World Bank Document · PETPOBRAS - Petroleo Brasileiro S.A. SUCaR - Superintendencia de Implantacao do Projeto Carajas SUNOR - Superintendencia de Pre-Operacao Norte Industry Department

Document of tF rn ,The World Bank &y . '

FOR OFFICIAL USE ONLY

Report No. 3921-BR

STAFF APPRAISAL REPORT

BRAZIL

CARAJAS IRON ORE PROJECT

July 6, 1982

Industry DepartmentLatin America & the Caribbean Projects Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Cruzeiro (Cr$) 1 = US$0.008Cr$ 125.04 = US$1.00

(as of December 31, 1981, the date of base cost estimates)

BRAZILIAN FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

1 meter (m) 3 3.281 feet (ft) 3

1 cubic meter (m ) = 35.315 cubic feet (ft )1 cubic yard (cu. yd.) = 0.765 cubic meters1 kilometer (km) = 0.62 miles1 kilogram (kg) = 2,205 pounds1 metric ton (t) = 1,000 kilograms or 2,2051 metric ton per year (tpy) = 1,000 kilograms per year1 Fe unit = 1 percent (%) of iron content1 knot 1 nautical mile (6,080 ft) per hour1 megawatt (Mi) = 1,000 kilowatts1 kilovolt (KV) = 1,000 volts

1 megavolt (MVA) = 1,000 kilovolt amperes

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

ALBRAS - Aluminio Brasileiro S.A.ALUNORTE - Alumina do Norte do Brasil S.A.AMZA - Amazonia Mineracao S.A.BNDES - Banco Nacional de Desenvolvimento Economico e SocialCACEX - Carteira do Commercio Exterior do Banco do Brasil S.A.CIMA - Comissao Interna de Meio AmbienteCIP - Conselho Interministerial dos PrecosCONSIDER - Conselho de Nao Ferrosos e de SiderurgiaCVRD - Companhia Vale do Rio DoceDEPEK - Departamento de Edificios e Projetos, CVRDDNPM - Departamento Nacional da Producao MineralEC - European Communities

ECSC - European Coal and Steel CommunityELETROBRAS - Centrais Eletricas Brasileiras S.A.ELETRONORTE - Centrais Eletricas do Norte do Brasil S.A.FINAME - Agencia Especial de Financiamento IndustrialFUNAI - Fundacao Nacional do IndioGEAMAM - Grupo de Estudos e Assessoramento de Meio AmbienteIESA - Internacional de Engenharia, S.A.KfW - Kreditanstalt fur WiederaufbauMBR - Mineracoes Brasileiras Reunidas S.A.MRN - Mineracao Rio do Norte S.A.PETPOBRAS - Petroleo Brasileiro S.A.SUCaR - Superintendencia de Implantacao do Projeto CarajasSUNOR - Superintendencia de Pre-Operacao Norte

Industry DepartmentLatin America & the Caribbean Projects DepartmentJuly 1982

FOR OFFICIAL USE ONLYBRAZIL

CARAJAS IRON ORE PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page No.

I. INTRODUCTION .............................................. 1

II. SECTOR ISSUES AND REGIONAL IMPACT ......................... 1

A. Background ........................................... 1B. The Mining Sector. 2C. Steel Developments ........................ . 4D. Regional Impact. 6

III. THE IRON ORE MARKET .......................... 7

A. Background. 7B. International Iron Ore Market .. 8

1. Historic Production, Consumption and Trade 82. Future Supply/Demand Balance and Quality

Considerations ................................ 113. Iron Ore Prices ................................. 18

C. Market and Marketing for CVRD Ore ......... ........... 201. Past Production/Consumption of Brazilian Ore .... 202. Future Outlook .............. 213. Marketing of Carajas Iron Ore ...... ............. 23

IV. THE COMPANY .................... 24

A. Ownership .................... 24B. Organization and Management ........... ............... 25C. Staffing and Training ................................ 26D. Operations ............ ...................... 27E. Financial Position .................................. 29

This report has been prepared by Ms. M. 0. Smith, and Messrs. B. Stenberg,J. Franz, and N. Ahmad and Ms. J. Wright of the Industry Department; Messrs.Lal and Echeverria of the Latin American Projects Department; Mr. R.Goodland of the Office of Environmental Affairs, and Ms. M. Koch-Weser of theAgriculture and Rural Development Department. Messrs. R. Bourton, A. Funes,and F. Higginbottom (Consultants) also contributed to the report.

This document has a restricted disttribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Page No.

V. THE PROJECT ..................................... ..... 31

A. Project Development .................................. 31B. Project Description .................................. 32

1. Mine Component .................................. 322. Railroad Component .............................. 353. Port Component .................................. 37

C. Infrastructure .. . ..................................,. 401. Carajas Town Development ... 402. Other Town Developments ... ...................... 413. Urban Environmental Measures .................... 424. Other Infrastructure . ................. . 42

D. Ecological Aspects ................................... 431. Environmental Management ....... ............... .. 432. Amerindian Protection ........ ................... 45

E. Employment and Training .............................. 461. Direct Employment .............................. 462. Training Program ................................ 47

VI. PROJECT IMPLEMENTATION ................. 48.................. 48

A. Project Management and Organization ..... ............. 48B. Implementation Schedule ......... ..................... 51

VII. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT ...... ....... 54

A. Capital Costs ................... ..................... 54B. Financing Plan ................... .................... 57

1. Equity Financing ................................ 582. Debt Financing .................................. 593. Cost Overruns ................................... 60

C. Procurement .................... ...................... 61D. Allocation and Disbursement of Bank Loan ...... ....... 62

VIII. FINANCIAL ANALYSIS ........................................ 63

A. CVRD ................................................. 631. Carajas ........... .............................. 632. Existing Operations ...................... 65

B. Financial Projections ............... ................. 69C. Financial Covenants ................ .................. 72D. Financial Rate of Return and Sensitivity Tests .. 73E. Major Risks .................................. 75

IX. ECONOMIC ANALYSIS ......................................... 76

A. Economic Rate of Return .............................. 76B. Foreign Exchange Benefits ............................ 77C. Other Benefits ............ ................... 78

X. AGREEMENTS .................. ................... 79

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Page No.

CHARTS AND DIAGRAMS

4 CVRD Corporate Organization ............ ........................ 255-1 Mining Component and Carajas Township ....... ................... 335-2 Railway Component ...................... 355-3 Port Component ...................... 386-1 CVRD Project Management ...................................... 486-2 Project Implementation Schedule ................................ 526-3 Project Critical Path ...................................... 53

ANNEXES

4-1 CVRD--Historic Income Statements, 1976-814-2 CVRD--Historic Statement of Changes in Financial Position, 1976-814-3 CVRD--Historic Balance Sheets, 1976-814-4 CVRD--Equity Investments and Holdings in Subsidiaries and Associated

Companies, 1980

6-1 Carajas-Sao Luis Railway5-2 Caraias Townsite Description5-3 CVRD--Environmental Management Program: Organization and Activities5-4 Caraias Amerindian Sub-project

6 Project Management Linkages

7-1 Detailed Capital Cost Breakdown by Year, 1978-887-2 Bank-Financed Goods7-3 Procurement Schedule for Bank-Financed Goods7-4 Disbursement Schedule for Bank Loan

8-1 Assumptions for Financial Projections8-2 CVRD Proforma Consolidated Financial Statements, 1982-908-3 Carajas Proforma Financial Statements, 1982-808-4 Financial Rate of Return--Assumptions and Calculations

9-1 Economic Cost/Benefit Streams9-2 Incremental Foreign Exchange Benefits

MAP IBRD 16254

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DOCUMENTS AVAILABLE IN THE PROJECT FILE

A. IRON ORE MARKET 1/

1. 1980 Iron Ore Manual. Tex Report Co., Ltd.2. 1981-82 Iron Ore Manual. Tex Report Co., Ltd.3. Iron Ore. Metallic Minerals Program--1980. SRI International:

December 1980.4. World Steel. Metallic Minerals Program--1980. SRI International:

September 1980.5. World Steel. Metallic Minerals Program--1981. SRI International:

September 1981.6. Iron Ore Availability: The Need for New Development. W.W. Bilhorn

and R.E. Sargent (AMAC): 1981.7. Iron Making and Steelmaking in the 80's--Future Quality Requirements

for Iron Ore. Douglas C. Blackwell (AMAX) and C. Warren Brock(Broken Hill): March 1981.

8. World Steel Dynamics. Paine Webber Mitchell Hutchins: August 1981.9. Growth of DR Iron Production: The Effect on International Scrap

Prospects and Iron Ore Pellet Availability. AMAX: September 1981.10. World Iron Ore: The Steel Crisis and After. CRU: received March 1982.11. Brazilian Mineral Yearbook 1980. Ministry of Mines and Energy: 1981.12. Brazilian Mineral Balance 1980. Ministry of Mines and Energy: 1981.13. The International Steel Market and the Outlook for Light Non-Flat

Products. IPD/EPD, World Bank: May 1981.14. Iron Ore Handbook. EPD, World Bank: December 1981.15. A Report on Iron Ore Marketing, Including an Analysis of CVRD's Fore-

casts and the Potential for the Carajas Project in 1985.World Bank Consultant: February 1981.

16. Private Communications from: Mitsui, Nissho Iwai Corporation.

B. THE COMPANY

1. CVRD Subsidiary Companies

C. FEASIBILITY STUDIES

1. Carajas Project Feasibility StudyHistorical Development and Technical Aspects

-- Economic and Financial EvaluationAmazonia Mineracao, S.A.: November 1979

2. Carajas Project Feasibility Study (62 Volumes)Amazonia Mineracao, S.A.: September 1980

D. PROJECT DESIGN

1. Mine Design2. Railroad Design3. Port Design

1/ Iron ore market documents are available in the Mining Library, IND.

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E. PROJECT MANAGEMENT

1. Management Organization Plan (2 volumes)CVRD: May 1981

2. Management Contracts3. Implementation: General Master Plan

Amazonia Mineracao, S.A.: November 1979

F. ENVIRONMENTAL ASPECTS

1. Carajas Project: Iron Ore Mine, Railroad, Port:Environmental Reconnaissance. CVRD/DEPEK/World Bank: July 1981

2. Environmental Planning Studies3. Environmental Management Manual. GEAMAM: 1980-814. Environmental Activities5. Amerindians: Apoio as Comunidades Indigenas. FUNAI: January 1982

I

I. INTRODUCTION

1.01 The Government of Brazil and the Companhia Vale do Rio Doce (CVRD)have requested a Bank loan of US$304.5 million to finance mining, railroad andport equipment, technical assistance, and a small amount of townsite civil worksfor the integrated development of the Carajas iron ore project. The proposedProject would consist of a 35 million ton per year (tpy) open pit mining develop-ment in the eastern Amazonian state of Para, a 280,000 dwt capacity deepwaterport at Ponta da Madeira in the northern coastal state of Maranhao, and an890-km interconnecting railroad line (Map IBRD 16254), all of which would beowned and operated by CVRD. The Carajas iron ore deposits presently representthe largest potential for development and export in Brazil's mining sector.Development of this potential through the Project will expand iron ore exportsand contribute positively to Brazil's balance of payments. The proposed loanwould be the first by the Bank Group directly to CVRD, one of the leading ironore mining companies in the world and the largest mining company in Brazil,and would be the fifth loan in the Brazilian mining sector. 1/

1.02 The Government first discussed the Project with the Bank in 1972when the Project was in its early stages of formulation. Since then, theGovernment, the Project owners, and the Bank have had continuous dialogueduring which the Project has undergone significant modifications in scope,design and ownership.

1.03 A preparation mission for the Carajas project visited Brazil inFebruary 1981, followed by a preappraisal mission in June/July 1981. TheProject was appraised in October/November 1981 by a mission comprisingMs. M. 0. Smith (Chief), and Messrs. J. Franz and B. Stenberg (IND);Ms. Koch-Weser (AGR); Mr. R. Goodland (PAS); and Messrs. R. Bourton, A. Funesand F. Higginbottom (Consultants). Follow-up missions were carried out byMr. J. Newman (LCP) and by Messrs. M. Lal (LCP), S. Spencer (TWT), A. Funes(Consultant) and Mr. E. Echeverria (LCP) in January/February 1982 and byMessrs. Stenberg and Franz (IND) in March 1982.

II. SECTOR ISSUES AND REGIONAL IMPACT

A. Background

2.01 During 1967-73, Brazil sustained high economic growth (over 10% peryear) while liberalizing trade, reducing inflation rates, building inter-national reserves, and accumulating only modest external debt. Despite thesevere impact of oil price increases (Brazil at that time imported more than

1/ The Bank Group has participated in three CVRD-sponsored projects, i.e.,the Trombetas bauxite project (US$15 million IFC investment, Report No.IFC/J-201, 1977); the Valefertil fertilizer project, (US$82 million, Loan1411-BR, 1977); and the Valesul aluminum project (US$98 million, Loan1660-BR, 1979). The other mining sector loans were made for CompanhiaMineira de Aluminio (US$22 million, Loan 526-0-BR, 1968) and MineracoesBrasileiras Reunidas S.A. (US$50 million, Loan 785-0-BR, 1971).

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80% of its oil), growth continued to average better than 7% per year in1973-80 under a high-growth strategy by the Government and availability ofexternal financing in large volumes and on relatively easy terms. Growth inthis latter period, however, was accompanied by accelerating inflation, aquadrupling of external debt, increasing government intervention in theeconomy, and declining rates of domestic saving. 1/

2.02 In 1981, the economy, reflecting Government stabilization measures,entered into an industrial recession, with industrial production falling bynearly 10% and GDP by 4%. The balance of trade, however, turned positive(US$1.2 billion surplus) for the first time since 1977 and inflation wasreduced to 95%, with a steadily declining trend evident through the secondhalf of the year.

2.03 GDP growth is expected to recover to about 4% in real terms in 1982,and the Government plans to maintain an average growth rate of around 5% inreal terms for the rest of the decade, based in large part on a strong exportperformance. The Government therefore has given emphasis in its investmentpolicies towards export expansion and further import substitution.

2.04 The Carajas Project forms an important part of this national strategybecause all iron ore produced at Carajas is to be exported. While a smallportion of Project exports will replace exports from CVRD's southern miningoperations (para. 3.44), the Project will be a sizeable net foreign exchangeearner for the country over at least the next 50 years (para. 3.03). Govern-ment recognition of this importance, and of the Project's potential impact onstimulating other resource developments in the Eastern Amazon, is discussedbelow.

B. The Mining Sector

2.05 In 1980, the mining sector contributed over 10% (about US$1.6billion) to the value of the country's merchandise exports, about 1.3% to GDP,and about 1% to total Government revenues.

2.06 Sector output is highly diversifed (some 70 mineral commoditiesare produced) although dominated by iron ore, which in 1980 accounted for26% of the value of mineral production and over 90% of the value of mineralexports as shown in the table below. In addition to being one of the world'sprincipal producers of iron ore (Chapter III), Brazil is the leading producerof pyrochlore (columbium), ferro colombium and natural quartz crystals. Interms of value, other important minerals are crushed stone, limestone, coal,marine salt, manganese, bauxite, gold and tin.

1/ For more detailed background economic information, see latest CountryEconomic Memorandum for Brazil (Report No. 3275-BR, dated May 29, 1981).

Brazil: Mineral Production, 1977-80(US$ million)

1977 %_ 1978 % 1979 % 1980 %

I. Metals 873 42.9 1,045 43.6 1,194 45.9 2,250 59.7Iron Ore 587 28.8 706 29.5 748 28.7 994 26.3Pyrochloreconcentrate 63 3.1 48 2.0 95 3.7 105 2.8

Tin 55 2.7 83 3.5 88 3.4 99 2.6Gold 29 1.4 63 2.6 65 2.5 274 7.3Manganese 58 2.9 70 2.9 61 2.3 78 2.1Others 81 4.0 75 3.1 137 5.3 700 18.6

II. Non-metals 1,061 52.1 1,199 50.0 1,186 45.6 1,042 27.6Aggregates andconstructionmaterial 409 20.1 401 16.7 380 14.6 n.a. n.a.Limestone 268 13.2 361 15.0 245 9.4 343 9.1Phosphate 23 1.1 52 2.2 112 4.3 183 4.9Salt 76 3.7 88 3.7 80 3.1 n.a. n.a.Others 285 14.0 297 12.4 369 14.2 n.a. n.a.

III. Diamonds and Gems 24 1.2 47 2.0 49 1.9 18 0.5Gemstones 11 0.6 24 1.0 30 1.2 n.a. n.a.Raw Diamonds 9 0.4 11 0.5 10 0.4 n.a. n.a.Others 4 0.2 12 0.5 9 0.3 n.a. n.a.

IV. Coal 78 3.8 105 4.4 174 6.6 462 12.2

Total 2,036 100.0 2,396 100.0 2,603 100.0 3,772 100.0

n.a.--not available.Source: CVRD

2.07 The enormity of BrazilJs known reserves in many of its importantminerals provides the country with a long-term economic base. Recent dis-coveries of large bauxite reserves in the Amazon have increased measuredbauxite reserve estimates to about 4.5 billion tons, ranking Brazil thirdafter Guinea and Australia. The recently discovered Serra Pelada gold deposit,south of Carajas, is estimated to contain more than 100 tons of gold. Pub-lished figures (1979) show that Brazil also has substantial measured reservesof beryllium, chromium, copper, manganese, tin, titanium, tungsten, anduranium. Particular gains in production in 1980 were achieved in gold,bauxite and phosphate rock.

2.08 While it is widely felt by Government agencies and mining companiesthat the country is not well explored, recent increases in reserve levelsindicate an upswing in exploration activity. It is estimated that US$48-50million was spent on exploration in 1981, of which DOCEGEO, a subsidiaryof CVRD, accounts for US$22 million, primarily in the Amazon region. Between

1971 and 1980, DOCEGEO spent US$115 million. The Government provides fiscalincentives for exploration by Brazilian firms and financing of exploration anddevelopment through Banco National do Desenvolvimento Economico (BNDE) andCompanhia de Pesquisa e Recursos Mineracais (CPRM), a small exploration agencycreated in the mid-1960s.

2.09 Brazil's mining sector is made up of about 670 companies, most ofwhich are privately held. Production, however, is concentrated in 50 majorcompanies which accounted for 61% of total output in 1979. Three of these arestate owned.

2.10 Companies operate under a mining code established in 1967 underDecree Law No. 227 which provides a sound basis for the development of Brazil'smineral wealth. 1/ The Departmento Nacional da Producao Mineral (DNPM) withinthe Ministry of Mines and Energy is responsible for the implementation ofmining policy, enforcement of the mining code, and issuance of explorationand mining licenses. In addition, the DNPM prepares the national miningplans. There have been two such plans, the first covering the years, 1965-75,and the second, 1981-90. While the first plan emphasized regional geologicalmapping and exploration work, the second plan consists of general statementsof objectives in mine development. The second plan gives priority to theproduction of copper to reduce the substantial import of this commodity(estimated at US$494 million in 1980) and to other commodities in which Brazilis deficient, namely lead, zinc, tin and aluminum. The development programfor the greater Carajas region is handled outside the second plan and isdiscussed in Section D below.

2.11 The Government is actively promoting both domestic and especiallyprivate participation in the mineral sector through the provision of tax,financial, and customs incentives. The Government has given priority tothe Carajas Project, granting in late 1980 particular incentives for theProject, as well as for the overall Grande Carajas Program.

C. Steel Developments

2.12 Between 1960-80, Brazil's steel industry experienced rapid andsteady growth. While world steel output increased on average by 3.7% a year,Brazilian production increased by 10.0% a year. By 1980 Brazil had become thetenth largest steel producer in the world (15.3 million tons in crude steelequivalent) and the largest in Latin America. 2/

2.13 Production by the state-owned SIDERBRAS group contributed 61%(9.4 million tons) of the output in 1980, while private industry provided

1/ The code is a revision of the 1940 code and is considered to be clear,concise and liberal.

2/ The leading steel producers by order of (million tons of) output were theU.S.S.R. (150.5), Japan (111.4), U.S. (103.2), F.R. Germany (43.8), China(34.0), Italy (26.5), France (23.1), Poland (18.0), Canada (15.9), Brazil(15.3), and Czechoslovakia (15.0).

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the balance (5.9 million tons). The three principal producers accountingfor over half of total output are CSN, COSIPA and USIMINAS for which theBank has made a total of five loans. 1/ The breakdown of production amongmajor producers is as follows:

Brazil: Steel Production, 1980(crude steel equivalent)

State-owned Group -000 tons %

CSN 2,440 15.8COSIPA 3,002 19.5COFAVI 156 1.0COSIM 151 1.0PIRATINI 168 1.0USIBA 255 2.0USIMINAS 3,259 21.1

Sub-total 9,411 61.4

Private Group

ACESITA 479 3.1Belgo-Mineira 874 5.7COSIGUA 673 4.4Mannesmann, S.A. 723 4.7Others a/ 3,179 20.7

Sub-total 5,928 38.6

Total 15,339 100.0

a! Comprising more than 30 small private companies.

2.14 The development of the steel sector in the late 1960s and early1970s was part of national development plans to meet growth in domesticconsumption, with exports beginning only in the late 1970s. Domestic con-sumption grew at an average rate of 9% p.a. between 1970 and 1980, reaching15.2 million tons in equivalent ingots in 1980. Steel exports outstrippedBrazil's steel imports for the first time in 1979. Brazil had a positivetrade balance in steel of 1.1 and 1.2 million tons in 1979 and 1980,respectively.

2.15 The steady expansion in the Brazilian steel industry was reversedin 1981, when steel production and consumption contracted sharply, reflectinggeneral stagnation in the Brazilian economy. By 1985-86, however, it isexpected that domestic consumption will have surpassed that of 1981. Forecastiron ore consumption by domestic steel producers is shown in the table inpara. 3.40.

1/ In 1972, the Bank made three loans to help finance the Stage II expansionsof CSN, COSIPA and USIMINAS (Loan Nos. 797-BR, 828-BR, and 812-BR respec-tively). These were followed, in 1975, by loans to CSN and COSIPA(1151-BR and 1152-BR) for their Stage III expansions.

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D. Regional Impact

2.16 The Project is located within tVe Eastern Amazon, in the GreaterCarajas region, an area of about 4,000 km , located north of the 8th paralleland between the Amazon, Xingu and Parnaiba rivers, covering part of thestates of Para, Goias and Maranhao. The natural wealth of the EasternAmazon, is unique in mineral potential, and includes iron ore, manganese,nickel, copper, tin, bauxite, gold and others. The conditions are alsofavorable to agricultural, cattle raising and reforestation activities.Most of the recent imineral discoveries have been in the Carajas region.

2.17 A Grande Carajas Program has been developed that outlines a broadscheme for regional investments in the magnitude of some US$60 billion. Theobjective is to develop the region into a highly productive center of basicraw materials, semi-finished and finished products, mostly for export; however,the precise scope and timing of specific projects still need to be defined. 1/

2.18 One of the preconditions to future major developments in the regionis the existence of basic infrastructure. In this respect, the CarajasProject will contrilbute substantially to regional development throughinstallation of a major railroad line in West-East direction linking theremote Serra dos Carajas area with the northern sea coast near Sao Luis andthrough development of a bulk terminal capable of handling ships up to 280,000dwt. The Project will round-out basic infrastructure requirements, since theregion is beginning to receive other large infrastructure investments. Amongthese are (i) the Transamazonia highway running East to West and the Belem-Brasilia highway running North to South, both of which are already constructed;(ii) the Tucurui hydroelectric plant with an initial capacity of 4,000 MW,scheduled for start-up in 1983; (iii) the Itaqui commercial port at Sao Luiscapable of handling vessels of up to 60,000 dwt, in operation; and (iv) theBarcarena river port in Para State, capable of handling vessels of up to50/60,000 dwt, under construction.

2.19 The major mining projects implemented in the region so far havebeen located near commercial waterways or in coastal areas. These includethe Trombetas bauxite project which has access to the Amazon River, theAlunorte and Albras alumina and aluminum projects in Barcarena near Belem,and the Alcoa alumina and aluminum projects near Sao Luis (Map). The Carajasinfrastructure will open up the Serra dos Carajas area in the interior wherethe potential for resource development is high.

2.20 There are several projects which are in early stages of developmentand are likely to make use of the Carajas transportation network in themedium term, including: (i) a copper concentrate project, for which CVRD hascompleted exploration, and has prefeasibility work under contract; (ii) aferro-manganese project, for which CVRD is studying a possible joint-venturedevelopment; (iii) several tin projects which Brazilian private firms areimplementing; (iv) a bauxite project at Paragominas, which is being studied by

1/ Copper concentrate, bauxite, ferro-manganese, tin and gold projects arein early stages of development (para. 2.20).

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foreign and local companies, including CVRD; and (iv) the mechanized exploita-tion of gold at Serra Pelada, which has been mined so far superficially byhand.

2.21 The Project will also spur indirectly, over the long term, develop-ment of the more important towns and areas in the region into commercial andindustrial centers. The Grande Carajas Program envisages the developmentof seven such centers: Carajas (production of iron ore), Sao Felix do Xingu(production of tin concentrate), Maraba (central junction for railway,waterway and highway systems), Tucurui (pig iron and sponge iron production),Barcarena (already installed for production of alumina and aluminum), Para-gominas (production of alumina and aluminum), and Sao Luis/Ponta da Madeira(production center for semi-manufactured steel products, export sinter,among others). While these developments are for the most part conceptual atthis stage, the Carajas Project, in addition to laying basic infrastructure,will draw large numbers of persons into the region (with direct employmentalone to be close to 5,600 persons at full operation), stimulate growth ofsupporting services and facilities, and accelerate the region's social andeconomic transformation.

III. THE IRON ORE MARKET

A. Background

3.01 The worldwide iron ore market has had surplus capacity since thelate 1970s, reflecting the sharp downturn in world steel demand in 1975and the generally weak steel market thereafter. After a normal one to two-year lag behind the contraction in steel output, iron ore consumption andsupply began to decline in 1976-77. Iron ore consumption turned up in1979, following an increase in crude steel production in 1978, but began todecline again in 1980. Large expansions in iron ore production capacitieswere made when steel consumption in market economies was growing at5.2% annually (1960 through 1974). By 1978-79, these capacity increasescould no longer be absorbed as steel consumption in market economies fell onaverage by 0.9% annually (1974 through 1980). By 1980, iron ore production isestimated to have been in the range of 15% below effective productioncapacity. 1/

3.02 The market prospects for iron ore are inextricably linked tothe demand for steel which in turn depends in large part on GDP growth.Demand for iron ore in the market economy countries 2/ has been projectedbased on two alternative steel production growth scenarios that cover therange of reasonable expectations. The two scenarios assume growth in steelproduction in the market economies at 1.8% p.a. and 2.7% p.a., respectively.

1/ Effective capacity is defined here as the upper limit of sustainableoperating capacity or 90% of normal design capacity. The effectiveoperating rate is the extent to which effective capacity is used.

2/ Includes industrialized countries and developing countries as listedin footnotes to the table in para. 3.04.

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Growth is thereby expected to be more rapid in developing countries (4.9% to6.3% p.a.) than in industrialized countries (1.0% to 1.8% p.a.) which stillaccount for over three quarters of total steel consumption. As discussed inmore detail below, the analysis of iron ore demand based on these two scenariosindicates that by the second half of the 1980s the iron ore market will beeither approximately in balance (with a surplus of potential iron supply ofless than 2% of iron ore demand in the low steel-growth scenario) or, underthe high steel-growth scenario, face a growing supply deficit to reach over10% of iron ore demand in 1990, unless new mining capacity beyond that underimplementation or presently planned were to come on stream, in addition toincreases in effective operating rates in existing mines. In any case, evenunder the low steel-growth scenario, any iron ore surplus will have disappearedby the late 1980s. Various iron ore market experts using differing assumptionshave made forecasts with similar findings (para. 3.25). While these expertsdiffer on the exact timing of iron ore market equilibrium, they concur in thegeneral expectation that the current iron ore overcapacity will work itselfout and might turn into a deficit as early as the mid-1980s.

3.03 The Carajas iron ore development has advantages over other potentialnew developments which may or may not materialize in the 1980s, despite itsdisadvantage of accessibility due to the remote location of the deposits inthe Eastern Amazon. These advantages are:

(a) A high-grade ore with about 66.0% Fe, requiring no con-centration, and having positive sintering and blast furnaceproperties;

(b) Large, easily mineable deposits with a long-term potentialof at least 50 years based on presently measured reservesof 2.6 billion tons of ore;

(c) Good marketability exemplified by already existing long-term purchase contracts for 24.7 million tpy, i.e., 71%of the initial 35 million tpy production target, withprovision of guaranteeing the off-take of at least 80%of the contracted tonnage in each single year;

(d) Relatively low estimated operating costs which together withthe expected long mine life, will help to defray the highinitial capital cost of the Project (para. 7.08); and

(e) Ownership by an existing well-managed, experienced andfinancially-sound iron ore operating company.

B. International Iron Ore Market

1. Historic Production, Consumption and Trade

3.04 World iron ore production increased on average at a swift 3.5%p.a. between 1960 and 1975-76, but has remained fairly static thereafter. In1979 there was an increase in output reflecting a temporary recovery insteel consumption, but in 1980 iron ore output declined again due mainly tosteel production cutbacks in the industrialized countries. Apparent iron ore

consumption 1/ has followed the same pattern. The following table summarizesproduction and apparent consumption growth of iron ore from 1960-80.

World Production and Apparent Consumptionof Iron Ore 1960-80

(million tons)

198'! A.eae.r. t at a

I. Production 1960 1965 1970 1975 1976 1977 1978 1979 1980-' 1960-75/76 1975/76-79180

1. Market Economies

Industrialized Ceuntries - 256 264 321 326 327 290 282 316 301 1.6 (1.4)

Developing Countries t/ 93 146 196 262 247 241 232 252 254 6.7 (5.1)

Sub-total 349 410 .5.17 .551 924 .5- 31 .54 .f18 .53.5 3.3 (0.9)

2. Centrally Planned Economies 173 214 257 301 304 311 326 333 337 3.7 2.6

Total Prodoctian -/ 522 624 774 889 878 842 840 901 892 3.5 0.4

}1. Apparent Consumption

1. Merket Economies

Induntrialized Countrien 319 363 461 474 473 419 407 455 429 2.6 (I.

Developing Countries 28 46 51 99 96 104 91 101 94 8.4 0.0

sub-total 347 409 512 573 569 523 491 556 523 3.3 (1.4)

2. Centraly Planned Economies 179 218 259 308 313 325 341, 353 357 3.6 3.4

Total Consumption - 526 627 771 881 882 849 839 909 840 3.4 0.4

Source: Economic Analysis and Projections Department

a/ Apparent consunptton estimates based on preliminary figures.b/ Northern EC coantries (excluding Greece), otber countries in Eastern Europe,United States, Canada, Japan, and OceanIia.c/ Includes Greece, Spain, Turkey, Yugoslavia, and South Africa.d/ Differences in production and consumption totals are due to discrepancies in statistics on trade figures where apparent

c.nsumption is defined s production less eaports plus imports.

3.05 Over the two decades, there has been a shift in production away fromthe industrialized countries, particularly the U.S. and EC countries, towardthe developing countries and Australia, with the developing countries account-ing for about 46% of total iron ore production in market economies in 1980,compared to 27% in 1960. Production from developing countries and new miningareas, (i.e., Australia) accounted for over 60% in 1980.

3.06 The change in major sources of production has been accompaniedby a structural change in industrial ownership. Traditionally, most ironore production was captive to the steel industry. While this is stilllargely the case in the U.S., Canada and Sweden, captive mining has diminishedsubstantially elsewhere in Europe. There is now greater reliance by the steelindustry on ore produced independently and from large-scale mines whereoperating costs are lower than those of traditional suppliers. Often the oresare imported under long-term purchase contracts. The Carajas Project istypical of this market trend.

3.07 International trade in iron ore has developed significantly overthe past two decades, reflecting the shift in area of production (para. 3.05).Between 1960 and 1980, total exports more than doubled, from 152 million tonsto 370 million tons, as shown below:

1/ There are no statistics in iron ore consumption published. Apparent con-sumption is estimated based on iron production plus country imports lesscountry exports.

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Traded Iron Ore, 1960_30

(million tons)

Annual17 ImPorting Countria 1960 1965 1970 1975 1977 1978 1979 1980(Est) Growth Rate

A. Markat EconomieoIndustrialized CountriesJapan 15 39 102 132 133 115 130 134 11.6Fed. Rap. Germany 34 35 48 44 40 42 52 50 2.2United States 35 46 46 47 39 34 34 25 (1.7)3Balium - Luxembourg 21 24 29 26 22 24 26 22 0.2United Kingdom 18 19 20 16 16 1S 18 9 (3.4)Italy 3 8 11 16 15 16 17 17 9.1Others 9 15 20 29 27 30 37 38 7.5

Sub-toC&I 135 1686 i3 310 29 276 314 295 4.0

Davslopins Coustrias 1 2 5 11 17 18 25 23 17.0Sub-total Market Economies m M M4 a 4.3

S. Centrally-Planned EconomiesPoland 7 9 12 1f5 17 17 19 18 4.8Romania 1 3 6 11 12 13 15 16 14.9Czechoslovakis 7 10 13 13 16 16 15 15 3.9Others 4 6 7 10 10 10 10 10 4.7

Sub-total EZs 199 28 38 51 55 36 59 3 5.8

Iotal Inports 1/ 155 216 319 372 364 350 398 377 4.5

17. Exporting CountriesA. Market Economies

Industrialised CountriesAustralia - - 41 80 79 75 78 s0 30.4 btCanada 17 31 39 36 45 32 49 39 4.2Sweden 20 24 28 23 19 22 26 21 0.2France 27 21 19 16 12 11 10 10 (4.8)Others 8 10 9 7 7 11 13 6 (1.4)

Sub-total 72 86 136 162 162 151 176 156 3.9

evelo ping CountriesSraz.1 5 13 28 73 59 66 76 78 14.7India 9 12 21 23 23 2D 20 22 4.6Liberia 3 1S 24 19 19 20 20 20 10.0South Africa - 1 3 2 12 13 16 14 14.1 b/Venezuela 19 17 21 20 12 13 14 11 (2.7)Other s 29) 45 53 37 29 27 30 26 (0.5)

Sub-total 65 103 150 174 154 159 176 171 5.0Sub-total Market Eccnomies 137 189 286 336 316 2}Q IL 327 4.5

B. Centraltv-?lanned EconcmiesUSSR is 24 36 44 41 41 39 40 5.0Others - - - - - - - 3 -

Sub-total CPEs 15 24 36 44 41 41 39 43 5.4

Total Exports a/ 152 213 322 380 357 35t 391 370 4.6

So'rce: Economic Analysis and Projections Department

a. Differences due to discrepancies in trade statistics and goods in transit."I Since 1961.

3.08 Major importers continue to be the industrialized countries whichaccount for about 80% of total trade in iron ore. Japan has becomeby far the largest importer (134 million tons in 1980), followed by theFederal Republic of Germany (50 million tons), the U.S. (25 million tons) andBelgium-Luxembourg (22 million tons).

3.09 The two leading exporters are the new mining areas of Australia(80 million tons in 1980) and Brazil (78 million tons), followed by Canada(39 million tons) and India (22 million tons). In general, exports from theEuropean Community (EC) have been declining since 1960, as exports by newmajor market entrants, including Liberia, India and South Africa have increased.

3.10 Major new trade flows have developed in the Pacific and Atlanticbasins centering principally on the Japanese and EC markets. The Japaneseimport about half of their ore from Australia and, to maintain diversityin supply, the remainder from Brazil, India and others. The EC countriesimport ore from other near-by European countries, Sweden and Norway, aswell as from Canada, Brazil and Liberia.

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3.11 The centrally planned economies (CPEs) have steadily accounted forabout 10-12% of iron ore trade since 1960. While they have traditionallyconfined their trade to themselves, since 1975 they have become net importersof between 14 and 20 million tpy from market economies. The USSR is the majorproducer (249 million tons in 1980 out of a total CPE production of 337million tons), and is the largest CPE exporter of iron ore.

2. Future Supply/Demand Balance and Quality Considerations

3.12 Iron ore market forecasts rely fundamentally on judgments about(i) the future growth in steel production and underlying growth in GDP, and(ii) the future potential iron ore supply. The forecasts of iron ore demandand supply have been made excluding the CPE countries because information onfuture iron ore requirements and production in CPEs is poor. The forecastdemand for iron ore in the market economies (paras. 3.21-3.24), however,assumes that the CPEs will continue to be net importers of about 15 milliontpy from market economies through 1990. In view of the existing net importposition of the CPEs (para. 3.11) and the likelihood that net imports by theCPEs from market economies will increase, the assumption is regarded asconservative.

3.13 Supply. The estimates of future potential iron ore supply in marketeconomy countries have been based on (i) an extensive review of potential ironore projects to determine those new mines and expansions of existing minesmost likely to be implemented within the decade; and (ii) the expected gradualdepletion or closing of certain existing iron ore mines. The supply estimatesare based on a gradual increase in effective operating rates in major existingmines and on additional new capacity.

