3,580 3,801 Payment under M/V Ythan settlement agreement - (8,000) Deferred income tax (65,342) (23,817) Depreciation 52,271 53,161 Amortization of expenses and commissions from debt restructuring 11,334 - Unpaid accrued interest and other financial expense 16,324 32,675 Adjustment of cost of call option 7,700 5,235 Provision for estimated settlement value of the loan with related company 45,182 - Net changes in operating assets and liabilities Accounts receivable 18,285 56,533 Related companies, net (734) (74,191) Inventories (42,213) (4,261) Prepaid expenses, advances to suppliers and other assets (5,198) 4,527 Accounts payable to suppliers 54,563 (40,623) Accrual for employee termination benefits, net (700) 5,508 Other liabilities, accruals and personnel benefits (31,553) 4,939

Net cash provided by (used in) operating activities 142,849 (10,867)

Cash flows from investing activitiesAdditions to property, plant and equipment (31,232) (12,849)Withdrawals of property, plant and equipment 8,695 3,281

Net cash used in investing activities (22,537) (9,568)

Cash flows from financing activitiesNew indebtedness 246,157 - Long-term loans repaid through foreclosure of accounts receivable (315,716) -

Net cash used in financing activities (69,559) -

Cash Increase (decrease) for the year 50,753 (20,435)Balance at the beginning of the year 12,686 33,121

Balance at the end of the year 63,439 12,686

Supplementary information Cash paid for taxes 7,909 235

Revaluation of fixed assets, net 27,290 155,209

Difference between fair value and cost of shares of subsidiary 299,289 -



25

Notes to the Consolidated Financial StatementsSeptember 30, 2008 and 2007

1. Incorporation and Activities

International Briquettes Holding (IBH), domiciled in the Cayman Islands, was incorporated on October 14, 1997. As a company whose shares are listed on the Caracas Stock Exchange, it is regulated by the Comisión Nacional de Valores (CNV) of the Bolivarian Republic of Venezuela. IBH’s legal address is: Ground Floor, Caledonian Hoose, Mary Street, P.O. Box 1043, George Town, Grand Cayman, Cayman Islands. IBH’s administrative offices are located in: Torre América, piso 11, Avenida Venezuela, Urbanización Bello Monte, Caracas. The business objective of IBH and its subsidiaries (IBH or the Group) is the production of high-density reduced iron briquettes (HBI). Their plants are located in Ciudad Guayana, Venezuela, with a total nominal design capacity of 3,020,000 metric tons per year. At September 30, 2008 and 2007, IBH and its subsidiaries have 989 and 1,001 employees, respectively.

The accompanying consolidated financial statements were approved by the Board of Directors on November 20, 2008.

Activities

Bank debt being restructured

As described in Note 11, in August 2005, IBH and its subsidiaries signed an agreement with creditor banks to maintain the current status of bank debt being restructured (Standstill Agreement). This Agreement established minimum debt repayment requirements including option contracts (put and call) on 39.14% of the shares held by creditor banks in the subsidiary IBH de Venezuela. Based on the terms of these agreements, the consolidated financial statements of IBH reflect 39.14% of the shares covered under the aforementioned option and recognize the results of the aforementioned subsidiary as from September 1, 2005 (Note 11).

Payment of financial debt being restructured and exercise of purchase option

During 2008 a subsidiary of IBH reduced its financial debt to US$76.6 million after financial creditors foreclosed certain guarantees set out in the loan agreements. In addition, this operation gave rise to the following transac-tions: i) capital increase through accounts receivable and securities proportionally contributed by shareholders of the subsidiary IBH de Venezuela, and ii) amendment and execution of the purchase option agreement on shares of IBH de Venezuela. In return for these capitalizations, IBH agreed to exercise the purchase option for US$76.6 million using a long-term loan for this amount obtained by a subsidiary from a subsidiary of Siderurgica Venezolana “Sivensa”, S.A. (Sivensa), shareholder of IBH (Notes 9, 11 and 12).

New regulations

On April 30, 2008, the Venezuelan government enacted Decree law No. 6,058 regulating the steel sector activities in the Guayana region. Given the relation of the steel sector with strategic activities for the country’s development, this decree reserves to the Venezuelan government the steel transformation industry in the Guayana region, where the country’s the largest steel reservoir is located. Steel production is reserved to the Venezuelan government since 1975. This decree has not affected manufacturing activities and continuity of IBH’s companies located in the Guayana region.

In July 2008, the Venezuelan government enacted 26 decree laws governing activities within certain sectors of the Venezuelan economy and establishing the regulations applicable to social security, housing loans and the public financial systems, among others.


26

In March 2007, the Venezuelan government established that, as from January 1, 2008, the unit of the Venezuelan monetary system (Venezuelan bolivar) would be redenominated at a conversion rate of one thousand current bolivars to one new bolivar (“Bolívar Fuerte”). Therefore, any amount expressed in local currency before January 1, 2008 would be converted to the new unit (“Bolívar Fuerte”) on that date by dividing it by one thousand. The Central Bank of Venezuela (BCV) drew up an activity schedule to be complied with by financial institutions and companies in general. By January 1, 2008, IBH and its subsidiaries had adapted their information systems to accommodate the new monetary unit.

2. Bases of Presentation and Summary of Significant Accounting Principles

IBH presents its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and in U.S. dollars (US$), considered its functional currency. These financial statements have been prepared under the historic cost convention, adjusted for property, plant and equipment revaluations.

IFRS used by IBH are those applicable at September 30, 2008, including relevant modifications and interpretations applicable from 2008.

Standards, amendments and interpretations effective in 2008

The following standards, amendments and interpretations to previously published standards are mandatory for IBH’s accounting period ended September 30, 2008: IFRS 7, Financial Instruments: Disclosures; International Financial Reporting Interpretations Committee No. 10 (IFRIC 10), Interim Financial Reporting and Impairment; IFRIC 11, IFRS 2 - IBH and its subsidiaries and Treasury Share Transactions.

IBH management determined that these standards and interpretations had no material effect on IBH’s consolidated financial statements.

Standards, amendments and interpretations to existing standards that are not yet effective

The following standards, amendments and interpretations to existing standards have been published and are mandatory for IBH’s accounting periods beginning on or after October 1, 2008 or later periods, but which IBH has not adopted early: IAS 1(Revised), Presentation of Financial Statements (effective as from January 1, 2009); IAS 23 (Amended), Borrowing Costs (effective as from January 1, 2009); IAS 32 (Amended), Financial Instruments: Disclosures and Presentation and IAS 1 (Amended), Presentation of Financial Instruments (effective as from January 1, 2009); IAS 27 (Revised and Amended), Consolidated and Separate Financial Statements (effective as from January 1, 2009); IAS 28 (Amended), Investments in Associates (and consequential amendments to IAS 32, Financial Instruments: Disclosure and Presentation and IFRS 7, Financial Instruments: Disclosures (effective as from January 1, 2009); IAS 36 (Amended), Impairment of Assets (effective as from January 1, 2009); IAS 38 (Amended), Intangible Assets (effective as from January 1, 2009); IAS 19 (Amended), Employee Benefits (effective as from January 1, 2009); IAS 39 (Amended), Financial Instruments: Recognition and Measurement (effective as from January 1, 2009); IAS 16 (Amended), Property, Plant and Equipment (and consequential amendment to IAS 7, Cash Flow Statement (effec-tive as from January 1, 2009); IAS 29 (Amended), Financial Reporting in Hyperinflationary Economies (effective as from January 1, 2009); IAS 31, Interest in Joint Ventures (and consequential amendments to IAS 32 and IFRS 7) (effective as from January 1, 2009); IAS 40, Investment Property (and consequential amendments to IAS 16) (effec-tive as from January 1, 2009); IAS 41, Agriculture (effective as from July 1, 2009); IAS 20 (Amended), Accounting for Government Grants and Disclosure of Government Assistance (effective as from January 1, 2009); IFRS 1 (Amended), First-time Adoption of International Financial Reporting Standards and IAS 27, Consolidated and Separate Financial Statements (effective as from January 1, 2009); IFRS 2 (Amended), Share-based Payments (effective as from January 1, 2009); IFRS 3, Business Combinations (effective as from January 1, 2009); IFRS 5, Non Current Assets Held for Sale


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and Discontinued Operations (and consequential amendment to IFRS 1) (effective as from January 1, 2009); IFRS 8, Operating Segments; IFRIC 12, Service Concession Arrangements (effective as from January 1, 2009); IFRIC 13, Customer Loyalty Programs (effective as from January 1, 2009); IFRIC 14, IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective as from January 2008); IFRIC 15, Agreements for the Construction of Real Estate (effective as from January 2008); and IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective as from October 2008).