3.14 The production capacity forecasts during the 1980s by country areshown on the following page. The maximum annual production and year thatproduction was actually achieved by country are also shown as a referencepoint in the forecast.

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Forecast Availability of Iron Or* Supply-in Market Economy Countries, 1980-90(million tons)

-ActualMaximum Annual Production

1980 1950 to 1980 1986 1987 1988 1990Tonnage Year

1. INDUSTRIALIZED COUNTRIES

Australia 97.0 97.5 1977 111,4 111.2 113,2 113.2Canada 51.2 59.7 1979 55,0 55,0 55.0 55.0Prance 30.1 57.4 1970 30.0 30.0 30.0 30.0Sweden 28.5 36.0 1974 25.0 25.0 25,0 25.0USA 77.8 91.2 1970 80,0 80,0 80,0 80.0Others a/ 16.1 - - 16.5 16,5 16,5 16.5

TOTAL INDUSTRIALIZEDCOUNTRIES 300.7 317.9 317,7 319,7 319.7

2. DEVELOPING COUNTRIES

Africa, South of Sahara

Guinea - - - - 2.5 7.5 12.5Liberia 20.0 23.5 1972 14.8 11.2 11.2 11.2Mauritania S.0 10.4 1973 12.0 12,0 12.0 12.0South Africa 30.0 31,6 1979 32.0 32.0 32,0 32.0Others b/ 1.6 - - 3.6 3.6 3.6 3.6

Subtotal 59,6 62,4 61., 3 66.3 71.3

North Africa & Middle EastAlgeria 3.0 3,7 1972 3,0 3,0 3,0 3.0Others a/ 2.5 - - Z,5 2,5 2.5 2,5

Subtotal 5.5 5.5 5,5 5.5 5.5

Asia & PacificIndia 40.0 42,7 1976 47,0 47.0 50.0 50.0Others d/ 1.0 - - 1.0 1,0 1,0 1.0

Subtotal 41,0 48,0 48,0 51.0 51,0

LAtin America 6 CaribbeanBrazil 99.6 99.6 1980 147.7 156,7 156,7 158.7Chile 12.0 12,6 1980 12,0 12,0 12.0 12,0Venezuela 14,8 26,4 1974 16,0 16,0 16,0 16.0Others e/ 13.6 - - 17,4 17,4 17,4 17.4

Subtotal 140.0 193,1 202,1 202,1 204,1

EuropeSpain 9.0 9.0 1980 9.0 9,0 9,0 9,0Yugoslavia 4.5 5.2 1975 4.5 4,5 4,5 4,5Others f/ 2.8 - - 7,8 4,0 4,0 4,0

Subtotal 16,3 16.3 17,5 17,5 17.5

TOTAL DEVELOPING COUNTRIES 262.4 325.3 334.4 342.7 349.4

TOTAL MARKET ECONOMIES 563.1 643.2 652.1 662.1 669.1

Source: Industry Department

a/ Austria, Belgium,Finland, F.R. Germany, Italy, Japan, Luxembourg, New Zealand, Norway, and United Kingdom,b/ Angola, Sierra Leone, and Zimbabwe.c/ Egypt, Iran, Morocco, and Tunisia.d/ R. Korea, Malaysia, and Thailand.e/ Argentina, Colombia, Mexico, and Peru.f/ Greece, Portugal, and Turkey.

3.15 The forecast increase in production in market economies of about 106million tons annually between 1980 and 1990 (from 563 to 669 million tpy) isdue largely to the expected increase by 59 million tpy in Brazilian production(para. 3.40). It also assumes sizeable increases in current effective opera-ting rates of existing mines (35 million tpy), other new capacity (63 milliontpy), and depleted capacity (minus 51 million tpy). The table below shows theforecast new capacity by project.

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Forecast Availability of Iron Ore Supplyfrom New Projects other than Brazil by 1990

(million tpy)

Country/Project Tonnages Comments

AustraliaWest Angela 15 Replacement of Robe RiverArea C 8 Replacement of Goldsworthy

GuineaMifergui-Nimba 12.5

LiberiaWestern Area 8.0

MauritaniaGuelbs 12 Out of which 8.0 million tpy is

replacementAngolaCassinga 1 Rehabilitation of closed-down

mineSierra LeoneMarampa 1 Treatment of old tailings from

closed-down mineIndiaGoa 3

PortugalMoncorvo 2

Total 62.5

Source: Industry Department

3.16 While the above iron ore production estimates have been based on therealization of increases in operating rates of existing mines and likely newprojects, it is recognized that, if there were a major market upturn, addi-tional discretionary capacity could come on stream with limited additionalinvestment and a lead time of one to three years. The total amount of suchdiscretionary capacity is estimated to be about 35 million tpy in 1986 through1990. This discretionary capacity could also be regarded as potential replace-ment for the currently-expected expansions, and new mines should then encounterdelays. The incremental discretionary tonnages are to be found mainly inAustralia, Canada, South Africa, the U.S., and Venezuela.

3.17 Quality. There are various types of iron ore feed such as concen-trates, sinter fines, lump ores, and pellets, for which market demand hasshifted in the last six to eight years. Until the mid-1970s, the demand forpellets for blast furnace operations was strong. However, following the sharprise in oil prices and the ensuing recession in the industrialized economies,the demand for pellets decreased more steeply than that for sinter feed

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because the steel companies decided to operate their sinter plants at ahigher level of capacity utilization in preference to buying pellets.

3.18 Since coke and iron units (i.e., the Fe units contained in the ironore) constitute, on average, 75% to 80% of the production cost of iron-making,a major concern of the iron and steel industry has been to optimize cokeconsumption and general blast furnace productivity. In terms of iron units,pellets, sinter fines and concentrates are normally of equally high grade, andthe economics associated with different types of burden are the decidingfactor. Compared with pellets, sinter produced from high-grade sinter feedsuch as Carajas would provide cost savings due to (i) lower grinding costs andthe simpler beneficiating process required vs. pellet-feed making; (ii) smallerinitial capital expenditures for beneficiation; and (iii) the fact that sintercan be self-fluxing or super self-fluxing at no extra cost and give overallreduction in thermal requirements in the blast furnace.

3.19 The table on the following page shows the strong upward trend inpellet production among market economies in the 1960s and early 1970B whichincreased from 16 million to 133 million tons between 1960 and 1975/76, or byan average of 14.6% p.a. This compares with an increase in sinter productionfrom 116 million tons to 310 million tons, or by an average of 6.5% p.a.during the same period. Thereafter, production of both pellets and sinterflattened as a result of the downturn in steel demand. The major producers ofpellets have been the U.S. (78 million tons in 1979) followed by Canada (31million tons) and Australia (9 million tons). Since 1979, 23% (16 milliontpy) of export pellet capacity has been, in fact, shut down. Sinter productionhas been concentrated in Europe (127 million tons in 1979), Japan (101 milliontons) and the U.S. (33 million tons).

3.20 For major blast furnace operations which account for about 75% ofsteel production (the rest being accounted for by scrap and sponge iron-based electric steel-making), Carajas ore offers the properties and charac-teristics which iron-makers have most favored over the past several yearsand which are expected to remain in premium demand. The ore is a high-gradesinter feed containing 66.5% Fe which compares well to average ore grades inother major iron ore-producing countries, such as Australia (64%), Canada(62%), Sweden (62%), and the U.S. (61%). Unlike the U.S. and Canadian oreswhich generally require grinding, beneficiation and pelletizing, Carajasore requires no concentrating or energy-intensive beneficiation. Carajassinter feed thus has distinct cost advantages and will result in lower produc-tion costs for iron than pellets.

3.21 Demand and Supply/Demand Balance. As noted previously, demandprojections for iron ore between 1980 and 1990 in market economy countrieshave been prepared under two steel growth scenarios that cover the range ofreasonable expectations: a high case and a low case, where steel production

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Iron Ore Pellets and Sinter Production for Market Economy Countries, 1960-79

(million tons)

Average Annual Growth Rate (2)1960 1975/76 1977/78/79 1960-75/76 75/76-77/78/79

I. PELLETS

Industrialized Countries

Australia -- 9.5 9.5Canada 1.2 25.9 26.6 21.9 1.1Japan 0.6 6.8 5.3 17.0 (9.5)Norway -- 2.7 2.6 -- (1.5)Sweden 0.4 8.7 6.7 22.0 (9.9)USA 13.9 62.1 64.6 10.1 1.6Others -/ 0.0 0.8 1.0 -- --

Subtotal 16.1 116.5 116.4 13.6 0

Developing Countries

Brazil __ 4.4 6.5 __ 16.9Chile -- -- 15 -- --Liberia 4.3 4.0 -- (2.9)Mexico -- 3.1 6.5 -- 34.5Peru -- 3.0 2.5 -- 7.0Others c/ -- 1.5 1.8 -- --

Subtotal 0.0 16.2 22.7 -- 14.4

Total Pellets 16.1 132.7 139.1 14.6 1.9

II. SINTER

Industrialized Countries

Australia 1.6 6.5 6.5 9.5 --Austria 2.6 4.8 5.3 4.0 4.0Belgium-Luxembourg 5.2 lq.6 19.4 8.9 (0.4)Canada 3.4 1.7 1.7 (4.4) --Finland 0.3 2.1 2.8 13.4 12.2France 6.4 31.9 34.2 10.9 2.3Germany, FR 22.9 37.6 35.3 3.3 (2.5)Italy 2.1 14.9 14.5 13.5 (1.1)Japan 7.7 110.4 103.0 18.7 (2.7)Netherlands, The 1.0 2.9 2.9 7.1 --Norway 0.6 1.3 0.9 5.1 (13.7)Sweden 2.5 3.4 2.9 2.0 (6.2)UK 15.0 14.9 15.7 -- 2.1USA 41.3 31.8 32.5 (1.7) (0.9)

Subtotal 112.4 283.8 277.8 6.2 0.9

Developing Countries

Brazil 0.8 6.6 8.9 14.6 12.7India 0.5 6.0 6.3 17.4 2.0Mexico -- 1.3 1.3 -- --

Spain 1.3 7.6 9.6 12.1 9.8Turkey 0.2 1.1 1.0 11.6 C3.7)Yugoslavia 1.0 2.6 2.9 6.4 4.5Others A l 1.7 1.7 -- --

Subtotal 3.9 27.0 31.7 13.3 6.6

Total Sinter 116.3 310.8 309.5 6.5 (0.2)

Source: UNCTADEconomic Analysis and Projections DepartmentIndustry Department

a/ Columns may not add due to rounding.b/ Belgiumi-Luxembourg, Finlauid, and Italy.

ct India. Morocco, Philippines, and Yugoslavia.

di Argentina, Colombia, Portugal, and Venezuela.

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is assumed to increase by 2.7% and 1.8% p.a., respectively, as shown in thetable below.

Forecast Steel Production and Iron Ore Supply/Demand in Market Economies, 1979/80-90

Actual Average Annual1979/80 1986 1987 1988 1990 Growth Rate a/

I. Crude Steel Production b/

1. Industrialized CountriesHigh case 397.9 446.8 454.9 463.1 479.9 1.8Low case 397.9 424.5 428.7 433.0 441.7 1.0

2. Developing CountriesHigh case 84.6 125.8 133.8 142.4 160.7 6.3Low case 84.6 115.5 121.1 127.0 139.8 4.9

3. Total Market EconomiesHigh case 482.5 572.6 588.7 605.5 640.6 2.7Low case 482.5 540.0 549.8 560.0 581.5 1.8

II. Iron Ore Demand

Market EconomiesHligh case 539.5 658.5 677.0 696.3 736.7 3.0Low case 539.5 621.0 632.3 664.0 668.7 2.1

III. CPE Net Import Requirement c/ 18.0 15.0 15.0 15.0 15.0 (1.7)

IV. Iron Ore Production Potential 564.41/ 643.2 652.1 662.1 669.1 1,6(of which Carajas) - 20.0 31.5 35.0 35.0 --

V. Iron Ore Market Surplus(Deficit)

High case - (30.3) (39.9) (49.2) (82.6) -Low case - 7.2 4.8 (16.9) (14.6) -

Source: Economic Analysis and Projections DepartmentIndustry Department

a/ Based on 10.5 years from 1979/80 to 1990.b/ The projections have not been related to GDP growth assumptions in developed and

developing countries as the Bank is presently revising the official forecast forthe coming 5-10 years. As a rule of thumb, steel demand is about 1.0-1.5 pointslower than GDP growth in the industrial countries, which are the principle con-sumers of iron ore. Using the above assumption, the low case would thus relateto a 2.0-2.5% average growth rate in these countries. This must be consideredvery reasonable and establishes the low case as a likely demand floor.

c/ CPE nst import requirement from market economies (para. 3.12),d/ Actual production.

3.22 This forecast steel growth compares with an actual average annualgrowth in steel production of 3.6% for 1960-80 and can be considered con-servative. Under the high case, steel production is assumed to increase by1.8% p.a. in industrial countries and by 6.3% in developing countries. Underthe low case, steel production would increase by 1.0% p.a. in industialcountries and by 4.9% p.a. in developing countries. Between 1960 and 1980,the comparable per annum increases were 3.0% in industrial countries and 8.6%in developing countries.

3.23 In determining the level of iron ore demand in the market economies(excluding CPE import requirements), the ratio of iron ore requirements perton of crude steel production has been assumed to be 1.15 through 1990. Thisratio is based on 1981 data for market economies and is not expected tochange noticibly. While increased use of higher-grade ores in iron productionand improvements in ore treatment will reduce the iron ore requirement perunit of crude steel output, this reduction is expected to be offset by: (i)the increased use of primary iron in basic oxygen furnace (BOF) steel-makingas the scrap market tightens towards the mid-1980s; (ii) the slowdown in

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scrap-based electric arc furnace steel-making (which is less iron-intensive

than BOF) in the mid-1980s as energy costs increase and scrap is less avail-able; and (iii) the increase in developing countries share of steel-makingwhere the input-output ratio is higher (about 1.27).

3.24 The forecast scenarios establish a range between a market surplus ofabout 7 million tons of iron ore and a market deficit of about 30 milliontons in 1986. Since both the potential surplus and deficit represent,respectively, only 1.2% and 4.6% of expected iron ore demand and additionaldiscretionary capacity could be added when needed (para. 3.16), expectationsare that the market will be in reasonable balance by that time. The smalldegree of risk of oversupply decreases in the next several years, and dis-appears altogether in the late 1980s. In light of the conservative approachtaken in the above analysis, the market risk appears acceptable. On the otherhand, if the high-case scenario were to apply (or some scenario in between),the supply deficits could rise quickly if no further iron ore capacity wereto become available in the second half of the 1980s.

3.25 Other recent iron ore forecasts have been made of market balancein the mid-1980s with similar findings. Estimates of market surpluses anddeficits fall within a normal range of error that would have to be expected inany such forecasts, as shown below:

Projected World Crude Steel Production and Iron Ore Market, 1985(million tons)

MarketSource of Date of Crude Steel Derived Iron Iron Ore SurplusEstimate Estimate Production a/ Ore Demand Supply (Deficit)

Confidential JapaneseIndustry Source 1981 823-879 970-1,028 973-995 25-(33)

Amax, U.S.A. 1981 863 1,087 1,045 b/ (42) c/

Rohbstoffhandel,F.R. Germany 1981 832 d/ 956 d/ 965 d/ 9 c/

Confidential EuropeanIndustry Source 1981 820-835 984-1,002 e/ 990-1,005 3-6

a/ World crude steel production in 1980 and 1981 was 717 and 708 milliontons, respectively.

b/ Includes probable new projects in Australia, Brazil, India, Mauritania, theU.S.S.R., and other countries.

c/ Projected as a balance of international trade, i.e., total importrequirements less actual iron ore imports.

d/ Figures for centrally planned economies have been added to facilitatecomparability (i.e., crude steel production: 333; derived iron oredemand: 416; iron ore supply: 341; giving a market deficit of 29).Rohstoffhandel projects a 1990 market deficit of 83, of which 35 is fromCPEs.

e/ The ratio of iron ore requirement per ton of world crude steel productionhas been assumed as 1.20. This is based on data for 1981, and compareswith 1.15 for market economies only (para. 3.23).

3.26 Market risk to Carajas is further minimized by the fact that theProject will only reach full production in 1988, when market recovery should bestrengthening. CVRD has obtained long-term sales contracts for 24.7 milliontpy of iron ore, which seem to be adequate in assuring sales during its first

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two years of production build-up when it is planning to produce 5 million tonsin 1985 and 20 million tons in 1986. 1/

3.27 Carajas ore has proven to be highly marketable (para. 3.45) belongingto the segment of the iron ore market for sinter fines where demand is expectedto be comparatively stronger in the mid to late-1980s. This is due to thecost advantages noted earlier (para. 3.18) that can be achieved by usingsinter in the blast furnace rather than pellets. As a result of this economy,it is expected that as the market recovers and steel capacity utilization in-creases to effective levels, new steel capacity will favor the BOF in place ofthe more energy-intensive electric arc furnace. The expected tightening ofscrap availability (para. 3.23) by the mid-1980s should contribute to thisdevelopment, as the BOF uses a smaller amount of scrap than the predominanttype of electric arc furnace which is scrap-based, and in the future is likelyto consume an even greater proportion of primary iron to scrap.

3.28 Future sinter use by industrialized countries has been facilitatedby the development of a new production process by Japan, allowing thetransportation of sinter and thus the construction of sintering facilitiesoffshore rather than,, traditionally, as an integrated part of a steel plant.Offshore construction meets the increasing concern with potential sinter plantpollution in the industrialized countries while allowing steelmakers to havethe cost advantage of using sinter.

3.29 The demand for pellets for blast furnace charges is expected todecline for cost reasons, while the demand for high-quality lump ores shouldremain high for use in direct reduction and blast furnace operations. Theavailability of this high-quality ore, however, is limited and is not expectdto increase its share (about 10%) of the iron ore market.

3. Iron Ore Prices

3.30 Past Trends. From the 1950s to the mid-1970s, iron ore pricesdeclined sharply in real terms as a result of reductions in production costsassociated largely with large mine developments, economies of scale, andimprovements in materials handling and transportation. After a brief recoveryin 1975, iron ore prices continued to decline in real terms to 1979 reflectingthe softening in world iron ore demand. Small real increases in prices in1979 and 1980 still left real 1980 prices well below the 1970-75 level. Thecontinuing weakness in steel consumption and the depressed condition of theiron ore market resulted in a further sharp drop in real prices in 1981. Pastiron ore prices are given in the table below:

1/ CVRD is planning to meet contract obligations fully in each of the twoyears through production from its southern system.

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Past Iron Ore Prices--CIF German Ports(USJ per Fe unit per ton)

Brazilian Reference OreYear Current Price Constant (1980) Index (Constant)

1968 18.5 66.8 1001970 22.4 72.7 1091972 18.8 51.2 771974 27.9 51.5 771975 34.8 55.9 841976 33.7 53.3 801977 33.2 48.4 731978 29.8 36.7 551979 35.8 39.4 591980 41.1 41.1 621981 37.4 39.2 59

Source: Economic Analysis and Projections Department

3.31 Although small real increases in prices were achieved in 1979 and1980, current price levels over the past five years have generally been closeto production costs. Profitability has been squeezed in the industry, partic-ularly among the pellet producers where almost one quarter of the exportpellet plant capacity has been shut down between 1978 and 1981 (para. 3.19).

3.32 Future Outlook. Despite continuing depressed market conditions,major real-price increases in 1982 have been achieved. Agreement was reachedbetween CVRD and the German steel mills in February 1982 on a 10.3% priceincrease (in US$ terms) to be applied during the first quarter of 1982 and a17.4% increase over 1981 prices to be applied during the remaining threequarters of 1982. The average annual price increase thus agreed with theGerman mills for 1982 is 15.6%. Other European consumers have since concludedthe same pricing arrangements and matched the German price increases to CVRD.In April 1982, CVRD reached agreement with the Japanese Steel Mills on a 13.6%price increase to become effective for a full year beginning April 1. Basedon the recent European and Japanese agreements, the average iron ore price in1982 will be 4.9% higher than that in 1981 in real terms, assuming internationalinflation is no higher than the expected 7.8%. 1/

3.33 This significant real-price increase is widely regarded by consumersand suppliers alike as necessary to prevent major mine closures and to promoteexpansions and large-scale new mine developments to ensure the long-termavailability of sufficient ore of good quality at reasonable prices. Also,it has been the Japanese approach to follow production costs closely and tooffer, over the medium term, sufficient remuneration to iron ore mines tomaintain operations. This policy is unlikely to change.

3.34 Nevertheless, in view of the jump in real prices (which is expectedto become more broadly accepted) and the continuing, although diminishing,

1/ IBRD Commodity Price Forecast Update, December 1981.

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oversupply of the matrket, during the next few years, further real priceincreases through 1985 are forecast to be modest. While it is expected thatiron ore prices will at least keep pace with international inflation aspurchasers recognize the need for ore producers to cover production costs andearn some profits (para. 3.33), market experts differ as to whether realprices will also in the next few years increase by a range of up to 2% p.a.For the financial analysis of the Project in this report, no further priceincreases for 1983-85 have been assumed. As the market comes into balance andcontinues to strengthen, prices are expected to increase again in real termsby 1.5% p.a. from 1986 through 1990. In light of the analysis of marketbalance in para. 3.21 above which indicates the possibility of a 22 millionton market deficit by 1986, the price assumptions may be too conservative.However, for purposes of this report, this approach is considered prudent.

3.35 The additional supply of iron ore on the market from the CarajasProject, by itself, is not expected to have a significant detrimental effecton iron ore prices since Carajas will constitute about 7.5% of estimatedworld exports of iron ore when operating at its full initial capacity of 35million tons in the late 1980s and since, as noted above, the overall demand!supply situation for iron ore in the world at that time is expected to beroughly in balance. Further, the recognition by ore buyers that the producersmust have fair prices, even in times of oversupply, makes any significantnegative effect on prices unlikely.

C. Market and Marketing for CVRD Ore

1. Past Production/Consumption of Brazilian Ore

3.36 In 1981, Brazil became the largest producer of iron ore amongmarket economy countries. The country is endowed with over 10% (estimated byBrazil's Ministry of Mines and Energy at 34.2 billion tons) of world iron orereserves, exceeded only by the USSR with 42% and Canada with 14%. About 40%of Brazil's reserves are located in the southern state of Minas Gerais in theQuadrilatero Ferrifero. The remainder are located in the Amazon.

3.37 The Minas Gerais deposits were the first to be developed in Brazildue to locational advantages for both the domestic market and sea terminalaccess for export. The two major companies which are exploiting thesedeposits have been CVRD and MBR, 1/ each company having built its own seaterminal at Tubarao and Sepetiba Bay, respectively. In addition, there areseveral smaller producers, of which the more important are Ferteco Mineracao,S.A. (FERTECO) under German consortium ownership; and Samarco Mineracao,S.A. (SAMARCO) under joint Brazilian/U.S. ownership; and S.A. Mineracao daTrinidade (SAMITRI), under joint Brazilian/Arbed 2/ ownership. FERTECO andSAMITRI are captive companies, producing between 4 and 8 million tons peryear. The other smaller producers typically sell their output to CVRD. There

1/ A private company owned 51% by Empreendimentos Brasileiros de Mineracao,S.A. (EBM) and 49% by St. John d'el Rey Mining Company, a British Companycontrolled by the U.S. Hanna Mining Company.

2/ Arbed of Belgium/Luxembourg/Germany (para. 3.45).

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are three pellet companies under joint-venture ownership with CVRD, (NIBRASCO,ITABRASCO and HISPANOBRAS) which produce pellets for export from pellet feedsupplied by CVRD.

3.38 The following table shows the significant increases in production,consumption and export of Brazilian iron ore over the last 20 years.

Brazilian Iron Ore: Major Market Indicators, 1960-80(million tons)

Annual AverageRate of Growth

1960 1965 1970 1975 1977 1979 1980 (Z)

Production 9 21 35 88 77 88 100 12.8Apparent Consumption 4 8 7 16 18 13 12 5.6Exports 5 13 28 73 59 66 76 14.6Share of Market EconomyExports (%) 3.8 6.8 9.8 21.6 18.. 21.5 22.5 9.3

Source: Brazilian Ministry of Mines and EnergyIndustry Department

3.39 Production increases have been sufficient for Brazil both to meetincreasing domestic demand in the 1970s from its own steel industry andto increase its market share in the expanding international market. CVRDis the largest producer of iron ore in Brazil and, in 1980, produced 63million tons or 63% of total domestic production. MBR produced 15.7 milliontons in the same year, which together with CVRD accounted for almost 80% oftotal domestic iron ore output.

2. Future Outlook

3.40 The projected increase in Brazilian iron ore production and thecountry's export capacity for this product depends almost entirely on theproduction of CVRD and MBR, as shown in the table below:

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Brazil: Iron Ore Supply and Demand Forecasts, 1980-90(million tons)

Actual1. Production 1980 1982 1986 1987 1988 1990

1. CVRD Southern System a/ 63.0 61.4 63.9 60.2 56.7 56.7Carajas -- -- 20.3 31.5 35.0 35.0

2. CAPANEMA -- 1.5 8.5 8.5 8.5 8.53. MBR 15.7 16.0 26.5 28.0 28.0 30.04. SAMARCO 5.2 7.0 7.0 7.0 7.0 7.05. FERTECO 8.0 7.5 8.5 8.5 8.5 8.56. SAMITRI 3.7 4.1 6.0 6.0 6.0 6.07. Others 4.0 6.0 7.0 7.0 7.0 7.0

Total 99.6 103.5 147.7 156.7 156.7 158.7

II. Consumption/Supply

1. Domestic Consumption supplied byCVRD b/ 6.0 6.4 14.8 15.4 15.4 15.4MBR 2.7 2.7 3.0 4.5 5.2 6.2Others 11.1 2.6 6.0 6.0 6.0 6.0Subtotal 19.8 17.7 23.8 25.9 26.6 27.6

2. Exports (Quantities available) c/ 79.8 85.8 123.9 130.8 130.1 131.1

Total 99.6 103.5 147.7 156.7 156.7 158.7

Source: Industry Departmenta/ Excluding purchases.bI Including deliveries from Capanema mine to Tubarao Steel works (CST).c/ Including CVRD pellet feed to domestic joint ventures for export as pellets.

Both companies are planning sizeable expansions. MBR envisages increasingiron ore production from 16.0 million tons in 1981 to about 30 million tonsby 1990, based on mine expansions at the Agua Claras and Mutuca mines,and maintenance of current operation levels at the Pico and Jangeda mines.

3.41 CVRb intends to increase its iron ore production by 43 million tpy,or from 63 million tons in 1980 to 106 million tons in 1990, 1/ entailing (i)mine expansions in its southern system necessary to prevent a more accelerateddecline in production levels and (ii) implementation of the Carajas Project.CVRD's southern mines are becoming depleted of high-grade hematite ore. As aresult, Carajas production will not be a full net addition to CVRD's produc-tion but be partly offset by a decline in production (6 million tpy) from thesouthern system (para. 4.13).

3.42 Outside CVRD and MBR, the only planned major increase comes fromthe new 8.5 million tpy CAPANEMA mine which is jointly owned by CVRD and aJapanese consortium and is about to start operations. The other iron oreproducers (FERTECO, SAMARCO, SAMITRI) are expected to continue operating atabout present levels as captive producers. The pelletizing plants are alsoexpected to undergo little or no growth due largely to the generally poormarket prospects.

1/ Including CAPANEMA and purchases.

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3.43 Including production by iron ore companies and pelletizing companies,Brazilian iron ore production is expected to increase from 100 milliontons in 1980 to 159 million tons in 1990, or by almost 60%. Between 1980 and1986, domestic consumption of ore is projected to increase by about 8 milliontpy based on CVRD and MBR contracted domestic sales programs through 1986, andthereafter on the growth in consumption requirements by the state-owned steelcompanies of which some are under construction and are to be completed priorto 1985 (para. 2.15).

3.44 As a result of expansion plans and forecast domestic consumption,it is expected that exports will increase by some 51 million tpy 1990. Ofthis amount, CVRD is expected to contribute about 22 million tons, MBR about11 million tons, CAPANEMA about 7 million tons, and other small mines about13 million tons. 1/ Although CVRD plans for all Carajas ore to be exported, 9million tons of the 35 million ton production will replace CVRD exports fromits southern mines (para. 3.46). CVRD plans to divert the 9 million tons fromthe south to its domestic market which is reasonable based on domestic steelproduction plans.

3. Marketing of Carajas Iron Ore

3.45 The marketability of the Carajas ore as an important long-termsource is best exemplified by the advance contract commitments that CVRDhas been able to obtain from steel-producing countries during a period ofprolonged economic recession and depressed steel conditions in Europe andelsewhere. CVRD began marketing the Carajas ore in 1980 and has success-fully signed agreements for 24.7 million tpy as shown in the following tablewhich lists the sales contracts by steel company buyers and importingcountries.

Brazil: Sales Contracts for Carajas Iron Ore as of End-1981(million tons)

Southern NetSystem Additional

Importer (Country) 1985 1986- 1987 1988/89 Swap Exports

Italsider (Italy) 2.50 2.50 2.50 2.50 1.20 1.30Salzgitter (F.R. Germany) 0.50 0.50 0.50 0.50 0.30 0.20Thyssen (F.R. Germany) 2.40 2.40 2.40 2.40 0.90 1.50Mannesmann (F.R. Germany) 0.80 0.80 0.80 0.80 0.30 0.50Krupp (F.R. Germany) 1.00 1.00 1.00 1.00 0.50 0.50Klockner (F.R. Germany) 0.50 0.50 0.50 0.50 0.50 --

Korf (F.R. Germany) 0.50 0.50 0.50 0.50 -- 0.50Dillinger (F.R. Germany) 0.25 0.25 0.25 0.25 -- 0.25Usinor (France) 1.70 1.70 1.70 1.70 0.80 0.90Solmer (France) 1.40 0.60 1.00 1.50 0.30 1.20Arbed (Belg/Lux/F.R. Germany) -- 1.00 1.00 2.00 -- 2.00Japanese Steel Mills (Japan) 7.00 8.50 10.00 10.00 4.50 5.50Pohang (Korea) 1.00 1.00 1.00 1.00 _ 1.00

Total 19.55 21.25 23.15 24.65 9.30 15.35

1/ The table in para. 3.40 shows planned production which differs fromdeliveries depending upon movements in stocks.

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3.46 The two largest iron ore-importing countries, Japan and F.R. Germany,account for 65% of the contracted sales volumes, and France, Italy, Belgium-Luxembourg and Korea for the remainder. As mentioned previously, of the totalamount of Carajas contracted sales (24.7 million tpy), 9.3 million tpy consti-tute swaps with contracted export sales from CVRD's southern system. Netadditional exports for CVRD under the Carajas sales contracts are therefore15.4 million tpy. CVRD's planned diversion of the 9.3 million tpy to thedomestic market is discussed earlier in para. 3.44. No further swaps infuture sales contracts for Carajas ore are planned to be made.

3.47 CVRD has sought to minimize market risk by obtaining contractsfrom its traditional customers, and by including provisions in the above-noted contracts to envisage full performance in offtake of ore. The contractprovisions are (i) an incentive of a 3% reduction in price for fullofftake of contracted volumes by the customer, and (ii) a guarantee forno less than 80% offtake of contracted volumes in any one year. Iron oreprices are negotiated on an annual basis, taking into consideration trends inthe market and in production costs. In analyzing the economic and financialrisks to the Project of continuing soft market conditions, sensitivity testshave been made of reduced offtake based on the contract terms and CVRD expe-rience (paras. 8.37 and 9.04).

3.48 CVRD is planning to undertake a second-stage marketing effort withinthe next two years which would provide sufficient lead time (three to fouryears) prior to availability of the incremental ore (10 million tons) in 1987.CVRD expects to be able to market the balance of Carajas production withoutthe price incentive provision noted in contracts already signed. In light ofthe forecast strengthening of the market, it is reasonable to expect that CVRDshould market the-balance successfully.

IV. THE COMPANY

A. Ownership

4.01 CVRD was established by decree in June 1942 as a majority state-ownedenterprise and operates according to corporate by-laws to develop mineraldeposits in Brazil and abroad by extraction, beneficiation, industrialization,transportation, shipping and trade in mineral products. Until 1981, Companyownership was 77% Government and 23% public. The Government neld all ordinaryvoting shares, as well as about one quarter of preference shares in theCompany. 1/ In 1981, as part of a four-year plan to raise new equity for theProject (para. 7.12), CVRD invited all shareholders to reinvest their dividends.All CVRD dividends were reinvested, with the exception of a small proportionof preferred stock held by specialized Government agencies for social agencyand federal savings. This latter proportion was sold to the public, therebyreducing Government ownership to 73% and increasing private ownership to 27%.

1/ Preference shares have the same rights as ordinary shares, except asregards voting to elect members of the Board of Administration. Theytake priority in receiving a minimum annual dividend of 6%.

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B. Organization and Management

4.02 CVRD operates under the direction of a seven-member AdministrativeCouncil and the management of an eight-member Board of Directors. ThePresident of CVRD is appointed by the President of the Republic and presidesas Chairman over both the Council and the Board. The remaining members of theAdministrative Council are elected for three-year terms by the General Assemblyfrom outside the Company. The Council meets once a month, providing overallguidance and supervision to the Company-s operations. The AdministrativeCouncil is responsible for election of CVRD's directors and for defining theirresponsibilities.

4.03 The Board of Directors includes the seven managing directors of CVRD-sfunctionally-organized operation. CVRD-s organization chart is shown below:

BRAZIL: CARAJAS IRON ORE PROJECT Chart 4CVRD CORPORATE ORGANIZATION

ADMINISTRATIVECOUNCIL

PRESIDENT

… STRATEGICPLANNING L__ …

l 80~~~~~~~~~~~~~~~~~BARU OF DIFIEC1'ORSl

l ~~~~~~~~~~~~~~~~~~~~~~~PRESID r'I

ADVIN STRATIVE PRODUCTION DEVELOPMENT VICE PRESIDENT FINANCE COMMERCIAL TFCHNICALDIRECTOR DIRECTOR DIRECTOR AND DIRECTOR DIRECTOR DIRECTOR DIRECOR

l ACMININRRATIVE ML ENGINEERING FINANCE IRON ORE SALES FORESTRYSUPERINTENDENCY SUPERINTENDENCY SPRTEY S ENDENCY SUPERINTENDENY SUPERINTEND OENCY

RAILROAO ~~~~~~~PLANNN AND1JRCI-ASIN1G AND - N ZAE

LEGAL l RAILRAD MINERAL RESEARCH D ORGANIZAON MATERIAL NONIRON ORE SALESSUPERINTENDENCY SUPERINTENDENCY SUPSUPERINTENDEN SUPERINTENDENCY SUPERINTENDENCY SUPERINTENDENCY

j~~~~~~~~~~~~~AAA PROJ 7FFl,-PLE ZN rUEITNENCT SYSTEMS t |GENERAL 1 ECRNICALL | SUPPORT l | SUPERINTENDENCY I SUPERINTENDENCY STAFF SUPPORT

PORT I STUDIlS ANU HRUJECTSSUPERINTENDENCY SUPERINTENDENCY

|CARIAIAS PREOPERATION |

SUPERINTENDENCY II SUNOR) l

INDUSTRY DEPARTMENTAPRIL 1982 YorlId Bank 23643

In November 1981, the number of managing directors was increased from five toseven and their functions were redefined to meet CVRD's increasing responsi-bilities. The main changes were the appointments of: (i) a commercialdirector in charge of iron ore and non-iron ore sales; (ii) a Vice Presidentwith specific responsibilities for planning, financial control, and informationsystems as well as responsibility for the functions of the President in hisabsence; (iii) a Strategic Planning Unit responsible for the reporting to theAdministrative Council on long-range policy planning and programming; and (iv)three new superintendencies for budgeting, planning and studies, and forestry,respectively.

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4.04 The reorganization is timely and important in view of CVRD's growthin both iron ore and other (para. 4.20) activities and thus the increased needfor strong management and control. The placement of planning and controlfunctions under the Vice President and the creation of a strategic planningunit strengthens these functions considerably, and allows the DevelopmentDirector who previously had overall planning responsibility to focus moreon Carajas and other potential projects. It further gives formal recogni-tion to the importance of CVRD's marketing activities which have been carriedout largely through two subsidiary companies--Rio Doce, Europa S.A. and RioDoce, America S.A.--located in Brussels and New York City, respectively.

4.05 The management of the Carajas Project is the responsibility oftwo directors: the Development Director during the construction period andthe Production Director after start of operations. Following the incorporationof AMZA into CVRD in 1981, the Superintendencia de Implantacao do ProjetoCarajas (SUCAR) was established to assume AMZA's function. One of the mainduties of the Development Director is to ensure coordination between SUCAR andthe Superintendencia de Pre-Operacao Norte (SUNOR) which will manage thepreoperation phase and constitute the nucleus of the organization that willoperate the Project. The Production Department has the experience with whichto provide information on operating equipment and requirements and is activelyproviding this support to SUCAR through SUNOR. Other supporting inferfaceshave been established between SUCAR's own planning and control, engineering,material supplies, civil works and administrative units directly to CVRDsuperintendencies with respective functions.