IBH management considers that the aforementioned standards, amendments and interpretations to the existing standards will not result in a material effect on IBH’s consolidated financial statements.

a) Use of estimates in the preparation of consolidated financial statements

The preparation of consolidated financial statements in conformity with IFRS requires the use of certain accounting estimates. It also requires management to exercise judgment in the application of IBH accounting policies and to make estimates and assumptions that affect the amounts of assets and liabilities at the balance sheet date, the amounts of income, costs and expenses reported for the year ended on that date, and the disclosure of contingent assets and liabilities. Actual results may differ from those estimates. Areas involving a higher degree of judgment or complexity or those where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2-f, g, k and o.

b) Translation into U.S. dollars

Functional and presentation currency

The consolidated financial statements are presented in U.S. dollars, its functional currency. IBH’s main operations and assets are located in Venezuela. Subsidiaries in Venezuela have significant export sales, costs, assets and debts denominated in U.S. dollars; hence, the U.S. dollar is considered their functional currency.

Financial statements expressed in bolivars have been translated into U.S. dollars in conformity with International Accounting Standard No. 21 (IAS 21) as applicable to an entity whose functional and presentation currency are the same. Pursuant to IAS 21, balances in nominal bolivars have been translated into U.S. dollars as follows:

Accounts Exchange rate

Balance sheetCurrent assets, except inventories and prepaid expenses Year-end Liabilities Year-end Inventories and prepaid expenses HistoricProperty, plant and equipment Historic Other assets Historic Deferred income tax Year-end Equity Historic

Consolidated income statement Net sales Monthly average Cost of sales HistoricDepreciation and amortization HistoricMaterials and supplies used in operations Monthly averageGeneral and administrative expenses Monthly averageInterest and other income (expense) Monthly average


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The translation adjustment is included in the results for the year. Exchange gains and losses arise mainly from the effect of exchange rate fluctuations on net monetary items denominated in bolivars (Note 19) and are included in the consolidated income statement.

c) Consolidation

Subsidiaries

Subsidiaries are all entities in which IBH has over 50% direct or indirect shareholding or the power to control finan-cial and operating policies. Subsidiaries are fully consolidated from the date on which control is transferred to IBH (Note 15). Equity in subsidiaries subject to purchase option is shown on a consolidated basis, according to manage-ment’s intention and the right to execute the options (Notes 11 and 12).

Increases in equity of subsidiaries are accounted for by the purchase method. Cost is measured at fair value at the acquisition date. Any excess of cost over the fair value of net assets is recorded as goodwill if estimated future cash flows allow recovery of payments in excess made in connection with the investment. If cost is lower than the fair value of net assets, the difference is recognized directly in the consolidated income statement.

When IBH acquires shares of a minority interest, the excess difference between book value of equity acquired and the amount paid is shown in equity under Difference between fair value and cost of shares of subsidiary.

Business combinations under common control

Since it is considered a business combination between commonly controlled subsidiaries, the merger in 2005 of Venprecar and Orinoco Iron, C.A. was recorded by the economic entity method, which considers book values of subsidiaries at the transaction date (Note 8). The net effect of changes in equity in subsidiaries was directly recorded under the equity account Net effect of combination (merger) of subsidiaries, which shows the difference between book value of net assets transferred and net assets received in combination. In addition, the increase in share-holding of the subsidiary IBH de Venezuela was recorded at the book value of net assets at the acquisition date, since it is considered a transaction with minority interests. The difference between book value and cost is directly shown in equity under Difference between fair value and cost of shares of subsidiary (Notes 11 and 12).

Transactions, balances and gains on transactions with Group subsidiaries are eliminated in consolidation.

Transactions and minority interests

Minority interests represent third-party interests in the results and equity of partially owned subsidiaries. Conditions for business transactions with minority shareholders are similar to those with third parties and are not eliminated for consolidation purposes.

The subsidiaries’ accounting policies are consistent with those adopted by the Group.

d) Trade accounts receivable

Trade accounts receivable are recorded at amounts billed, which approximate fair value.

IBH and its subsidiaries regularly assess the financial condition of their business clients and the recoverability of the other accounts receivable to record provisions for doubtful accounts.

e) Inventories

Inventories are shown at the lower of cost and net realizable value. Costs of finished products and raw materials are determined by the average cost method. The cost of finished products includes raw materials, direct labor and


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other direct production overhead costs, but excludes borrowing costs. Net realizable value is the estimated selling price less completion costs and selling expenses.

f) Property, plant and equipment

At September 30, 2008, buildings, machinery and equipment and land are recorded at amounts determined by independent appraisers in 2007, which represent fair values of these assets. Remaining property, plant and equip-ment is shown at historic cost. Historic cost includes expenses that are directly attributable to the acquisition of these assets. Additions, renewals and improvements are included in the asset’s carrying amount only when it is probable that future economic benefits associated with the asset will flow to IBH and can be measured reliably. The carrying value of replaced parts is disposed of. All other repairs and maintenance are included in the consolidated income statement in the period in which they are incurred. The interest cost of loans to finance construction of property, plant and equipment, during the time required to complete and prepare the asset for its intended use is capitalized.

The difference between historic cost of assets and revalued amounts is included in equity directly under Revaluation of fixed assets. Decreases that offset previous revaluations of the same asset are charged to this equity account; all other decreases are charged to the consolidated income statement. Additionally, each year the difference between depreciation based on revalued amounts and that based on historic costs is transferred from Revaluation of fixed assets to Unappropriated retained earnings (deficit), net of deferred income tax.

Depreciation of machinery and equipment is calculated based on the unit-of-production method according to the estimated future production capacity of the assets. Depreciation of other fixed assets is calculated using the straight-line method over the estimated useful lives of the assets. Useful lives of revalued assets are determined according to appraisals. Below is a breakdown of the estimated useful lives of the assets:

Estimated useful lives (Years)

Buildings 20 yearsMachinery and equipment Production units Other machinery and equipment 7 to 20 years Vehicles 3 years Furniture and fixtures 3 years

Land is not depreciated.

The residual value of assets and their useful lives are reviewed and adjusted, if necessary, at each balance sheet date.

Gains and losses from the sale of fixed assets are determined by comparing the amount of cash flows received to the book value of assets sold at the transaction date, and are recorded in the consolidated income statement. When revalued assets are sold, amounts included in the equity account Revaluation of fixed assets are transferred to Unappropriated retained earnings (deficit).

g) Recognition of loss in value or impairment of long-lived assets

IBH assesses possible impairment in the value of its long-lived assets when events indicate that their recorded value may not be recoverable. If it is likely that an asset will not be recovered, then its carrying value is reduced to its recoverable value which is the higher between fair value less cost of sale and value in use. At September 30, 2008 and 2007, IBH management considers, in conformity with generally accepted accounting principles, that none of its long-lived assets is impaired.


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h) Loans

Bank loans are initially recognized at fair value; they are subsequently shown at amortized cost since they bear interest at market rates.

Costs related to incurred debt are shown net of the related liability and amortized during the term of the debt, using the effective interest method (Notes 11 and 18).

Changes in loan terms and conditions are assessed to determine the effects on the accounting treatment given to the loan and the related costs incurred. If changes in conditions are accounted for as an extinguishment, all costs or commissions incurred are recognized as part of any income or loss derived from the extinguishment, if not, all costs or commissions incurred are adjusted to the book value of liabilities to be amortized over the term of the loan (Note 11).

Loans maturing within one year are classified as current liabilities, unless IBH has an unconditional right to defer repayment for a period of over twelve months after the balance sheet date. All other loans are classified as long-term liabilities.

i) Accounts payable

Accounts payable are initially recognized at fair value and subsequently shown at amortized cost using the effec-tive interest method.

j) Accrual for employee termination benefits and profit sharing

IBH and its subsidiaries accrue for their liability in respect of employee termination benefits, which are a vested right of employees, based on the provisions of the Venezuelan Labor Law and the prevailing collective labor agree-ment. This liability is presented net of advances granted to employees. Among other aspects, the Law provides for a minimum indemnity of 45 days of salary per year (up to a maximum of 90 days depending on length of service), without retroactive adjustments.