4.06 On September 16, 1981, CVRD's Board of Directors decided on thecreation of a Steering Committee to (i) carry out periodic reviews of theCarajas Project particularly with respect to implementation, costs anddifficulties encountered or expected; (ii) undertake periodic reviews ofoperational targets and time limits established by SUCAR; and (iii) review andtake decisions on major issues regarding the Project. The Committee comprisesCVRD's Directors for Development, Finance and Production, the Superintendentsof SUCAR and SUNOR, and will possibly include one to two consultants experiencedin large-scale project execution. The proper composition and functioning ofthis Committee is of critical importance to the Project. It has been agreed,therefore, that CVRD will maintain the existence of the Steering Committee,under the chairmanship of the Director-Vice President of CVRD and that theCommittee will meet at least once every three months and prepare minutes ofits meeting. CVRD will furnish minutes to the Bank within 30 days of anySteering Committee meeting.

C. Staffing and Training

4.07 CVRD is well managed and competently staffed and operated. At endMarch 1982, CVRD had a total of 20,938 employees, including about 600 traineesand apprentices. The composition of the staff is as follows:

CVRD-Staffing, 1981

Category Staff

Higher Technical and Managerial Staff 1,605 7.7Intermediate Technical and Managerial Staff 3,338 15.9Qualified/Specialized Staff 10,898 52.0Semi-Qualified Clerks 3,870 18.5Non-Qualified Staff/Manual Labor 646 3.1

Sub-total 20,357 97.2Pupils/Trainees and Apprentices 581 2.8

Total 20,938 100.0

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SUCAR has 746 employees, of which 320 are working on site at Carajas andSao Luis. Future staffing plans at Carajas are discussed in para. 5.58.

4.08 CVRD currently operates five training centers, located in Rio deJaneiro, Belo Horizonte, Porto Velho, Itabira and Tubarao, in total havingan area of 8,440 square meters. The 1981 training program in these centerscomprised 2,355 classes with 35,176 participants at a cost of about US$7.4million equivalent. 1/ Curricula for the more than 100 courses are adequate,and sufficient numbers of trained and qualified instructors are available.

D. Operations

4.09 The Southern System consists of CVRD's mining operation in the "IronQuadrangle" in the State of Minas Gerais, the Vitoria-Minas railway linkingthe mines to the port and the port facilities, including CVRD's pelletizingplants at Tubarao, in the state of Espiritu Santo.

4410 The CVRD operational activities in the Southern System for 1979-80are summarized in the table below:

CVRD--Operational Activities in the Southern System, 1979-80(million tons)

Iron Ore Pellets Other Total1979 1980 1979 1980 1979 1980 1979 1980

Production CVRD 52.9 63.0 4.3 4.6 -- -- 57.2 67.6Purchases from Others 3.3 3.9 3.0 1.8 -- -- 6.3 5.7

Total Ore 56.2 66.9 7.3 6.4 -- -- 63.5 73.3

Railway Transport for CVRD 59.0 65.8 0.8 0.7 0.9 0.9 60.7 67.4for Others 6.3 7.1 1.7 2.3 9.4 12.1 17.4 21.3

Total Rail Transport 65.3 72.9 2.5 3.0 10.3 13.0 781 88.7

Port Operations for CVRD 42.5 41.2 6.4 4.8 -- -- 48.9 46.0for Others 6.0 6.9 8.4 11.1 -- -- 14.4 18.0

Total Port Operations 48.5 48.1 14.8 15.9 -- -- 63.3 64.0

4.11 The vast iron ore deposits in Minas Gerais were discovered in 1910,but actual exploitation did not start until the mid-1940s after the foundationof CVRD in 1942 (para. 4.01). At that time a railway connecting the Itabiraarea with the Atlantic Seaboard was already in place and the initial objectiveof the newly-created CVRD was to mine, transport and ship 1.5 million tpyof iron ore. This goal was reached in 1952 and by 1967 ten million tons wereexported annually through the new deep-water port of Tubarao (outside Vitoria),construction of which had started in 1962. Between 1967 and 1970, productionwas doubled, triggering the construction of a second track, improvements inrailway curve radius and gradients as well as installation of modern signallingand traffic control systems. These works were completed in 1978 and therailway's annual capacity is now 100 million tons. In 1973, the construction

1/ US$1.00 = Cr$100.00.

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of the first beneficiation plant for low-grade ore (itaberite) concentrationwas completed and the second CVRD pelletizing plant at Tubarao startedproduction to meet the then increasing world demand for pellets.

4.12 The CVRD iron ore resources in the Itabira area are summarized intable below:

CVRD--Iron Ore Reserves(million tons)

MeasuredItabirite

Deposit Hematite Hard Soft Total Total Reserves a/

Acesita 310 n.a. n.a. n.a. 310Caraca 35 - 23 58 58Caue 329 55 580 964 964Conceicao 462 771 774 2,007 2,007Dois Corregos 75 28 117 220 220Picarrao 6 - '11 17 17Timbopeba 170 37 124 331 1,739Others - - - 979 b/ 4,360

Total 1,387 891 1,629 4,886 9,675

a/ includes measured, indicated and inferred reserves.b/ Itabirite.

4.13 The forecast production for these mines as a group is shown in para.3.40. Due to limited mineable reserves of high-grade hematite, the Caue mine,with a production capacity prior to 1981 of 38 million tpy will be cut back toabout 23 million tpy by 1987. This action will double the current 10-yearlifetime of the Caue mine. Partial replacement for these reductions inproduction will be from Timbopeba which will reach 7.5 million tpy capacity in1985, and from CVRD purchases of 8.5 million tpy from the Capanema mine(start-up in 1982), a joint venture 1/ between CVRD (51%) and a Japaneseconsortium (49%). 1/ The Capanema mine will have a capacity of about 8.5million tpy of which 2.1 million tons (25%) will be sold to Siderbras Tubaraosteel-works. In March 1982, CVRD purchased several hematite deposits (Acesita)lying between Caue and Capanema mines. The deposits are not presently beingmined, but will be used as strategic reserves.

4.14 Since 1973, CVRD has produced about 5 million tpy of pellets intwo of its three pelletizing plants at Tubarao (capacity 2.5 million tpyeach), and has purchased pellets from its jointly-owned pelletizing companies,HISPANOBRAS, NIBRASCO and ITABRASCO, also at Tubarao (para. 4.21).

4.15 The transport volume on the Vitoria-Minas Railway has increasedrapidly not only because of increases in the handling of iron ore and pelletsbut also increased volumes of other goods such as coal, linest:oii artid generalcargo. Other goods now constitute about 15% of total railway transport volume.

1/ Companhia de Mineracao Serra Geral.

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4.16 The Southern System produces and will continue to produce sizedlumpy ore, sinter fines, pellet feed and pellets as illustrated in table below:

CVRD Southern SystemProjected Iron Ore Sales by Product Mix, 1980-87

(million tons)

1980 1982 1985 1987

Lumpy ore 8.6 8.4 10.4 9.5Sinter fines 36.3 45.2 56.3 43.6Pellet feed 11.9 12.9 13.1 13.1Pellets 5.5 6.1 6.5 6.5

Total 62.3 66.7 86.3 72.7

All products are of competitive quality, chemically as well as metallurgically,and marketing in that respect has never been a problem.

E. Financial Position

4.17 The financial performance of CVRD over the last six-year periodis summarized below and detailed historic financial statements are shown inAnnex 4-1 through 4-3.

Summary of CVRD's Financal Performance, 1976-81

(US$ million)

1976 1977 1978 1979 1980 1981

Mineral Sales (million tons) 50.5 45.7 51.0 62.8 62.3 61.8

Mineral Revenues a! 789.8 711.8 758.3 911.7 950.6 942.8Other Revenues a/ 82.2 109.4 131.4 165.9 211.4 237.0Operating Expenses a/ b/ 540.0 600.0 720.3 787.9 735.6 790.2Net Income After Tax a! 216.3 82.4 51.5 35.5 269.5 246.8

Internal Cash Generation c/ 318.5 201.9 93.7 507.0 673.0 621.0Capital Expenditures a/ 599.3 417.9 336.3 171.4 327.7 819.1Long-Term Debt d/ 635.6 464.9 647.8 530.6 424.9 684.3Total Equity d/ 949.4 1,235.3 1,466.2 1,093.4 1,250.3 1,426.5

Debt:Equity Ratio 40:60 27:73 31:69 33:67 25:75 32:68Current Ratio 1.7 1.1 1.2 1.2 1.3 1.1Net Income/Revenue 24.8 10.0 5.8 3.3 23.2 20.9

a/ At average annual Cr$/US$ exchange rate.b/ Including depreciation.c/ On accrual basis.d/ At end of year Cr$/US$ exchange rate.

4.18 After 1976, when CVRD's net income was a healthy 24.8% of sales,iron ore prices fell sharply in real terms, decreasing net income to 3.3% ofsales in 1979. CVRD's recovery in 1980 and 1981 to profit margins exceeding20% was due to (i) a decrease in unit production costs by about one-third inreal terms from 1979-81 brought about by increased operating efficiency andeconomies of scale, and (ii) a 35% "maxi-devaluation" of the Cruzeiro againstthe US Dollar in December 1979, which was to CVRD-s advantage since itsrevenues are largely foreign exchange and its costs local currency.

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4.19 Between 1976 and 1981, CVRD invested a total of US$1,920 million:for Carajas (US$623 million); expansions, replacements and modernization inthe southern mines, railroad and port (US$743 million); and subsidiariesand associated companies (US$554 million). Throughout the period, the Companymaintained a low debt:equity ratio (which in 1981 was 32:68), using internallygenerated funds to cover loan repayments, dividends, and about 45% of allcapital expenditures. CVRD's current ratio, however, has recently declinedfrom 1.7 in 1976 to 1.1 in 1981. This reflects CVRD's past use of short-termborrowings and acceptance credits on ore shipments. In 1982, CVRD will reduceits short-term credit liabilities by about US$162 million, in anticipation ofthe availability of the longer-term finance for its major investments over thenext 5-6 years in Carajas. Its current ratio is therefore expected to improveto 1.6 in 1982, and remain at a sound level thereafter (para. 8.23).

4.20 CVRD has a number of equity investments and holdings in subsidiariesand associated companies which are shown in Annex 4-4. The investments,totalling US$804 million, are in iron ore (33%), ocean transport (23%),bauxite, alumina and aluminum (13%), phosphates and fertilizer (10%), foresta-tion, lump pulp (9%), and other (12%).

4.21 In 1980, CVRDs major operating subsidiaries and associated companiesgenerated revenues totalling US$845 million, and profits totalling US$91million, as shown below.

CVRD--Operating Performance of Selected Subsidiariesand Associated Companies in 1980

Product/ Production Sales Net IncomeService Volume Revenues (Loss)

(million units) ----- (US$ million)-----

ITABRASCO Pellets 2.5 tpy 70.9 4.4HISPANOBRAS Pellets 2.7 tpy 84.4 0.4NIBRASCO Pellets 5.5 tpy 174.8 8.4Mineracao Rio do Norte Bauxite 2.9 tRy 58.6 (8.7) a/Florestas Rio Doce Lumber 1.6 m 32.9 (0.4)CENIBRA Pulp 0.3 tpy 120.1 11.1DOCENAVE Ocean Freight 20 tpy 303.7 44.9Rio Doce Int-l. Finance Financial

Investment - - 31.1

Total 845.4 91.2

a/ 1980 was first complete year of operation.

4.22 While the earnings performance of these companies has been relativelylow, with the exception of DOCENAVE, CVRD's return on investment should improveas the companies (several of which are newly started operations) enter intofull operations and the economy strengthens. The investments required by thesubsidiaries and companies are largely completed and no major cash outlays areexpected of CVRD.

4.23 CVRD accounts are audited annually by the international accountingfirm, Arthur Andersen & Co. Auditing arrangements and procedures are satis-factory, and no problems are foreseen.

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V. THE PROJECT

A. Proiect Development

5.O1 The Carajas iron ore deposits are located about 550 km south ofBelem in the Greater Carajas region covering an area of about 4,000 squarekm (1,560 square miles) at an average altitude of about 650 meters above sealevel. The climate is tropical with the annual temperature averaging 24 Cwith small variations. There are two distinct seasons: a rainy season fromOctober to May and a dry season from June to September. The average annualrainfall recorded over an 11-year period is 2,236 mm. The vegetation is char-acterized as continuous equatorial rainforests except on top of the plateauswhere clearings occur, indicating outcropping iron formation.

5.02 Up to the mid-1960s, only sporadic geological surveys had been madein the Carajas region. Mineral prospecting on a commercial basis began in1966 triggered by discoveries of manganese deposits. U.S. Steel, through itsBrazilian subsidiary, Companhia Meridional de Mineracao, initiated a manganeseexploration program and at the outset of this program, the immense iron orepotential of the region was revealed.

5.03 In October 1966, the Department of National Mineral Production (DNPM)granted survey rights to Meridional and CVRD, and the two companies enteredinto an intensive two-year exploration program (para. 5.07) which during itspeak in 1971 employed 800 persons. In addition to the huge iron deposits, theprogram resulted in discovery of deposits of manganese, copper, bauxite,nickel, tin and gold.

5.04 On April 15, 1970, CVRD and U.S. Steel jointly founded AMZA (50.9%CVRD, 49.1% U.S. Steel) to determine the feasibility of development andexploitation of the deposit and to organize and operate the Carajas Project.The partnership lasted until June 15, 1977, when U.S. Steel, considering thllarger Project scope, magnitude of investments envisaged and the shift intarget markets from the U.S. to Europe and Japan, withdrew from the Projectallowing CVRD to purchase all its stock. CVRD acquired the AMZA shares heldby Meridional/U.S. Steel at a value equal to the exploration expendituresincurred by the foreign group plus annual interest, amounting to approximatelyUS$50 million. On April 6, 1981, AMZA was merged with CVRD to strengthen CVRDcontrol over the Project.

5.05 The first feasibility study, initiated in May 1972 and done underthe responsibility of AMZA, contemplated an integrated mining project consist-ing of a mine, beneficiation plant, transport system and a port. Marketanalyses and preliminary studies for auxiliary installations and services wereprepared. Various alternatives related to mining plans, transport systemsand port locations were assessed (paras. 5.10, 5.19), particularly the possi-bilities of transporting the iron ore by slurry pipeline, railroad or riverbarge, using the Tocantin River, to the northern seaport of Belem. Thesealternatives were rejected due to, inter alia, the lack of water depth atBelem to permit port expansion for the large transoceanic ships used in theiron ore trade (Project File). Comprehensive studies completed in May 1974 ofthe northern Brazilian coastline proved that Ponta da Madeira in Sao MarcosBay, in the vicinity of Sao Luis, capital of the State of Maranhao was themost favorable location for a deep-water port. AMZA was granted, in May 1976,the concession to build and operate a railroad between the port site and Serrados Carajas.

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5.06 Initially, AMZA contemplated an annual production of 20 milliontons, to be increased in stages to 50 million tpy. In view of the huge invest-ments required for the 50 million tpy project, and as a result of continuousstudies of the iron ore market and its projected trends, CVRD, being the soleowner of AMZA, directed AMZA in 1978 to undertake new technical and economicstudies to arrive at an optimal production level both economically and finan-cially. These studies, completed in 1980, indicated an annual productionlevel of 35 million tons by 1987 with provision for future expansion once theiron ore market could accept additional quantities. CVRD was assisted in thefinal revision of the feasibility study for the Project by InternationalEngineering Services, S.A. (IESA), a majority Brazilian owned consulting firm,and in the economic evaluation of the Project by Hill Samuel & Co. Limited(UK). The project scope was substantially reduced during the final phase ofreview, particularly the railroad component where reductions amounted to someUS$400 million.

B. Project Description

1. Mine Component

5.07 Ore Reserves. Most of the iron ore reServes in the Carajas Regionare located in two sectors of the Serra dos Carajas--Serra Norte and SerraSul--which are about 35 km apart. These deposits were delineated as partof the extensive exploration program in 1969 to 1972 (para. 5.03) which com-prised: (i) 1,000 km of survey lines for detailed geological mapping, (ii)560 km of geological reconnaissance lines of surrounding areas, (iii) 19,000sq km of aerial magnetometer survey, (iv) 350 km of ground magnetometersurvey, (v) 15 adits totalling 3,400 m in length, (vi) 277 diamond drillholes totalling 37,000 m and (vii) about 100,000 chemical tests.

5.08 The result of the program was an estimated 17.8 billion tons ofreserves of high-grade, low-phosphorous iron ore as shown in the table below:

Brazil--Iron Ore Reserves in Serra Dos Carajas(billion tons)

Reserves Grade %Deposit Measured Indicated Inferred Total Fe P SiO Al 03

-________ -_________ _2 - 2---

Serra NorteNi 0.28 0.12 0.45 0.85 66.41 0.05 1.12 1.17N5 0.34 0.12 1.12 1.58 66.18 0.05 0.88 1.07N4W - 0.63 1.10 1.73 65.75 0.04 1.25 1.33N4E 1.28 0.06 0.02 1.36 66.13 0.04 1.00 1.05Others 0.04 0.03 0.49 0.56 65.35 - - -

Sub-Total 1.94 0.96 3.18 6.08 65.86 - - -

Serra SulS 11 0.30 1.27 8.76 10.33 66.33 0.04 1.26 0.83Others - - 0.60 0.60 66.08 - - -

Sub-Total 0.30 1.27 9.36 10.93 66.32 - - -

Serra Leste 0.20 0.12 0.10 0.42 65.90 - - -Serra de Sao Felix 0.08 0.07 0.22 0.37 62.82 - - -

Total 2.52 2.42 12.86 17.80 66.08 - - -

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The magnitude of the reserves, the geographical concentration and the highquality of the ore make the Carajas region one of the most important ironore regions in the world.

5e09 The deposits are located on discontinuous ridges and plateaus thatrise abruptly 200-300 m above jungle-covered lowlands. Metasediments asso-ciated with the iron formation are phyllite, mica schist, quartzite andsandstones. The iron ore consists of friable, fine-grained hematite with agranular or platy texture which, in most areas, is covered by a canga capping.Hard hematite crops out on the crests of hills but also occurs embodied in thesoft friable ore. The main ore minerals are hematite and subordinated goethite.

5.10 Mining will start in the N4E deposit (Diagram 5-1) selected due toits relatively low overburden ratio, easy access to the railroad and measuredreserves of 1,280 million tons of high-grade ore. The N4E orebody has beenthoroughly explored and sampled and the base data as well as methodology usedto calculate and classify the reserves are satisfactory. The deposit is "J"shaped in configuration, 4.2 km long with an average width of 300 m and amaximum depth of 285 m below the surface. The mining sequences and theultimate pit plan were accomplished by using CVRDVs own mine planning computerprogram which has a proven record in the mines in the Southern System. Threedifferent ore types are defined, and detailed mine layout provides for suffi-cient exposed ore to allow an even run-of-mine ore blend to be produced at alltimes.

BRAZILCARAJAS IRON ORE PROJECT Diagram 5-1

MINING COMPONENT AND CARAJAS TOWNSHIP

NORTH TAI L1 NSfPOND

~~~~~~~/ ~~~~~~~~~~~GELAOO

N4W El -¢TR-AL1-_

OX ED S RAILWAY LOOP

;/ / 1 STOCK~~~~~~~~CPILE

/~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~oj6, - 23..646RE

NORE80DY XEL AN'PAT.a

MARCH 19 CRUSHING AND62{ -,,,1 > ~~~SCREENING PLANT

< _ < 7 4 P~~~~ILOT PLANT X

\ S NDVSTRIAL INSTALLATIONS )

0 OFFCE CONS-LICTION

t } t z D~~~~~ ~ ~ ~~REBUOD CAR AIAS

SOUT- TAILINGSEN TD 9A.AB.

W-rd 3Bn- - 23646INOUSTRY DEPART-ElNT

MA RC. 1982

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5.11 The mine will be a conventional open pit mine with a favorablewaste-to-ore ratio by weight of 1:2. Waste rock as well as ore will bemined using a standard shovel/truck mining system employing nine 12 and 16cu. yd. electrical shovels and twenty-three 154-ton off-the-highway dieselelectric trucks. Benches will be 15 m high and drilling will be done by two9-7/8" rotary drills (to be transferred from the Southern System). It isestimated that only 25% of the ore has to be blasted using ammonium nitrate-based explosives. Secondary blasting and bench improvements will be done byfour airtrack drills. Haul-roads will be 25 m wide, and mine development workand road maintenance will be performed by a fleet of wheel- and track-dozers,road graders, wheel-loaders and 35-ton trucks. In the dry season dusi-sup-pression on roads and in working areas will be achieved by three 40-m water-spraying units. Waste rock will be hauled to waste dumps where adequateenvironmental measures to prevent pollution (mainly surface water run-offsinto adjacent streams) will be installed. The ore will be transported anaverage of 1,000 m from the mining faces to the primary crusher.

5.12 Beneficiation. Due to its high natural iron content, the orerequires no actual concentration or treatment other than simple reduction insize of the run-of-mine ore to sinter feed and natural pellets. A pilotplant, in half industrial scale, has been in operation at the mine site sinceearly 1981 and about 350,000 tons of ore have been tested. These tests con-firmed the original flowsheet which was based on tests of bulk samples inCVRD's ore processing laboratories in Itabira and Belo Horizonte. In addition,samples have been sent abroad to laboratories in the U.S. and Europe, and thegood metallurgical properties of the products have been confirmed. Beneficia-tion facilities will consist of three stages of crushing (including primarycrushing) and screening, one stage of rod-milling, a solids recovery stagewith screw classifiers and cyclones and a final dewatering stage of theproducts. Tailings will be pumped to two tailings ponds. Due to the rela-tively high moisture content and other particular characteristics of therun-of-mine ore, wet screening has to be applied in order to prevent cloggingof the screen decks. Tailing thickeners will allow recirculation of someprocess water. Make-up process water will be pumped to the plant fromthe tailings ponds where effluents will be treated and spillway water will beclean. Beneficiated products are to be transported via belt conveyors tothe stockpile area which will have a capacity of 1.6 million tons. Two8,800-tph stackers will pile separately the sinter feed and the naturalpellets, and two 8,000-tph bucketwheel reclaimers will be used for reclaimingand subsequent train loading from two 1,600-ton silos located directly overthe double railway track. For adequate quantity and quality control, all mainbelt conveyors will be equipped with precision scales and five automaticsampling stations are incorporated in the flowsheet.

5.13 All supporting facilities such as offices, laboratories, maintenanceworkshops and warehouses will be common to the mine and the beneficiationplants. The general layout of all installations will allow for easy capacityexpansion where and when required. The total electrical power consumptionis estimated to 164,000 MWh/year. There is one Amerindian reserve in thevicinity of the mining complex. Plans for this and other reserves affected bythe Project are discussed in Section D.2.

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5.14 Pre-operation, starting in 1982, entails removal of 5.2 milliontons of overburden (about 15 million tons of ore will then be exposed) consist-ing mainly of canga which will be stockpiled in a separate area for possiblereclamation in the future. A limited amount of ore will be fed during 1982-83to the pilot plant for additional beneficiation and equipment testing andstockpi'le build-up. Actual mining is scheduled to start in July 1985.

5J15 At this time, all excavation and earthmoving required for theoffice/workshop/warehouse area as well as for the primary crusher have beencompleted and construction has started. Landclearing for other industrialareas has also commenced. The Southern tailings pond is almost complete. Alaboratory was completed in May 1981. Temporary workshop and warehouse forthe pre-operation phase have been erected. In September 1981, the total workforce at the mine site and on road improvement was about 4,150 personnel.

2. Railroad Component

5.16 Fixed Installations. The new railroad is being built to AARstandards to carry the ore from the Carajas mine to the port at Ponta daMadeira (Diagram 5-2). The total track length is 890 km with four stationsand 36 crossing loops, each 2,300 m long. The railroad will be single trackand 1.60-m gauge, and will use heat-treated rails weighing 68 kg/meter, with1,850 treated wooden ties per km on a 0.30 m bed of crushed stone ballast.Maximum grade for loaded trains will be 0.4% and for the unloaded trains 1.0%with the minimum radius of curvature 860 m. A Central Traffic Control systemas well as an Automatic Train Control system will be installed to be operatedin the Sao Luis terminal including train radio control and radio links foreach crossing.

Diagram 5-2BRAZIL

CARAJAS IRON ORE PROJECTRAILWAY COMPONENT

PARA roTCANT I'S PONTA DA MADEIRA

CARAJASC~~~~~~C EMARABA ~~~~~~~~~~~~~~~~~~~~~~~~~~AI

4' 4 ' GOIAS e V MARANHAO

-HOJECT PAlIshAY

S LUIS TF-ESINASAILW-Y FF SA

L.' ST-G AEE0POPTS 4'

W ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . <

0 "' Z I 'A4 S 1 M Uv 9 _ 4'90

o~ ~ ~~ ~ 0

804'4'n! S00 4700 S00 500 400 300 W20 100

LONGITUDINAL PROFILE

N-USr3 OEooOT.EN1 A. d.n4 23E47

- 36 -

5.17 Route Location. The principal towns passed by the railroad, oradjacent thereto are Santa Ines, Imperatriz and Maraba on the Rio Tocantins,which is served by an airport. From Km 0 (Ponta da Madeira) to Santa Inescity (Km 200) the topography is low lying with many small rivers, swampy inparts and with medium forest elsewhere. From Km 200 to Carajas (Km 890) theroute lies through jungle with large and dense timber and little civiliza-tion. Besides the line, there are only small villages, Santa Cruz (Km 282),Calis (Km 385), Pequia (Km 514), Cara (Km 634), Maraba on the Rio Tocantinspreviously mentioned (Km 737) and Parauapuebas (Km 862). Only about 115 kmbetween Km 415 and Km 530 can be described as hilly with a maximum height of324 m above sea level. The only major bridge which will cross the Tocantinsriver at Maraba has a total length of about 2.3 km; other medium-sized bridges(350-200 m long) are required to cross the Mosquitoes channel, Mearim river,Paraquen river, Pindare river, Socorro river and Vermelho river. As might beexpected in that area, culverts totalling some 77 km in length will be required.There will be 63 bridges in all along the route.

5.18 Two ballast quarries have been located adjacent tc the railroadroute, the Rosario quarry at Km 38 near Sao Luis and the Parauapuebas quarryat Km 862 near Carajas. Both quarries have adequate quality and quantityof stone.

5.19 Operation. The train type to be operated and their schedules weredetermined through extensive computer research of many alternatives. Thestandard train will have 160 iron ore wagons with an ore load of 15,680 tons(19,200 gross tons) hauled by three 3,000 H.P. diesel electric locomotiveswith two additional locomotive pushers for the 115-km mountainous section.The train schedule was developed using Centralized Traffic Control (CTC) andAutomatic Train Control (ATC) systems. Loaded trains are scheduled 21 hoursfrom Carajas to Sao Luis and empty return trains about 12-1/2 hours. Therewill be eight ore trains per day in each direction and up to a maximum ofthree service trains daily. Full-cycle turn-around time for each ore trainwill be 2.16 days. Maximum speed of a loaded train is 65 km/hr whereas forempty trains it is 80 km/hr. The line will operate 320 days per year. Generalcargo operations are expected to start-up in the late 1980s. Agreement hasbeen reached with the Government and CVRD that, six months prior to introducinggeneral cargo and passenger services on the railway, CVRD will prepare atariff schedule, satisfactory to the Bank, for such services, which will besufficient to cover the costs of providing the services, and put the tariffschedule into effect (with periodic modification to reflect any cost increases)when the services are introduced.

5.20 The iron ore wagons will have a capacity of 98 tons and will befitted with air-brakes and swivel-type automatic couplings which permit thecars to be tipped without disconnecting the train. The diesel electriclocomotives will have 3,000 HP, an axle load of 30 tons, and a maximum speedof 90 km/hr. Details of the Carajas-Sao Luis railway are given in Annex 5-1.

5.21 Project Implementation. CVRD started the construction works forthe railroad substructure-cuttings, bridges and viaducts, and culverts twoyears ago, except for the Tocantins river bridge and the Carajas mine ter-minal. The 890-km length was divided into 14 sections plus the terminalat the port, with each section let out as a separate contract to cover allrequired works in the section. The works are under the control of the WorksSuperintendent at Sao Luis (para. 6.06), with a Brazilian consulting firmappointed to each section for day-to-day supervision. The work completed todate, expressed as a percentage of the overall total work required is:

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Degree of Work Completion as at December 1981

Category % Completed

Earthmoving along the line 45Earthmoving Sao Luis terminal 84Bridges along the line 32Culverts along the line 56Concrete retaining walls 40

5.22 A separate contract for the Tocantins river bridge was let August 8,1981, and contracts for the track laying and ballasting are in process ofbeing let. The organization for management and control of the work on handand to be started is discussed in para. 6.06. The total number of contractorpersonnel working at the railroad site was nearly 15,000 in late 1981.

5.23 Maintenance. The Ponta da Madeira (Sao Luis) terminal will be themain yard of the railroad and includes, inter alia, the following installa-tions:

(a) Centralized maintenance workshop for all equipment,rolling stock, motive power and fueling plant;

(b) Wooden ties treatment plant;

(c) Rail welding plant; and

(d) Warehouse for all necessary spares for the line.

A supplemental, medium-sized maintenance workshop will also be available atMaraba station yard with fuel and oil shops. Total personnel will be 763.

5.24 The track maintenance will be mechanized to the extent possibleand will be undertaken by four teams placed along the line at:

(a) Sao Luis--covering Km 0 - Km 212;

(b) Santa Ines--covering Km 212 - Km 450;

(c) Pequia--covering Km 450 - Km 650; and

(d) Maraba--covering Km 650 - Km 890.

Total personnel will be 728.

3. Port Component

5.25 The new port is located in sheltered water, some 10 km southeastof the city of Sao Luis in Sao Marcos bay (Diagram 5-3). It is about 1.5 kmNorth of the existing port of Itaqui. A natural and stable 88-km seawardapproach channel, 1.6 km wide, will permit simultaneous two-way traffic forships, up to 280,000 dwt. Adequate water depth is available at Low WaterOrdinary Spring Tides (LWOST). The tidal range is 7 m on spring tides and 5 mon neap tides, resulting in both ebb and flood tide currents approaching a

- 38 -

Diagram 5-3BRAZIL

CARAJAS IRON ORE PROJECTPORT COMPONENT

SStatlonC<rM kiW tOr;er~~ShIpladri

CVRO~~~~~~~~~~~~~~~~~~~:,!!:.~~:jj:K Arar,i

Ralroadu:Port Anc laAncillarv uildirgs

-20 BAIA DE SAO MARCOS

| { t ) \\ l l l ~~~~~~Stockpile A,..v' Xh l

CarOupr A,. Lji

R.fl,CVHD Area imir

INOUSTRY DEPvARTNlENT r,d8- 34MARCH 1982

- 39 -

speed of 5 knots, which are excessive for safe ship handling. Rock groins aretherefore under construction to the north and south of the berth, on alignmentsdetermined in a hydraulic model; these will reduce the currents to an acceptablemaximum of three knots alongside the berth. The approach channel is adequatelydemarcated for navigation.

5.26 Berth Construction. Within the area enclosed by the groins andon a north/south line, about 300 m offshore, four breasting dolphins will beconstructed where the ships will berth, with three mooring dolphins to thenorth and three to the south. Depth of water alongside will be 23 m (LWOST).The remaining maritime structures will be (i) a concrete runway platform, forthe shiploader arm support; (ii) the shiploader pivot block to the north ofthe centre line behind the runway platform; (iii) connecting walkways betweendolphins and runway, and a service platform; (iv) an approach bridge for themain feed conveyor to the shiploader; and (v) a tug berth, behind the northernset of the mooring dolphins. All the marine structures will be reinforcedconcrete construction, supported on tubular steel and reinforced concretecomposite piles. These are anchored into the underlying solid rock, through a3-4 m layer of disintegrated/weak surface rock. Some 300 vertical and rakerpiles are to be placed for all the maritime structures, of which about 200 are1.30 m in diameter and the balance 0.80 m diameter.

5.27 The ship loader has a capacity of 16,000 tph. It is of the lineartype, pivoting about the rear pivot block, with a telescopic loading arm whichtravels on a rail mounted support along the concrete runway platform. Averageloading rate will be 10,650 tph.

5.28 Back-up facilities. Included in the port complex are (i) therailroad car dumpers which are located on the loop line from the Sao Luisrailroad terminal; as these can unload 8,000 tph, two dumpers are requiredfor a throughput of 35 million tpy; and (ii) the stockyard which has threereserve ore stacks holding 3.3 million tons in total; two 8,500-tph stackersplace ore in the stacks from the car dumper conveyors and two 8,000-tph bucketwheel reclaimers take ore from stack to the feed out conveyors, whence,through appropriate transfer towers, it is fed to the main feed-out conveyorto the ship loader. Ore can also be fed direct from the car dumpers to thefeed-out conveyor. Ancillary facilities include maintenance, and administra-tion buildings, utilities, and an operations centre.

5.29 Port Capacity. The complete system will enable 35 million tpy to bereceived from the railroad wagons and loaded into ships of varying size, thelargest expected to be 280,000 dwt. The limiting factor on the port capacitywill be the number of ships which can be handled per annum at the singleberth. For 35 million tpy capacity, the berth occupancy will average 64%,which is satisfactory.

5.30 Contracts for construction of the main berth, the groins, storageyard and earthworks, and the shiploader have been let, and clearance anddiversionary works necessary for the site are practically completed. InSeptember 1981, 845 contractor personnel were working on site.

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C. Infrastructure

1. Carajas Town Development

5.31 The Carajas townsite is on a plateau at an altitude of 640 m andabout 12 km from the mines. Located on the prevailing windward side away fromthe mining operations, the site is free of dust and stack effluents yet closeenough for a convenient "journey to work." The townsite is on the road toMaraba 170 km away, which is the largest municipality (70,000 urban popula-tion) in the Greater Carajas region. The new town will occupy 255 outof the total 508 ha that are suitable for town construction in the future.

5.32 By 1988 when the initial production level of 35 million tpy isreached, the number of basic workers at Carajas will total an estimated 2,044(2,033 in mining and 11 in railway operations). CVRD's initial estimates ofservice workers have been low for a new town which is expecte1 to become aseparate municipality self sufficient in services by the end of the 1980s,and CVRD has revised the estimates upwards. Based on an estimated requirementof 0.7 service workers per basic worker which is consistent with the experienceof single-industry, free-standing towns in the Americas and Southeast Asia,the Carajas town is likely to require about 1,430 service workers, or fourtimes the number for which CVRD had initially planned.

5.33 CVRD is presently revising its housing plans accordingly. Whileinitially the Company planned on a requirement for 1,706 dwellings, thenumber has increased to 2,720 on the following basis. The housing require-ments for the service workers are based on an average 1.3 workers per house-hold, and for basic workers an average 1.2 persons per household. The averagehousehold size for service workers is 5.5 persons and for basic workers 5.0persons.

5.34 Of the additional 1,014 dwellings which will be included in CVRD'splans to house additional service workers and their families, 930 will be inserviced lots, of which two-thirds should be of a minimum dimension (180 m )to permit the construction of an economical "core" unit for the lower-incomeservice workers. All land required by the Project for urbanization has beenacquired. No additional land will be required to be purchased for the addi-tional dwellings at Carajas town since the lot sizes would allow for increaseddensities to be achieved within existing urban boundaries. CVRD has agreed toreserve the additional lots for service workers, and since the additionaldwellings will be privately owned--rather than owned by CVRD--to make arrange-ments with Banco Nacional de Habitacao (BNH), or other financial agenciesacceptable to the Bank, for financing the construction or purchase of thehouses, to enable the permanent settlement of the additional service workersin the townsite over a period of about five years from Project Completion(para. 7.23). The cost increase to CVRD is estimated to be marginal, consist-ing mainly of additional house connections to utilities (Annex 5-2). CVRDwill include these additional costs in the project cost estimates (para.7.01). In view of the importance of the revisions being made in the Carajastown planning, CVRD has agreed that the final designs of the town plan andsite plans for all housing at Carajas be furnished to the Bank for review andapproval by no later than September 30, 1982.

5.35 In planning and designing the town, CVRD-s past experience withItabira township in the South has been well considered and local environmentand climatological factors taken adequately into account. A description

- 41 -

of the town, which will be fully self-contained in terms of community servicesand facilities, is given in Annex 5-1. The grid network of roads and vehicularcirculation plans are generally satisfactory although CVRD is making modifica-tions to restrict "through" traffic on tertiary streets. These and other suchmodifications will be reviewed and approved by the Bank as part of itsreview of the overall town plan (para. 5.34).

5.36 The Carajas town will continue to grow after 1988, particularly inthe service sector. It is important therefore that CVRD begin to developplans for the second-phase development of the town so that the later townexpansion can be controlled. CVRD has agreed to provide to the Bank forreview and approval an urban development plan for the second-phase development(1988-2000) of the Carajas town no later than June 1, 1985.

2. Other Town Developments

5.37 The Project will create employment for maintenance of the railwaydistributed at eight locations along the 890 km of track. The first settlementwill be Parauapebas on the Parauapebas river, 27 km from the new town. Themunicipal authorities of Maraba will be responsible for the management andoperation of the town. CVRD is preparing an appropriate urban developmentplan that will be of lower specification than that for Carajas town. Underthe plan, accommodations will be provided for 98 railway maintenance staffand service workers; and serviced lots will be provided to accommodate thenumerous persons that are likely to be drawn to the area seeking work in theregion, or working in other mining activities close by.

5.38 CVRD initially planned for a population of 5,000 at Parauapebas by1988 but, in view of the numbers of outsiders likely to be attracted to thearea, is revising its plans for the accommodation of 10,000 by 1988. Anadjacent area could be used to accommodate further growth of the town (to20,000 by the year 2000) if necessary. CVRD has agreed to furnish the com-pleted plans to the Bank for review and approval no later than September 30,1982.

5.39 The remaining seven locations where about 280 housing units andcommunity facilities to complement the existing local installations will beprovided for key railway operation personnel are listed below.

CVRD--Railway Housing Units

Km from the Port of Number of housingLocation Sao Luis Units

1. Rosario 38 242. Vitoria do Mearim 145 343. Santa Ines 213 304. Nova Vida 385 745. Pequia 514 356. Km 650 650 707. Maraba 737 469 a/

a/ All of these units will be sold to the workers and financed by theNational Housing programs of BNH.

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5.40 Sao Luis, at the port end of the railway and with an urban populationof 248,000, has a well-developed infrastructure that can absorb the additionalpopulation from the new port and railway operations. Except for two residencesfor senior management, no staff housing will be provided in Sao Luis. At theport/terminal area, 21 housing units will be provided for key personnel. Aland-use and zoning plan for the area around the port/terminal should beprepared in collaboration with the state and municipal authorities to ensure,inter alia, that the area does not develop into a small company town and thatexisting squatter groups near the port are resettled in a new location andother squatter developments along the access highway to the port controlled.CVRD has agreed to prepare jointly with the Government and appropriate stateand municipal authorities such a plan, satisfactory to the Bank, by December 31,1982, and no later than June 30, 1983, to enter into an agreement with appro-priate state and municipal authorities to carry out the plan according toan implementation schedule satisfactory to the Bank.

3. Urban Environmental Measures

5.41 CVRD's environmental management program for the Project is discussedin paras. 5.48-5.57 below and detailed in Annex 5-3. In relation to thisprogram CVRD would be asked to provide to the Bank, following review by itsown environmental advisory group (GEAMAM, para. 5.50), (i) a planting schemefor the protection of the forest edge cleared for the Carajas town, airportand access highway, and (ii) the final grading plan for the reformed contoursand replanting programs for the first site where the strip mining will becompleted. CVRD intends to make use of ERTS satellite remote scanning tomeasure periodically the impact of the mining and urban activities on thenatural environment with an overview of the region. At this macro level theplanned buffer zone surrounding the mining and urban areas and the reformedfinished contours of the mining sites (after extraction) should be reviewed byGEAMAM, CVRD and the Bank every three to six months during Project construction.

4. Other Infrastructure

5.42 Electric Power. The Serra dos Carajas is surrounded by two majorriver basins, the Tocantins/Araguaia basin and the Xingu basin, with a combinedhydroelectrical potential of about 16,000 MW 1/ firm energy. Eletronorte isnow implementing the Tucurui hydroelectric power plant in the Tocantins River.Planned final installed capacity is about 8,000 MW. The first unit of 330 MWwill start up in 1983, and by 1985 installed capacity is planned to be 2,310MW. The power plant will supply power to: (i) the Albras/Alunorte aluminium/alumina complex currently under construction, (ii) the Belem area, (iii) partsof the North-Northeast regions, and (iv) the Carajas iron ore project. TheTucurui/Electronorte transmission system will be integrated In 1982 with theCHESF system 2/ through a 1,856-km transmission line.

5.43 The Carajas Mine substation (2 X 90 MVA) will be connected througha 180-km, 230-kV transmission line with the Eletronorte/CHESF substationin Maraba. Land clearing and construction of this line has started. The lineis currently considiered part of the Project but will be sold to Eletronorteupon completion of line construction. A 230-kV line will be built more or less

1/ Estimate by Eletrobras.

2/ A power system located in the Northeast of Brazil based in Recife andBahia, and operated by the San Francisco River Hydroelectric Company.

- 43 -

along the railway from Maraba to Sao Luis to supply communities along therailway as well as Sao Luis and the port substation (2 X 33 MVA). The Govern-ment has agreed to ensure that CVRD is provided with such permanent supplyof electric power as required for the efficient operation of the Project.

5.44 Water Supply. The South Tailings dam (which was completed in early1982) will provide for all water requirements during construction, and initialindustrial requirements, as well as potable water, up to 1990. Thereafter,industrial supply will be provided from the Northern Tailings pond. Futurepotable water supply is expected to come from the Gelado Creek; however,future study is required to confirm this. Ample water supply will notconstitute a problem in the mining area.

5.45 Water requirements for the port area (ore terminal, railroad yard,rescreening plant, industrial buildings, ships) will be met by drilling sevendeep wells in the terminal area.

5.46 Roads/Airport. The 170-km road between the Carajas townsite andMaraba, where it interconnects with the Transamazonian Highway, is beingupgraded to a 7-m wide paved road. Along this road, about 10 km from theCarajas townsite, a new airport has been completed. The runway measures 2,000m by 45 m, and the airport can accommodate Boeing 727 aircraft for non-instru-ment as well as instrument landings. The minesite will be connected to thetownsite via a 12-km paved access road running along the mountain ridges.The existing roads to the Itaqui commercial port were relocated in 1980-82 tomake room for the railway yard and stockpile area.

5.47 Fuel Supply. Fuel (diesel oil and gasoline mainly) is being broughtin by PETROBRAS in coastal tankers to the Itaqui port, in the vicinity ofwhich, PETROBRAS operates a major storage terminal. Seventy-cubic meterrailway tank cars will load at the terminal for distribution to tank farmslocated in the port area, at shunting yards along the railway and at theCarajas minesite. Tank storage capacity will be sufficient at the mine and atrailway yards for 20 days consumption and at the port for 10 days' consumption.

D. Ecological Aspects

1. Environmental Management

5.48 In 1972, CVRD assigned responsibility for the environmental manage-ment of the Carajas Project to its Buildings and Projects Department (DEPEK)within SUCAR (para. 4.05). Since then, DEPEK has commissioned over a dozenenvironmentally-related studies completed over 1973-81, forming the basis forenvironmental planning of the Project. A list of these studies is given inthe Project File.

5.49 In January 1981, CVRD created an independent environmental advisorygroup--Grupo de Estudos e Assessoramento de Meio Ambiente (GEAMAM)--toadvise on all environmental aspects of the Company, and particularly tooversee activities at Carajas. The Group is composed of nine senior scien-tists/Amazon experts and chaired by an executive secretary who is technicaladvisor to the President of CVRD. The Group, together with DEPEK, has preparedan environmental management manual (Project File), containing guidelinescovering all aspects of contractors activities. In August 1981, GEAMAM met atthe Carajas mine-rail-port sites to inspect the Project, review the guidelineswith relevant personnel, and recommend appropriate environmental actions.

- 44 -

Since GEAMAM's role is extremely important in ensuring that environmentalprecautionary measures are taken, the Group should be continued on a systematicbasis. CVRD has agreed, therefore, to maintain GEAMAM with staff, functionsand responsibilities satisfactory to the Bank, and to cause GEAMAM to carryout site inspections at least twice every year through 1985, and at leastonce annually thereafter. Following each site visit, a report would beprepared by GEAMAM and furnished by CVRD to the Bank for review, with commentsby CVRD on each recommendation and a description of any action to be taken asa consequence of GEAMAM's recommendations.

5.50 In June 1981, CVRD established a permanent on-site Internal Environ-mental Commission (CIMA) at the Carajas mine, composed of CVRD employees andcontractors, to monitor and control project operations with respect to Govern-ment and CVRD environmental guidelines. A full-time environmental coordinatorfor the Project and full-time environmental officer to the mine CIMA have beenappointed. A second CIMA is being established at the port site with responsi-bility for monitoring port operations relating to the environment, and appoint-ment of its environmental officer is expected by mid-1982. Located at bothends of the Carajas railway, these CIMAs will have joint responsibility formonitoring the railway component. The existing and planned environmentalstaff and organizational arrangements are soundly based and vital to environ-mental control of the Project. CVRD has agreed to maintain the organizationalarrangements and staffing presently in place or proposed to be established forenvironmental control activities, with staff and functions satisfactory to theBank.

5.51 DEPEK and GEAMAM have been working closely with the Government'senvironmentally-related agencies (SEMA, IBDF, IPHAN, SUDAM) 1/ to obtaina technical and ecological evaluation of the Project and assistance in bioticinventory, conservation and other environmental necessities. An envirormentalprogram of activities is being outlined with the respective government agencies.The status of work has been detailed in a progress report CVRD furnished tothe Bank in January 1982 initiating routine reporting on environmentalactivities to the Bank. 2/ CVRD has agreed to complete preparation with theGovernment environmental agencies of its environmental work program for Bankreview and approval by not later than September 30, 1982, and to carry out thework program, jointly or with the assistance of the environmental agencies, ina manner and according to a timetable satisfactory to the Bank. Annex 5-3contains a summary of CVRD's environmental management program organization andactivities.

5.52 CVRD is making direct use of its environmental experience from theconstruction of Tubarao port, Itabira mines and 550 km of connecting railroadin the south in planning pollution control for the Project. In general,pollution problems are expected to be less severe in the nort:h than south forseveral reasons, among them: (i) Carajas ore is sinter feed, arnd less dusty

1/ Special Secretary of Environment, Ministry of Interior (SEMA); BrazilianInstitute for Forestry Development, Ministry of Agriculture (IBDF);National Institute of Historic and Artistic Patrimony, Ministry ofEducation (IPHAN); Superintendency for Amazon Development, Ministry ofInterior (SUDAM).

2/ One of the most important activities is the environmental zonation of theproject area required to locate special land tracts for conservation andother land uses.

- 45 -

than fines, ultra-fines and bluedust in the south; (ii) Carajas sinter feedwill be more humid (shipped wetter) than Itabira products; and (iii) theprevailing winds at Sao Luis are from port to sea unlike Tubarao where windsblow from the ore port towards the city. With respect to marine pollution,especially with regard to flushing of oil holds by cargo ships, CVRD isundertaking a three-year port study including a baseline marine study todetermine the optimum pollution prevention system. Due to the importance ofthis and other pollution studies CVRD is planning, CVRD has agreed to preparenot later than December 31, 1982, and thereafter carry out, according to atimetable satisfactory to the Bank, a pollution control program satisfactoryto the Bank, and to exchange views with the Bank on the adequacy and progressof all environmental, ecological and pollution control actions undertaken byCVRD with regard to the execution and operation of the Project.

2. Amerindian Protection

5.53 An estimated 4,535 Amerindians live in the area of influence of theCarajas Project, i.e., in a radius of about 100 km from the mine and railway.FUNAI, the government agency charged since 1967 with the implementation ofAmerindian policies and regulation of all contacts with Amerindians, maintains14 reserves and associated Indian Posts within the area, with a total of 37villages. FUNAI's second, sixth and seventh Regi6nal Delegacia, respectively,are responsible for the Indian posts in the Carajas area. With the exceptionof one group (the Guaja Indians), all Amerindian groups are in permanent orintermittent contact with the surrounding society, and some are in advancedstages of acculturation.

5.54 Four reserves are most immediately affected by the Project: theXikrin-Kayapo (247 in population), in the vicinity of the mining complex;and the Mae Maria (162 population), Caru (118 population) and Pindare (316population) reserves in the vicinity of the railway. In addition, about 40-50Guaja Indians live in the vicinity of the Carajas railway close to and withinthe Caru reserve. There is no resettlement of Amerindians required as aresult of the Project.

5.55 In anticipation of an accelerated economic development as a con-sequence of the Carajas Project, FUNAI has proposed a Carajas AmerindianSub-project to upgrade its services to the Carajas area. It is the Sub-project's objective to minimize potential adverse impacts by undertakingpreventive measures and by creating more viable conditions within the Amerindianreserves. The Sub-project which is shown in Annex 5-4, stresses measures to:(i) protect Amerindian lands; (ii) provide health care; (iii) provide overallFUNAI assistance in staff, communications, and transport at the Indian Posts;(iv) provide technical assistance and the funding for economic developmentprojects, and (v) provide education. It further proposes measures to strengthenthe outreach operations of FUNAI-s second Regional Delegacia-s "Ajudancia" inMaraba/Para and of its sixth Regional Delegacia in Sao Luis/Maranhao. In itsfirst year, the Sub-project will concentrate in particular on the four reserveswhich are already being affected by the Carajas mining and railroad constructionworks--Catete, Mae Maria, Caru and Pindare.

5.56 The Carajas Amerindian Sub-project--at a total cost over 1982-86 ofUS$13.6 million--will be incremental to FUNAI's regular current budget andwill be financed by CVRD. CVRD and FUNAI have signed a "convenio'° satisfactoryto the Bank, regarding the funding and execution of the Sub-project. Inaddition to provisions under the Sub-project, FUNAI will also carry out anyfurther special measures necessary to provide protection and assistance in

- 46 -

compliance with the Indian Statute, and in particular with respect to theprotection of Amerindian lands. Inter alia, such measures will comprise(i) the eviction of squatters and illegal trespassers from Indian lands;(ii) safeguards against trespass, i.e., field-level demarcations, clearmarking of reserve borders and regular surveillance; (iii) the redefinition,decree and demarcation of the lands of the Guaja and Parakana Indians; (iv)the settlement of cases of contested reserve borders and pending lawsuits;and (v) the register of all reserves with the Servico do Patrimonio da Uniao(SPU).

5.57 CVRD has agreed to take all necessary action to assist FUNAI tocarry out the Carajas Amerindian Sub-project. The Bank has received assuranceswith regard to the Government and CVRD's intention to enable Bank staff tohave reasonable access (accompanied at all times by FUNAI personnel) to theindigenous Amerindian population in the Carajas Project Area and to anyinformation which the Bank may reasonably require with regard to the executionof the Sub-project and to any further measures being taken for the protectionof the interests of such population. Agreement has been reached with theGovernment to put into effect in a timely manner the actions included in theSub-project and to take all further measures necessary for protecting theinterests of the Amerindian population in the Carajas Project area. TheGovernment has ensured that FUNAI will furnish to the Bank periodic reports onthe status of the Amerindian population living in the Carajas Project area,and that the Bank will have the opportunity to comment on FUNAI's program forthe Amerindian population in the Project area annually.

E. Employment and Training

1. Direct Employment

5.58 The total labor force requirement of the Project for differentproduction levels (15, 25 and 35 million tpy) is shown in table below:

Carajas Project: Labor Force Requirements

15 25 35Category million tpy million tpy million tpy

Higher Technical and Managerial Staff 170 180 214Intermediate Technical and Manager Staff 761 928 1,135Qualified/Specialized Staff 1,241 1,551 1,948Semi-qualified Clerks 946 1,191 1,393Non-Qualified Staff/Manual Labor 625 757 877

Total 3,743 4,607 5,567

CVRD will transfer to the Project, from its southern operations, a maximumof 15% of the required labor force, or about 835 persons. Those trans-ferred will be predominantly in the categories of skilled levels and above,constituting about one fourth of these levels. The balance will mainly berecruited from the states of Para and Maranhao. The proposed recruitment andtraining programs are considered sufficient to prepare new employees to ensurea smooth start-up of the operation and to be able to reach 35 million tpyduring the third year of operation. In addition, the transferred personnelwill be given refresher courses as required. The proposed training program,outlined below, should be considered a maximum effort and, depending on thelevel of education and past training of transferred and recruited personnel,could possibly be reduced.

- 47 -

2. Training Program

5.59 The proposed training program is based on CVRD's vast training expe-rience. The program will mainly focus on: (i) basic training; (ii) improvementcourses (repetition and updating of existing skills); (iii) specializationcourses (deepening of existing skills); and (iv) special training with thefollowing breakdowns:

Carajas Project: Training Program

Category No. of Man-Courses

Basic training 1,655Improvement 4,428Specialization 1,584Special training 302

Total 7,969

5.60 It is estimated that about 4,500 employees will participate in thesecourses. In addition, apprenticeship will be provided for about 740 students(from technical high schools, technical colleges and SENAI 1/ programs), andabout 670 scholarships will be awarded to students in the SENAI programs.On-the-job training will be conducted during the construction phase in parallelwith classroom training whenever possible. In particular, the future benefic-iation plant operators and maintenance personnel will be trained in theexisting pilot plant, the mining equipment operators and maintenance personnelwill be trained in the pre-production operation (ore to pilot plant andstripping of overburden) and finally railway personnel will be able to trainduring the handling/transport of construction material along the constructedparts of the railway. In view of CVRD's training experience noted earlier inChapter IV, it is well suited to carry out the Project-s training program.