The Venezuelan Labor Law also requires mandatory distribution to employees (profit-sharing bonus) of up to 15% of a company’s pre-tax income. The established minimum and maximum amounts for distribution are 15 and 120 days of salary, respectively. IBH and its subsidiaries accrued a profit-sharing bonus for its employees of 120 days of salary for 2008 and 2007. The profit-sharing bonus was paid in October 2008 and October 2007, respectively.

IBH and its subsidiaries do not have a pension plan or other post-retirement benefit programs.

k) Provisions

Provisions are recognized when IBH has a present legal obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount of the obligation can be reasonably estimated. Provisions are determined based on the present value of expenditures expected to settle the obliga-tion at a pre-tax discount rate that reflects the temporary value of money at the balance sheet date, as well as the specific risk of the related liability. The increase in the provision over time is recognized as interest expense. Provisions are not recognized for future operating losses.

When there are a significant number of similar obligations which, individually, are not significant, the likelihood of requiring an outflow of resources to settle them is determined considering the type of obligation as a whole and the respective provision is set aside.


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l) Revenue recognition

Revenue comprises the fair value of rights received from sale of goods in the normal course of IBH’s activities. Income is shown net of returns, rebates and discounts after eliminating sales transactions between IBH subsidiaries. Income from sales of goods is recorded when goods sold by IBH are dispatched and accepted by clients and the risk is transferred to the buyer. Sales are shown net of discounts.

m) Cost of sales

For presentation purposes, certain selling expenses, mainly freight and export insurance, are considered an integral part of cost of sales.

n) Basic and diluted net income (loss) per share

Net income (loss) per share is determined by dividing net income (loss) for the year by the weighted average of outstanding shares during the year. Basic and diluted net income (loss) per share is the same for all periods shown because IBH does not have any potentially dilutive instruments.

o) Income tax for the year and deferred income tax

Income tax for the year is determined based on applicable income tax laws at the balance sheet date in the countries where IBH operates and generates taxable income. Management regularly evaluates positions taken for deter-mining income tax for those situations in which laws and regulations are subject to interpretation and records the related provisions based on amounts expected to be paid.

IBH records deferred income tax in accordance with the balance sheet method. Under this method, deferred income tax reflects the net effect of expected future tax consequences arising from: a) temporary differences from applica-tion of the statutory tax rates expected in future periods to differences between the tax base of assets and liabilities and their amounts in the balance sheet, and b) tax credits and tax loss carryforwards. The effect on deferred taxes of changes in statutory tax rates is also recognized. IBH recognizes deferred tax assets only if their recoverability may be established beyond any reasonable doubt. If it is not likely that a portion or all of a deferred tax asset will be realized, it is not recognized.

IBH does not recognize a deferred income tax liability for temporary differences arising on investments in subsid-iaries and affiliates when: a) it is able to control the reversal of the temporary difference, and b) it is likely that the temporary difference will not be reversed in the foreseeable future.

p) Cash

Cash comprises cash on hand and at banks, short-term deposits, and other highly liquid investments maturing within three months.

q) Foreign currency balances and transactions

Foreign currency transactions are recorded at the exchange rate in effect at the transaction date. Foreign currency balances at September 30, 2008 and 2007, mainly bolivars, are shown at the official exchange rate of US$1/Bs 2.15 (Note 19). Exchange gains or losses are included in the consolidated income statement.

r) Capital stock

Common shares are classified as equity. IBH’s capital stock is represented by common shares.

s) Fair value of financial instruments

The carrying value of cash, trade accounts receivable, and accounts payable to suppliers approximates their fair value due to the short-term maturities of these instruments. Since most IBH loans and other financial obligations bear interest at variable markets rates, management considers their carrying amounts to approximate fair value.


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t) Accounting for derivative instruments and hedging activities

Financial instruments, including derivatives, are recognized in the balance sheet as either assets or liabilities at their respective fair values. IBH recognizes transactions with financial instruments at their transaction date.

IBH does not engage in hedging activities and has identified no derivative instruments.

u) Segment reporting

A business segment is a group of assets and operations engaged in providing products that are subject to risks and returns that are different from those of other business segments. Management believes that IBH operates in a single industry segment (briquettes) in one country (Venezuela).

v) Financial statements translated into bolivars

Unless otherwise stated, all financial information included herein is expressed in U.S. dollars. To comply with CNV requirements, amounts in the 2008 consolidated financial statements expressed in U.S. dollars have been trans-lated into bolivars using the official exchange rate of Bs 2.15/US$1 in effect at September 30, 2008 (Note 19).

Translation into bolivars using the exchange rate in effect at the date of origin of each transaction could result in bolivar amounts that differ significantly from those reported in the translation for convenience purposes. This convenience purpose translation should not be considered as a representation of the amounts in bolivars that have resulted, could have resulted or will result in the future from effective conversion of balances in U.S. dollars (Note 21).

3. Nature and Scope of Risks from Financial Instruments

IBH’s activities are exposed to certain financial risks: concentration of credit risk, liquidity risk and risks arising from the volatility of economic variables, such as exchange rates, interest rates and the market in general.

Concentration of credit risk

Financial instruments exposed to concentration of credit risk consist primarily of cash and trade accounts receivable.

IBH management administers its cash deposits and equivalents considering first the stability of the financial insti-tutions and then interest obtained. Demand and time deposits are not usually over 90 days to maintain a high liquidity level.

At September 30, 2008 and 2007, cash is placed with local and foreign financial institutions (Note 19).

Trade accounts receivable of the subsidiaries are concentrated in a small number of clients. Below is the classifica-tion of clients at September 30 based on their collection experience:

Percentage ofaccounts receivable

2008 2007

Clients with excellent payment experience 99.50% 99.15% Clients with good payment experience 0.50% 0.85%

IBH regularly assesses the financial condition of its clients based on a detailed analysis of overdue and maturing balances. Unrecoverable accounts are provided for in full.


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Liquidity risk

IBH regularly assesses its fund requirements to maintain cash availability according to maturities of its operating and financial obligations. When necessary, IBH management uses its credit capacity to finance working capital and investments.

Foreign exchange risk

Financial instruments exposed to foreign exchange risk are as follows:


Monetary assets in U.S. dollars 19,367 49,924 Monetary assets in foreign currency (mainly in bolivars) 139,983 58,323

159,350 108,247

Monetary liabilities in U.S. dollars (91,245) (449,048)Monetary liabilities in foreign currency (mainly in bolivars) (189,158) (74,873)

(280,403) (523,921)

Acquisition of foreign currency in the country is currently limited due to the exchange control regime in effect as from February 5, 2003. In March 2005, the Ministry of Finance and BCV established new official exchange rates, effective as from that date, of Bs 2.14/US$1 (purchase) and Bs 2.15/US$1 (sale) (Note 19).

Assets and liabilities in foreign currency are recorded at the official exchange rates published by BCV at September 30, 2008 and 2007, which represent values at which assets are expected to be realized and liabilities to be settled. IBH management does not engage in hedging activities in connection with its monetary assets and liabilities in foreign currency.

Interest rate fluctuation risk

IBH is exposed to interest rate fluctuation risk. Financial liabilities in foreign currency bear interest at market lending rates in Venezuela, and certain financial liabilities in U.S. dollars bear interest at fixed rates that approximate market rates for similar institutions. Below is a summary of financial liabilities and their interest rates at September 30:

2008 2007Effective Market Effective Market

rate rate rate rate

Between 8.13%Long-term loans (settled in June 2008) - - and 11.75% 10%Other financial liabilities 12% 12% - -

IBH management regularly assesses the cost of its financial liabilities to obtain the best credit conditions. Management does not engage in hedging activities in connection with interest rates of its financial liabilities.

Long-term loans at fixed interest rates and other financial obligations at variable interest rates approximate their fair value.

All financial liabilities are shown at their balance payable.


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Market risk

IBH is exposed to the risk of price fluctuation of supplies and finished products. At September 30, 2008 and 2007, IBH management has not engaged in hedging activities in connection with the cost of its raw materials and prices of products sold on local and international markets.

The main supplies used by the subsidiary IBH, such as fine iron ore and iron ore lumps, iron ore pellets, electricity and gas, are principally provided by Venezuelan state-owned companies (Note 9).

In 2008 and 2007, IBH exported 80% and 78%, respectively, of its annual sales, mainly denominated in U.S. dollars. A portion of its costs and expenses is denominated in bolivars.

4. Cash

Cash at September 30 comprises the following:


Cash on hand and at banks Local banks (Note 19) 54,389 8,766 Foreign banks 9,050 3,920

63,439 12,686

5. Accounts Receivable

Accounts receivable at September 30 comprise the following:


Trade 22,513 48,979Value added tax (VAT) and client withholdings (Note 13) 48,197 43,054Export incentives and import duty drawbacks, net - -Other 8,192 5,154

78,902 97,187

During the year ended September 30, 2008, 100% (96% in 2007) of the export sales of IBH’s subsidiaries went to Stemcor UK and, at September 30, 2008, trade accounts receivable from this client amount to US$19.1 million (US$47.9 million in 2007). Trade accounts receivable fell in 2008 compared to 2007 due to a decrease in briquette sales in September 2008 and an increase in collections.

In 2007 certain accounts receivable had been pledged in guarantee of bank loans (Note 11).

At September 30, 2008 and 2007, US$19 million and US$9 million, respectively, are subject to reimbursement in the form of export incentives and import duty drawbacks established in the Venezuelan Customs Law. It is IBH policy to set aside provisions for the full carrying amounts and recognize income upon collection. During 2008, no drawback payments were received (drawbacks of US$13 million were received at September 30, 2007).


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Total export sales per destination during the years ended September 30 are shown below:


United States of America 286,450 115,239Spain 101,761 57,096Italy 43,857 51,124Egypt 39,968 25,884Netherlands 31,759 11,645China 20,040 16,919Mexico 9,242 18,536Korea - 27,167India - 13,920Portugal - 6,200Canada - 5,423

533,077 349,153

Sales of subproducts in 2008 include US$15.6 million in respect of briquette fines and chips exported to China (43%), the United States of America (37%) and Mexico (20%) (US$9.5 million exported mainly to China at September 30, 2007).

6. Inventories

Inventories at September 30 comprise the following:


Finished products 33,474 19,016Iron ore and raw materials 33,134 6,025In-transit materials 6,112 5,466

72,720 30,507

At September 30, 2007, finished products amounting to US$19 million were shown at their net realizable value.

7. Settlement Agreement with BHP-Billiton

Background

In September 1997, IBH agreed with the Australian company Broker Hill Proprietary Company Limited (BHP-Billiton) to develop, construct and jointly operate the iron-ore direct reduction plant of Orinico Iron, as well as to operate the Operaciones RDI plant. In March 2001, Operaciones RDI shut down its plant. To date, no decision has been made as to how long this plant will be closed. At September 30, 2008, Operaciones RDI has assets of US$2.3 million and an equity deficit of US$7.4 million (US$2.2 million and US$6.9 million, respectively, in 2007).

On November 5, 2004, BHP-Billiton, owner of 50% of Orinoco Iron’s capital stock, agreed to terminate the Joint Venture with IBH and to assign 1% of Orinoco Iron’s capital stock. Consequently, as from that date, IBH owns 51% of Orinoco Iron’s capital stock and has assumed control of its operations and management; therefore, it began to consolidate Orinoco Iron’s results for accounting purposes.


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As part of this agreement, IBH undertook to pay BHP-Billiton US$30 million once creditor banks receive payment of principal and interest of US$240 million (Note 11). The aforementioned amount of US$30 million was recorded at net present value, which, at September 30, 2007, was estimated at US$23 million and recorded in the results for the respective years. During 2008, the aforementioned amount of US$30 million was paid, settling the debt with BHP-Billiton (Note 11).

8. Changes in Equity in Subsidiaries

Merger agreement between Venprecar and Orinoco Iron, C.A.

At Special Shareholders’ Meetings of Venprecar subsidiaries and Orinoco Iron, C.A. in May 2005, the shareholders approved the merger by absorption of Orinoco Iron, C.A. by the surviving company Venprecar. Currently, the direct and indirect shareholding of IBH in the surviving merged subsidiary Venprecar is 95.94%. Since these exchange transactions in the shareholdings of subsidiaries constitute a combination of commonly controlled entities, they were accounted for using book values at the transaction date. The difference between equity values exchanged is shown in equity under Net effect of combination (merger) of subsidiaries.

9. Balances and Transactions with Shareholders and Related Companies

IBH conducts business with its shareholders and related companies under various long-term contractual agreements.

i) Balances with related companies at September 30 comprise the following:


ReceivableSiderúrgica del Turbio “Sidetur”, S.A. 19,433 -Other 407 176

19,840 176

PayableCVG Ferrominera Orinoco, C.A. (indirect shareholder) 52,275 28,104Siderúrgica Venezolana “Sivensa”, S.A. (shareholder) 689 629Siderúrgica del Turbio “Sidetur”, S.A. - 838Other 377 1,260

53,341 30,831LoansRutedis Finance, B.V. (Note 12) 41,337 -Current portion of long-term loan (15,328) -

Long-term portion 26,009 -

The account receivable from Sidetur is mainly in respect of briquette sales.

The account payable to CVG Ferrominera Orinoco, C.A. is mainly in respect of raw material purchases and accrues interest on past due amounts. During the year ended September 30, 2008, the interest rate ranged between 16.59% and 24.78% per annum.

Except for the loan with Rutedis Finance B.V. (Note 12), accounts with other related companies are interest-free.


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ii) The most significant transactions with the shareholder and related companies at September 30 comprise the following:


Briquette salesSiderúrgica del Turbio “Sidetur”, S.A. 113,744 70,759

Purchases of iron oreCVG Ferrominera Orinoco, C.A. (indirect shareholder) 222,620 145,008

Electricity and water costsSiderúrgica del Turbio “Sidetur”, S.A. 3,548 3,350

Interest expenseRutedis Finance, B.V. 1,698 -Invermetal, Inc 250 -

Iron ore supply agreements

The iron ore and pellets used by Venprecar and Orinoco Iron to produce briquettes is provided by CVG Ferrominera Orinoco, C.A., a Venezuelan state-owned company and the only supplier of this mineral in Venezuela, under agreements entered into in 1988, renewed in 1998 for 20 years (Venprecar) and in 1997 for 20 years (Orinoco Iron). Agreements have automatic renewal clauses. According to these agreements, the price of supplies should be calcu-lated with reference to prevailing international market prices for iron ore. Interannual increases should not exceed variations of the international price index for the producer. In 2007 Venprecar, with prior authorization, imported a portion of pellets used for production.

In September 2005, the Venezuelan government issued the Decree for Guaranteed Supply of Local Raw Materials and Semi-finished Products through the Official Gazette to guarantee the supply of raw materials and semi-fin-ished products for the Venezuelan industrial transformation sector. This Decree requires companies to sign an Agreement for Guaranteed Supply of Raw Materials and Semi-finished Iron and Steel Products (CAMP) with the Ministry of Basic Industries and Mining (MIBAM) (through CVG Ferrominera Orinoco, C.A. in the case of Venprecar and Orinoco Iron S.C.S.), whereby these subsidiaries started receiving a 20% discount on the raw material price as provided in this agreement.

In November 2005, the Ministry of Basic Industries and Mining instructed CVG Ferrominera Orinoco, C.A. to begin applying the price representing the full international price of this raw material as from December 2005. On July 31, 2006, with prior approval from creditor banks, the subsidiaries Venprecar and Orinoco Iron entered into an agree-ment to adhere to the terms and conditions set out in the CAMP and, only as from August 2006, started receiving a 20% discount on the raw material price as provided in this agreement.

In January 2008, an increase in the reference price of raw materials, used to set prices in accordance with the iron ore supply agreements, resulted in a price increase of 66% for fine iron ore, 97% for iron ore lumps and 87% for pellets (price increase of 9.5% for fine iron ore and iron ore lumps and 5.3% for pellets in 2007).