5.61 In addition to the five existing training centers (para. 4.08)which will be partly used by the Project, two new centers--one in Carajas andone in Sao Luis--will be established. An agreement was signed with SENAI inOctober 1981 which outlines the support SENAI will give the Project. Maximumuse will be made of existing SENAI units in Belem, Maraba and Sao Luis, andcurricula, if not available, will be developed in cooperation with CVRDspecifically to meet the Project's demand. A new SENAI unit will also beestablished in Carajas, according to the agreement, and CVRD will provide 50%of the funds required. A preliminary study and assessment of technical andprofessional educational institutions in the Maranhao and Para states will befollowed by a more detailed review. In all, the two states have about 4,300students in technical schools, of which about 345 study mining and about 260metallurgy.

5.62 The proposed training program (para. 5.59) is estimated to costUS$25.2 million equivalent (all local costs), with the following break-down:

1/ SENAI is the National Service for Industrial Training with trainingunits in Belem, Maraba and Sao Luis.

- 48 -

Carajas Project: Training Costs(US$ million)

1982 1983 1984 Total

Basic training 4.59 2.29 4.09 10.97Improvement 0.97 1.06 2.31 4.34Specializationi 1.04 1.55 3.16 5.75Special Training 0.17 0.19 0.32 0.68Apprenticeships 0.37 0.83 1.54 2.74Scholarships 0.08 0.28 0.37 0.73

Total 7.22 6.20 11.79 25.21

VI. PROJECT IMPLEMENTATION

A. Project Management and Organization

6.01 Project management will be carried out by CVRD assisted by manage-ment contractors and technical specialists. The proposed management arrange-

ments are based on a three-month study (Project File) carried out for CVRDin May 1981 by International Engineering, S.A., a Brazilian majority-owned

firm, and a subsequent detailed review by the Bank, and are considered to besatisfactory. A project management organization chart is shown below.

Chart 6-iBRAZIL: CARAJAS IRON ORE PROJECT

CVRD PROJECT MANAGEMENT

OEVELORMENTDI"RcTGR

CARAJAS __--

1TING COMMmITTSEJ

PR,JECT DIRECTOR

I* RSECIALIgstS

[ l G~~~~~~~~ ~~EN EPAL GENER4w GENERAL PLANNING CONSTRUCTION GENERAL GENERAl

ENGINEERING AND CONTROL ENGINEERING CuaEMENT AGMINIsTRATONMANAGEMENT ( z srEcL2 SPECIAISTSI I SPICIAISTISTI

*POCLUREMENII E .0A0U.TER

SER,VCES V AGANAEMENr

SJPPORT 1CTIONS

ZATION

| GENERAIL CoSTRAcTlM ON| GENERALCONSTRUCTIONMANAGEMENT - SAO LUIS MANAGEMENT SEaRA NORTE

1 4 SPECIALISTS) I 4SPECIA LISTS)

I CGNSTCUCTION AIIROAC1 PO'T CONST-UCTION TOWNS.I PINE l

ADMINISTRATION CONSTRUCTION CONSTRUCTION ACMINISTSATION CONSTRIC AN CONSTALATION

DEPARTMENT DEEAaTMENT DEPARTMENT DEPARTMENT DEPARTMENT OEPACTMENT

r-- --- r-- ~~n r-- …- r-- - -- -- iI SAALROAI j TOCANTINS S PORT I I TGWNSITE I I MISE

I SAPEESTRUCTU.e I BRIDGE IW I S I

L _ _ L …_____ J L __. … __

LEGEND

I IMANAGEMENT LONTRACT PROJECTPERSONNEL

1942 1983 1984 1985 19}G

CVRD T7 | 7A 1 624 |*3 | 214

OTTERS I 110 5 SAG S 419

TOTAL 2350 2450 210 |600 - 853

INCJST-V DZPARTENT

AIPIL. 1982 -NAI,Id R. -23648

- 49 -

6.02 Project Management. The project management group is comprised ofCVRD personnel who staff all of the general management units of SUCAR (theproject superintendency, para. 4.05). The Project Director is supported byindividual managers for: (i) general engineering; (ii) planning and control;(iii) construction engineering and contracts; (iv) general procurement; and(v) administration, and by Construction Superintendents for two ConstructionOffices located in Sao Luis and Serra Norte responsible for port and railroadcomponents, and mine and township components, respectively.

6.03 CVRD has approved a total of 746 positions for SUCAR which arefully staffed and mobilized, including 131 persons in the Serra Norte Officeand 189 in the Sao Luis Office. At peak of construction activities, CVRDenvisages that the number of supervisory personnel and that of managerialassistance by consultants and contractors will total 1,704. Over 60% ofpersons in the top two levels of SUCAR management have worked together overthe last ten years on two previous and successfully-implemented projects(Valefertil fertilizer and CENIBRA pulp and paper projects), giving pastpersonal contact and experience to the project team.

6.04 The SUCAR team has been managing the initial project works for aperiod of about 2 years and has established appropriate lines of interfacewith CVRD operations in the Southern System and with other CVRD superinten-dencies (para. 4.05) in its control of Project work. Review of their reportingand control systems indicates that detailed information of Project progressand cost changes is being collected accurately and transmitted to headquartersexpeditiously. Monthly reports are being prepared and used to guide adjust-ments in operations. The need for improved management reporting to highlightany problem areas was discussed with CVRD and an understanding reached thatthis should be one of the areas required for technical assistance to besupplied under the Project (para. 6.07). Management planning and control willalso be strengthened through the work of the Steering Committee (para. 4.06).

6.05 Management Contracts. CVRD has arranged for six large managementcontracts--five to provide on-site management and supervision services inthe major construction areas, and one to provide general support in procure-ment. 1/ CVRD received proposals from 26 Brazilian firms, and has awardedcontracts to six qualified and experienced firms. The management contractsproposed by the firms were reviewed in the field prior to award and aresatisfactory to the Bank. These contracts are the following:

1/ Prior to this arrangement, the Project Director had obtained the servicesof 19 local consulting firms, primarily to supervise construction of therailroad infrastructure. These firms will be phased out when the worksfor which they are responsible are completed.

- 50

CVRD--Management Contracts

Area of Contract Responsibility Firm

1. Railway Superstructure (Track laying) a/ Engevix2. Tocantins Bridge Construction Geotechnica3. Port Construction and Equipment Erection Hydroservice4. Mine Installations Logos5. Townsites Construction Proman6. General Procurement International

Engineering S.A.

a! Technical support only has been provided in the management plan tothe railway infrastructure (embankment construction) since it isover two-thirds complete and under the supervision of a number oflocal consulting firms.

6.06 The first three contracts above will be under the control of theSuperintendent of the Sao Luis Office; the fourth and fifth, the Superintendentof the Serra Norte Office; and the sixth, the Manager of General Procurement inRio de Janeiro. More details of these management contracts are given in theProject File. The interfaces between management contractors, superintendenciesand headquarters are illustrated in Annex 6 for the port component and theinterfacing of management contractors for the other components will besimilar. These management arrangements will materially assist in ensuringtimely completion of the works.

6.07 Technical Assistance. In order to strengthen certain critical areasof CVRD's Management team, CVRD and the Bank have reached an understanding onthe appointment of 16 technical specialist consultants to be recruited locallyand internationally. The assistance would comprise:

(a) 4 specialists in the Project Director's office--one each for themine, railway, port and townsite works to assist and counsel theProject Director in his management, technical and procurement effortfor the implementation of that section of the Project. The special-ists will be experienced Senior staff of consulting firms;

(b) 4 specialists in CVRD's Rio de Janeiro Headquarters--to assist thedepartments concerned in procurement issues, contract letting andadministration, work planning and cost control;

(c) 4 specialists in the Sao Luis Construction Office--to assist theSuperintendent of Works, respectively, in the fields of port cons-truction, railway infrastructure (road bed preparation), railwaysuperstructure (track laying), and planning and cost control, withspecial attention to construction planning and methods, evaluationof unforeseen deviations and the preparation of alternative plans,methods and schedules to overcome any problems; and

(d) and 4 specialists in the Serra Norte Construction Office--withsimilar duties to those in the Sao Luis Office, to assist the WorksSuperintendent in mine and townsite construction, operation, plan-ning and cost control, and security.

- 51 -

6.08 The Bank has reviewed and approved terms of reference for theconsultants. Two consultants--a port specialist from SOROS Associates (U.S.A.)and a railroad specialist from CANAC (Canada)-have been hired by CVRD and arewell qualified and satisfactory to the Bank. Plans for employment of theremaining consultants and respective timetables have been confirmed with CVRD,and agreement reached that they be employed according to Bank guidelines. Itis envisaged that the Bank loan will finance 480 man-months of technicalassistance required at an average cost of US$16,000 per man-month, includingsubsistence and travel. The type of assistance required can only be providedby top-quality persons who have major experience with large-scale constructionprojects. The cost of obtaining such services is relatively high; but CVRDand the Bank consider that, in terms of related benefits in Project costsavings, the expenditure is justified.

B. Implementation Schedule

6.09 CVRD's Planning and Cost Control Department, reporting to the SUCARProject Director in Rio de Janeiro, has prepared fully-detailed "criticalpath" diagrams for each of the mine, railroad, port and townsites componentsof the Project. The diagrams cover all activities which are required tocomplete the 15, 25 and 35 million tpy production/export phases of the Projectby June 30, 1985; December 31, 1985; and September 30, 1986, respectively.

6.10 The diagrams indicate the dates required to place the major equip-ment supply and civil works contracts, as well as the equipment erectioncommencement dates and testing periods. The interrelationship of the differentevents is clearly established, and the necessity to complete a particular itemto enable others to commence is demonstrated. The available "float", orexcess time, available between the earliest possible completion date and thelatest acceptable completion date for particular activities is also estab-lished. The diagrams have been carefully and thoroughly prepared and are inall respects satisfactory. The critical activities, achievement of which isessential for meeting the date for completion of each phase, as noted above,are clearly defined.

6.11 Based upon the detailed diagrams, Chart 6-2 has been prepared whichindicates the implementation schedule for mine, railway and port construction.Chart 6-3 indicates the critical path for commencement and completion of majoractivities required for each of the 15, 25, and 35 million tpy productionlevels.

6.12 The Bank is satisfied that, based upon the planning and preparationfor the Project and the compilation of the procurement schedule based thereon,the assumed completion dates are realistic.

BRAZIL - CARAJAS IRON ORE PROJECTIMPLEMENTATION SCHEDULE

r ~~~~~~~~~~~~~~~~~19h!2 *90J 1984 1905 9

_ 7 4 _ S h_ I II 1B 11 12 _ 2 3 4 S £ _ 8 19 *1U F I _ 2 3 4 15 I 6 / 0 1 9 to iI11 ? I 1 2 1 3 14 5 I 6 7 1 8 I 9 I10 | 112 j1 I 1 2 1 3 4 1 6 | 71 9 |110i11 12

EARTCMOP ING AE 5TY 2 35_T|

CRUSIII tl 2MY5 M

35 MTY

SCREENING -5 1MTYI

-2S MTY

-- 35 MTY

GRINDING 15 MTY

25 SMTY

35 MTY

SOLIDS RECUJPERATION iDMTY

- 2S MTYIII

-35 MTY

STOCKPILE AREA ISMTYF- I

-3 TSMT Y

TRAIN LOADING -25 MTY

-3NMTY

TAILING PONDS

SERVICE FACILITIES -15 MTY

25 2MTY

35 3MTY

ELECTRICAL SLOSTAIAION

RAILWAY

TERMINAL - SAG LUIS

TRACE SUPERSTRUCTURE/INERASTRUCTURE - -- [TOCANT INS BRIDGE

CRGSSTIE TREATMENT

RAILWAY YARDS

TERMINAL - MINE -

TR/AEFIC CONTROL SYSTEM

TELECOMMUNICATION SYSTEMI I II

PORT

RELOCATION OP EXISTING FACILITIESI

CAR DUMPER -2 2MTY ------

- 3SMTY -

STOCKPILEr AREA - 1 MTY

253MTY

STACKERS/RECLAIMERS - 1SMTY

-2 DETY

-35 MTY

SHIPPING CONVEYOR

PIERS

SH/IPLOADER r

SERVICE FACIETIES

ELECTRICAL SUBSTATION

Sib o5r. 35 MTYV 15, 25 .oS3 M,iIo- Ton P., Y.. Capact

lod.-Ir D*.~,-nSM-hP 1962

BRAZIL - CARAJAS IRON ORE PROJECTCRITICAL PATH SCHEDULE

.1992 I9R3 1984 61985 1

1 2 3 4 1 85 9 7 18 _ 1 t 1 2 13 4 5 16 8 101 1 1 2 _ 3 4 5 1 6 7 1 8 1 9 110 1 112 2 3 4 5 1 6 7 8 1 9 011 I 112 1 1 31 1 67 9 I 1 t

MINE

EAR7 HMOVING

9ENEFPIC IAT ION PLANT 15 MTY - CIVIL WORKS

- DELIVERY/ERECTION------

25 MTY - CIVIL WORKS

- DELIVERY/ERELTION

35 MTY - CIVIL WORtKS

- DELIVERY/ERECTIONT

STOCKPILEJTRAINLOADtND ISMEY - CVILWORKS

- DELIVERY/ERECTION W - 4

25 MTY - CIVI L WORKS p

-- DLIVERY/ERECTiON

35 MTY -CIVIL. WORKS

D ELIVERY/ERECTION TS

STACKERS/RLCLA/MPRS 15 MTY D ELIVERY/ERECTION

25 M7Y DELIVERY/ERECTION

35MTY DELIVERY/ERECTION

RAILWAY

ROSARIO OUARiRY PREP/CRUSHER ERECTION

CR0SST/C TREATMENT PLANE MTTY iTRACK SUIIGRACE / INFRASTRUCTURE

TOCANTINS BRIDGEII I

TRACK SUPERSTRUCTURE

POR T

CAR DUMPER 25 MTY CIVIL WORiKS

- DELIVERY/ERPCTION TS

35 MTY -CIVIL WORKS

-DELIVERY/ERECTION LT

EART DM0VINGU

STOCKPILE/CONVEYORS 15 MITY CIVIL WORKS

-DELIVERY/ERECTION

25SMTY -CIVIL WORKS

-DELIVERY/ERECTION ES

35N-Ty- CIVIL WORKS

-DOLIVERY/EREC1ISON

SHIPLOADER - CIVIL WORKS

- D)ELIVERY/ERECTION LS

BREAKWATERS

CARAJASTEOWNSITE IS MTS CONSTRUCTION

25 MTY CONSTRUCTION

35 MTY CONSTURCTION

I - - U li rt~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r

LEGE FN D Hm 8ON5S

Ju. 1982

- 54 -

VII. CAPITAL COSTS, FINANCING PLAN AND PROCUREMENT

A. CilCost

7.01 As summarized below, the total financing required for the CarajasIron Ore Project is estimated at US$4,527 million, of which US$1,490 million,or 33% is in foreign exchange. Including allowances for physical contingen-cies, US$680 million (19.5%) will be needed for the mine, US$1,872 million(53%) for the railroad, US$251 million (7%) for the port, US$206 million (6%)for the townsites in Carajas and Maraba, US$481 million (14%) for projectmanagement, inspection services, engineering, and insurance, and US$14 million(0.5%) for the Amerindian program, or a total of US$3.50 billion. Capitalexpenditures made through 1981 were US$624 million, representing 20% of totalbase cost. Expenditures in 1981 were US$354 million, and in 1978-80 wereUS$270 million. A breakdown of the capital cost estimates by year from1978-88 is given in Annex 7-1.

7.02 The capital cost estimates were prepared by CVRD with assistancefrom International Engineering, S.A. that also provided project managementassistance (para. 6.01). The original estimate as of February 1981 wasupdated by CVRD in detail during January and February 1982 and is expressed inend-1981 terms. An extensive review, including: (i) recalculation of unitcosts for civil works; (ii) update of labor, fuel and construction materialcosts; (iii) update of construction equipment operating costs; and (iv) reviewof domestic transportation as well as sea freight costs, was carried out,taking into account the experience available from the various constructionsites that were in operation during 1981.

7.03 The Project will be exempt from all import and customs duties duringconstruction, as provided for in Declaration No. 01/81 of August 4, 1981, bythe Executive Secretariat of the Grande Carajas Program.

7.04 Physical contingency allowances average 12.5% of total base cost for1982-88: 12% for the mine, 13% for the railroad (including US$18.4 millionfor 8 additional railway sidings above the 36 presently foreseen), 12% for theport, 18% for the townsites and 10% for engineering, pre-operational expenses,training and project management. Price escalation was calculated on the basecost plus physical contingency estimates as follows:

Price Contingencies(%)

Year Local Foreign

1982 80 8.01983 60 8.01984 50 7.51985 40 7.01986 40 6.01987 40 6.0

These local and foreign rates are in line with the latest Bank assumptions onBrazilian and international inflationary trends. The US Dollar equivalentof local price contingencies reflects a cumulative real depreciation of theCruzeiro against the US Dollar of 4.6% in 1982, 12.6% in 1983, and 14% in 1984(para. 8.22).

- 55 -

Brazil--Carajas Iron Ore Project

Capital Cost Estimates (End-1981 Base Cost Estimate)

Cruzeiro Billion a/ US$ Million

Local Foreign Total Local Foreign Total %

MineCivil Works bj 23.6 11.7 35.3 188.9 93.8 282.7 8.9Equipment 17.1 9.1 26.2 137.1 72.8 209.9 6.6Freight and Erection 5.2 2.1 7.3 41.4 17.1 58.5 1.8Engineering 4.4 0.5 4.9 34.9 4.0 38.9 1.2Training and Pre-op. Expenses 3.3 0.8 4.1 26.4 6.4 32.9 1.0

Subtotal 53.6 24.2 77.8 428.7 194.1 622.8 19.5

RailroadCivil Works b/ 7.8 25.4 100.2 598.5 202.8 801.3 25.2Equipment 40.8 39.4 80.2 326.6 314.9 641.5 20.2Freight and Erection 13.8 8.4 22.2 109.9 67.5 177.4 5.5Engineering 6.6 0.8 7.4 52.3 6.7 59.0 1.9Training and Pre-op. Expenses 2.3 0.5 2.8 18.6 4.2 22.8 0.7

Subtotal 138.3 74.5 212.8 1,105.9 596.1 1,702.0 53.5

PortCivil Works b/ 10.4 2.5 12.9 83.4 19.6 103.0 3.2Equipment 7.0 2.5 9.5 55.7 20.1 75.8 2.4Freight and Erection 1.6 0.7 2.3 12.6 6.0 18.6 0.6Engineering 0.9 0.3 3,2 23.4 2.7 26.1 0.8Training and Pre-op. Expenses 0.9 - 0.9 7.0 0.2 7.2 0.2

Subtotal 22.8 6.0 28.8 182.1 48.6 230.7 7.3

TownsitesCivil Works 13.7 5.8 19.5 109.2 46.8 156.0 4.9Equipment 1.8 0.1 1.9 14.1 1.0 15.1 0.5Freight and Erection 0.1 0.1 0.2 1.0 0.2 1.2 -Engineering 0.7 0.1 0.8 6.1 0.5 6.6 0.2

Subtotal 16.3 6.1 22.4 130.4 48.5 178.9 5.6

Project ManagementSupervision (CVRD) 22.9 - 22.9 183.2 - 183.2 5.8Inspection Services 5.7 - 5.7 45.4 - 45.2 1.4Management Contracts 24.5 - 24.5 196.0 - 196.0 6.2Technical Assistance 0.7 0.5 1.2 5.8 3.8 9.6 0.3Engineering Insurance 0.1 - 0.1 1.0 - . 1.0 -

Subtotal 53.9 C.5 54.4 431.2 3.8 435.0 13.7

Amerindian Program 1.7 - 1.7 13.6 - 13.6 0.4

TOTAL BASE COST 286.6 111.4 398.0 2,291.9 891.1 3,183.0 100.0

Physical Contingencies 28.3 11.9 40.2 226.0 95.4 321.4Price Escalation 13.7 16.9 30.6 109.9 135.3 245.2

INSTALLED COST 328.6 140.2 468.8 2,627.8 1,121.8 3,749.6

Working Capital 21,4 5,2 26.6 171.4 41.5 21Z,9

PROJECT COST 350.0 145.4 495.4 2,799.2 1,163.3 3,96Z.5

Interest During Construction c/ 29.7 40.3 70.0 237.6 322.0 559.6

Front-End Fee on Bank Loan - 0.5 0.5 - 4.5 4.5

TOTAL FINANCING REQUIRED 379.7 186.2 565.9 3,036.8 1,489.8 4,526.6

a/ The costs expressed in Cr$ have been calculated from the US$ costs using an exchangerate of Cr$ 125.04 - US$1.00 and are therefore only notional, as changes in theexchange rate are expected (para. 8.22).

b/ Includes US$5.9 million for land. In the mine component, US$67.4 million for roadconstruction is also included.

c/ Includes IDC through June 30, 1985. None of the IDC is to be financed by the Bank.

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7.05 Total project management costs, consisting of CVRD supervision,management contracts and technical assistance, are estimated at US$389 millionor 12.2% of base cost which is appropriate in view of the relatively largerequirements of interfacing of components and contracting of work under theProject. Training programs for all components total US$26 million. Thisamount is lower than it would otherwise be, due to CVRD plans to use some ofits existing training facilities and experienced personnel from its southernoperations (requiring no training) for the Project and to share certaintraining and costs with SENAI. Preoperational expenses are estimated to totalonly US$37 million, mainly due to the limited amount of overburden removalrequired at the mine.

7.06 The estimated working capital of US$225 million is based on financialprojections and pricing assumptions discussed in Chapter VIII and includes alladditional needs until the 35 million tpy capacity is reached in 1988.Interest during construction on all long-term debt has been estimated atUS$560 million through June 30, 1985, of which US$322 million (57%) is forforeign and US$238 million (43%) for local long-term debt. The total has beencalculated on the basis of the financing plan outlined in para 7.09.

7.07 The capital cost estimates were reviewed extensively in January/February 1982 (para. 7.02) and are considered to be reliable, particularlyas a large number of contracts for civil works, goods and services hadbeen undertaken by that time (para. 7.25) and were taken into considerationin the review. CVRD has established cost control procedures for the Projectwhich have been reviewed in detail and are considered sound (para. 6.04).

7.08 The total capital cost fcr the Project, including physical contin-gencies but excluding price escalation, working capital, front-end fee, andinterest during construction, is about US$100 per annual ton capacity inend-1981 terms, based on 35 million tpy. Estimates for other similar green-field mining developments in the world indicate total capital costs in therange of US$60-US$110 per annual ton capacity. However, the mine capital costof US$19/ton and the port capital cost of US$7/ton compare very favorably withother developments, and the rather high total project cost is mainly attribu-table to the heavy investment in the long railway of US$54/ton annual capacity.This cost is acceptable, however, because the Carajas Iron Ore Project is onlythe first step in the development not only of the mineral production capacityof the greater Carajas, but also of the agricultural and other potential ofthe region. An expansion of the Carajas iron ore capacity by 15 million tpyto 50 million tpy, which is expected in the early 1990s as market demandstrengthens, would require capital investments of only US$26 per incre-mental annual ton capacity and is favorable in comparison with other world-wide incremental developments which are estimated to cost US$25-US$60 perannual ton capacity. 1/ Based on 50 million tpy total capacity, the capitalcost per annual ton of iron ore is only US$78.

1/ The production expansion to 50 million tpy has been assumed in 1993 forpurposes of rate of return sensitivity tests in paras. 8.36-8.38, whichis reasonable in view of market expectations (para. 3.21).

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B. Financing Plan

7.09 The financing plan for the Project is summarized as follows:

Brazil--Carajas Iron Ore ProjectFinancing Plan, 1978-87

US$ Million B

A. Equity

1. CVRD Internal Cash Generationa. Expended to 12/81 524.1 11.6b. New from 1982-88 914.1 20.2

Sub-total 1,438.2 T3.8

2. New Capital Subscriptiona. Reinvested Government Dividends 257.2 5.7b. CVRD Convertible Debentures 125.0 a/ 2.7

Sub-total 382.2 8.4

Total Equity 1,820.4 40.2

B. Debt

1. Locala. BNDES 697.0 15.4b. FINAME 321.4 7.1c. Banco da Amazonia/Others 75.2 1.7d. CVRD Convertible Debentures 125.0 a/ 2.7

Sub-total 1,218.6 26.9

2. Foreign b/a. Japanese Import Loan 250.0 5.6b. Japanese Exim Bank Direct Loan 50.0 1.1c. Japanese Commercial Bank Syndication 150.0 3.3d. Japanese Bond Issue 45.4 1.0e. EEC 400.0 8.8f. KFW 130.0 2.9g. IBRD 304.5 6.7h. Morgan Guarantee 27.0 0/ 0.6i. European Export Credits 36.7 0.8J. Japanese Export Credits 36.0 0.8k. U.S. Exim Bank 58.0 d/ 1.3

Sub-total 1,487.6 32.9

Total Debt 2,706.2 59.8

C. Total Financing 4,526.6 100.0

D. Contingency 400.0 e/ 8.8

E. Total Financing plus Contingency 4,926.6 108.8

a/ Issue of CVRD convertible debentures totals US$250 million, of which50% is assumed to be converted into common and preferred shares from1988-90.

b/ All foreign loan amounts will be in USS equivalent, with the exceptionof the Japanese Bond Issue (Y 10 billion) and the KfW loan (DM 300million).

c/ Fully disbursed in 1981.d/ Of which about 50% is from U.S. commercial banks.e/ Commercial co-financing: US$200 million; EEC: US$200 million.

Excluding the contingency financing of US$400 million, local funds account for

67% of total financing and foreign funds for 33%, in line with local andforeign capital costs. Out of total debt financing of US$2,704 million, aboutUS$525 million or 19% is tied financing, and US$2,179 million or 81% is untiedfinancing.

7.10 In view of CVRD's low debt:equity ratio (32:68 in 1981), Project

financing on an overall debt:equity ratio of about 60:40 is acceptable. Atthe same time, CVRD as a whole will maintain a ratio of not greater than 55:45(para. 8.32).

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7.11 The table below summarizes the expected terms of long-term debtfinancing of the Project as taken into account in the financial projections andplans. All loans are expected to be made directly to CVRD.

Long-Term Debt Financing Terms

Interest Commit. Grace Repay- TotalRate Fee Period ment Maturity(%) (%) (years) (years) (years)

Local Loansa. BNDES 9 0.1 6 12 18b. FINAME 9 0.1 3.5 9 12.5c. Banco da Amazonia/Others 9.6 0.1 3.5 9 12.5d. CVRD Conv. Debentures 11 - 6 1 7

Foreign Loansa. Japanese Import Loans 8.5 0.5 5 10 15b. Japanese Exim Bank 8.0 0.5 5 10 15c. Japanese Syndication 9.2 0.5 5 5-8 10-13d. Japanese Bond Issue 9.4 - 5 7 12e. EEC 12.4 - 4 11 15f. KfW 11.75 0.25 5 10 15g. IBRD 12.8 a/ 0.75 3 12 15h. Morgan Guarantee LIBOR b/

+1.25 - 5 7 12i. European Export Credits 10.5 0.5 5 10 15j. Japanese Export Credits 8 - 5 8 13k. U.S. Exim Bank 10.5 - 5 7 121. Commercial Co-financing LIBOR b/

+1.25 0.5 5 5 10

a/ The interest rate for the IBRD loan will be the prevailing variableinterest rate plus guarantee fee of 1.2 percentage points. For thepurposes of financial projections, however, a constant rate of 11.6%interest plus 1.2% guarantee fee has been applied.

b/ About 15%.

The weighted average of the financing terms is 10.8% p.a. interest for 14years, including 4.7 years grace.

1. Equity Financing

7.12 The financing plan stipulates that between 1982 and 1987US$919 million be provided through internal cash generation from CVRDaveraging about US$153 million p.a., equivalent to 24% or less of CVRD'sprojected annual internal cash generation (para. 8.23); these amounts arewell within CVRD's normal capacity. Provision for unexpected generatingshortfalls are discussed in para. 7.23.

7.13 New share capital from CVRD's shareholders totals US$257.2 million,of which US$32.2 million has been provided in 1981 through reinvestment of1980 dividends by both the Government (78%) and CVRD's private shareholders(22%). Upon request by CVRD, the Government has further agreed to reinvestits dividends over the next three years, which is estimated to increaseCVRD-s share capital by US$60 million in 1982, US$75 million in 1983, andUS$90 million in 1984.

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7.14 In December 1981, CVRD successfully placed a first issue of converti-ble debentures, equivalent to about US$77 million, in the Brazilian capitalmarket. Two more issues in similar amounts are planned for late 1982 and late1983, raising the debenture total to US$250 million. Assurance has beenobtained from Government that CVRD will be permitted to issue debentures in1982 and 1983. The 1981 debentures are each convertible into 65% common and35% preferred shares, permitting private ownership of common (voting) sharesfor the first time in CVRD history. As a result, private investors may holdup to about 22% of CVRD's common (voting) shares by 1990, depending on thepercentage of debentures that wi'll be converted into shares. In the financingplan, a conversion percentage of 50% has been assumed for each issue, withconversion taking place on the due date. It was agreed the convertibledebentures would be subordinated to other indebtedness of CVRD and thustreated as quasi-equity and excluded from the definition of debt for purposesof the debt:equity ratio to be maintained by CVRD (para. 8.31).

2. Debt Financing

7.15 Banco Nacional de Desinvolvimento Economico Social (BNDES) providesuntied financing of US$697 million equivalent, of which US$40.1 million wasdisbursed in 1981. FINAME, a wholly-owned BNDES subsidiary, finances 70% ofthe purchase price of Brazilian equipment according to a specific list ofitems, agreed upon by FINAME and CVRD. FINAME financing for equipment isequivalent to US$321.4 million. Banco da Amazonia (BAZA) will refinance 80%of the FINA4E interest during construction up through 1986 estimated to totalUS$75.2 million. The remaining 20% of FINAME interest will be refinanced byother Brazilian banks, currently being identified by CVRD or by BAZA, whichhas expressed its interest to refinance 100% of the FINAME interest.

7.16 Untied Japanese financing for the Project totals US$495 million, ofwhich US$270 million is from commercial banks and US$225 million from Govern-ment institutions. The package consists of four different financialinstruments:

(a) The Japanese import loan of US$250 million will be made by theCarajas Finance Company, which will be established by the sevenJapanese steel mills that are the buyers of Carajas iron ore.The Company will borrow the funds from the Export-Import Bank ofJapan (70%) and Japanese commercial banks (30%) and will relendthe proceeds to CVRD;

(b) In addition to its participation in the import credit scheme,the Export-Import Bank of Japan will make a direct loan ofUS$50 million to CVRD;

(c) The Bank of Tokyo will syndicate a yen loan of US$150 millionequivalent, to be made available in 2-3 tranches with separateterms and conditions as indicated in the table of para. 7.11; and

(d) The fourth element in the Japanese financing package is theprivate placement of yen bonds by CVRD, amounting to US$45.4million equivalent.

7.17 The EC Commission has approved a credit line of up to US$600 million tobe raised by the European Coal and Steel Community (ECSC) in the European capitalmarkets and re-lent to CVRD at cost, with the requirement of a bank guarantee.The financing is untied. CVRD has accepted Bank of America's offer to coordinatea syndication for a stand-by letter of credit to guarantee up to US$150 million

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(covering the first two expected draw-downs) for the first 5 years of the15-year maturity at a cost of about 1.075% p.a. The Banco do Brasil mayparticipate in the syndication and provide its own guarantee of the loans fromyears 6 to 15 at a cost of about 0.5% p.a. For purposes of the financingplan, it is assumed that US$400 million of the ECSC line of credit will bedrawn down for project financing and US$200 million will constitute 50% of thecontingency reserve (para. 7.21). The US$400 million is assumed to be drawndown in three tranches with separate terms and conditions as indicated in thetable of para. 7.11.

7.18 Kreditanstalt fur Wiederaufbau (KfW) has approved financing for theProject of DM 300 million (US$130 million equivalent). KfW was the first ofthe foreign co-lenders to make a commitment to the Project, however, suchcommitment is contingent on the availability of financing from other potentialco-lenders and on the receipt of loan guarantee by the German Government. KfWexpects to receive such guarantee for between 80% and 90% of its loan, andpossibly an additional 10% from German commercial banks.

7.19 In addition to the above loans, CVRD intends to seek export finan-cing of US$129 million equivalent for equipment to be procured from the U.S.,Europe, and Japan. The Export-Import Bank of the U.S. has already extended toCVRD a commitment of US$58 million. Export credits from Europe and Japan,totalling US$70.5 million, will be sought-during tendering. Considering thetype of procurement items (crawler tractors, shovels, bucketwheel reclaimers,railroad signaling equipment), availability of export financing should pose noproblems.

7.20 The proposed Bank loan to CVRD would total US$304.5 million equivalent,carry the prevailing variable interest rate plus a guarantee fee of 1.2 percent-age points, include the 1.5% up-front fee, and have standard country terms, i.e.,3 years of grace and 12 years of repayment. For the purposes of financial pro-jections, an effective rate of 12.8% has been assumed. Based on present forecastsof interest rate trends, this assumption appears reasonable and is not likely todistort the financial projections. The effectiveness of (i) the Japanese importloan; (ii) the direct loan from the Japanese Exim Bank; (iii) the Bank of Tokyosyndicated loan; (iv) the ECSC loan; and (v) the KfW loan will be a condition ofeffectiveness of the proposed IBRD loan.

7.21 CVRD hds agreed to bring total contracted contingency financing to alevel of US$400 million or 10% of the Project cost. CVRD will obtain US$200million over and above the ECSC contingency financing (US$200 million) fromcommercial banks under co-financing arrangements with the Bank. Accordingly,CVRD has agreed to obtain and have ready for draw-down at least US$100 millionof the commercial bank contingency financing by year-end 1982 and the balanceby year-end 1983.

7.22 CVRD has a Morgan guaranty syndicated loan of US$300 million ondeposit at the Central Bank which it has not yet used due to Governmentrestrictions on its withdrawal and its relatively high cost (less than 10years maturity implying, as a consequence of taxes, an effective interest rateof about 21%). Should CVRD need to use such funds to meet project expenditures,particularly during the period up to availability of additional commercialbank contingency financing, the Government has agreed and taken all stepsnecessary to "unfreeze", i.e. remove restrictions, on US$200 million of theloan which is now available for CVRD draw-down.

3. Cost Overruns

7.23 Agreement has been reached with the Government that, in case of costoverruns or shortfalls in CVRD's internal cash generation or any other funding,the Government will make available or cause to be made available to CVRD

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the funds required to complete the proposed Project, and do so without delayand in a form satisfactory to the Bank. For purposes of this covenant,Project Completion is defined as: (i) completion of the physical constructionof all the facilities included in the Project; and (ii) operation of mine,railroad and port during a consecutive period of 12 months at a production andexport level of no less than 31 million tpy, during which time CVRD willmaintain a current ratio of at least 1.1 and, on the basis of consolidationwith its majority-owned operating subsidiaries, a current ratio of at least1.2.

7.24 As a modus operandi, CVRD and Government have agreed that at least60% of the additional funds required would be provided by Government in formof equity contributions. The remaining funds required would be provided throughnew borrowing, secured by a Government guarantee, if necessary (para. 8.31).

C. Procurement

7.25 Under the Project 1/ (i) works of a total value of about US$1,550million equivalent; (ii) goods at a total value of about US$1,400 millionequivalent; (iii) management services for US$240 million equivalent; and(iv) inspection services for about US$50 million equivalent will be procured.Procurement started in 1978 when the first earthmoving contract for a diffi-cult section of the railway near Sao Luis was let. Procurement status as ofDecember 31, 1981, is shown below.

Carajas--Procurement Status(% of total as of December 31, 1981)

Expenditures Committed Uncommitted

Works 27.4 41.8 30.8Goods 0.8 11.3 87.9Management Services 0 100.0 0Inspection Services 22.3 77.7 0

The above expenditures have been financed by debt and equity in a ratio of11:89. So far, contracts have been let through local competitive biddingprocedures which were found at appraisal to be satisfactory. Procurement ofservices also used prequalification procedures. All contracts for works on thecritical path have been awarded.

7.26 Goods, mainly components for partly Brazilian-manufactured equipment,with an estimated value of US$68 million will be financed by the U.S. Exim Bankand procured accordingly. Other equipment components, estimated at US$48million equivalent, will be procured through limited international competitivebidding in Europe. Electrical mining shovels and preheated rails, estimatedat US$33 million equivalent, will be procured in the Japanese market throughlocal competitive bidding. These procurement arrangements were reviewed atappraisal and found satisfactory.

7.27 Bank-financed equipment, machinery and erection services, totalling

an estimated US$265.4 million including contingencies, will be procured throughICB in accordance with Bank guidelines and consist mainly of railway trackmaterial, mobile equipment, fenders and steelcord conveyor belt for the mine andthe port. These goods are grouped in 31 bidding packages (ranging from US$0.1to US$36.7 million each). Limited international tendering will be used for

1/ The values given for works, goods, management services, and inspectionservices include physical and price contingencies.

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equipment and machinery packages of US$300,000 or less. At present, onlyone such package is envisaged. Bidding documents for railway cross-ties andfenders have been reviewed by the Bank, and invitation to bid for the first 2packages--consisting of 290,000 ties each--has been issued. Qualifyingdomestic suppliers/manufacturers would be afforded a preference in bid-evalua-tion of 15% or the import tax whichever is lower. Approval by CACEX has beenobtained for all Bank-financed items. The list of goods to be financed by theBank is shown in Annex 7-2 and the procurement schedule for those goods inAnnex 7-3.

7.28 Partly Bank-financed civil works, comprising the construction ofmajor mine service facilities, residential buildings in the Carajas townsite,and community service facilities (hotel, supermarkets, hospital, cinema/theater,bus station and church) and totalling US$75 million equivalent includingcontingencies, are divided into four packages (ranging from US$15.1 to US$22.1million each) and will be procured through ICB in accordance with Bank'sguidelines. Under this category, the Bank will finance US$22.5 million, whichis the estimated foreign component of these works. The tender documents havebeen reviewed and approved by the Bank. In addition, the Bank will financeUS$12.1 million in technical assistance and the consultants will be employedaccording to Bank guidelines for the use of consultants (August 1981) (paras.6.07-6.08).

7.29 All remaining uncommitted works (estimated at about US$477 millionequivalent) and goods (estimated cost US$1,230 equivalent) will be procuredthrough local competitive bidding procedures, which were found to be satis-factory.

' ^ , Contract Review for Bank-financed Goods. Nineteen packages forgoods over US$5.0 million equivalent (para. 7.31) and all four bidding packagesfor civil works (para. 7.32) will be subject to the Bank's prior review ofprocurement documentation, resulting in a coverage of about 93% of the totalestimated value of goods contracts procured through ICB. The balance of ICBgoods contracts would be subject to random post review by the Bank aftercontract award.

D. Allocation and Disbursement of the Bank Loan

7.31 The Bank loan of US$304.5 million will finance goods and servicesand front-end fee as shown in the table below:

Allocation of the Bank Loan(USS million)

Loan allocation X of Expenditures

Category Amount % to be financed

I. Technical Assistance 9.1 3.0 100%

II. Civil Works 15.5 5.1 30%

III. Equipment/Machinery a/

A. Mining Equipment 13.0 4.3 100%

B. Railway Equipment 100%

(i) Wooden ties 48.6 16.0

(ii) Rails 62.4 20.5

(iii) Fastening system 60.3 19.8

(iv) Miscellaneous 3.3 1.1

C. Port Equipment 6.5 2.1 100%

D. Construction Steel 29.1 9.5 1002

Sub-total 223.2 73.3

IV. Front-End Fee 4.5 1.5 100%

V. Unallocated 52.2 17.1

Total 304.5 100.0

a/ Including erection.

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The percentage of equipment expenditures to be financed by the Bank relates tothe ex-factory costs of local goods and cif costs of imported goods. It isexpected that for those items to be financed by the Bank, about US$110 million(or 37% of the Bank loan) will be for contracts awarded to local suppliers,following ICB. All disbursements would be made against fully documentedwithdrawal applications.

7.32 The Project disbursement profile (Annex 7-4) deviates from thehistorical country industrial sector profiles as well as the historical

mining sector profile. The reasons are (i) physical implementation of theProject started more than two years ago; (ii) 68% of the Bank loan willfinance material for the railway superstructure, construction of which peaksin 1983 and 1984; and (iii) items at an estimated value of US$21.2 million areout for bid and procurement of goods at an estimated value of US$51.1 millionwill be initiated in May 1982. The Bank is now reviewing the tender documents.The Project as a whole is expected to be completed in December 1986, withphysical completion of the port in July 1985, the townsite in December 1986,the mine and beneficiation plant in October 1986 and the railroad in October1986. The Bank loan is expected to be fully disbursed by December 1986.

VIII. FINANCIAL ANALYSIS

A. CVRD

1. Carajas

8.01 The financial projections for CVRD have been made in current USdollars based on (i) capital and operating cost estimates updated in December1981 cruzeiro terms and converted into US dollars at the prevailing exchangerate (Cr$ 125.04); (ii) iron ore revenues in 1982 terms so as to incorporateimportant real price increases agreed between CVRD and its major clients inthe first quarter of CY1982; and (iii) other revenues in end 1981 terms. Theprojections assume inflationary and exchange rate changes shown and discussedin para. 8.22.

8.02 Production, Ore Stocks and Sales Volume. Production at Carajas isexpected to start on July 1, 1985, with 5.7 million tons in 1985, and reachfull design capacity of 35 million tpy in 1988. Prior to actual productionstartup, the pilot plant at the mine (para. 5.12) is plannned to produce about1.4 million tons for stockpile build-up. Sales are forecast to start in thesecond half of 1985 with 5 million tons and reach 35 million tons in 1988.Projected production, ore stocks and sales from 1985-88 are summarized in thetable below:

Carajas Production, Ore Stocks and Sales, 1984-88(million metric tons)

1985 1986 1987 1988through 1st 2nd 1st 2nd 1st 2nd 1st 2nd1984 Sem. Sem. Sem. Sem. Sem. Sem. Sem. Sem.

Pilot Plant Production 1.0 0.4 - - - - - -

Industrial Production - - 5.7 9.1 11.2 13.8 17.9 17.5 a/ 17.5 a/Sales - - 5.0 9.0 11.0 13.7 17.8 17.5 17.5Ore Stocks at Mine 1.0 1.4 0.65 0.7 0.74 0.77 0.8 0.8 0.8Ore Stocks at Port - - 1.45 1.5 1.66 1.73 1.8 1.8 1.8

a7- Based on an average 92.5% p.a. capacity utilization.

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8.03 Product and Sales Mix. Based on extensive laboratory and pilotplant tests, 20% of the run-of-mine ore will be natural pellets and 80%sinter feed. Natural pellets average 66.5% Fe and 2% moisture, sinter feedalso 66.5% Fe but 7% moisture. Natural pellets represent 20% of the projectedsales volume and sinter feed 80%. Accordingly, the Carajas sales mix isprojected as follows:

Projected Carajas Sales Mix(million tons)

from1985 1986 1987 1988

Lumpy Ore 1.0 4.0 6.3 7.0Sinter Feed 4.0 16.0 25.2 28.0

Total 5.0 20.0 31.5 35.0

8.04 Operating Costs. Operating costs for Carajas were developed byCVRD based on comparable cost data from the Minas Gerais mines. The initialestimate of February 1981 was updated by CVRD to December 1981 terms andreviewed by a Bank mission in March 1982. The detailed update took intoaccount (i) recent salary and wage increases; (ii) an increase in the con-sumption power tariff; (iii) increased prices for diesel fuel and lubricants;and (iv) 1981 operating costs of the Minas Gerais mines.

8.05 The table below gives estimated operating costs for the Projectuntil 1990.

Carajas--Operating Cost, 1985-90 a/(US$ per ton--end-1981 real terms)

1985 1986 1987 1988 1989 1990

Mine 2.09 1.94 1.73 1.73 1.74 1.75Railroad 3.60 3.26 2.76 2.74 2.80 2.84Port 0.90 0.85 0.76 0.71 0.71 0.72Townsites 0.47 0.41 0.33 0.31 0.31 0.31General/Adm. 0.27 0.25 0.16 0.15 0.15 0.16

Total 7.33 6.71 5.74 5.64 5.71 5.78

a/ Assumes a 3.5% p.a. real wage increase up to 1985 and 2.0% p.a.from 1985-90, based on CVRD analysis of its experience from1979-82 and expectations on continued dampening in inflation andgradual moderation in policies on real wage increases.

Both in terms of scale of operation and technical applications the Project is,in most respects, similar to CVRD's current operations in the South. In viewof this, the 40 years of operating experience and the cost data availablein the South constitute a good and rather unique base for the projectedoperating cost estimates which are found to be satisfactory. The Project is

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not overly complex from a technical/operating point of view and, in comparisonwith operating costs of other similar large scale mining ventures worldwide,the estimated costs compare favorably.

8.06 At full production in 1988, the cost per ton of iron ore is estimatedat US$18.64 in real end-1981 terms, including US$7.30 for operating costs andMineral Extraction Tax (IUM), and US$11.34 for depreciation/amortization offixed assets, preproduction expenses, and interest during construction.

8.07 Iron Ore Prices. Carajas iron ore prices are based on the 1982prices that CVRD obtains for its ores from the Minas Gerais mines, adjustedfor the specific Fe and moisture contents of the Carajas ore. Accordingly,natural pellets are priced at USJ39.45 per dry metric Fe unit, equivalent toUS$25.71 per natural metric ton. In addition to the specific Fe and moisturecontent of Carajas, the sinter feed price of US$20.17 per natural metricton also reflects (i) 60% of sinter feed sales to Europe and 40% to Japan;(ii) a Carajas quality premium of US41 per dry Fe unit; (iii) a premiumfreight differential of USU1.5 per dry Fe unit for deliveries to Europe and apenalty freight differential of USi1 for deliveries to Japan, and (iv) a 3%discount on 24.7 million tons already contracted (para. 3.47). Carajas pricesare projected to remain constant in real terms through 1985, and increase by1.5% p.a. in real terms from 1986 through 1990.

2. Existing Operations

8.08 Production Volume. Production in CVRD's Minas Gerais Mines, includ-ing pellet feed for CVRD's own pelletizing plants, is projected to decreasefrom 61.4 million tpy in 1982 to 56.7 million tpy in 1990. The decrease by4.7 million tons is a result of reductions in the Caue and Conceicao mines(9.7 million tpy), which are only partially replaced by an increase in theTimbopeba mine (5.0 million tpy). During 1983-87, CVRD plans to produce 18.5million tpy in the recently acquired Chacrinha and Piriquito mines to partiallysubstitute Carajas production, which has been contracted for, based on start-up in January 1985 and full production from 1987, but will not materializesince start-up of Carajas is now scheduled for July 1985 and full annualproduction from 1988 onward. CVRD-s ore purchases from other mines areprojected to increase from 5.6 million tons in 1982 to 13.9 million tons in1990, mostly from Capanema (para. 3.42). CVRD-s projected own production andore purchases from other mines are shown in the table below.

CVRD--Projected Production from Existing Operations andPurchase of Production from Other Mines

(million tons)

1982 1983 1984 1985 1986 1988 1990

CVRD Production 61.4 65.8 63.9 63.7 63.9 56.7 56.7Ore Purchases 5.6 13.4 13.9 14.3 13.9 13.9 13.9

Total 67.0 79.2 77.8 78.0 77.8 70.6 70.6

8.09 Sales Volume. The sales volume of CVRD-s existing operations isprojected as follows:

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Projected Sales Volume of CVRD's Existing Operations(million tons)

1982 1983 1984 1985 1986 1988 1990

ExportsLumpy Ore 7.9 9.4 9.9 9.1 8.6 8.2 8.2Sinter Feed 36.9 38.5 40.6 45.6 36.9 32.0 32.0Pellet Feed 1.0 0.7 0.8 0.9 0.9 0.9 0.9Pellets 2.7 3.8 3.9 4.0 4.0 4.0 4.0

Sub-total 48.5 52.4 55.2 59.6 50.4 45.1 45.1

Domestic SalesLumpy Ore 0.5 0.7 1.0 1.3 1.3 1.3 1.3Sinter Feed 4.5 6.7 9.0 10.7 11.0 11.6 11.6Pellet Feed a/ 11.8 12.2 12.2 12.2 12.2 12.2 12.2Pellets 1.4 2.3 2.5 2.5 2.5 2.5 2.5

Sub-Total 18.2 21.9 24.7 26.7 27.0 27.6 27.6

Total 66.7 74.3 79.9 86.3 77.4 72.7 72.7

a/ Pellet feed sales to CVRD joint venture pellet companies are includedin iron ore exports in the table on Brazilian iron ore supply and demandforecasts in para. 3.40.

During the critical project implementation years 1982-84, the projected salesvolume represents only 78% of contracted volume sn ' 2°^R3 and 82% in 1984.

8.10 Commercial Transport Volume. Commerc-. transDort of goods on CVRD'sMinas Gerais railroad is projected to increase 'r-m 4.2 bilLion ton-km in 1982to 9.1 billion ton-km in 1990, equivalent to 10.'J' growth p.a. This comparesto the past average growth rate of about 15% p.a, between 1976 and 1981.

8.11 Transport and Shipping Volume of FERTECO, and SAMITRI Ores andPellets. Ores and pellets from these producers (para. 3.37) are transportedand shipped from Tubarao port by CVRD. Their volume is expected to be 10.4million tons in 1982, and projected to increase to 11.9 million tons in 1990.

8.12 Operating Costs. Operating costs of CVRD's existing operations areprojected to increase from US$542.5 million in 1982 to US$715.1 million in1990 (all in end 1981 real terms), in line with projected volumes of ore andpellet production, ore and pellet purchases, and commercial railroad transportof goods and passengers (paras. 8.08-8.09). At the same time CVRD's operatingcost structure will change, as shown in the table below, reflecting (i) pro-jected production decreases in CVRD's own mines; (ii) the increase of purchasesfrom joint ventures and others; and (iii) the increase of commercial transportsvolumes on the Minas Gerais railroad.

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Projected Operating Costs of CVRD's Existing Operations(US$ million, end-1981 real terms)

1982 % 1985 % 1990 %

Mining 136.4 25 141.0 20 131.3 18Railroad (Ores and Pellets a/ 194.9 36 231.6 32 215.6 30Port a/ 58.4 11 48.4 7 45.1 7Pellet Plants 38.7 7 53.2 7 55.9 8Ore and Pellet Purchases 64.3 12 155.9 22 165.3 23Railroad (Goods and Passengers) 43.8 8 74.7 11 95.9 13Other Services 6.0 1 6.0 1 6.0 1

Total 542.5 100 710.8 100 715.1 100

a/ Including FERTECO, and SAMITRI ores and pellets.

8.13 Iron Ore Pricing and Revenue Projections. For 1982, CVRD hasobtained significant real price increases in both the export and domesticmarkets (para. 3.32). Iron ore prices are assumed to remain constant in realterms from 1983-85, and increase by 1.5% p.a. from 1986 through 1990 (para.3.34), remaining constant in real terms thereafter. Nevertheless, since priceincreases for exports to Japan became effective only in April 1, 1982, realexport prices in 1983 will be about 2.5% higher than in 1982. CVRD's 1982iron ore prices are shown in the table below:

CVRD Iron Ore Prices, 1982 a/(US$ per ton)

Export Market Domestic Market

Lumpy Ore 20.56 13.38Sinter Feed 19.52 11.64Pellet Feed 16.85 15.16Pellets 33.03 29.29

a/ Fob prices.

Domestic iron ore prices are controlled by the Price Control Authority CIP, agovernment agency, which revises prices twice per year based on cost schedulespresented by CVRD. Domestic prices for pellet feed and pellets, which repre-sent 73% of the expected 1982 sales volume, are in line with export prices.Domestic prices for lumpy ore and sinter feed are 35-40% below the exportprices, but cover production cost including depreciation, and overhead. Thepricing policies for domestic iron ore have been discussed with the Governmentwhich will undertake an analysis of the prices and their economic effects.The study is to be completed and furnished to the Bank by June 30, 1983.Based on the projected iron ore prices and sales volume, CVRD's mineralrevenues from its existing operations are projected to total, in 1982 realterms, US$1,268 million in 1982 and US$1,478 million in 1990, of which exportrevenues are US$989 million or 78% in 1982 and US$1,036 million or 70% in 1990.

8.14 CVRD-s projected other sales revenues, mostly from railroad transportand port charges, are based on present tariffs, which are assumed to remainconstant in real terms, growing according to increased transport and handlingvolumes (para. 8.09-8.10). Revenues, in 1982 real terms, are projected at

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US$166 million in 1982 and US$240 million in 1990, equivalent to 12% and 14%of total revenues in 1982 and 1990, respectively.

8.15 Capital Expenditures. Capital expenditures from 1982-90, excludingCarajas and subsidiaries, are projected to total US$1,224.5 million in currentterms. The investment program, which was reviewed in detail during appraisal,is sound. About 55% of the total is allocated towards expansions and replace-ments that are necessary to achieve the projected production targets. About27% will be spent on reforestation of the mined areas, and 20% on a coal pierat Tubarao port. A breakdown of the program is shown below.

Projected Capital Expenditures Excluding Carajas and Subsidiaries(US$ million--current terms)

1982 1983 1984 1985 1986-90 Total %

Expansions a/ 256.5 101.6 46.7 22.5 63.0 490.3 40Replacements 68.1 105.1 60.4 29.5 140.0 403.1 33Reforestation 22.6 30.4 32.0 34.6 211.5 331.1 27

Total 347.2 237.1 139.1 86.6 414.5 1,224.5 100

a/ Includes projected expenditures on the Tubarao port coal pier.

8.16 Equity Contributions to Subsidiaries and Associated Companies.Equity contributions from 1982-90 are projected to total US$664.9 million incurrent terms. Their allocation is shown in the table below:

Urojected Equity Contributions to Subsidiaries and Associated Companies(US$ Million--current terms)

1982 1983 1984 1985 1986-90 Total %

Valesul 20.3 18.8 - - - 39.1 6Valenorte/Albras/Alunorte 49.2 83.7 79.5 42.2 115.9 370.5 56Mineracao Rio do Norte 7.0 17.4 10.7 27.1 31.2 93.4 14Flonibra 2.6 2.2 2.4 2.5 113.6 123.3 18Others 0.5 6.9 7.6 7.7 15.9 38.6 6

Total 79.6 129.0 100.2 79.5 276.6 664.9 100

8.17 Contributions to Valesul, an aluminum smelter project financed bythe Bank (Loan 1660-BR) and completed in May 1982 will cover project cost in1982 as well as cash shortfalls during start-up in 1982-83, which are expectedas a result of the prevailing very low aluminum prices. Contributions ceaseafter 1983, as it is estimated that aluminum prices will have recoveredsufficiently.

8.18 Contributions to Valenorte, Albras and Alunorte (para. 4.20) willhelp to finance an alumina/aluminum complex near Belem in the state of Para.Valenorte, Albras and Alunorte are joint venture companies with Nippon AmazonAluminum Co. (NAAC), a Japanese consortium. Alunorte is scheduled to startproduction in 1984 and will produce 800,000 tons of alumina per year at full

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capacity. The bauxite will be supplied by Mineracao Rio do Norte (para.8.19). Albras will produce 320,000 tpy of primary aluminum, with start-up ofthe first potline of 80,000 tons scheduled for 1985 and the fourth for 1988.Total financing required is estimated at about US$2.6 billion in currentterms. In addition to providing equity (i) CVRD guarantees the BNDE loans forAlbras and Alunorte, totalling US$654 million; and (ii) in case BNDE disburse-ments are not forthcoming as stipulated, CVRD has to pay the difference infinancial charges between substitute financing and BNDE-s financing at 7.5%.No specific provision has been made for this in the financial projectionsbecause BNDE's disbursements will take place mainly over the period 1985-88,by which time BNDE's liquidity constraints are expected to be relieved (para.8.25).

8.19 Contributions to Mineracao Rio do Norte a joint venture with 9Brazilian and foreign partners, will help to finance the expansion of theTrombetas Bauxite Development in the state of Para from about 3 million tonsproduction in 1981 to about 10 million tons in 1986. Total financing requiredfor the project is estimated at about US$500 million in current terms.

8.20 Contributions to Flonibra would finance a pulp plant to be con-structed during the second half of the eighties. -Contrary to the projectedequity outlays for the bauxite/alumina/aluminum projects mentioned above,which reflect contractual commitments by CVRD, projected outlays for Flonibraare tentative in timing as well as amounts.

B. Financial Projections

8.21 Detailed financial projections have been prepared for (i) CVRDconsolidated with the Carajas Project; and (ii) the Carajas Project alone,based on assumptions given in Annex 8-1 and the following paragraph.

8.22 The projections have been prepared in current US-Dollar terms andassume the following inflation and exchange rates:

Inflation and Exchange Rate Assumptions

1982 1983 1984 1985 1986 1988 1990

International Inflation (%) 8.0 8.0 7.5 7.0 6.0 6.0 6.0Domestic Inflation (%) 80 60 50 40 40 40 40Average Exchange Rate 176.9 300.7 437.4 591.3 777.8 1,356.6 2,363.7

(Cr$/US$)International Inflator 1.04 1.12 1.21 1.30 1.38 1.55 1.75Domestic Inflator 1.00 1.00 1.07 1.15 1.22 1.37 1.54

(in US$ terms)

The projected exchange rates assume that the presently overvalued cruzeirowill be gradually devalued in real terms against the US Dollar by about 14%from end-1981 through mid-1983, equivalent to its average value for 1980 whichis considered its long-term equilibrium value. To correct the over-valuationof the cruzeiro, which began in 1980 and continued at increasing levels duringthe first three quarters of 1981, the Government, since the fourth quarter of1981, has been following a policy of a crawling-peg devaluation equal todomestic inflation, thus leading to a progressive real devaluation of theCruzeiro. After reaching the average real 1980 level in mid-1983, the Cruzeirois assumed to be devalued to maintain its purchase power parity with the USDollar.

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8.23 The financial projections of the CVRD are summarized below (Annex 8-2):CVRD--Suinmary of Financial Projections

(Su billion--currant terms)

Actual - - - - - - - - - - - - Projected…- - - - - - - - - - - - - - - -

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

A. CVRD Consolidated (incl. Carajas)

Iron Ore Sales (million tons) 61.9 66.7 74.3 79,9 91.3 97,4 105.7 107.7 107.7 107,7

Sales Revenue

Iron Ore 0.94 1.27 1.54 1.75 2.15 2.50 2.94 3.23 3.47 3.73

Other 0.24 0.17 0.19 0.23 0.26 0.29 0.32 0.34 0.37 0.40

Subtotal 1.18 1.44 1.73 1.98 2.44 2.79 3.26 3.57 3.84 4.13

Operating Expenses 0.79 0.85 0.95 1.03 1.42 1.79 1.96 2.10 2.24 2.Ji

Operating Income 0.39 0.59 0.78 0.95 0.99 1.00 1.90 1.47 1.60 1.77

Net Income After Tax 0.25 0.52 0.66 0.78 0.72 0.63 0.90 1.10 1.28 1.50

Internal Cash Generation 0.42 0.64 0.84 1.02 1.15 1.21 1.57 1,81 2.00 2.21

Capital ExpendituresCarajas 0.35 0.77 1.22 1.01 0.43 0.25 - - 0.01 -

Other 0.31 0.43 0.37 0.24 0.17 0.21 0.15 0.14 0.11 0.09

Subtotal 0.66 1.20 1.59 1.25 0.60 0.46 0.15 0.14 0.12 0.09

Cash Surplus - 0.09 0.03 0.14 0.30 0.49 0.59 0.85 1.09 1.40

Current Ratio a/ 1.0 1.6 1.5 1.3 1.4 1.3 1.3 1.3 1.3 1.3

Debt Service Coverage (times) 2.5 3.1 3.6 3.5 3.0 2.9 2.9 2.8 3.2 4.0

L-T Debt: Equity Ratio 32:68 44:56 49:51 47:53 44:56 40:60 32:68 25:75 18:82 14:86

B. Carajas Alone

Iron Ore Sales (million tons) - - - - 5.0 20.0 31.5 35.0 35.0 35,0

Sales Revenue - - - - 0.13 0.57 0.96 1.15 1.24 1.33

Operating Expenses - - - - 0.25 0.60 0.73 0.79 0.84 0.87

Operating Income - - - - (0.12) (0.03) 0.23 0.36 0.40 0.46

Net Income Before Tax - - - - (0.26) (0.32) (0.05) 0.12 0.19 0.29

Internal Cash Generation - - - - (0.04) 0.39 0.3° 0.55 0.62 0.72

L-T Debt:Equity Ratio b/ 11:89 53:49 63:37 64:36 67:33 70:30 69:31 62:38 53:47 44:56

a/ Excluding cash surplus.b/ Equity includes 50% of convertible debentures fro. issue date.

8.24 CVRD Consolidated. 1/ The financial projections indicate that CVRDmay be expected to maintain its present sound financial position throughoutthe Carajas construction and start-up period. The main factors contributingto CVRD's satisfactory financial prospects through 1987 are:

(a) the substantial price increases obtained in 1982(para. 3.32);

(b) sales volume increases from 66.7 to 79.9 million tpy between1982 and 1984, which are based on realistic off-take percent-ages of contracted volumes (para. 8.09); and

(c) during the Carajas start-up period from 1985-87, the additionalsale of 18.5 million tons of Minas Gerais ores, which willsupplement the Carajas sales of 56.5 million tons duringthese years, so as to ensure full delivery of 75 million tonsof Carajas contracts already committed or to be committedbetween 1985 and 1987 (paras. 3.46 and 3.48).

From 1988 on, the projections assume that Carajas will be fully on streamwith 35 million tpy, compensating the reduction of sales volume from CVRD's

existing operations to 72.7 million tpy, which is 9% above the 1982 volume.

1/ Consolidated with the Carajas Project.

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8.25 The financial projections also indicate that even small relativedifferences between actual and projected figures could potentially be quitelarge in absolute terms, and therefore the projections anticipate certaincontingencies. First, BNDE's projected disbursement in 1983 and 1984 are US$50and US$100 million lower respectively than originally estimated, in view ofBNDE-s expected liquidity constraints during that period. Second, FINAME'sdisbursements in 1982 have been assumed at only US$49 million as budgeted by

FINAME, whereas CVRD would have been eligible for US$93 million, or US$44million more, according to the agreed equipment list.

8.26 The financing plan contains another US$400 million of contingency

financing (paras. 7.17 and 7.21) which are not included in the financialprojections. Together with forecast cash surpluses of US$560 million through1985, the critical Carajas construction years, these would be sufficient toabsorb the combined events of (i) a 5% drop in sales revenues from 1982-85(about US$375 million); (ii) a 10% increase in Carajas capital expenditurespredicted for the same period (about US$340 million); and (iii) a 7% realdevaluation instead of the expected 14% (about US$175 million), providing areasonable safety margin against adverse developments.

8.27 CVRD-s financial ratios remain satisfactory throughout the forecastperiod. The debt/equity ratio is not projected to become greater than 49:51nor the debt service coverage to drop below 2.8. The current ratio, excludingsurplus cash, is projected to be 1.3 or higher. The exceptionally low currentratio of 1.0 in 1981 resulted from the use of Banker's acceptances on oreshipments and the use by CVRD of its majority-owned offshore subsidiary Rio DoceInternational Finance for short-term cash management. In anticipation oflong-term financing for Carajas becoming available in 1982, the financialprojections assume that outstanding short-term borrowings will be reduced byabout US$162 million in 1982. To allow CVRD some flexibility in arrangingpre-export financing and in maintaining the bulk of its liquidity off-shore,

which have been financially advantageous practices for the Company, agreementhas been reached that CVRD will maintain a current ratio of at least 1.1, andon a consolidated basis with its majority-owned subsidiaries a ratio of atleast 1.2. 1/

8.28 Carajas. Separate financial projections have been establishedfor the Carajas Project (Annex 8-3). The projections indicate book lossesof US$257 million, US$318 million and US$39 million for 1985, 1986 and 1987,respectively, as a result of the high depreciation (above US$400 millionp.a.); however, only a small cash loss of about US$41 million is projected for1985, whereas in 1986 and 1987 Carajas- internal cash generation is projectedat US$88 million and US$391 million, respectively. In 1988, the first year atfull capacity, Carajas' net income is projected at 11% of sales revenue andin 1990 at 21% of sales revenue. The latter is in line with the profit-ability of CVRD-s Minas Gerais mines in good years such as 1976 and 1980(para. 4.17), indicating that Carajas' low operating cost and high-quality ore(price premium) will compensate the relatively high capital costs of theProject.

8.29 The financial projections also indicate that Carajas would stillbreak even in net income terms in 1988 if revenues were 11% lower than projec-ted. Internal cash generation in 1987-88 would remain sufficient to cover

1/ CVRD consolidated financial statements, which are audited by ArthurAndersen, include 14 operating subsidiaries of which the four largest,after merger of AMZA with CVRD (para. 5.04), are Florestas Rio Doce(forestry), DOCENAVE (ocean transport), Rio Doce International Finance,and DOCEGEO (geological research).

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projected funds applications, i.e. replacements, working capital and debt

service, if revenues were 10% lower than projected in 1987, and 16% in 1988.

8.30 With respect to funds flow, the financial projections assume that

Carajas will be financed with debt and equity in a proportion of approximately60:40 through the construction period, with 50% of the convertible debenturestaken as debt and 50% as equity. This is considered acceptable in viewof CVRD-s corporate debt to equity ratio, which is projected not to exceed49:51 through 1990 (para. 8.23). In order to ensure that debt financing of

the Project is maintained within reasonable limits at all times, CVRD hasagreed that, on the basis of cumulative expenditures for the Project, theproportion of debt to equity financing not exceed 70:30.

C. Financial Covenants

8.31 To ensure the necessary financing for the Project and its completionin a sound manner, agreement has been reached on the following financialcovenants: that

(a) Government will take all necessary action to enable CVRD to issueconvertible debentures in the Brazilian capital market in both

1982 and 1983;

(b) CVRD will issue subordinated convertible debentures in the Brazilian

capital market in the aggregate amount of at least US$172 millionequivalent, of which about US$86 million will be issued in 1982and the remainder in 1983;

(c) Government will make equity contributions to CVRD by reinvestingthe Government portion of dividends from 1982-84;

(d) until project completion (para. 7.23), CVRD will prepare annuallyfive-year forecasts of the Company's sources and uses of funds forreview with the Government and the Bank by August 31 each year, andwill consult with the Bank on the uses of funds as well as anyadditional financing requirements by no later than September 30

each year;

(e) CVRD will provide timely and sufficient funds to cover theexpenditures required for the Project, including the necessarylocal and foreign funds to complete the Project as defined inpara. 7.23, and to cover any possible cost overruns;

(f) Government will equally ensure, by way of a back-up guarantee toCVRD's obligation, timely and sufficient funds to cover theexpenditures required for the Project, including the necessarylocal and foreign funds to complete the Project as defined inpara. 7.23, and to cover any possible cost overrun the necessityfor and amounts of such funds being determined in the annualreview mentioned in (d) above;

(g) in the case of cost overrun financing, Government will provide that

not less than 60% of additional resources will be in the formof Government equity contributions; and

(h) CVRD will ensure that, on the basis of cumulative expendituresfor the Project, the proportion of debt to equity financing ofthe Project will not exceed 70:30.

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8.32 To ensure maintenance of a sound financial position during projectimplementation and thereafter, CVRD has agreed that

(a) CVRD's non-Carajas investments and equity contributions to sub-sidiaries and associated companies will together not exceed theagreed-upon investment program (paras. 8.15-8.16) by an amountequivalent to US$30 million in any one year through 1985 and byUS$50 million equivalent from 1986 through project completion (para.7.23), without prior Bank approval. Investments included theagreed program but deferred for physical and financial reasonsfrom one year to the following years would be considered to beincluded in the agreed investment program;

(b) CVRD will maintain a debt/equity ratio not greater than 55:45, withthe ratios to be calculated excluding the current portion oflong-term debt;

(c) CVRD will maintain a current ratio of not less than 1.1:1, and1.2:1 on the basis of consolidation with its majoritiy-ownedsubsidiaries (para. 8.27);

(d) CVRD will not incur any debt maturing by its terms more than oneyear after the date on which it is originally incurred, unlessfinancial projections prepared by CVRD and acceptable to the Bankshow that the debt service coverage will be at least 1.5 includingthe debt to be contracted; and

(e) CVRD will furnish to the Bank financial statements and accounts forCVRD and for CVRD consolidated with its wholly owned subsidiaries,audited by independent auditors satisfactory to the Bank, withinfour months after the end of each fiscal year.

D. Financial Rate of Return and Sensitivity Tests

8.33 The financial rate of return for the Project has been calculatedin real terms. Since CVRD owns and operates two major mines (Caue, Conceicao)and two small mines (Picarrao, Caraca), is commencing operations at two majormines (Timbopeba and, in a joint venture, Capanema), and has recently added toits reserves two additional, largely undepleted mines (Chacrinha, Piriquito),its options are not limited to implementing Carajas or doing nothing at all.CVRD without Carajas could pursue other alternatives such as increase, maintain,or reduce production in existing mines, bring Chacrinha and Piriquito on stream,or do various combinations of these principal possibilities. To establishthat Carajas is the superior investment choice for CVRD and to estimate itsnet return, it is necessary to determine its financial benefits to CVRD overand above those generated by other alternatives. Hence, the financial rate ofreturn of the Project has been calculated on an incremental basis.

8.34 To arrive at incremental streams, two scenarios have been definedfor CVRD as a whole, one "with" Carajas and another one "without", both ofwhich are described in detail in Annex 8-4. The "without" case stipulates,that CVRD will increase its production in the Minas Gerais mines from 67million tons in 1982 to about 80 million tons in 1986, a level that can bemaintained through 2002, before gradually dropping to 49 million tons in 2007.The "with" case stipulates that (i) Carajas will come on stream, and (ii) CVRDwill bring on stream new capacity in the South as permitted by the market andbeneficiation capacity.

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8.35 Other important assumptions underlying the calculations are thefollowing:

(a) the Carajas sales volume increases to 35 million tpy in 1988and is maintained at that level through the year 2015;

(b) a 3% price discount on the presently contracted 24.7 milliontpy (para. 3.47) has been applied from 1985-99;

(c) a devaluation of the Cruzeiro by 14% in real terms has beentaken into account (para. 8.22); and

(d) no financial benefits have been quantified for future non-Carajas railroad transport.

Further detailed assumptions as well as revenue and cost streams are givenin Annex 8-4.

8.36 Based on these assumptions, the incremental financial rate ofreturn of the Project is about 11%.

8.37 Sensitivity Tests. These tests which are summarized below show thatthe rate of return is most sensitive to changes in sales revenue, projectdelays, capital costs, and exchange rate variations. If one assumes that thesales volume increases to 50 million tpy by 1993 which is reasonable given (i)expectations on increasing market strength in the 1990s and the good market-ability of Carajas ore (para. 3.03), and (ii) CVRD plans and Carajas Projectengineering design which allows for the production expansion with a relativelysmall additional outlay (about US$360 million or 11% of the original base costestimate) in capital costs, the base case return increases to about 12%.

Sensitivity Tests on Incremental Financial Rate of Return

50 million tpy35 million tpy beginning 1993

1. Base Case 10.6 12.12. Capital Costs up 10% 9.7 11.33. Operating Costs up 107 10.2 11.84. Operating Costs down 107 11.0 12.55. Sales Revenue up 10% 12.1 13.66. Sales Revenue down 10% 9.1 10.77. Sales Revenue up 20% 13.7 15.28. Sales Revenue down 20% 7.5 9.1

9. Project Delay of I year 9.5 11.0

10. 0X real devaluation of Cruzeiro 9.6 11.111. 5% real revaluation of Cruzeiro 9.2 10.712. 20% real devaluation of Cruzeiro 11.1 12.6

13. Capital Costs up 10% 8.5 9.9Project I year delayedSales Revenue down 10% through 1989Operating Costs up 10% through 1989

14. Sales Revenue down 10% 8.1 9.70% real devaluation of Cruzeiro

15. Sales Revenue up 10% 12.6 14.420% real devaluation of Cruzeiro

16. No real increase in iron ore 10.2 11.7prices through 1990; 1.5% p.a.increase from 1991-95

8.38 Of the various factors used in the sensitivity tests, market (salesrevenues) and exchange rates are more exogeneous to CVRD than capital andoperating costs and implementation schedule which are within the Company's

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domain of control. The likelihood of lower revenues is primarily related tothe possibility of a small global market oversupply by the time Carajas comeson stream (para. 3.24). While oversupply, as was mentioned there, may continueto exist for one-to-two years beyond the Carajas start-up in 1985, realisticforecasts by the Bank and various experts expect equilibrium by the secondhalf of the 1980s, and therefore, the probability of persisting oversupplyduring the 5 years after start-up is considered to be low. Should the 1.5%p.a. real increase in prices assumed for the years 1986-90 (para. 8.13) bedeferred until 1991-95, the return falls to 10.2%.

8.39 While it is possible that only a portion of the assumed devaluationwill materialize, or that it will take place at a slower pace over a longertime period, it is unlikely that there will be no devaluation at all. However,if one assumes that instead of a cruzeiro devaluation a 5% revaluation overthe December 1981 exchange rate occurs, the return drops to 9.2%.

8.40 A 10% increase of operating costs is unlikely, given CVRDIs extensiveexperience in its existing operation, from which the base operating costparameters have been derived. A 10% increase in capital cost cannot beexcluded, but is noc expected, because capital cost estimates have beencarefully prepared and in light of the sizeable amount of expenditures andcontract commitments made as of end-1981 (paras. 7.07 and 7.24).

8.41 Project delays of a full year or more are also unlikely in view of(i) the high degree of completion of the major and more difficult earth works,(ii) CVRD-s current implementation plans which allow for a reduction inactivities during the rainy seasons, (iii) the elaborate planning and controlprocedures that are applied, and (iv) the well-staffed and experienced projectmanagement organization.

8.42 The rate of return has also been calculated in the case of Carajasas an independent entity, entirely separate from CVRD's other operations.Under this assumption Carajas is credited with the benefit of its totalproduction, because it does not have to compete with other benefit yieldinginvestment alternatives. The resulting rate of return is 11.3% based on 35million tpy and 12.8% based on 50 million tpy starting in 1993.

E. Major Risks

8.43 The technical risks to the Project are small. Each component--mine, railroad and port--is relatively straightforward in terms of technicaldesign, construction and operation, and the interfaces between components havebeen taken adequately into account in project management and on-going operatingarrangements (Chapter VI).

8.44 As discussed in Chapter III, the current oversupply of the iron oremarket is of concern, and while there is reasonable expectation by the Bankand various experts that the market should be in equilibrium by-the timeCarajas comes on stream (para. 3.25), it cannot be excluded that some oversupplymay persist a year or two beyond Carajas initial production build-up in 1985.Under the circumstance, it must be considered possible that prices may notrise in real terms beginning in 1986 as has been assumed in this report (noreal price increases are assumed until 1986, but from 1986-90 real prices areexpected to increase by 1.5% p.a.) and that there may be reductions in CVRDsales volumes in individual years, posing financial risk to the Project.However, most market experts tend to expect price increases of up to 2% p.a.through 1985, and of greater percentages thereafter as the market strengthens

- 76 -

(para. 3.34). Carajas is not expected to depress the general level of ironore prices when the Project comes fully on stream in 1988, as the Projectproduction will comprise about 7.5% of estimated international marketsupply (para. 3.35) and is not expected to create a market surplus. ShouldCarajas or any one of the other 8 envisaged new projects not go forward forany reason, it is expected that replacement would be made from capacityincreases in certain existing mines where, with limited capital investment and1-3 years lead time, production increases could be obtained (paras. 3.15-3.16).

8.45 As indicated above, the principal financial risk facing the Projectis the possibility of insufficient or untimely availability of internallygenerated cash for equity financing to complete the Project. Internallygenerated cash may not be available, because (i) it has not materialized;or (ii) Carajas requirements cannot be met because of competing other CVRDinvestments. To reduce the risk of the first case, equity contributions frominternally generated cash have been kept at a minimum during the crucial years1982-84. They total US$460 million from 1982-84, representing 10% of projectedinternal cash generation in 1982, 25% in 1983, and 18% in 1-984. Other measurestaken to help CVRD cope with insufficient cash generation are (i) the contract-ing of US$400 million of contingency financing, which is a condition of effec-tiveness (para. 7.20); (ii) the annual review of expenditures and revenuesthrough Project completion, which would permit early identification of cashshortfalls (para. 8.31); and (iii) the Government cost overrun guarantee (para.8.31). To reduce the risk of the second case, i.e. competition with otherinvestments, Bank approval has been agreed if non-Carajas investments in anyyear are more than US$30 million higher through 1985 and US$50 million higherfrom 1986 through Project Completion than the agreed amounts (para. 8.32).

IX. ECONOMIC ANALYSIS

9.01 The Project is an important element in the Government-s policyobjective to improve Brazil½s balance of payments through increased exportsand foreign exchange earnings. The Project would contribute directly toforeign exchange earnings by financing the development, exploitation, andsale of iron ore abroad, and would also give support through provision ofbasic infrastructure to subsequent resource developments in the region whichwould largely also be for export (para. 2.19). Several projects alreadyin early stages of development which would be facilitated by the Carajastransportation network include bauxite, ferro-manganese, gold, copper andtin projects. Over the longer term, developments are envisaged in otherminerals in the region, as well as in agriculture, and in production ofsemi-finished and finished products.

A. Economic Rate of Return

9.02 The economic rate of return of the Project has been calculated inreal terms, based on the streams given in Annex 9-1. The return has beencalculated on an incremental basis as in the financial return (para. 8.34) andthe economic cost and benefit streams have been based on the same assumptionsused for the financial rate of return, except for (i) exclusion of all identi-fiable taxes; and (ii) application of a standard conversion factor of 0.83 toforeign exchange costs and benefits to reflect foreign trade distortionscaused by import tariffs, export taxes and subsidies, as well as other formsof trade restrictions and incentives. The economic rate of return is 13%,

- 77 -

which is satisfactory for new mining projects where large capital investmentsand long lead times to development are required. The return includes asproject costs all capital expenditures made by CVRD since 1977.

9.03 The return can be viewed as conservative in view of (i) the inclusionof all transport, housing and social infrastructure costs without accountingfor the economic and social benefits to the population involved; and (ii)pricing assumptions (para. 3.34) where no real increase is assumed through1985.

9.04 Sensitivity Tests. If evaluation is made of the Project at aproduction and sales level of 50 million tpy starting in 1993 as can bereasonably assumed (para. 8.37), the return increases to 15%. This test, aswell as a series of tests made of 35 million tpy base case are shown below:

Sensitivity Tests on Incremental Economic Rate of Return

50 million tpy35 million tpy beginning 1993

… --------(%) … -----

1. Base Case 13.1 14.62. Capital Costs up 1O0 12.1 13.53. Operating Costs up 10 12.8 14.34. Operating Costs down 10% 13.4 14.85. Sales Revenue up 10 14.6 16.06. Sales Revenue down 10% 11.6 13.17. Sales Revenae up 20% 16.1 17.68. Sales Revenue down 20% 10.1 11.6