Other supply agreements

Electricity and water used by Venprecar are delivered under contracts between service suppliers and Siderúrgica del Turbio “Sidetur”, S.A., a subsidiary of Sivensa. Under these 10-year contracts signed in 1991, with automatic renewal clauses, Venprecar will reimburse Sidetur for the cost of services provided. In addition, Venprecar and Sidetur share certain common expenses.


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10. Property, Plant and Equipment

Property, plant and equipment at September 30 comprise the following:

Buildings,machinery Furniture Work in

(Thousands of U.S. dollars ) and equipment Vehicles and fixtures progress Land Total

Year ended September 30, 2007Balance at the beginning of the year 988,183 3,608 1,711 4,563 5,823 1,003,888 Additions 8,364 146 1,445 2,873 21 12,849 Withdrawals, net (662) (16) - (2,597) (6) (3,281)Depreciation expense (52,239) (422) (500) - (53,161)Revaluation 229,919 - - - 6,951 236,870

Net balance at the end of the year 1,173,565 3,316 2,656 4,839 12,789 1,197,165

At September 30, 2007Cost 1,251,349 5,951 5,742 4,839 4,364 1,272,245 Accumulated depreciation (379,895) (2,635) (3,086) - - (385,616)Revaluation 302,111 - - - 8,425 310,536

Net balance 1,173,565 3,316 2,656 4,839 12,789 1,197,165

Year ended September 30, 2008Balance at the beginning of the year 1,173,565 3,316 2,656 4,839 12,789 1,197,165 Additions 23,251 844 925 6,212 - 31,232 Withdrawals, net (3,928) (14) - (4,753) - (8,695)Depreciation expense (51,030) (342) (900) - (52,272)Revaluation - - - - - -

Net balance at the end of the year 1,141,858 3,804 2,681 6,298 12,789 1,167,430

At September 30, 2008Cost 1,270,672 6,781 6,667 6,298 4,364 1,294,782 Accumulated depreciation (430,925) (2,977) (3,986) - - (437,888)Revaluation 302,111 - - - 8,425 310,536

Net balance 1,141,858 3,804 2,681 6,298 12,789 1,167,430

Depreciation expense for the years ended September 30, 2008 and 2007 was US$52.3 million and US$53.2 million, respectively, and was charged to cost of sales.

During the years ended September 30, 2008 and 2007, IBH and its subsidiaries did not capitalize interest on property, plant and equipment.


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11. Long-term Loans Being Restructured and Other

Long-term loans being restructured and other at September 30 comprise the following:

(Thousands of U.S. dollars)

Balance at September 30, 2006 330,153

Capitalization of interest 32,675

Balance at September 30, 2007 362,828

Capitalization of interest (Note 18) 16,324 New indebtedness 246,157 Payments through foreclosures of accounts receivable (315,716)Amortization of expenses and commissions related to financial debt (Note 18) 11,334 Debt from settlement with BHP-Billiton 30,000 Capitalization of debt in IBH de Venezuela (350,927)

Balance at September 30, 2008 -

a) Background of the financial debt being restructured and Standstill Agreement

Background

Orinoco Iron received funds of US$613 million (senior debt) in conformity with several lines of credit to finance construction of the Orinoco Iron Plant. Fifty percent (50%) of this debt was guaranteed by IBH and Venprecar.

Lenders shared a common security package which comprised: (1) pledges on all of the assets of Orinoco Iron (as borrower) and Operaciones RDI (as guarantor); (2) pledges on sales, construction and supply contracts and insur-ance policies of Orinoco Iron, Operaciones RDI and Venprecar; (3) pledges by IBH of its share ownership in the capital stock of Orinoco Iron, Operaciones RDI, SVS International Steel Holdings (SVS International) and Venezolana de Prerreducidos Caroní “Venprecar,” C.A.; (4) pledges by SVS International of its share ownership in Siderúrgica del Caroní “Sidecar,” S.A.; (5) pledges by Sidecar of its share ownership in Venprecar; (6) a mortgage on land and civil works owned by Venprecar; (7) a mortgage on Venprecar’s business operations; (8) escrow agreements on two bank accounts of Venprecar, and 9) an unconditional guarantee by Operaciones RDI.

In May 2001, BHP-Billiton paid creditor banks of Orinoco Iron US$314 million in respect of its percentage (50%) of the secured debt. After this payment, BHP-Billiton became an Orinoco Iron creditor for this amount, subject to the same rights of its initial creditors and subordinated to debt settlement with creditor banks. In November 2004, BHP-Billiton assigned its rights on this debt to Orinoco Iron’s creditor banks. This debt was subject to the settlement agreement with BHP-Billiton (Note 7).

During 2008 the financial debt being restructured bore interest for US$16.32 million; interest payable to banks was calculated based on the terms of the original debt agreements at between 11.25% and 5.38% (11.75% and 8.13% during 2007) per annum, including additional interest charges on late payments of 2% beginning May 2001. At September 30, 2007, the balance of the financial debt being restructured was US$296 million and unpaid accrued interest was US$77.3 million.

Standstill Agreement

In August 2005, creditor banks of Orinoco Iron, C.A. (subsequently merged into Venprecar) and IBH and its subsidiaries signed an agreement to maintain the existing status of the bank debt being restructured (“Standstill


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Agreement”). According to this agreement, default conditions in respect of the debt being restructured still existed. Furthermore, the agreement should not have been construed as a waiver of the aforementioned default or as a novation of the debt and its original terms. Therefore, Venprecar was required to pay at least US$304 million in principal and interest, fees and other amounts to which creditor banks were entitled. Under this agreement, financial institutions maintained all of the rights related to the guarantees originally subscribed in 1997 and creditor banks reserved the right to take any necessary legal action against the responsible parties in case Venprecar defaulted on the aforementioned payments. Based on the terms of the agreement and during the standstill period, creditor banks should forbear from enforcing their rights and/or take any other action in connection with the debt being restructured provided that no new events of default had occurred in connection with the new obligations arising from the agreement, except for action that, at their sole discretion, creditor banks could exercise in respect of accounts receivable from and revenues of Venprecar, Operaciones RDI and Orinoco Iron S.C.S. Based on the above, IBH presented the aggregate debt as a long-term liability. In addition, put and call option contracts were signed in August 2005 by IBH and Venprecar in respect of 39.14% of shares in IBH de Venezuela (Class “B” shares) owned by creditor banks. Venprecar would have the necessary resources to conduct normal business operations, including those required for investments in fixed assets.

The Standstill Agreement would remain in effect until a financial restructuring agreement was reached, provided that the following conditions were met:

a) Payment of an amount equivalent to US$180 million and the equivalent of minimum interest calculated at LIBOR plus 4.5%, payable quarterly. At September 30, 2007, the balance amounted to US$157.2 million (including minimum interest of US$27.6 million).

Payment of US$194 million on October 1, 2014 and the equivalent of interest calculated at 6%. Unpaid accrued interest could be capitalized annually. The balance of principal and interest at September 30, 2007 was US$204 million.

b) Compliance with debt restructuring agreements with CVG’s subsidiaries.

c) Transfer by the subsidiary IBH de Venezuela of 3% of Venprecar’s shareholding to CVG upon approval and request of the latter.

d) Compliance with call option contracts in favor of IBH or Venprecar on 39.14% of IBH de Venezuela shares. Compliance with the put option in favor of creditor banks. The exercise price for both put and call options would be in the range of US$34 million to US$80 million, depending on the exercise date. Considering the terms of the afore-mentioned agreement and future estimates made by management, in 2005 IBH recorded a liability in respect of the present value of the exercise option price under Other long-term liabilities and accruals, which was expected to be exercised in 2010. At September 30, 2007, this liability amounted to US$24 million. Furthermore, as from 2005 IBH has consolidated 39.14% of the shares covered under the aforementioned option, and the results of the subsidiary were fully recognized as from September 1, 2005 even though the aforementioned option had not been legally exercised at that date. The difference between the liability recorded in respect of the option and the equity value of the related shareholding is shown in equity under Difference between fair value and cost of shares of the subsidiary.

b) Repayment of financial debt being restructured in 2008

In January 2008, creditor banks of the financial debt being restructured assigned to another foreign bank the debt owed at that date by Venprecar, which amounted to US$384 million. This change in creditor was notified to the Commission for the Adminsitration of Foreign Currency (CADIVI). As from that date and until June 2008, acting as the creditor and due to the increase in sales prices of briquettes, accounts receivable of US$316 million resulting from exports made by Venprecar and Orinoco Iron, S.C.S. were foreclosed for purposes of debt collection.