9. Project Delay of 1 year 11.7 13.1

10. 0% real devaluation of Cruzeiro 12.2 13.711. 5% real revaluation of Cruzeiro 11.9 13.212. 20% real devaluation of Cruzeiro 13.3 14.8

13. Capital Costs up 10% 10.7 12.1Project 1 year delayedSales Revenue down 10% through 1989Operating Costs up 10% through 1989

14. Sales Revenue down 10 10.8 12.20% real devaluation of Cruzeiro

15. Sales Revenue up 10% 14.7 16.320% real devaluation of Cruzeiro

16. No real increase in iron ore 12,8 14.2prices through 1990; 1.5% p.a.real increase from 1991-95

17. Excluding Project Expenditures 13.9 15.5through 1979 (US$136 million)

18. Excluding Project Expenditures 16.4 18.0through 1981 (US$620 million)

9.05 In respect to any one particular change, the return is most sensitiveto changes in sales revenues. A variation of sales revenues by 10% results ina return variation of 1.5%. The rate of return is also very sensitive toproject delays; in case of a one-year delay, the return would drop by 1.4%.These tests show the importance of the recent price increases (para. 3.31)agreed by CVRD with the German and Japanese mills, and of maintaining theProject on schedule (para. 8.38).

9.06 Two sunk cost alternatives have also been tested. The streams forcase 16 exclude all capital costs through 1979 (US$136 million), increasingthe rate of return by about 0.8%. This case treats project costs as sunkroughly through the feasibility and design engineering stage. The streamsfor case 17 exclude all capital costs through 1981 (US$620 million), increasingthe rate of return by about 3.3% to 16.4% for 35 million tpy.

- 78 -

9.07 Evaluation was also made of the Carajas Project as a separateentity in terms only of the costs and benefits associated with it, ratherthan as incremental to CVRD (para. 3.46). Under these circumstances, theeconomic rate of return is 13.9% based on 35 million tpy and 15.4% based on50 million tpy starting in 1993.

B. Foreign Exchange Benefits

9.08 The foreign exchange benefits of the 35 million tpy Project are highsince the Project generates 100% foreign exchange from export sales of ironore, and its costs other than the service of foreign debt are largely in localcurrency. The Project, therefore, will contribute strongly to the improvementof Brazil½s balance of payments situation and has been given high priority bythe Government.

9.09 Incremental foreign exchange benefits have been calculated basedon the streams for the incremental financial rate of return plus debt serviceon foreign financing for Carajas. Revenues have been calculated as 100%foreign exchange, as all incremental production will be exported. Theforeign exchange portions of operations, capital and replacement costs arebased on a detailed study prepared by consultants for CVRD, and include thedirect as well as indirect foreign exchange costs. Built up item by item, thetotal foreign exchange portions for operating, capital and replacement costsover the life of the Project are about 20%, 27% and 30%, respectively.

9.10 The resulting incremental foreign exchange benefits of the Projectare considerable, averaging annually US$632 million in real 1982 terms from1985-2015. The annual foreign exchange balance will become positive in1985 and the cumulative balance in 1988. The cumulative foreign exchangebenefit of the Project over 30 years (up to the year 2015) is about US$20billion, which increases to US$27 billion assuming a i')duction and salesexpansion to 50 million tpy in 1993. The table below summarizes the expectedincremental foreign exchange benefits of the Project and Project Expansion(Annex 9-2):

Incremental Foreign Exchange Benefits(US$ billion--1982 real terms)

Thru1984 1985 1986 1988 1990 1995 2000 2010 2015

Foreign ExchangeInflow 0.00 0.06 0.41 0.71 0.72 0.80 0.80 0.80 0.80

Foreign ExchangeOutflow 1.16 0.24 0.25 0.18 0.15 0.10 0.07 0.07 (0.10) a

Net Annual Foreign b/ b/Exchange Flow (1.16) (0.18) 0.16 0.53 0.57 0.70 0.73 0.73 0.90

Cumulative Net Foreignb/ b/

Exchange Flow (1.16) (1.34) (1.18) (0.23) 0.90 4.06 7.73 15.68 19.60

Cumulative Net ForeignExchange Flow(50 million tpy) (1.16) (1.34) (1.18) (0.23) 0.88 4.95 10.16 21.55 27.03

a! Residual value of foreign replacements.b/ Rounded.

- 79 -

C. Other Benefits

9.11 As noted in Chapter II, D and para. 9.01 above, the Project providesmajor regional benefits in opening up a remote but resource-rich area of theAmazon. The Project will generate economic activity directly at Carajas,along the rail-line and at the port city of Sao Luis, and indirectly through-out the region.

9.12 The Project will provide direct employment for about 6,000 employees,and about 2,500 service workers up through 1988, and lead to additionalemployment opportunities thereafter as basic workers are drawn by a variety ofexpected mining developments and other economic opportunities in the region.

9.13 Urban development in the region will be accelerated by the Projectthrough the development of the new town of Carajas as well as expansion ofexisting towns particularly along the railway line where maintenance and otherrailway personnel will be housed (para. 5.39) and where outsiders are likelyto be drawn and at Sao Luis, which is already an established port city.

9.14 In the above respects, the Project is expected to play a key rolein spurring the economic growth of the region, and importantly to begin theprocess of planning and controlling the growth of a territory with both vasteconomic potential and unique environmental features.

X. AGREEMENTS

10.01 The following agreements have been reached:

(a) With the Government:

(i) that, six months prior to introducing passenger serviceson the railway, CVRD will prepare a tariff schedule, satis-factory to the Bank, for such services, which will be suffi-cient to cover the costs of providing the services, and put thetariff schedule into effect (with periodic modification toreflect any cost increases) when the services are introduced(para. 5.19);

(ii) that it will ensure that CVRD is provided with such permanentsupply of electric power as required for the efficient operationof the Project (para. 5.43);

(iii) that CVRD and FUNAI have signed a "convenio' satisfactoryto the Bank on the funding and execution of the AmerindianSub-project (para. 5.56);

(iv) that (a) it will put into effect in a timely manner the actionsincluded in the Amerindian Sub-project and take all furthermeasures necessary for protecting the interests of the Amerindianpopulation in the Carajas Project area; and (b) FUNAI will fur-nish to the Bank periodic reports on the status of the Amerindianpopulation living in the Carajas Project area and give the Bankthe opportunity to comment on FUNAI's program for the Amerindianpopulation in the Project area annually (para. 5.57);

(v) that it will make equity contributions to CVRD by reinvestingits portion of dividends from 1982-84 (paras. 7.13, 8.32);

- 80 -

(vi) that it will take all necessary action to enable CVRD to issueconvertible debentures in the Brazilian capital market in both1982 and 1983 (paras. 7.14, 8.31);

(vii) that it will ensure--by way of a back-up guarantee to CVRD'sobligation--timely and sufficient funds to cover the expendituresrequired for the Project, including the necessary local andforeign funds to complete the Project as defined in para. 7.23;and to cover cost overruns (para. 8.31); and

(viii) that in the case of cost overrun financing, not less than 60%of additional funds will be in the form of Government equitycontributions (paras. 7.24 and 8.31);

(b) With CVRD:

(i) that it will maintain the existence of the Steering Committee,under the Chairmanship of the Director Vice President of CVRD;that the Committee will meet at least every three months;and prepare minutes of its meeting; and that CVRD will furnishminutes to the Bank within 30 days of any Steering Committeemeeting (para. 4.06);

(ii) that it will reserve lots for additional service worker housingand make arrangements with BNH for financing houses for thepermanent settlement of the additional service workers in thetownsite over a period of about five years from Project Completion(para. 5.34);

(iii) that the final designs of the town plan and site plans for allhousing at Carajas be furnished to the Bank for review andapproval, not later than September 30, 1982 (para. 5.34);

(iv) that an urban development plan for the second-phase developmentof the Carajas town be submitted to the Bank for review andapproval, not later than June 1, 1985 (para. 5.36);

(v) that a plan for the accommodation at Parauapebas of 10,000people by 1988 be submitted to the Bank for review and approval,not later than September 30, 1982 (para. 5.38);

(vi) that (a) it will prepare, jointly with the Government andappropriate state and municipal authorities, a squatter re-settlement plan, satisfactory to the Bank, by December 31,1982, and (b) by no later than June 30, 1983, it will enterinto an agreement with appropriate state and municipal authori-ties to carry out the plan according to an implementationschedule satisfactory to the Bank (para. 5.40);

(vii) that (a) it will maintain GEAMAM with staff, functions andresponsibilities satisfactory to the Bank, and cause GEAMAMto carry out site inspections at least twice every yearthrough 1985 and at least once annually thereafter; and(b) following each site visit, a report will be prepared byGEAMAM and furnished by CVRD to the Bank for review, withcomments by CVRD on each recommendation, and a description

- 81 -

of any action to be taken as a consequence of GEAMAM-s recom-mendations (para. 5.49);

(viii) that it will maintain the organizational arrangements andstaffing presently in place or proposed to be establishedfor environmental control activities with staff and functionssatisfactory to the Bank (para. 5.50);

(ix) that it will (a) complete preparation, with the Governmentenvironmental agencies, of its environmental work program forBank review and approval by not later than September 30, 1982,and (b) carry out the work program, jointly or with the assist-ance of the environmental agencies, in a manner and accordingto a timetable satisfactory to the Bank (para. 5.51);

(x) that it will (a) prepare, not later than December 31, 1982,and thereafter carry out, according to a timetable satisfactoryto the Bank, a pollution control program satisfactory to theBank, and (b) exchange views with the Bank on the adequacy andprogress of all environmental, ecological and pollution controlactions undertaken by CVRD with regard to the execution andoperation of the Project (para. 5.52);

(xi) that it will take all necessary actions to assist FUNAI tocarry out the Amerindian Sub-project (para. 5.57);

(xii) that the remaining technical assistance consultants beemployed according to Bank guidelines (para. 6.08);

(xiii) that it will obtain and have ready for draw-down at least US$100million of commercial bank contingency financing by year-end 1982and the remaining US$100 million by year-end 1983 (para. 7.21);

(xiv) that it will provide timely and sufficient funds to coverthe expenditures required for the Project, including thenecessary local and foreign funds to complete the Projectas defined in para. 7.23, and to cover any possible costoverruns (paras. 7.23, 8.31); and

(xv) that it will observe certain financial covenants as outlinedin paras. 8.31-8.32.

10.02 The following is a condition of effectiveness of the Bank loan:

(i) the effectiveness of (a) the Japanese import loan; (b) thedirect loan from the Japanese Exim Bank; (c) the Bank of Tokyosyndicated loan; (d) the ECSC loan; and (e) the KfW loan.

10.04 Given the preceding agreements and assurances, the Project issuitable for a Bank loan to CVRD of US$304.5 million for a period of 15 years,including 3 years' grace.

Industry DepartmentLatin America & the Caribbean Projects DepartmentJuly 1982

- 82 - ANNEX 4 -

Brazil-Carajas Iron Ore Project

CVRD - - Historic Income Statements, 1976-81-/

(US$ Million)

1976 1977 1978 1979 1980 1981

Mineral Revenues 682.8 627.3 655.0 577.6 765.0 700.1Other Revenues 71.1 96.4 113.5 105.1 170.1 176,0

Total Revenues 753.9 723.7 768.5 682.7 935.1 876.1

Production Costs 281.2 318.8 401.0 323.9 408.7 422.9

Gross Profit 472.7 404.9 367.5 358.8 526.4 453.2

Administrative Expenses 58.2 80.4 75.3 58.6 54.5 51.5Selling Expenses 22.2 17.2 17.6 20.7 28.7 28.0Depreeiation & Amortization 105.7 112.4 128.3 96.7 82.2 62.0Research & Development - - - - 17.9 22.4

Operating Income 286.6 194.9 146.3 182.8 343.1 289.3

Financial Expenses Net 63.8 118.3 98.1 188.9 158.2 170.1Other Income (Loss) 1.8 (2.9) (3.7) 37.2 34.0 75,2

Net Income Before Tax 224.6 73.7 44.5 31.1 218.9 194.4

Income Tax 37.6 1.1 - 8.6 2.0 11.1

Net Income After Tax 187.0 72.6 44.5 22.5 216.9 183.3

a/ The amounts in Cruzeiros were converted to US Dollars at the exchange ratein effect at the close of each fiscal year.

Industry DepartmentJuly 1982

- 83 - ANNEX 4-2


CVRD--Historic Statement of Changes in Financial Position, 1976-81 -/

(US$ Million)

1976 1977 1978 1979 1980 1981

SOURCES

Net Income after Tax 187.0 72.6 44.5 22.5 216.9 183.3Depreciation & Amortiz. 105.7 112.4 128.3 96.7 82.2 62.0Depreciation & Amortiz.

included in Production Costs 3.1 7.6 3.4 8.5 11.4 5,5Other b/ (20.4) (14.7) (95.3) 193.5 125.4 210,3Internal Cash Generation 275.4 177.9 80.9 321.2 435.9 461.1

Increase in Long Term Loans 433.3 225.3 381.6 183.9 153.6 303.7

Increase in OtherAsset Accounts 2.0 10.9 - - - -

Treasury Bonds Transferredtn Current Assets - 153.9 - - - -

Other Sources 9,9 - 8.1 32.4 48.3 56,2

Capital Stock Subscriptions 25.6 - - - - 23,9

Total Sources 746.2 568.0 470.6 537.5 637.8 844.9

APPLICATIONS

Investments in Fixed Assets 212.9 236.1 180.8 74.3 100.9 561.6Treasury Bonds 200.1 - - - -Investments in Subsidiariesand Assoc. Companies 100.0 131.4 95.0 33.9 147.4 46.6

Investment in Other Companies 5.1 3.5 14.7 0.4 15.4 -Decrease (Increase) inOther Liability Accounts 9.0 16.0 - - - -

Dividends 36.9 36.0 24.5 7.8 47.2 53.1L-T Debt Transferred toCurrent Liabilities 41.9 249.2 90.5 100.1 55.6 24.2

Deposits at Central Bank - - - 217.9 166.0 126.6Other Applications 13.9 6.6 31.3 58.4 35.8 57.2Increase (Decrease) inWorking Capital 126.4 (110.8) 33.8 44.7 69.5 (24.4)

Total Applications 746.2 568.1 470.6 537.5 637.8 844.9

a/ The amountsin Cruzeiros were converted to US Dollars at the exchange rate ineffect at the close of each fiscal year.

b/ Inter alia, monetary restatement and deferred tax.


- 84 -

ANNEX 4-3

Brazil-Carajas Iron Ore Project

CVRD - - Historic Balance Sheets, 1976-81a/'

(US$ Million)

1976 1977 1978 1979 1980 1981

ASSETS

Operating Cash 10.9 6.0 4.2 1.4 0.5 0.3Accounts Receivables 126.1 220.6 157.9 170.3 182.5 263.3Inventories 121.1 148.3 131.9 79.8 155.9 167.6Marketable Securities

& Deposits 257.6 172.8 49.3 29.4 - 2.1Other Current Assets 9.1 9.8 122.1 137.1 88.7 119.4

Total Current Assets 524.8 557.5 465.4 418.0 427.6 552.7

Net Fixed Assets 959.6 1,312.7 1,408.5 976.8 807.8 1,337.2

Investments in Subsidiaries& Associated Companies 198.5 312.4 574.4 434.9 655.6 519.5

Other Long-Term Assets 231.8 42.4 76.4 92.1 137.6 145.9Total Long-Term Assets 430.3 354.8 650.8 527.0 793.2 665.4

Deferral Charges - - 6.9 59.3 27.3 113.8

Total Assets 1,914.7 2,225.0 2,531.6 1,981.1 2,055.9 2,669.1

LIABILITIES

Accounts Payable 82.1 107.6 87.7 70.4 66.4 147.9Current Portion of L.T. Debt 138.7 332.4 214.2 188.3 159.7 264.9Other Current Liabilities 93.1 66.1 90.9 78.8 110.0 115.1

Total Current Liabilities 313.9 506.1 392.8 337.5 337.0 527.9

Long-Term Debt 635.6 464.9 647.8 530.6 424.9 684.3Other Long-Term Liabilities 15.8 18.7 24.8 19.6 43.7 30.4

Total Long-TermLiabilities 651.4 483.6 672.6 550.2 468.6 714.7

Share Capital 500.4 549.9 421.8 282.2 270.2 336.8Reserves & Retained Earnings 449.0 685.4 1,044.4 811.2 980.0 1,089.7

Total Equity 949.4 1,235.3 1,466.2 1.093.4 1,250.3 1,426.5

Total Liabilitiesand Equity 1,914.7 2,225.0 2,531.6 1,981.1 2,055.9 2,669.1

Current Ratio 1.7 1.1 1.2 1.2 1.3 1.1LTD/Equity Ratio 40:60 27:73 31:69 33:67 25:75 32:68

a/ The anounts in Cruzeiros were converted to US Dollars at the exchange rate ineffect at the close of each fiscal year.


- 85 -

ANNEX 4-4


CVRD Equity Investments and Holdings in

Subsidiaries and Associated Companies, 1980

EquityPercentage of Investment

SUBSIDIARIES Holding (US$ million)

Amazonia Mineracao S.A.- AMZA a/ 90.92 250.0Vale do Rio Doce Navegacao S.A. - DOCENAVE 96.63 182.1Rio Doce International Finance Ltd. - RDIF 90.00 85.4Forestas Rio Doce S.A. 94.61 28.0Valenorte Aluminio Ltda. b/ 99.99 23.0Rio Doce Geologia e Mineracao S.A. - DOCEGEO 99.99 6.9Rio Doce Europa S.A. - RDE 99.92 5.5Navegacao Rio Doce Ltda. 50.00 2.1Caraca Ferro e Aco S.A. 99.99 0.8Empresa Hidroeletrica Lutzow S.A.

(in liquidation) 80.00 0.2Seamar Shipping Corporation c/ 0.04 -Valec Comercio e Servicos Ltda. 51.00 -Itabira International Co. Ltd. - ITACO 99.99 (5.3)Rio Doce Engenharia e Planeiamento S.A.

(in liquidation) 100.00 (0.2)Controladas de Mineracao (29 small companies) -Rio Doce America In¢. - RDA - -Minas del Rey Dom Pedro S.A. - (inactive) 50.71 (3.2)

Subtotal 575.3

ASSOCIATED COMPANIES

Fertilizantes Fostalados S.A. - FOSFERTIL 34.12 81.0Mineracao Rio do Norte S.A. 46.00 39.2Valesul Aluminio S.A. 60.51 41.0Celulose Nipo-Brasileira S.A. - CENIBRA 50.63 29.4Empreendimentos Florestas S.A. - FLONIBRA 49.30 15.1Minas de Sera Geral S.A. 51.00 12.7Cia Nipo-Brasil de Pelolizacao - NIBRASCO 51.00 5.7Urucum Mineracao S.A. 33.33 3.2Itavale Ltda. 60.00 2.3Porto Especializado da Barra do Riacho S.A. -PORTOCEL 10.34 1.1

Ferritas Magnelicas S.A. - FERMAC 20.29 0.1Intervale Ferroviana S.A. (in liquidation) 40.00 -Companhia Hispana-Brasileira de Pelolizacao -HISPANOBRAS 50.89 (1.6)

Companhia Italo-Brasileira de Pelolizacao -ITABRASCO 50.90 (0.4)

Alumino Brasileiro S.A. - ALBRAS - -Alumia do Norte de Brasil S.A. - ALUNORTE - -

Subtotal 228.8TOTAL 804.1

a/ Responsible for execution of Carajas project, was incorporated into CVRDon January 26, 1981.

b/ VJalenorte Aluminio Ltda. has a participation in the capital stock ofthe companies listed below whose projects are in the pre-operatingstage:

Percentage of Holding

- Aluminum Brasileiro S.A. - ALBRAS 51.00- Alumina do Norte do Brasil S.A. - ALUNORTF 60.80- Mineracao Vera Cruz S.A. 36.00

c/ The remaining capital stock is owned by DOCENAVE.


- 86 -ANNEX 5-1Page 1 of 6

BRAZIL

CARAJAS IRON PROJECT

The Carajas-Sao Luis Railway

General

1. The new railroad line is being built in order to link the mines atCarajas with the sea port at Sao Luis de Maranhon City.

2. The basic technical characteristics of the rail line will be asfollows:

- 890 km of the main line with the safety standard of US FederalRailroads, with two terminals (mine and port), four stations alongthe line and 36 crossing loops.

- single track, 1.60 meter gauge, 68 km/meter rails; 1,800 per kmtreated wooden ties; 0.30 meter of ballast stone; standard switches.

- 63 bridges as a total of 11.3 km.- CTC (and ATC) signalling system (Centralized Control trains).- A main maintenance workshop at Sao Luis de Maranhon for locomotives,

wagons and permanent way equipment; and a medium size maintenanceworkshop for the same purpose at Maraba City.

- Diesel Electric locomotives (84 nos) 3000 HP, truck cc., weight180 tons

- Iron-ore wagons (2878 nos), standard design, with 98-ton capacityand 120 tons of gross weight.

3. The basic charcteristics of the operation of the line are as follows:

- Iron-ore trains with 160 wagons and three diesel-electric locomo-tives plus two helpers in the mountainous area (about 80 km).

- Maximum speed of loaded train 65 km/hour.- Maximum speed of unloaded train 80 km/hour.- Gross weight of loaded train 19,200 tons.- Number of trains daily (two ways): eight plus three service trains.- Loaded trains from Carajas to Sao Luis Port: 20.77 hours- Unloaded trains from Port to the Mine: 12.36 hours.- Train loading at the Mine: 4 hours.- Train unloading at the Port: 5 hours.- Turn-around per train: 2.16 days.- Working days: 320 per year.- The personnel for the line operation will be 594 for train operations,

763 for maintenance of rolling stock, locomotives and equipment,and 728 for maintenance of permanent way and infrastructure.

Status of Project at Appraisal

4. Engineering design for the Railway has been done in great detail.CVRD began the construction works two years ago in order to make as a firststage the required embankment, bridges and viaducts, drains and headquarterinstallation at Sao Luis de Maranhon. The total length of the line was dividedinto 14 portions plus two terminals at the Mine and the Port. Each portion is


being built by a contractor which is in charge of the required earthmoving,bridges, culverts, drain improvements, and concrete protection walls. As aresult, along the total length of the line, the required infrastructure isbeing made and the average of works already done is as follows:

- Earthmoving along the line: 46%- Earthmoving at Sao Luis Port Terminal: 84%- Earthmoving at Carajas Mine Terminal: 0%- Bridges along the line: 35%- Tocantins Bridge (2.5 km): 10%- Culverts tubes along the line: 56%- Concrete protection walls along the line: 40%- Number of personnel involved as contractors, CVRD Inspectors

and Consultants: 15,682.

5. The Tocantins Bridge construction has advanced considerably sinceappraisal and inspection of designs and construction work by a Bank missionconfirmed the soundness of design and construction procedures.

6. (a) CVRD is controlling the construction works through a technicalteam placed at Sao Luis de Maranhon and supported by the CVRD headquarter atRio de Janeiro and the technical team of the existing (Minas Gerais-Vitoria)line. The CVRD construction team is supported by several consultant firmsspecialized in each one of items included in the project, such as earthmoving,bridges, drains, geologic study, topographic surveys, railroad project design,signalling and telecommunications.

(b) The design of each section of the line is being reviewed duringthe execution of the works in order to improve specific points as is beingdone by consultant firms, which are at the same time supervising the contractorstogether with the CVRD representative in the field.

(c) As a result of the above CVRD policy for the construction works,several design improvements have been made as a result of experience, and ingeneral terms, all contractors are working on schedule and it is expected thatthe goal of completing all the construction works according to the schedulewill be achieved.

Railway Construction Costs

7. Details of Railway Construction and Investment Costs are given inthe table on the following page. The organization and procedures for theidentification and control of railway construction costs appear appropriateand sound. The organization is such that work territories are realistic,considering the environment. The assignment of headquarters and field respon-sibilities enables a quick response and reaction to the needs of on-goingfield activities as well as constant and accurate feed-back to support resources,thus enabling a current evaluation of costs and design alternatives. Communica-tions between headquarters in Rio de Janeiro and construction field coordinatorsoffices is by direct dial phone with practically 100% availability. Radiocommunication is available and highly dependable between the field offices andwork locations. These facilities enable daily and frequent discussions ofplans, work schedules, possible alternatives and such other issues that mightaffect the progress or costs of the work.

BRAZIL: CAIAS PrUICT

RAILROAD IUVESTIEU PLAN (USS silltoa)- > ~~~~~~~~~~~~~ae Dec/St

-1979 to Dec. 1981 1982 1983 1914 1985 196 1987 TT A LNAT. FOR. TOTAL MAT. FOR. ToTAL WT. Ylit. TOTAL NT. PM. TOTAL NAT. FOR. TCTLFa MAT. FOR . ALT. FOR.TGTAL sir. F.--R. T-TAL

1. fEglnear1ng 45.5 5.4 50.9 4.2 0.3 4.5 1.3 0.1 1.4 0.8 0.4 1.2 0.4 0.4 0.6 0.2 0.0 0.2 - _ _ 52.4 6.6 59.02. Infrastructure

1.1,nd Purchase 0.9 0.0 0.9 0.6 0.0 0.8 3.1 0.0 3.1 0.0 - - - - - - - - - - - 4.8 - 4.82.R!A1road

. reatructure 161.4 51.6 213.2 160.1 56.0 216.1 111.0 36.7 147.7 16.7 5.2 21.9 1.9 - 1.9 - - - 451.1 149.7 v- 3.63.Train Control &

Teleco. udicaClon - - - 4.0 12.4 16.4 4.8 18.6 23.4 3.6 11.3 14.9 1.0 0.3 1.3 0.3 0.1 0.4 0.1 - 0.1 13.B 42.7 56.53. grisgem 31.2 10.4 41.6 36.3 12.1 48.4 33.4 11.1 ".45 4.2 1.4 5.6 - - - - - -_ - 105.1 15.0 14D_I4. Loc6motives 0.6 0.2 0.6 4.2 27.0 31.2 23.2 11.0 34.2 10.5 31.4 41.9 14.4 4.6 19.0 16.8 4.S 21.3 - - ' 69.7 718. 146.15. wag'na 0.7 0.2 0.9 10.6 3.0 13.8 57.7 16.1 73.8 32.0 8.9 40.9 19.6 5.5 25.1 13.3 3.7 17.0 - - _ 134.1 37.4 111.56. IraQk Superstnrcture 2.Z 0.6 3.0 33.6 9.3 42.9 50.8 63.3 134.1 30.6 54.4 85.2 2.2 2.0 4.2 1.6 1.2 2.8 _ _ - 121.2 151.0 272.77. Aesably of the .

Track Structure - - - 11.2 3.7 14.9 22.1 7.3 29.4 19.7 6.5 26.2 2.0 0.7 2.7 0.7 0.3 1.0 - - - 55.7 18.5 74.2A. 9.ilddngs - - - 4.2 1.5 5.7 7,3 2.4 9.7 4.4 1.3 5.7 0.2 - 0.2 0.3 0.1 0.4 - _ _ 16.4 5.3 21.19. k4.rkshop Eqvlpmit - - - 1.5 0.5 2.0 11.3 3.7 15.0 7.3 2.5 9.8 - - - - - - - - - 20.1 6.7 26.5 1

10. freight* 0.4 0.1 0.5 7.1 6.7 13.8 23.4 21.2 S4.6 19.3 23.9 43.2 1.2 0.7 1.9 1.0 0.5 1.5 - 0.1 0.1 52.4 53.2 115.611. IPre Oprati.. Ceet

TOraining - - - 3.6 0.6 4.4 5.9 1.6 7.5 4.0 1.3 5.3 2.5 0.7 3.2 - - _ _ _ - 16.2 4.2 IX4 co

T a Ia *6. 46. 1. U1.1 63I.1 434.9 4643 113.1 .4 193.3 14.5 36.3 45.4 16.9 60.3 34.2 10.4 44.6 O.1 0.1 0.2 1113.0 589.0 1702.-

Fhysidel _mosse v . 100.0 88.0 1M..)

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ANNEX 5-1Page 4 of 6

8. Field Resident Engineers can authorize expenditures for specialwork, e.g., landslide repairs, up to a specific level (about US$40,000) thenthey must apply to the Field Construction Coordinators and they, in turn, toheadquarters when it exceeds their level of authority. All authorizations forextra work or changes in work or volumes must be quickly communicated toheadquarers in any case. A rolling 3-month work program is maintained,incorporating the changes brought about, plus experience which would affectthe costs, timing, design, etc.

9. Evidence of control being exercised can be found throughout thedocumentation examined by the mission. Three out of 15 contractors have beenpenalized for delays in carrying out their work (up to December 31, 1981). In1981 earthwork was reduced by approximately 10 million cubic meters with priceadjustments occurring in 14 of the 16 contracts (12 lower 2 higher). Physicalexamination, on the ground at 6 locations and low fly-over by plane andhelicopter over the entire project revealed no obvious construction faults ineither the design or the work.

10. The mission reviewed the main items of the capital cost estimate forthe railroad by examining unit costs for civil works, which are well researchedand reasonable in the Brazilian context, and by comparing equipment costs withinternational levels. CVRD has already signed all required contracts for therailway embankments, cuttings and bridges, and contractors have already completedabout 40% of the total scope of works to be done. These works have withstoodtwo rainy seasons and this year's record floods with clear safety margins.Estimates for signalling and telecommunications are based on similar contractsexecuted during the last five years on CVRDs Vitoria-Minas line. Tractionand rolling stock requirements have been estimated from traffic forecasts, andoperations, utilization and availability data based on performance on theVitoria-Minas line. Total estimates have been revised periodically to takeinto account on-the-job experience, and since 1980 these revisions haveresulted in significant decreases in total costs. In sum, cost estimatesincluding physical contingencies are satisfactory. However, given the costoverruns which have been encountered in major projects world-wide, it would beprudent to include sensitivity analyses for 10% and 20% increases in totalcosts.

11. A detailed breakdown of the operating costs is given in the table onthe following page. Methods and procedures of the identification, recordingand preparation of CVRD railway operating costs were examined and found to bereasonable and typical of practices used on other railways. Similar methodsand procedures will be used on the Carajas Line. Operating costs, without


Railroad Economical Operational Cost(US$ 000)

Domestic Currency Foreign Currency Total

Item/million tpy 15.0 25.0 35.0 38.3 50.0 15.0 25.0 35.0 38.3 50.0 15.0 25.0 35.0 38.3 50.0

Electric Power 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Diesel Oil and Lubricants 5,760.0 9,452.0 13,212.9 14,448.8 18,838.6 9,397.8 15.422.7 21,557.9 23,574.0 30,736.5 15,157.8 24.875.3 34,770.9 38,022.6 49,575.0

Permanent Way Maintenance Equipment 800.1 808.6 905.2 905.2 965.2 3,411.1 3,447.3 3,859.1 3,859.1 4,114.7 4,211.3 4,255.9 4,764.3 4,764.3 5,079.8

Subgrade Maintenance Materials 3,457.1 3,460.3 3,460.3 3,460.3 3,460.3 1,152.4 1,153.4 1,153.4 1,153.4 1,153.4 4,609.5 4,613.7 4,613.7 4,613.7 4,613.7

Locomotive Maintenance Materials 337.3 477.3 613.2 657.7 814.1 412.3 583.4 749.5 803.8 974.9 749.6 1,060.7 1,362.7 1,461.5 1,809.0

Wagons Maintenance Materials 1,709.3 2,465.5 2.149.2 3,386.6 4,255.3 732.6 1,056.6 1,349.7 1,451.4 1,823.7 2,441.9 3,522.9 4,498.9 4,838.0 6,079.0

Electric Maintenance Materials 694.7 694.7 694.7 694.7 694.7 60.4 60.4 60.4 60.4 60.4 755.1 755.1 755.1 755.1 755.1

Manpower 17,697.7 21,533.9 24,794.6 25,510.5 32,894.5 0.0 0.0 0.0 0.0 0.0 17,697.7 21,533.9 24,794.6 25,510.5 32,894.5

Buildings Maintenance 135.7 274.9 388.6 388.6 388.6 0.0 0.0 0.0 0.0 0.0 135.7 274.9 388.6 388.6 388.6

Administration Materials 1,474.2 1,542.2 1,775.1 1,775.1 1.775.1 0.0 0.0 0.0 0.0 0.0 1,474.2 1,542.2 1,775.1 1,775.1 1,775.1

Total 32,066.2 40,710.0 48,993.9 51,227.2 64,086.1 15,166.6 21,723.8 28,730.0 30,902.1 38,883.6 47,232.8 62,433.8 77,723.9 82,129.3 102,969.7

Unit Cost (USS/t) 2.14 1.63 1.40 1.34 1.28 1.01 0.87 0.82 0.81 0.78 3.15 2.50 2.22 2.14 2.06

estn %

' 001

- 91 -


depreciation I/ for iron-ore traffic (approximately 70 million tons per year)on existing CVRD line, were as given in the following table. Operating costsfor the Carajas Line were derived from them and are also shown in the table.

ITEMS Vitoria-Minas Line Carajas Project(Existing Line) 1981Total Annual US$ Cost US$ Cost Per TonCost (US$ Mil.) Per Ton (35 Mil. Ton Level

Fuel and Lubricant 52,316 0.67 1.32Permanent Way 8,361.4 0.11 0.14Infrastructure 5,657.3 0.07 0.13Locomotive 4,507.5 0.06 0.04Wagon Maintenance 6,682.7 0.08 0.13Electric Installations 3,948.1 0.05 0.02Manpower 110,812.1 1.41 0.90Building Maintenance 3,202.0 0.04 0.01Administrative 5,166.3 0.07 0.05Total 200,651.6 2.56 2.75

(Existing line cost per ton for 1977=$2.70; 1978=$2.62; 1979=$2.58; 1980=$2.30)

12. The operating cost developed by CVRD for the Carajas new line isbasically the same or similar to that the Company is obtaining in the opera-tion of the existing Vitoria-Minas railroad line. After inspecting theoperation of the existing CVRD line and reviewing its computerized systemfor maintenance and cost research, the mission believes that CVRD can have thesame performance in the Carajas line operation.

1/ Depreciation is based on Asset-Life, e.g.:

Locomotives* 25 years Small equipment 30 yearsWagons 15 years Communications 30 yearsPerm. Way Equip. 8 years Others 15 yearsBldgs. and Warehouses 15 years Civil Works 20 years

* Locomotives transferred from existing CVRD line will be depreciatedover 18 years.

Latin America & the Caribbean Projects DepartmentJuly 1982

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Brazil--Carajas Iron Ore Project-

Carajas Townsite Description

1. CVRD is presently revising its housing plans for Carajas town toaccommodate an estimated 14,200 population, or about 4,000 more persons thanoriginally planned. This is due to an increase in estimated service workersrequired by the town, based on an estimated requirement of 0.7 service workersper basic worker which is consistent with the experience of single-industry,free-standing towns in the Americas and Southeast Asia. While initially theCompany planned on a requirement for 1,706 dwellings, the number has increasedto 2,720 as shown in the following distribution by housing type. Housingrequirements for service workers are based on an average 1.3 workers perhousehold, and for basic workers 1.2 workers per household. The averagehousehold size for service workers is 5.5 persons and for basic workers 5.0persons.

Carajas Townsite--Housing Distribution by Type, Initial Stage

Estimated Single-Labor Family Urbanized Total EstimatedForce Detached Apt. Lots Dwellings Population

1. CVRD Basic Workers

Mining Operation 2,033 1,520 80 - 1,600 8,000Railwav 11 a/ 10 - - 10 50

Subtotal 2,044 1,530 80 - 1,610 8,050

2. Service Workers

Professional 50 45 5 - 50 250Non-professional 1,380 - 130 930 1,060 b/ 5,900

Subtotal 1,430 45 135 930 1,110 6,150

Total 1 1,575 215 930 2,720

a! Of the original 500, 489 have been reallocated to Maraba.b/ Financed in part by BNH.

2. Of the additional 1,014 dwellings which CVRD is now including in itsplans to house additional service workers and their families, 930 yill be inserviced lots, of which half will be of a minimum dimension (180 m ) to permitthe construction of an economical "core" unit for the lower-income serviceworkers. No additional land will need to be purchased because the lot sizeswill allow for increased densities to be achieved within existing urbanboundaries. The incremental cost is estimated to be marginal, consistingmainly of additional utilities hook-ups. In planning and designing the town,CVRD made use of its past experience with the Itabira township in the south.

3. The Carajas town will be fully self-contained 2in terms of communityservices and facilities. An Slementary school (3,740 m ) for 1,080 studentsand secondary school (2,500 m ) will be built in accordance with agreementswith Brazilian school authorities. 1/ A modern hospital with a 100-bed

1/ Sites for three additional schools have been provided for the gradualincrease in school age population.


capacity will provide clinical, surgical, and emergency and general health careservices. Two supermarkets will be built to provide food and householdhardware. Twenty shops (88 m each) will be built for local enterprises, suchas bakeries, butchers, and clothing stores. Two social/recreational clubs areplanned (one is already completed), as well as a 40-room hotel and 500-seatcinema/theater. The open space to be provided is being increased beyond the 2ha per 1,000 population originally planned to provide more effective recreation

areas, especially for the teenage population. The network of parks and play-grounds linked together by greenways will have bicycle and pedestrian pathwaysso that children will be able to travel safely through the town. An industrialservice center of about 5.6 ha with expansion to 10 ha has been provided onthe southeast side of the town towards the airport. Maintenance and repairshops as well as warehousing and storage areas will be provided.

4. The town has been laid out on a grid network of roads--primary,secondary and tertiary. CVRD is preparing a one-way traffic system on thetertiary streets that will restrict "through" traffic. This one-way systemwill provide a better definition to the hierarchy ,of superblocks and facilitatevehicular circulation.

5. Systems for potable water, sanitary sewage, storm drainage,electricity, communications, public transportation, and garbage collectionwill be installed and operating by the end of 1984. Guidelines have beenprepared for the treatment of the sanitary sewage with oxidation ponds,velocity check-dams for the storm drainage, and a sanitary land fill for solidwaste disposal. For the first five years, CVRD will operate and maintain thetown services; thereafter, the Maraba municipal authorities, or a separatemunicipal corporation, will take over responsibility in a phased manner. Anadequate tax base will be established to cover the cost of repairs, maintenanceand replacement of the municipal services and facilities.

6. The Carajas town will continue to grow after 1988, particularly inthe service sector. Since free-standing new industrial towns in developingcountries experience a basic to service worker ratio of 1:2.5, Carajas canexpect to achieve at least a 1:1 ratio for the second-phase town developmentup to the year 2000 and a population increase--of up to 4,000 people--relatedto a modest increase in basic workers drawn by the development of other miningactivities in the area.

7. The additional 6,000 population could be accommodated on the 80 haavailable to the town and through redensification of the apartment buildingsites adjacent to the town center. The major portion of housing would be theminimum standard "embryo" unit.

9. In view of the importance of the planning and designing of thetown to meet the requirements of the expected growth in population, CVRD willbe asked to furnish its plans for the first and second-phase developments(up to the year 2000) to the Bank for review and approval by no later thanSeptember 30, 1982, and June 1, 1985, respectively.

Latin America & the Caribbean ProjectsDepartment/Industry Department

July 1982

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CVRD's Environmental Management Program: Organization and Activities

Environmental Management Organization

1. From the outset of preparation of the Carajas iron ore Project,CVRD recognized and addressed environmental considerations relating to theProject. In May 1972, CVRD assigned responsibility to its Buildings andProjects Department (DEPEK) 1/ for environmental management of the Project;and from 1972-81, more than a dozen environmentally-related studies 2/ werecommissioned by DEPEK, providing a foundation for environmental planning.

2. As project preparation progressed and the scope of environmentalissues was better defined, greater emphasis was placed on environmentalmanagement. In January 1981, CVRD created an environmental advisory group--Grupo de Estudos e Assessoramento de Meio Ambiente (GEAMAM)--comprisedof eight senior independent experts 3/, to advise CVRD on all enviromentalaspects of the Company, and particularly the Carajas Project. The ExecutiveSecretary of the Group is CVRD's Technical Advisor, who reports directly toGVRD's President and oversees DEPEK-s environmental activities.

3. In June 1981, CVRD created an internal environmental commission(Comissao Interna de Meio Ambiente (CIMA) lo aL.d at the mine site, staffedby an experienced environmental management/Amazonian-applied ecology expert.A second CIMA is being established at the port site with responsibility formonitoring port operations, and appointment of its environmental officer isexpected by mid-1982. Located at both end3 of the Carajas railway, theseCIMAs will have joint responsibility for monitoring environmental aspects ofthe railway component and will supervised by a senior environmental specialistheadquartered in Rio de Janeiro reporting to DEPEK.

1/ DEPEK (Departamento do Edificios e Projetos) is the Building and ProjectsDepartment of SUCAR (Superintendencia de Implantacao do Projeto Carajas),the Carajas Project Implementation Superintendency (para. 4.05).

2/ A list of these studies is available in the Project File.

3/ These experts are specialist in: the Amazon, Amazon biology (2 spe-cialists), climatology, conservation, geomorphology, soil science,and tropical agronomy.

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4. These organizational relationships are illustrated in the chartbelow.

CVRD -- Carajas Environmental Management Organization

___ CVRD

r---- -President

L Technical Advisor r ]Executive Secy. of GEAMNA.EAMAMJ

SUCARCarajas Project

Implementation Superintendency

I __

= = == = ~~~~DEPEK|Environmentally - _ Buildings & Projects _Related Government Department, charged ConsultantsAgencies (SEMA, with environmental man-IBDF, IPHAN, Others) agement of the Carajas

Project

Mine/Towns it: FortInternal Commission Internal Commissionifor Environmen (CIMA) for Environment (CIMA)

5. GEAMAM, at the highest level of CVRD's environmental management,is responsible for advising on overall environmental policy and under itsterms of reference is charged with:

(a) studying, discussing and proposing measures concerning therational use of natural resources and their conservation inCVRD's areas;

(b) suggesting measures to prevent or reduce possible environ-mental damage;

(c) assessing plans, programs or projects an environmental issues,and on the use and conservation of natural resources; and