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In June 2008, after foreclosure of these accounts receivable, the remaining balance of Venprecar’s financial debt for US$74.8 million was assigned to another foreign bank. This assignment was notified to CADIVI. Upon this assign-ment, Venprecar agreed with the creditor of the financial debt to novate the obligations derived from the debt, thereby, all agreements related to the financial debt being restructured, including guarantees, were terminated and the financial debt was substituted by a new debt of Bs 161 million, denominated and payable in bolivars. In July 2008, Venprecar notified that it had no foreign currency debt derived from the financial debt being restructured. The aforementioned transactions were conducted independently by creditor banks.

On June 25, 2008, the new financial creditor resolved to increase the capital stock of IBH de Venezuela for Bs 755 million (equivalent to US$351 million), which included the remaining balance of the financial debt for Bs 161 million (equivalent to US$74.8 million) and other loans to finance working capital granted during 2008 to Venprecar and Orinoco Iron for Bs 594 million (equivalent to US$276 million), which included the amount in connection with BHP-Billiton settlement payment for US$30 million (equivalent to Bs 64.5 million). In turn, IBH contributed accounts receivable and other credits for Bs 1,143 million (equivalent to US$532 million), thereby, maintaining the original equity of both parties.

12. Other Long-term Liabilities and Accruals

Other long-term liabilities and accruals at September 30 comprise the following:


Provision for the estimated settlement value of short-term loan with related company (Note 17) 16,754 -Other 5,372 -

Other short-term liabilities and accruals 22,126 -

Provision for the estimated settlement value of long-term loan with related company (Note 17) 28,428 -Broken Hill Proprietary Company Limited (BHP-Billiton) (Note 7) - 22,934Cost of call option (Note 11-a) - 24,366

Other long-term liabilities and accruals 28,428 47,300

IBH and Venprecar, together with the financial creditor, owner of 39.14% of shareholding in IBH de Venezuela, resolved to amend and reissue the call option contract (formerly IBH’s creditor banks) originally signed in 2005 and, agreed the new total value of the option, after the capital increase, of US$76.6 million. On June 30, 2008, the parties executed the call option through which IBH acquired 39.14% shareholding in the subsidiary IBH de Venezuela. This transaction was recorded as a transaction between shareholders (Note 2-c), giving rise to an increase of US$299 million in the equity account Difference between book value and cost of shares in subsidiary.

To pay the acquisition of 39.14% shareholding in IBH de Venezuela, Venprecar issued a promissory note in favor of a Sivensa subsidiary for US$76.6 million, at 12% annual interest during the first year and 14% annual interest as from the second year. At September 30, 2008, this debt amounts to US$41.3 million and is shown at its estimated settle-ment value; the effect of which is included under Other long-term liabilities and accruals (Note 17).

As a result of the aforementioned transaction, IBH obtained 100% of equity in IBH de Venezuela.


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13. Taxes

The estimated income tax benefit (expense) for the years ended September 30 comprises the following:


Income tax, net (106) (235)Deferred income tax 65,342 23,817

Total tax benefit 65,236 23,582

Income tax

For Venezuelan subsidiaries, the main differences between the amount of income tax computed at the regular 34% statutory tax rate and the effective income tax rates result mainly from inflation adjustments for Venezuelan tax purposes, intercompany transactions, income from foreign sources and requirements that Venezuelan income tax be based on the underlying bolivar accounts of each Venezuelan company on an individual basis as follows:

(Thousands of U.S. dollars,except percentage) 2008 2007

Financial income (loss) 14,114 (49,936)Statutory tax rate 34% 34%

Notional income tax gain (expense) (4,799) 16,979

(Increase) decrease in notional income tax expense resulting fromNon-deductible provisions (2,910) (26,696)Inflation adjustment for tax purposes 102,248 35,458 Other, net (mainly effect of declaring taxes based on individual results in bolivars) 8,747 (21,791) (Provision) release of tax loss carryforwards (38,050) 19,632

Tax benefit 65,236 23,582

Venezuelan Income Tax Law requires an annual inflation adjustment of nonmonetary items and fiscal equity resulting in an increase or decrease in taxable income for Venezuelan subsidiaries. Under this Law, the new values resulting from inflation adjustments are to be depreciated over the remaining useful lives of the fixed assets. The Law also allows tax losses and investment tax credits to be carried forward for three years to offset taxable income and tax expense, respectively. At September 30, 2008, the subsidiary Venprecar computed a net tax loss of Bs 198 million (equivalent to US$92 million), which may be offset with future taxable income until the year ending September 30, 2009. At September 30, 2008, the subsidiary Venprecar has tax loss carryforwards of Bs 72.5 million (equiva-lent to US$33.7 million) which may be offset with future taxable income until the year ending September 30, 2009. In addition, the subsidiary Venprecar has investment tax credits of Bs 7.7 million (equivalent to US$3.5 million), of which Bs 5.9 million (equivalent to US$2.7 million) and Bs 1.8 million (equivalent to US$0.8 million) may be used until 2010 and 2011, respectively. At September 30, 2008, the subsidiary Venprecar computed foreign-earned estimated taxable income of Bs 1.34 million (equivalent to US$0.6 million), thereby, computing income tax of Bs 0.43 million (equivalent to US$0.2 million) which was fully offset with investment tax credits.

At September 30, 2007, the subsidiary Venprecar had advance payments of income tax in respect of estimated income tax returns paid in previous years of Bs 9.8 million (equivalent to US$4.6 million), shown under Prepaid expenses. During 2008, advance payments of income tax were sold to the related company Sidetur.


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The components of deferred income tax liability at September 30 are shown below:


Exchange difference taxable when collected 8,639 22,869Difference in tax base of fixed assets 71,700 150,073

Deferred income tax liability, net 80,339 172,942

A summary of the movements of deferred income tax liability accounts is shown below:

DifferenceExchange in tax base

difference taxable of fixed Deferred(Thousands of U.S. dollars) when collected assets total

Balance at September 30, 2006 (22,869) (92,229) (115,098)

Credits (charges) to results - 23,817 23,817 Credits (charges) to revaluation - (81,661) (81,661)


Credits (charges) to results 14,230 51,112 65,342 Credits (charges) to revaluation - 27,261 27,261


Value added tax (VAT)

In May 1999, the Venezuelan government enacted the Value Added Tax (VAT) Law. This tax is based on a tax credit system; it is payable based on the value added at each stage of production or sales. The tax rate is set annually in the Venezuelan Budget Law. The tax rate was set at 9% as from July 1, 2007 (11% between March 1 and June 30, 2007; 14% between May 12, 2006 and February 28, 2007; and 15% between September 1, 2004 and July 31, 2005). The Law provides a special zero tax rate for exporters, granting them the right to recover tax credits from the purchase or import of goods and services based on the ratio of export sales to total sales.

At September 30, 2008, IBH subsidiaries have non-interest-bearing net VAT credits of Bs 103.6 million (equivalent to US$48.2 million at the official exchange rate at September 30, 2008). This balance includes Bs 9.5 million (equivalent to US$4.4 million) in respect of requests for Special Tax Reimbursement Certificates approved in accordance with resolutions issued by the National Integrated Customs and Tax Administration Service (SENIAT) during January, February, April and May 2008 for the tax period between August 2007 and October 2007. Additionally, this balance includes Bs 36.7 million (equivalent to US$17.1 million) in respect of tax reimbursement requests that have not yet been approved for the tax period between November 2007 and June 2008. In addition, this balance includes Bs 40.6 million (equivalent to US$18.9 million) in respect of tax credits to be requested at September 30, 2008.

At September 30, 2008, Orinoco Iron has recorded Bs 4 million (equivalent to US$1.9 million) in respect of tax credits which may be offset with taxable local sales and Bs 11.9 million (equivalent to US$5.5 million) in respect of tax credits that are subject to appeals filed in May and July 2007 after they were initially disallowed by the Tax Authorities.


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Should the disallowance be upheld, this amount must be taken to cost of sales. However, in the opinion of the subsidiary’s management and its legal advisors, there is reason to believe that the final decision will be in favor of IBH. In the opinion of IBH management and its legal advisors, these tax credits are fully recoverable. Therefore, at September 30, 2008, no provision has been set aside in this connection. Furthermore, at September 30, 2008, IBH subsidiaries have recorded VAT withholdings made by local clients of Bs 0.9 million (equivalent to US$420,000).

During October and November 2008, IBH subsidiaries requested tax credits from SENIAT for the tax period between May and August 2008 amounting to Bs 8.1 million (equivalent to US$3.8 million). Requests for the remaining tax credit balance of Bs 32.3 million (equivalent to US$15 million) are yet to be made.

During 2008, tax credits requested for Bs 61.9 million (equivalent to US$28.7 million) were recovered through Special Tax Reimbursement Certificates (CERTs).

Transfer pricing

Venezuelan Income Tax Law includes transfer-pricing regulations. According to these regulations, taxpayers that conduct transactions with related parties abroad are required to calculate income, costs and deductions applying the methodology set out in the Law. For the year ended September 30, 2007, the Company made the transfer-pricing study and prepared all the documentation needed to file a transfer-pricing return for information purposes. The results of this study determined that computation of transfer prices had no effect on taxable income. The study for 2008 is in process, but management believes it will have no effect on taxable income for 2008.

Tax on financial transactions for incorporated and unincorporated entities

On October 3, 2007, the Venezuelan government enacted by Decree Law the Tax on Financial Transactions for Incorporated and Unincorporated Entities. This tax is levied upon debits or withdrawals made from current and savings accounts, custody deposits or any other type of demand deposits, liquid asset funds, trust funds and other financial market funds or financial instruments transacted by incorporated and unincorporated entities with Venezuelan banks and other financial institutions. Entities qualified as special obligors and debt payments made without the mediation of financial institutions are also subject to this tax. The tax rate was set at 1.5% as from November 1, 2007. During the year ended September 30, 2008, IBH recorded Bs 19.2 million (equivalent to US$8.9 million) in this connection, shown under Administrative and selling expenses (Note 17). The tax on financial transac-tions was repealed on June 12, 2008.

14. Equity

Capital stock

Authorized capital stock is represented by 20,115,000 common shares with a par value of US$0.01 each, of which 19,897,520 are subscribed and fully paid shares.

At a Special Shareholders’ Meeting on September 26, 2008, it was resolved to use the amount of US$121,533,000 included in Share premium, recorded in the consolidated balance sheet as part of the consolidated financial state-ments of IBH for the year ended September 30, 2007, to partially make good the deficit at that date.

Dividends

The Capital Markets Law requires companies with publicly traded shares to distribute to their shareholders at least 50% of their net profit (in bolivars) after tax and appropriation to legal reserves. In addition, at least one-half of this


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dividends must be paid in cash. In conformity with CNV rules, the basis for distribution of dividends and statutory equity does not include equity in the results of subsidiaries. For the year ended September 30, 2008, IBH (unconsoli-dated legal entity) has determined profits of US$18 million available for dividend distribution. Under IBH’s bylaws, dividends may be paid out of profits, subject to certain legal restrictions on the share premium account.

15. Main Subsidiaries

Subsidiaries with the most significant operations are the following:

ParticipationName % Country Activity

Venezolana de Prerreducidos Caroní “Venprecar”, C.A. 95.94 Venezuela Briquette plantIBH de Venezuela, C.A. (incorporated in May 2005) 100 Venezuela Holder of shares of subsidiariesInversiones IBH, C.A. (incorporated in September 2008) 100 Venezuela Holder of shares of subsidiariesOrinoco Iron, S.C.S. (incorporated in 2005) 95.94 Venezuela Briquette plantOperaciones RDI, C.A. 100 Venezuela Briquette plantBrifer Internacional Ltd. (Brifer) 100 Barbados Owner of Finmet property rightsSiderúrgica del Caroní “Sidecar”, S.A. 100 Venezuela Holder of sharesInternational Briquettes Marketing Services (IBMS) 100 United States Marketing services

of AmericaSDP International Corporation 100 United States Purchase of spare parts

of America

Participation percentage of Venprecar, IBH de Venezuela, C.A. and Orinoco Iron S.C.S. includes acquisitions made once the put option became effective (Note 12).

16. Regulations

The Law on Narcotic and Psychotropic Substances was published in Official Gazette No. 38,287 on December 16, 2005. This Law repeals the previous Law of September 30, 1993 and requires all companies, public or private, with 50 or more employees to earmark 1% of their annual taxable income for social programs for the prevention of illegal drug consumption and traffic, one-half of which is to be set aside for child welfare protection programs. At September 30, 2008 and 2007, IBH subsidiaries did not set aside a provision in this connection since contributions were made for the prevention of illegal drug consumption and traffic of US$1.1 million and US$1.3 million, respec-tively. The invested amount of US$0.6 million was determined based on IBH subsidiaries’ taxable income for 2008. During 2006, IBH subsidiaries computed tax losses.

Contribution under the Law for the Advancement of Science, Technology and Innovation became mandatory as from January 1, 2006. This Law establishes that the country’s major corporations will annually earmark from 0.5% to 1% of gross income generated in Venezuela to support activities which, according to the Law, relate to investments in science, technology and innovation. This Law defines major corporations as those whose annual gross income exceeds 100,000 tax units. This Law’s Regulations establish the mechanisms, methods and procedures for manda-tory contributions from major corporations, as well as the timeframe and procedures that must be complied with for the purpose of determining which activities will be considered by the People’s Power Ministry for Science and Technology in connection with these contributions. Contributions under this Law are to be calculated based on gross income obtained during the previous period. During 2008 and 2007, IBH invested US$5.4 million and US$7.7 million, respectively, in science, technology and innovation activities. The invested amounts of US$5.1 million and US$5.7 million were determined based on IBH subsidiaries’ gross income for 2008 and 2007, respectively.


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17. Expenses by Nature

Expenses by nature for the years ended September 30 comprise the following:


Expenses by natureRaw materials 255,597 173,954 Electricity, gas and water 94,811 76,067 Labor 56,257 40,184 Depreciation (Note 10) 52,271 53,161 Provision for estimated liquidation value of loan with related company (Note 12) 45,182 - Shutdowns 33,264 32,499 Exports 25,204 17,129 Spare parts 18,511 15,347 Personnel 15,181 11,818 Materials 15,003 13,923 Tax on financial transactions (ITF) (Note 13) 8,945 - Municipal taxes 7,684 764 Professional fees 6,894 7,218 Net gain on sale of securities (46,199) (8,022)Indemnity from M/V Ythan insurance claim (Note 20) (6,000) - Income from drawback collection (Note 5) - (12,894)Other expenses 40,212 36,635

Total cost of sales, general, administrative and other operating expenses 622,817 457,783

During the year ended September 30, 2008, IBH subsidiaries swapped securities, resulting in a net gain of US$46 million (net gain of US$8 million in 2007).

18. Interest and Other Financial Expense

Interest and other financial expense for the years ended September 30 comprises the following:


Interest on loans (Note 11) (16,324) (32,675)Amortization of expenses and commissions related to financial debt (Note 11) (11,334) - Interest expense with suppliers (7,760) (8,467)Other financial expense (restatement of BHP-Billiton accrual and put option) (Note 11) (7,700) (5,235)Intercompany interest expense (Note 12) (1,948) - Other expenses and commissions on loans (Note 11) (2,589) (3,213)Third-party interest expense (735) - Other (1,264) (1,703)

(49,654) (51,293)

During 2008, due to payment of the debt being restructured of IBH, expenses and commissions related to the Standstill Agreement of US$11 million were fully amortized and included under Interest and other financial expense (Note 11).


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19. Foreign Currency

IBH and its subsidiaries have the following balances in bolivars at September 30:

(Thousands of bolivars) 2008 2007

AssetsCash 116,937 18,849 Accounts receivable 181,945 104,355 Other monetary assets 2,081 2,190

Total monetary assets 300,963 125,394

LiabilitiesAccounts payable (334,063) (97,446)Other monetary liabilities (72,626) (63,531)

Total monetary liabilities (406,689) (160,977)

Total net monetary liabilities in bolivars (105,726) (35,583)

Total net monetary liabilities at their equivalent in thousands of U.S. dollars US$(49,174) US$(16,550)

At September 30, 2008 and 2007, IBH has deferred income tax liabilities of Bs 172,729 million and Bs 371,825 million, respectively.

IBH and its subsidiaries do not engage in hedging activities in connection with their balances and transactions in bolivars.

The year-end exchange rate, the average exchange rates for each year and increases in the Consumer Price Index (CPI) published by BCV at September 30 were as follows:

2008 2007

Year-end exchange rate (Bs/US$1) 2.15 2.15Average exchange rate for the year (Bs/US$1) 2.15 2.15Increase in the Consumer Price Index (%) 36% 15%

On January 21, 2003, the Venezuelan government announced the closure of the foreign exchange market in Venezuela and, on February 5, 2003, the Ministry of Finance and BCV began to publish the legal instruments regulating the exchange control regime. On that same date, the government created the Commission for the Administration of Foreign Currency (CADIVI) with the task of establishing the detailed rules and regulations and generally administering the exchange control regime.

Among other things, the first of these legal instruments requires the sale to BCV of all incoming currency. BCV centralizes all currency purchases and sales in the country.

CADIVI has subsequently issued resolutions on a number of requirements in connection with the administration of the exchange control regime, such as user registration, guidelines for importers and exporters, and the registration of private-sector foreign debt at January 22, 2003. IBH subsidiaries have complied with all CADIVI requirements for user registration.


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On March 2, 2005, the Ministry of Finance and BCV established new official exchange rates, effective as from that date, Bs 2.14/US$1 (purchase) and Bs 2.15/US$1 (sale).

Orinoco Iron, C.A. (extinguished due to the merger by absorption by Venprecar) complied with requirements set out in regulations issued by CADIVI for registration of its foreign debt of US$728 million at January 22, 2003. In connec-tion with that amount, Orinoco Iron, C.A. received approval to purchase foreign currency and Authorizations for Currency Liquidation of US$147 million, which were not used. During 2008, the creditor bank foreclosed foreign accounts receivable arising from exports of Venprecar and Orinoco Iron amounting to US$316 million to collect this debt in foreign currency. The remaining amount of US$74.8 million was converted into bolivars in June 2008. In July 2008, Venprecar, as surviving company, notified CADIVI that it had no debt in U.S. dollars. At September 30, 2008, a subsidiary of IBH has long-term debt in foreign currency with a subsidiary of Sivensa amounting to US$41.3 million not registered with CADIVI (Note 11).

As described in Notes 10 and 11, Venprecar guaranteed a long-term loan in foreign currency received by Orinoco Iron, considered overdue by creditor banks since Orinoco Iron defaulted on payments and certain covenants set out in the loan agreement. In 2004 and 2008, Orinoco Iron’s creditor banks foreclosed certain guarantees, including Venprecar’s cash balances in U.S. dollars and accounts receivable denominated in U.S. dollars (Note 11).

20. Litigations and Claims

IBH is a party to several lawsuits and claims arising in the normal course of business, whose possible outcome cannot be quantified. In the opinion of IBH management, based on the opinion of its legal counsel, these matters should not have a material adverse effect on IBH’s consolidated financial position or consolidated results of operations.

a) M/V Ythan

During 2008, the subsidiary Venprecar collected US$6 million on the M/V Ythan insurance claim filed by Venprecar. In December 2006, Venprecar paid US$8 million, approved by CADIVI, under the settlement agreement of the M/V Ythan case. Foreign currency received from this indemnity was sold to BCV (Note 17).

b) Environmental regulations

Venprecar, Orinoco Iron and Operaciones RDI are subject to Venezuelan environmental laws and regulations. These subsidiaries are not involved in any environmental-related claims with Venezuelan environmental and health authorities and are not aware of any claims or conditions expected to result from environmental violations that could, in the opinion of management, have a material adverse effect on the consolidated financial position or results of IBH’s operations.

c) Tax matters

On April 10, 2008, SENIAT notified the subsidiary Venprecar, as affected party due to the merger with Orinoco Iron, C.A., of two tax assessments for failing to retain and pay value added tax (VAT) within the legal timeframe for the tax period from January 2003 to December 2004. These tax assessments amount to Bs 6.7 million (equivalent to US$3.12 million), of which approximately Bs 5.4 million (equivalent to US$2.5 million) is in respect of overdue interest. In Venprecar’s opinion, calculation of overdue interest was not well grounded in law. Venprecar appealed these assessments within the legal timeframe. Venprecar management and its legal counsel believe there is a reasonable expectation of obtaining a favorable outcome for Venprecar.


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21. Financial Statements Translated into Equivalent Bolivars

The consolidated balance sheet and the consolidated income statement of International Briquettes Holding and its subsidiaries translated into bolivars for convenience purposes, as described in Note 2-v, are provided below as supplementary information:

Consolidated Balance Sheet for Information PurposesSeptember 30, 2008 and 2007

(Thousands of equivalent bolivars, Note 2-v) 2008 2007

AssetsCurrent assets Cash 136,394 27,275 Accounts receivable 169,639 208,952 Related companies 42,656 378 Inventories 156,348 65,590 Advances to suppliers 13,111 2,361 Prepaid expenses and other current assets 2,421 11,705

Total current assets 520,569 316,261

Property, plant and equipment, net 2,509,974 2,573,905 Other assets 25,394 15,684

Total assets 3,055,937 2,905,850

Liabilities and EquityCurrent liabilities Short-term loan with related companies 32,955 - Accounts payable Suppliers 228,923 111,613 Shareholders and related companies 114,683 66,287 Profit sharing, vacations and other personnel accruals 28,948 22,109 Other liabilities and accruals 47,571 10,395

Total current liabilities 453,080 210,404

Long-term loan being restructured and other - 780,080 Long-term loan with related company 55,919 - Accrual for employee termination benefits, net of advances to employees 32,747 34,252 Deferred income tax 172,729 371,825 Other long-term liabilities and accruals 61,120 101,695

Total liabilities 775,595 1,498,256

Equity Capital stock 432 432 Share premium 230,484 491,780 Revaluation of fixed assets 391,472 369,897 Net effect of combination (merger) of subsidiaries 378,893 378,892 Difference between fair value and cost of shares of subsidiary 1,055,807 412,336 Retained earnings (deficit) Legal reserve 13,100 13,100 Available (deficit) 135,158 (329,460) Minority interests 74,996 70,617

Total equity 2,280,342 1,407,594

Total liabilities and equity 3,055,937 2,905,850


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Consolidated Income Statement for Information PurposesYears ended September 30, 2008 and 2007

(Thousands of equivalent bolivars, Note 2-v) 2008 2007

Net salesExports 1,146,116 750,679 Local 284,203 194,429 Sales of subproducts 45,839 42,043

1,476,158 987,151 Cost of sales (1,234,726) (946,208)

Gross income 241,432 40,943

General and administrative expenses (95,120) (76,437)Other operating income, net (9,210) 38,412

Operating income 137,102 2,918

Interest and other financial expense (106,756) (110,280)

Income (loss) before tax 30,346 (107,362)

Income tax 140,257 50,701

Net income (loss) 170,603 (56,661)


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Relations

RelationsINVESTOR

Investor Relations

Corporate Finance Department

Av. Venezuela Edificio Torre América Piso 11. Urbanización Bello Monte. Caracas, VenezuelaTelephones: (58212) 707.61.27 / 707.62.80Fax: (58212) 707.63.52E-mail: [email protected]

Transfer Agent

Planivensa

Av. Venezuela. Edificio Torre América. Piso Planta Libre. Urb. Bello Monte. Caracas, Venezuela.Telephones: (58212) 707.64.68 / 707.64.66Fax: (58212) 707.64.56E-mail: [email protected]

Auditors

Espiñeira, Sheldon y Asociados (Member firm of PricewaterhouseCoopers)

Av. Principal de Chuao, Edif. del Río, Caracas, VenezuelaTelephone: (58212) 700.63.32Fax: (58212) 991.52.10E-mail: [email protected]

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Published by:

Corporate Finance Department

Design and production:

Pérez Fernández Estudio Gráfico, S.R.L.

Photos:

Antal Oppenheimer

Impresión:

Grupo Intenso

Caracas, 2009

Deposito Legal: pp 199902DF429

Documents

2008 - ibhcayman.com.ve PDF/Informe Anual... · International Briquettes Holding, IBH is a world class company headquartered in Venezuela and consolidating companies engaged in the