(d) making recommendations on whatever technical topic may arisewithin their specialists

and will operate in this capacity for the life of the loan.

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6. GEAMAM has prepared an "Environmental Management Manual" for allof CVRD-s operations--including the Carajas Project and all future CVRDprojects in the Amazon region. This comprehensive manuals which is availablein the Project File, has been reviewed by the Bank and is satisfactory. GEAMAMis also responsible for reviewing the project-specific activities of DEPEK andthe CIMAs, as well as advising on CVRD coordination with environmentally-related government agencies. To date CVRD has worked closely with several ofthese agencies at the national level and has made preliminary contacts withothers at the regional level. 1/

7. DEPEK, at the supervisory level, has prepared detailed proceduresfor environmental protection and management--including minimization of pol-lution, dust, water and noise--which will be binding on all contractors forthe Project. The CIMAs, at the operational level, are responsible for over-seeing the proper implementation of these procedures.

Environmental Activities

8. In addition to its planned long-term cooperation with environment-ally-related environmental agencies in areas summarized in para. 5, CVRD has4 priority activities which it plans to complete by mid-1982. These are sum-marized below and described in greater detail in the Project File.

9 Environmental Zoning. The Ministry of Mines and Energy (DNPM)undertook a resource survey resulting in a detailed map (1:250,000 scale)of the Carajas region. Based on this survey and other data, CVRD is preparinga 1:100,000 scale base map showing mineralized deposits, IBDF tracts, INCRAareas, FUNAI reserves and other Amerindian-occupied areas. This zoning willfacilitate planning for appropriate land use, reduce the incidence of incompa-tible activities and allow for systematic conservation of special tracts.

10. Conservation Tracts and Biotic Inventories. Based on the results ofthe environmental zoning, CVRD plans to review the forest areas in theconcession and along the railway track in order to set aside conservation

1/ At the national level, these agencies include: (i) the Federal Environ-mental Secretariat (Secretaria Especial do Meio Ambiente: SEMA) respon-sible for coordinating and supervising environmental aspects of all majorprojects/activities in Brazil; (ii) the Brazilian Forestry DevelopmentInstitute (Instituto Brasileiro de Desenvolvimento Florestal: IBDF)responsible for forestry and endangered species and which, together withSEMA has undertaken an environmental reconnaissance of the Carajas region;(iii) the National Research Council (Conselho Nacional de Pesquisas:CNPq) which is undertaking biotic inventory of the Amazon region and theCarajas area in particulr; (iv) the National Institute of Historic andArtistic Patrimony (Instituto de Patrimonio Historico e ArtisticoNacional: IPHAN) which plans to undertake a five-year archeologicalsalvage and preservation project in the Carajas area; and (v) the NationalFoundation for Indigenous Populations, Ministry of the Interior (FundacaoNacional do Indio: FUNAI) which is implementing protective measures forthe Amerindian communities impacted by the Project (Annex 5-4).

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tracts where appropriate. CVRD has already acquired 20,000 ha for thispurpose. Biotic inventories are being carried out by the National ResearchCouncil in areas where forest clearing is presently envisaged to allow pre-servation where appropriate.

11. Greenbelt Bufferzone. GEAMAM has strongly recommended the creationof a bufferzone to minimize the negative impact of the Project on the surround-ing areas. As iron ore mineralization extends to the concession-s perimeter,CVRD has requested expansion of the concession area to allow the establishmentof a bufferzone around the mining area. A similar bufferzone is planned alongthe railway and at the port.

12. Ecological Stations. CVRD is eager to prevent unlawful exploitationof the flora and fauna in the Project area and plans with the assistance ofIBDF, to establish guard posts in the bufferzone, to ensure adequate sur-veillance of the area.

Office of Environmental Affairs/Industry Department

July 1982

- 98 -



Carajas Amerindian Sub-Project 1/

A. General

1. Under Brazilian law, Amerindians are entitled to assistance andprotection aimed at ensuring their survival and gradual acculturation. 2/It is part of this policy that the protection provided duly recognizes thecultural distinctness of the Amerindians and their need, given their existingeconomic system, for large areas of land. The most important parts of thelegislation are: (i) the guarantees regarding Amerindian land rights, and(ii) the protection of native lands from squatters and other illegal trespass.A more complete description of Brazilian Amerindian policies and the AmerindianSub-project (summarized below) is in the Project File.

2. All Amerindians areas in the Carajas Project vicinity receive FUNAI 3/assistance but experience budgetary constraints and problems related to therecruitment, training, and retaining of staff, and to a lack of transport andcommunication equipment. The large area size of some reserves and the numerousoutlying villages under the responsibility of individual Indian Posts makeadequate coverage almost impossible. All Indian lands, a total of 2,203,588ha, have been defined by decrees and portarias. However, most lack field-leveldemarcation and register in the "Servicio do Patrimonio da Uniao" (SPU). Atpresent, illicit intrusions on the lands are becoming more frequtI11L. C;-!I.in the region's natural environment and away :rom more nomadic to sedentaryways of tribal life are causing health problems in connection with inadequatewater supply, nutrition and the poor quality of health care. 4/

3. The objective of the Sub-project is to minimize immediate andlonger-term adverse impacts of accelerated regional development on Amerindiansin the area of influence of the Carajas Project. The Amerindian reserveswithin this area are shown in the following table.

1/ "Projeto Ferro Carajas, Apoio as Comunidades Indigenas, Janeiro 1982"prepared by FUNAI in January 1982 forms the basis for the Sub-project.(Project File).

2/ The indigenous population of Brazil has its status and rights definedin a body of legislation comprised of Article 198 of the Constitutionof 1969, the Indian Statute of 1973 (Law No. 6,001), and a series oflaws and decrees enacted between 1967 and 1980 which established and nowgovern FUNAI.

3/ FUNAI, the National Indian Foundation and a government agency, was createdin 1967 and charged with the implementation of Amerindian policies andregulation of all contacts with Amerindians.

4/ Amerindians in the Carajas area belong to nine different tribes, who havetraditionally lived fractured into small groups. The Carajas projectarea spans the vast region in a radius of 100 km from the approximately800 km long Carajas railway line and comprises very distinct ecologicalzones. The culture, subsistence base, contact history and current degreeof acculturation of its Amerindian groups vary considerably.

- 99 -


Amerindian Reserves in the Area of Influence of the Caraias Project

Amerindian / Number of

Reserves State Group Population Area Size Area Status- Municipality Villages

(ha)

1. Catete Para (2a) Xikrin/ 247 439,150 Pending/ Maraba 1

Kayapo Edital

2. Mae Maria Para (2a) Gaviao 162 62,000 Decree Maraba 2

3. Parakana Para (2a) Parakana 123 270,000 Decree + Tucurui 2

Portaria

4. Sororo Para (2a) Surui 89 26,257 Decree + Maraba 1

Portaria

5. Alto Turiacu Maranhao (6a) Ulrubu- 312 530,524 Decree + Moncao 5

Kaapor Portaria

6. Angico Torto Maranhao (6a) Guajajara 1,084 413,589 Decree + Amarante 8

(Tenetehara) Portaria

7. Arariboia Maranhao (6a) Guajajara 569 7 -/ C/ Ararante 4

8. Canudal Maranhao (6a) Guajajara 434 ? b _ c/ Amarante 2

9. Caru Maranhao (6a) Guajajara 118 170,000 Decree + Bom Jardin 5

and Guaja Edital

10. Guaja Guaja 29 1

11. Governador Maranhao (6a) Gaviao 308 41,643 Decree + Carutapera 1

Portaria & Moncao

12. Krikati Maranhao (6a) Krikati 297 136,000 Decree + Montes Altos 1

Portaria

13. Rio Pindare Maranhao (6a) Guajajara 316 13,425 Decree + Mloncao &

Edital Bom Jardin 2

14. Apinaje Goais (7a) Apinaje 447 101,000 Decree + Tocantinopolis 2

Portaria

Tote1 4,535 2,203,588 37

Source: FUNAI

a/ All areas lack register with the "Servico do Patrimonio da Uniao".

b/ Unknown.

ci Posaibly included in Angico Torto Decree; data being verified.

4. The Sub-project will combine emergency and preventive actionprograms, in response to possible threats to the physical and cultural survivalof the Amerindians posed by the construction of the railway line; by increasesin spontaneous settlement, mining and other extractive activities; and inanticipation of future requirements to ensure viable and independent forms ofsubsistence for the Amerindians. The Sub-project reflects FUNAI's philosophythat the longer-term minimization of adverse impacts can be achieved throughsubstantial social and economic assistance to (i) create self-sustainingliving conditions inside the reserves now that would later compare favorablyto alternative lifestyles of the outside world, and (ii) provide Amerindianswith the education required to eventually deal on an equal basis with thesurrounding society.

- 100 -


5. The Sub-project will fund investments, start-up staff, and operatingcosts to ensure forceful action programs in areas described below. In supportof the Sub-project, CVRD will substantially supplement FUNAI's current budget-ary allocations with US$13.6 million in project funds over 1982-86 (Annex 7-1)as shown in the table below.

Carajas Amserindian Subprolect-Total Project Costa/

(US$ 000--and-1981 tersa)

1982 1983 1984 1985 1986 Total

Para State/2nd Regional DelgaciaMaraba Ajudancia 158.6 253.8 111.4 113.1 118.7 755,6Catete 367.9 202.7 108,3 108,3 110.7 897.9Mae Maria 349.3 68.8 61.2 54.1 55.2 588.6Parakana 344.9 531.3 124.2 125,0 125.8 1,251.2Socoro 323.7 235.8 44.9 46.1 47.9 698.4

Subtotal 1,544.4 1,292.4 450.0 446,6 458,3 4,191.7

Maranhao State/6th Regional Delgacia 164.8 318.3 140,0 ' 195.2 115.2 933.5

Alto Turiaeu 161.6 228.7 12.0 12.0 12.0 426.3Angico Torto 209.5 802.0 117.3 44.3 47.8 1,220,9Arariboia 166.3 577.9 48.7 49.9 51.7 894.5Canudal 81.0 308.6 21.0 20.6 21.8 453.0Caru 785,1 370.8 310.2 310,5 311.3 2,087.9Guaja 74,2 96.8 1.6 - - 172.6

Governador 109.3 210.9 76.5 10.2 10.2 417,1Krikati 82.6 161.5 112.4 11.2 12.4 380.1Rio Pindare 176.2 66.0 14.0 6.0 6.0 268.2

Subtotal 2,010.6 3,141.5 853.7 659.9 588.4 7,254.4

Goiaa State/7th Regional DelgaclaApinaje 361.7 391.3 117.0 29,1 29.0 928,1

Technical Reserve 261.9. 239.9 239.9 239.9 239.9 _jZ21.5

Total 4.178.6 5,065.1 1,375,5 1,315.6 13,595,4

Source: FUNAI.a/ For detailed cost breakdowin refer to Apoio as Comunidades Indigenas

(FVMAI: 'January 1982) in the Project File.

6. Amerindian Land Protection. This is the responsibility of FUNAI-s"Departamento Geral do Patrimonio Indigena" (DGPI), whose activities arefunded under FUNAI's regular budget. 1/ In conjunction with the Sub-project,DGPI would be obliged to carry out any measures necessary to protect Amerindianlands, such as (i) eviction of squatters and illegal trepassers from Indianlands; (ii) safeguards against trepass, i.e., field-level demarcations, clearmarking of reserve borders and regular surveillance; (iii) redefinition,decree and demarcation of the lands of the Guaja and Parakana Indians; (iv)settlement of contested reserve borders and pending lawsuits; and (v) regis-tration of all reserves with the SPU.

1/ Under the Bank-financed "Northwest Region Development Program's BR.364Amerindian Protection Project, land activities are also funded out ofFUNAI's regular budget.

- 101 -


7. At present, the definition and protection of Amerindian landsconstitutes a major problem only in the cases of the unacculturated GuajaIndians who are being attracted into the Caru Reserve; the Parakana Indianswho are currently being removed from their traditional lands, which will beflooded for the Tucurui power dam, to a new area which is still under defini-tion and lacks reserve status; and the Xikrin-Kayapo Indians whose CateteReserve is invaded by a large livestock and woodlogging enterprise.

8. Under the Sub-project itself, the protection and surveillance ofAmerindian lands would be supported through:

(a) funding minor demarcation works inside the Catete, Parakana,Sororo, Arariboia, Governador and Alto Turiacu reserves(2% of total sub-project cost);

(b) substantial increases in the transportation and communicationfacilities;

(c) increases in FUNAI staff and the establishment of observationposts under the administration and Guaja "Protection" components;and

(d) the acquisition of chain saws and other agricultural equipmentwhich might be used to maintain reserve border markings, underthe economic development component.

9. For the future, however, increasing pressure on Amerindian landsremains a matter of great concern. For the effective protection of Amerindianlands, preventive action and early detection are essential.

10. Health. Expenditures for health, water supply, and (to a lesserextent) housing and other social infrastructure works account for the largestsingle share (28%) of total Sub-project cost. The Sub-project will:

(a) improve FUNAI's mobile health services, to provide betterimmunization, curative and emergency services and dentalcare. A new Mobile Health Unit (Equipe Volante de Saude, EVS)will be staffed and equipped at the Maraba "Ajudancia", and theoperations of the existing Mobile Health Unit in Sao Luis willbe substantially upgraded by better equipment and operatingfunds;

(b) establish "Casas do Indio" in Maraba and Sao Luis, toaccommodate Amerindians in need of prolonged treatmenttogether with caretaking family members;

(c) fund FUNAI contracts with local hospitals in Maraba and SaoLuis for health services to Amerindians;

(d) upgrade health services at all 14 Indian Posts and theiroutlying villages according to need, by the construction of


infirmaries, the contracting of health attendants, specialbudgetary allocations for drugs not supplied under thegovernment's "CEME" system, and by training courses extendedto paramedical staff; and

(e) provide potable water and upgrade hygiene and housing con-ditions in large communities.

11. FUNAI Administration. The presence of knowledgeable and motivatedFUNAI staff at the Indian Posts is indispensable to protecting and assist-ing Amerindian communities, and to the early detection and correction ofproblems. In order to retain staff at isolated Indian Posts, it is necessaryto provide them with the means essential to the effective execution of theirwork and with simple but acceptable living quarters. Both aspects are addressedunder the Sub-project: transport, communication and housing facilities willbe upgraded and field-level staff will be increased (24.5% of total Sub-projectcost).

12. Economic Development Projects. These projects (23% of total Sub-project cost), together with accompanying investments in physical infrastruc-ture and vehicles, are part of the long-term strategy to assist the Amerindiansin adding modern cultivation practices to their traditional subsistence activi-ties, and in becoming economically independent. With modern agriculturaltechniques, the large tracts of reserve lands would allow the Amerindians tobecome self-sufficient in food production and to produce enough marketableexcess to finance the purchase of certain goods they have come to depend on(e.g., firearms for hunting, metal tools, salt, sugar, kerosene, etc.). Theseeconomic development projects will be carefully adapted to each community'sneeds, cultural characteristics and environmental conditions, and, in thecases of larger production schemes, to market conditions, and provide equip-ment, inputs and technical assistance for agriculture, livestock, fruit andother food production projects, or support to extractive activities (e.g.,Brazil and-Babacu nut collection and processing), etc.

13. Education. The Sub-project will finance the construction andstaffing of additional schools in outlying villages and the developmentof bilingual teaching programs (9.5% of total Sub-project cost).

14. Guaja Indian Protection. This protection is a major immediateeffort sponsored under the Sub-project (13% of total Sub-project cost). TheGuaja Indians live in very small bands in and around the Caru and the AltoTuriacu reserves. For their subsistence, they depend mostly on hunting andgathering. They are estimated to have a total remaining population of 40-60individuals, not all of whom are yet in contact with the civilized world.Health hazards, through common contagious diseases, contractable in uncon-trolled contact with non-Indian populations, may threaten their survival.FUNAI will therefore seek to contact and immunize the unknown Guaja bands,whose movements have been reported by residents of the area, and to improvethe situation of the 26 Guaja Indians who were already contacted and attractedinto the Caru reserve in 1981. The latter, first contact with the Guaja hashad unfortunate preliminary results: the 26 Guaja are now grouped in small


settlements along the southern border of the Caru reserve, immediately oppositea major railway construction camp and next to a densely populated small townarea, while their contacts and health situation go uncontrolled by FUNAIagents. FUNAI has begun to implement an emergency program, which will befunded under the Sub-project, consisting of:

(a) the creation of a mobile team to assist the Guajas presentlyin the vicinity of the railway project;

(b) designation of a "sertanista" (expert in the attraction of newtribes), who could coordinate the entire Guaja protectioninitiative;

(c) establishment and staffing of five temporary watchposts forpurposes of attracting the uncontacted bands; and

(d) creation of a new, permanent Indian Post for the Guaja, inthe very interior of the Caru reserve.

15. Sub-project implementation would involve an annual iterativeplanning, implementation, monitoring and evaluation process. The Sub-projectwas prepared with the active participation of the Amerindian communities andof local FUNAI staff, but will require substantial fine tuning on the basis offurther anthropological studies, an analysis of potential changes in theexternal environment, and--with regard to economic and infrastructure invest-ment projects--further technical analysis and careful evaluations of firstresults. Priorities in implementation--the protection of the physical survivalof Amerindians and of Amerindian lands--must be pursued consistently and willbe acceptable grounds for adjustments of the Sub-project as needed. The Bankwill receive semi-annual reports on Sub-project implementation and will beable to comment on annual plans prior to their approval. In addition, Bankstaff will be entitled to supervise Sub-project implementation in the field,always accompanied by a FUNAI agent.

Agriculture and Rural DevelopmentProjects Department/Industry Department

July 1982

- 104 -

ANNEX 6


Project Management Linkages

The diagram below, for the port component, is representative ofthe management arrangements planned for each of the Project components andillustrates interfaces between CVRD and contracted management assistance aswell as functional, standards and procedural, and command linkages.

Port Component--Project Management Linkages

CVRD MANAGEMENT PACKAGE

PHROLJCT DIRECrOR sAo LUiSCARAJAS IRON ORE PROJECT

| I GENERAL CONSTRUCTIONMANAGER- sAo LUIS ,I

CONSTRUCTION I MANAG ERiRO DEPAR

T MENT t

GENERAL PLANNING _ Li P

_ & CONCOROLNTMANJAGER *! _| CONRO _ _ _ _ _ _ _ CNTROL_

I ENERALC NSIN i I TR

1L,NAÆE R…| L _ ___ _______. 4 ENGINEERING I

Nt--l E-I I CL- - fE1NG F.. CIV

G NEIIALI

i i _ MECHANICAL

I l __ | | LEGEND

_ ELECTRICAL _ ,_ _ _ ERECTION _ | Interface CVRDtMnawnWWma

l . | ! l I t I t rz~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~acka ge

I INS tRUMNTATION j Commnnd links

GENERAL ADIITRTO t. I _ &PladrdPcedureslinllADMNINTRATIN I MNICIA ADIITAINStandardsMANAGER _ -

G ENaeRaL I O M -T k

| |MANI;.Gf R --I----

Source: Management Organization PlanCVRD, May 1981


- 105 - ANNEX 7-1

Brazil--Carajas Iron Ore ProjectDetailed Capital Cost Breakdown by Year, 1978-88

(US$ million--end-1981 terms)

Total Grand1978-81 1982 1983 1984 1985 1986 1987 1988 1982-88 Total

Mine

Civil Works 74.7 104.8 89.1 12.8 1.3 -- -- -- 208.0 282.7Equipment 2.8 18.2 99.9 84.6 3.1 1.3 -- -- 207.1 209.9Freight & Er. 0.9 5.0 11.3 33.2 7.5 0.6 -- -- 57.6 58.5Engineering 27.3 6.4 4.2 1.0 -- -- -- -- 11.6 38.9Training & Pre-op 6.7 2.1 5.5 12.8 5.7 -- -- -- 26.1 32.8

Subtotal 112.4 136.5 210.0 144.4 17.6 1.9 -- -- 510.4 622.8

Railroad

Civil Works 255.5 248.1 252.0 30.4 7.2 8.1 -- -- 545.8 801.3Equipment 4.9 130.2 232.1 184.9 48.9 40.4 0.1 -- 636.6 641.5Freight & Er. 0.5 21.7 70.4 75.0 5.7 4.0 0.1 -- 176.9 177.4Engineering 50.9 4.5 1.4 1.2 0.8 0.2 -- __ 8.1 59.0Training & Pre-op -- 4.7 8.5 6.1 3.5 -- -- 22.8 22.8

Subtotal 311.8 409.2 564.4 297.6 66.1 52.7 0.2 -- .1.390.2 1,702.0

Port

Civil Works 21.3 28.1 32.2 18.7 2.7 -- -- 81.7 103.0Equipment -- 13.2 35.6 26.4 0.6 -- -- -- 75.8 75.8Freight & Er. -- 0.3 2.5 13.9 1.8 0.1 -- -- 18.6 18.6Engineering 21.8 2.6 1.2 0.4 0.1 -- -- -- 4.3 26.1Training & Pre-op -- 0.5 1.3 3.4 2.0 -- -- -- 7.2 7.2

Subtotal 43.1 44.7 72.8 62.8 7.2 0. -- -- 187.6 230.7

Townsites

Civil Works 14.4 18.0 22.8 55.1 34.2 11.5 -- -- 141.6 156.0Equipment 2.2 -- 12.9 -- -- -- -- -- 12.9 15.1Freight & Er. 0.1 -- 1.1 -- -- -- -- -- 1.1 1.2Engineering 1.7 4.9 -- -- -- -- -- 4.9 6.6

Subtotal 18.4 22.9 36.8 55.1 34.2 11.5 -- -- 160.5 178.9

Proiect Management

Supervision 123.2 15.7 15.6 13.0 8.8 6.9 -- -- 60.0 183.2Insp. Services 10.7 16.0 14.0 4.5 -- -- 34.5 45.2Mgmt.Contracts -- 32.6 65.1 55.5 30.2 12.6 -- -- 196.0 196.0Technical Asst. -- 3.0 3.5 3.1 -- -- -- -- 9.6 9.6Engr. Insurance -- 0.1 0.3 0.4 0.2 -- -- -- 1.0 1.0

Subtotal 133.9 67.4 98.5 76.5 39.2 19.5 -- -- 301.1 435.0

Amerindian Program -- 4.2 5.0 l.r 1.4 1.3 __ __ 13.6 13.6

Total Base Cost 619.6 684.9 987.5 638.1 165.7 87.0 0.2 -- 2,563.4 3,183.0

Physical Contingencies -- 8.0 45.4 65.2 88.2 114.6 -- 321.4 321.4

Price Escalation -- 16.7 42.9 86.6 47.3 51.7 -- -- 245.2 245.2

Installed Cost 619.6 709.6 1,075.8 789.9 301.2 253.3 0.2 -- 3,130.0 3,749,1

Incr. Working Capital -- -- -- -- 31.7 79., 73.5 34.9 212.9 212.9

Project Cost 619.6 709.6 1,075. 789.9 332.9 332.3 73.7 34.9 3,342.9 3,962.5


- 106 -

Annex 7-2


Bank-Financed Goods

Item Quantity

1. Wheel dozers 2

2. Front-end loaders 4

3. Dewatering screens 67

4. Trackmobiles 3

5. Rails 97,600 tons

6. Tie plates 1,010,000

7. Spring clips 2,020,000

8. Screw spikes 4,040,000

9. Spring washers 4,040,000

10. Wooden ties 1,450,000

11. 15-ton Cranes 2

12. 50-ton Jacks 4

13. Telecom Towers 9

14. Fender assembly 5

15. 80-ton Crane 1

16. Conveyor belts 16,750 meters

17. Construction Steel 11,656 tons


- 107 -ANNEX 7-3

Brazil--Carajas Iron Ore ProjectProcurement Schedule for Bank-Financed Goods

Packaga Bid Docuiants To Tender Tencier Bid Evaluation To

no. Item Bank for Review Issue Date Closing Date Bank for Review

1 Wheeldozer 300 Hp Post Review Oct. 1, 84 Nov. 30, 84 Post Review

2 F/E Loader 11 cyd Mar. 15, 83 May 31, 83 Jul. 30, 83 Sep. , 83

3 Dewatering screens Post Review Jan. 1, 83 Feb. 28, 83 Post Review

4 Tracknobiles Post Review Jul. 1, 82 Aug. 31, 82 Post Review

5A Rails Reviewed May 14, 82 Jul. 2, 82 Aug. 1, 82

B Rails Aug. 15, 82 Oct. 1, 82 Dec. 30, 82 Jan. 31, 83

C Rails Feb. 15, 83 May 1, 82 Jun. 29, 83 Jul. 31, 83

6A Tie plates Apr. 15, 82 May 30, 82 Jun. 29, 82 Jul. 30. 82

B Tie plates Sep. 1, 82 Oct. 15, 82 Dec. 15, 82 Jan. 15, 83

C Tie plates Feb. 1, 83 Mar. 15, 83 Jun. 15, 83 Jul. 15, 83

7A Spring clips Apr. 15, 82 May 30, 82 Jun. 29, 82 Jul. 31, 82

B Spring clips Sep. 1, 82 Oct. 15, 82 Dec. 15, 82 Jan. 15, 83

C Spring clips May 1, 83 Jun. 1, 83 Aug. 1, 83 Sep. 1, 83

8A Screw spikes Apr. 15, 82 May 31, 82 Jul. 15, 82 Aug. 15, 82

B Screw spikes Jul. 1, 82 Aug. 15, 82 Nov. 16, 82 Dec. 15, 82

C Screw spikes Feb. 1, 83 Mar. 15, 83 May 15, 83 Jun. 15, 83

9A Spring washers Post Review May 30, 82 Jun. 29, 82 Post Review

B Spring washers Post Review Aug. 15, 82 Nov. 16, 82 Post Review

C Spring washers Post Review Mar. 15, 83 May 16, 83 Post Review

lOA Wooden ties Reviewed Apr. 1, 82 May 17, 82 Jun. 30, 82

B Wooden ties Reviewed Apr. 1, 82 May 17, 82 Jun. 30, 82C Wooden ties Reviewed May 30, 82 Jul. 30, 82 Aug. 31, 82

D Wooden ties Jun. 15, 82 Aug. 30, 82 Oct. 29, 82 Nov. 26, 82E Wooden ties Jan. 15, 83 Feb. 28, 83 Apr. 29, 83 May 31, 83

11 Burro Crane 15t Post Review Nov. 1, 83 Dec. 26, 83 Post Review

12 El-Mech Jacks Post Review Sep. 1, 82 Oct. 29, 82 Post Review

13 Tele-towers Post Review May 30, 82 Jul. 30, 82 Post Review

14 Fender Assembly Reviewed May 30, 82 Jul. 30, 82 Post Review

15 Crane 80 ton Post Review Apr. 1, 83 May 27, 83 Post Review

16 Steelcord belts Apr. 15, 82 May 30, 82 Jul. 30, 82 Aug. 31, 82

17 Construction Steel Apr. 15, 82 May 30, 82 Jul. 30, 82 Aug. 31, 82


- 108 -Annex 7-4


Disbursement Schedule for Bank Loan(US$ million)

Bank Fiscal Quarterly Disbursement Cumulative DisbursementYear/Quarter Amount % Total Amount % Total

1983 I 4.5 1.5 4.5 1.5II 32.7 10.7 37.2 12.2III 42.8 14.1 80.0 26.3IV 42.4 13.9 122.4 40.2

1984 I 31.7 10.4 154.1 50.6II 36.0 11.8 190.1 62.4III 43.2 14.2 233.3 76.6IV 25.7 8.4 259.0 85.0

1985 I 23.4 7.7 282.4 92.7II 5.7 1.9 288.1 94.6III 3.8 1.2 291.9 95.8IV 2.2 0.7 294.1 96.5

1986 I 3.4 1.1 297.5 97.6II 2.0 0.7 299.5 98.3III 0.7 0.2 300.2 98.5IV 0.2 0.1 300.4 98.6

1987 I 4.0 1.3 304.4 99.9II 0.1 0.1 304.5 100.0

Total 304.5 100.0


- 109 -

Annex 8-1Page 1 of 6


Assumptions for Financial Projections

A. CVRD Existing Operations

1. Escalation. To apply the appropriate escalator, the foreign andlocal percentage of each projection item was estimated based on historic dataas well as the general results of the detailed study that was carried out forCarajas (para. 10). The foreign/local split for the major items is shownbelow.

Foreign and Local Portion of Selected Projection Items

Foreign Local

Mineral Exports 100 -Domestic Mineral Sales - 100Other Sales 50 50Operating Costs Minerals 15 85Operating Costs Services 19 81Investments in Fixed Assets 25 75Contributions to Subsidiaries 35 65Selling Expenses 50 50Administrative Expenses - 100

2. Operating Cost. All operating costs are based on 1981 data fromexisting operations and take into account the projected physical volumes ofproduction and services. Operating costs for CVRD's own production of oreand pellets, as well as the cost of services, have been increased by 1% p.a.in real terms during the projection period, to reflect expected real costincreases of electricity (1982-85) and fuel (1986-90). Purchase costs of oresand pellets are assumed to increase in real terms in line with the price ofiron ore. Accordingly, they take into account the 1982 price increase, andhave been increased by 1.5% p.a. in real terms from 1986-90.

3. Other Expenses. Depreciation and amortization on revalued fixedassets, interest during construction, and pre-production expenses are based onthe depreciation schedules applicable under Brazilian fiscal regulations.Mineral extraction tax (IUM) has been calculated based on the applicablerates, i.e. (i) for exports, 7.5% on 60% of the fob export price of theprevious year; and (ii) for domestic sales, 15% on 60% of the domestic fobprice.

4. Debt Service. Financial charges and principal repayment includeCVRD's existing long-term debt plus US$180.8 million of new non-Carajas debtin 1982, of which US$79 million is from Banco Central for purchase of theChacrinha/Piriquito mines from Acesita. For calculation of the financialcharges on the some 50 loans, LIBOR, where applicable, has been assumed

- 110 -


at 13%, 12%, 11%, and 10%, for 1982, 1983, 1984, and 1985-90, respectively.With respect to the revaluation of local long-term debt, it has been assumedthat the applicable ORTN index (the index according to which the BrazilianReadjustable Treasury Bonds are revalued) will follow the exchange rate index,in line with current Bank expectations. As a result, the US Dollar equivalentof local long-term debt remains unchanged.

5. Financial Income. Projected financial income consists of (i) dividendsfrom subsidiaries (88%), and (ii) interest payments of subsidiaries on loans fromCVRD (12%), as shown in the table below.

Projected Financial Income, 1982-90(US$ million--end-1981 constant terms)

1982-85 1986-90 Total %

Dividends from Subsidiaries 20.8 182.5 203.3 88Interest from Subsidiaries 23.3 4.8 28.1 12

Total 44.1 187.3 231.4 100

Dividends from 1982-85 are expected to come mainly from DOCENAVE. The in-creased dividends after 1985 are expected to come from CVRD's bauxite, alumina/aluminum investments mainly from 1988 on (para. 8.15). Loans outstanding fromsubsidiaries totalled about US$73 million at the end of 1981. Since CVRD doesnot intend to make loans to its subsidiaries after 1981, interest payments bythe latter are projected to decrease from US$8.4 million in 1982 to US$0.3million in 1990.

6. Taxable Income. Tax allowances include (i) depletion allowances,equivalent to 20% of the IUM base (60% of the fob price) on CVRD's own produc-tion (excluding purchases), according to Law-Decrees 1096/70 and 1779/80; (ii)ore processing allowances for exports of pellets and exports of upgradeditabirite ore according to Law-Decree 1240/72; and (iii) a "special exchangevariation" allowance related to the maxi-devaluation of December 1979, whichpermits to deduct, over a period of five years, the exchange variations inrespect of assets and liabilities in foreign currency which exceeded thevariation of the nominal value of Brazilian Treasury Readjustable Bonds(ORTN), according to Law-Decree 1733/79 of December 20, 1979. The taxableincome is further adjusted for (i) adding gains on investments in subsidiariesand associated companies, (ii) adding exchange gains without billing, and (iii)deducting monetary restatement on long-term loans.

7. Income Tax. Income tax has been calculated at 35% of taxableincome. Since actual payment of income taxes takes place about 6 months afterthe end of the fiscal year and income tax is not subject to monetary restate-ment during that period, the US Dollar equivalent of the income tax paid is

- 111 -

Annex 8-1Page 3 oY 6

reduced in line with the nominal devaluation of the cruzeiro. Therefore, theamount of income tax shown in the projected income statement and balance sheetis higher than the amount shown in the funds flow statement. The differenceis credited to reserves.

8. Dividends. Dividends have been calculated at the minimum levelrequired by Brazilian Corporate Law, i.e. 25% on 95% of net income after tax(5% is mandatory legal reserve). Like income tax, dividends are paid duringthe following year and are not subject to monetary restatement. Accordingly,the US Dollar equivalent of dividends shown in the projected balance sheetis higher than that in the funds flow statement, and the difference is creditedto reserves.

9. Working Capital. CVRD's working capital requirements are based onforecast current assets and liabilities as follows: (i) cash at 3% of operat-ing costs; (ii) inventories at 37% of operating costs; (iii) accounts receiv-able at 21% of sales revenues in 1982 (phasing in of 1982 price increase and22% from 1983; and (iv) accounts payable at 25% of operating cost.

B. Carajas

10. Escalation. To determine the foreign exchange content of materialsand equipment used for construction and operation of Carajas, CVRD had consult-ants undertake a detailed study which was reviewed and found satisfactory byBank staff. Subsequently, foreign and local portions of capital, operating andreplacement costs were built up from the specific factors for individualmaterials and equipment. The table below shows the local and foreign portionsof operating, capital and replacement cost items, according to which local andforeign escalation have been calculated.

Foreign and Local Portion of Carajas Costs

Foreign Local…% …

A. Operating CostsMine 13 87Railroad 30 70Port 12 88Other - 100

Weighted Total 20 80

B. Capital Costs (Base)Mine 31 69 69Railroad 35 65Port 21 79Townsites 27 73Project Management and Amerindian Programs 1 99Weighted Total 28 32

C. Replacements 30 70

- 112 -Annex 8-1Page 4 of 6

11. Operating Costs. Projected operating costs are based on the produc-tion build-up given in para. 8.04 and assume (i) real price increases for fuelof 2.9% p.a. from 1986-90, in line with current expectations; and (ii) realprice increases for electricity of 3% in 1982 and 5% p.a. from 1983-85,reflecting the Brazilian policy objective to achieve a return of 10% on netfixed assets in the power sector. These costs are expected to develop asshown in the table below:

Carajas--Projected Operating Costs(US$ million--Current terms)

1985 1986 1987 1988 1989 1990

Mine 14.0 54.9 82.1 96.3 103.1 110.8Railroad 23.8 91.8 130.3 151.6 164.2 177.9Port 6.0 24.4 35.7 39.5 42.2 45.2Townsites 3.1 11.5 15.3 16.8 18.1 19.2General/Adm. 1.8 6.6 7.6 8.2 8.9 9.7

Total 48.7 179.2 271.0 312.4 336.5 362.8

12. Selling Expenses. Carajas selling expenses have been calculatedat 1% of sales revenues.

13. Taxes. The projections include IUM tax at 7.5% of 60% of salesrevenues obtained by applying the price of the previous year. A IUM rebatefrom the State of Para which receives 70% of the tax, has been taken intoaccount from 1985-89. The rebate totals US$74.7 million, and reimburses CVRDfor the estimated current capital cost of the road from Maraba to Carajas.The projections also include social 1ax (PIS) at 0.75% of sales revenues.Income taxes have not been calculated because Carajas enjoys a 10-year taxexemption, as established by the Inter-Ministerial Council for the GreaterCarajas Program with Decree 01/81 of August 4, 1981.

14. Depreciation. The following depreciation periods have been applied:

- 113 -


Depreciation Periods

A. General Years a/Civil Works 20Transmission Line Carajas-Maraba 10Project Management, Interest During Construction

Pre-operating Expenses, Training, Engineering,Townsites (excl. civil works) 10

B. MineTrucks, Shovels, Drills, Tractors 5Crushing, Screening and Classifying Equipment 10

C. RailroadLocomotives 10Wagons 7Utilities and Interfaces 10Rails, Ties 7

D. PortShiploader, Stacker, Reclaimer 10Utilities and Interfaces 10

a! Although the actual life of the assets may be longer, the depreciationperiods are in accordance with Government standards governing taxliability.

15. Working Capital. Carajas working capital requirements are basedon (i) cash at 3% of operating cost, (ii) inventories of 2.6 million tons ofore stocks (para. 8.01), 20 days of fuel and lubricants and 10% of annualspare parts; (iii) accounts receivables equivalent to 80 days of sales; and(iv) accounts payable equivalent to 90 days of operating costs.

16. Carajas Iron Ore Prices. Natural pellets with 66.5% Fe, 2% moisture,and USJ39.45 per dry metric Fe unit, are priced at 0.665 x 0.98 x 39.45 =US$25.71 per natural metric ton in real 1982 terms. Sinter feed with 66.5%Fe and 7% moisture is priced differently for Europe and Japan, as shown inthe table below:

- 114 -


Carajas Sinter Feed Price(1982 real terms)

Europe Japan(USZ per dry (USc per dry

metric Fe Unit) Long ton Fe Unit)

FOB Tubarao 33.0 31.02Quality Premium + 1.0 + 1.0Freight Differential + 1.5 - 1.0

Total 35.5 31.02

… ----- USi per dry metric Fe unit --

35.5 30.53

------- …US per natural metric ton ------

Sales Price without CarajasDiscount 21.95 18.88

Carajas Discount 0.66 0.57Net Sales Price 21.29 18.31

Weighted Net Sales Price for 24.7 million tpy 20.08Weighted Net Sales Price for 28 million tpy(including 3.3 million tpy without discount) 20.17

17. Carajas iron ore prices are assumed to (i) increase in real termsby 1.5% p.a. from 1986-1990; and (ii) increase in line with inflationaryincreases, as shown in the table below:

Carajas Iron Ore Prices(US$ per natural metric ton)

1985 1986 1987 1988 1989 1990

---------------- 1982 real terms ----------------

Natural Pellets 25.71 26.09 26.49 26.88 27.49 27.70Sinter Feed 20.08 20.38 20.78 a/ 21.09 21.41 21.74

----------------- current terms ----------------

Natural Pellets 31.93 34.33 36.98 39.76 42.79 46.04Sinter Feed 24.94 26.82 29.01 a/ 31.19 33.57 36.13

a/ Phasing in of average sinter feed price including 3.3 million tpywithout discount.


.115 -

ANNEX 8-23gW XL ~~~~Page 1 of 3

CARAJ1A S I EON O313 331031j1£:

CVUR EIINsO xbATED-i IN(:3o1: irArlIEFi4r

C lSt NI LL (ON GCuRRENT (1:R133;)

19131 19332 191:CZ 11334 19313- 984 1 9 317 1113 199 1990

3313113AL SACIS (MItT)

SOil IliLIN SYSlEM 61 .33 66.7 74. 79 .9 336. 3 77.4 74.2 72,7 72.7 727CA 16,i,)A S -- 5.0 20. 0 3 1.3 330 :3 .0 33.0

T U (~~ ~~~~1.0 i66, 7 74. 79p.9 91 3 9 . 4 105.7102.7 iOn?7 to?,;

SAL-t R(.VfUEIJE

80(3(143F1313 F515(EM 942.33 1.272.*7 1,363 1 .'t4 ItA734-1 2.0,. .927 .4 1,924.3 2. (374. 3 2. 23~4 .0 2. 4034 .r A AJ.A S 3 4. 66. 4 '964.0 1 l1S.71.yI 239.3. . 334 .0

5t11'- TOTAI. 942.33 91I272..? 1,534,331 1,734.1 2,147.3 2,493,33 29Z33fI.3 .1, 22?.2 S.474 .3 3. 7331.8aOTHIER S;AlES7 237.0 17(3 *7 1914.0 224.4 26,3 9 294.*2 3 I133 I 3 343,313 3633. 9 393 * 4

TnlAL S;ALES IIE-VENUF 1A793 1 .PI tA44.3,4 1 73(0.33 1,9332.7 2,411.2 2,73333. 3 3. 236,33 3.372, 0 3.31343. 2 4 ,134.2

OPF:RAIAIN( CItETS

SCIUTIERN YSEN366 35'4,.1 6 43 *) 5 709 .2 13312 6 3362.. 9 02. 7 973. 1 1,1349 * 3 1 .127.1tAWAIAS -- - 31 . 4 16Ill.7 2.46 .0 2336,.9 3 091. 0 333. 4TOTAL. (3PiRATxNi3 £03n75 526.*6 334 * 1 6433,3S 709 .2 3364 * 0 1 026, 6 1,1433,7 1.261,6 1 3'53 * 3I1 460 .5

GOrnSS INCOMNE 65-3.2 3339.3 1.0332,3 1,273.3! 1.1147. 2 1,761,4 2, 10(33.1 2,31(0.4 2, 433'4,9 2,673. 7

o (HElR EXIPENSES

ADMNINST3IATIvL. Eixi,iENmsE 62,3 63, 6 62 .33 67 .1 73.61 1333,0 1333.6 914.1I 100.0 1(06.3SI•LLINt) EX3'UNE:!rSr 37.3 30 .9 31 I. 9 3 4. 3 38.0 44.4 50 .3 34 .6 3q. 0 61 .9Exi'LODRATXi1Nmu3:EEARci:i4 30 .4 23,. 2 23.3 26.7 26.7 28.2 29.9 31 .7 33.6& 3.65.DC P'RAANM0lT(i11.E-3'3(Uf11C)c 334, 1133.33il 121 I* 1 123)f .33 32 . 1 313i. 4 3:16e. 2 I3. 5333.9 lS333. 9LOCAL- rAXESUI(XJM.PIS) 491.3 F 34,9 63.3 72 .33 336.2 92.6e 102.3 1 22. 2 13t5.1 Iel' 16.7

OPERAr(1333 INCOME .3833 9 3.73 *5 9 777.3t 931.5 *31 I990. 7 997 * 33 1,300. * 3 1.474,7 1,604.3' 1 770.3

FINANCIAL. INCOME 38.0 31.7 14.9 14.0 8,. 6 19.6e 33.7 36, 4 70 .3 7,.;,

F INANE Al. I'MA313hS

LOANS FOI33 3:ARAJ3AS23310 --- 139 317,1 34. 1 30.3 27.6 24,3EEC ---- 23.2 492.8 47.6 43.8 39.2 34.6JAPANES,E LOANS . --- 21.6 43 .2 41.7 333. 1 33 .6 233.6KFW --- 7.7 15.3 14.5 13S.0 11.5 9.9OT1IIE1C FOREION IIANS -- 7.6A 17 .9 97 .7 1 4,3i 1 2 .3 9.73333S1"I/r'XAM[E/31A?A/(3THrRS - 7.3 339 .2 92.7 334 .7 76, 2 67.2CVRD DEBENrTURES -- 13.8 27.3 27.5 19,0 9.7 -

OTHER CVURD I CAMSF(38E13N 105 731.33 63 2 '5.2 431. 9 36 .31 25.5 14.9 6.0 2.2LOCAL 2.2.9 11.9 13.4 11.9 10.3 9.1 8l.2 7.3 Is. 9 4.3

SUP1-TOE AL 143.4 335S. 7 78. 6 69.1 191 .3 .125.6 309.1 266.4 222.0 180.3

OTHER INCOME (21.6) 3,35 6.0 6.4 6.9 7.3 7.0 31.2 8.7 9.2

MET INCOMNE 8131133RE TAX 261.9 5S24.4 719.8 903.1 814.9 699.1 1,033.2 1.272,9 1,461.3 1,674 .8

3IPLETI33N333TER ALI3AMI:NE-S 218.6 340,3 .536.33 3166.I0 3532 .2 504.33 647.0 769P.9 3385,5 Y98.?

TAXABJIL INCOME 43,.3 (15. 9) 1333.0 337.1 2312 .7 194.3 3338,2 903 . 0 575i.8 6833.3

LIM;.: INCONF: TAX 15.1 *- 64,1 110,0D 98.9 68,0. 135,9 171.9.1 184,4 192.2

ADD: 31311'30t1331A AL,iOMANCE.S 218.6 A 40.3 536.81 366,0 532 .2 504 .8 647.0 7489.9v 3333.5 980.7

N-T INCOUME AFFIR3 TAXES 246.33 32.4 633 .7 783.51 716.0 631.1 899.3 1,097.8i 1,276.9V 1,482.3

*DbVASiTRT hwSPA*trIwNYREPOKT PUEIPANIEPI6/21/92

- 116-ANNEX 8-2Page 2 of 3

CANAJAB*l 18111t lIMYE I'f0J.IE1:

CVJRD 1 (EFIOOI IDATIEI;I l O.W 11 IIH' NDIJI 1TA TIE4 I NT

tUI16 mmu.ln IIc uEIRII.Ewr Timms)_ _.. - 4 _, ~ .. 1 .. . . .. ~..- ... - _. _

19H1 17N2 IYH;S 19114 19.15 19J76 19tf7 190H 19119 1V90

UOtill'IE S

iET x1fl:nmr. Dicrl I riAX TIXxvDItEwDo 334.3 524.4 71f.lJ 903. 1114.9 6Y9.1I IO 01,2 1 272.Y9 1.461 .3 I 674.!DtPIfCIAllXX11XN/AMORltIUAt ln 114 .1 111f1l 121 .1 120.11 30 2.0 515.4 5t36.2 1M.I. 1 33.1 9 533.9

tNTUIRNAL, GAIIi IW1iRATStION 4111.4 64f.2 1140 t0: 23.9 1 146,i I 21.4 .9 1 571.4 1 1106.0 1 9911.2 2 2011.4

LUAN1I I?IR CAIA.AJA138R - ;7.2 1S2,9 901. ' 11.4 S.0[EC 1211, 0 192 a 120.0 -JAPANI:fI:M I.lhANt 144.0 A9 .; 1 1 57.7xrw 41.6 49.4 f9.0tilHgK F(JSI IN 27- 1- .7 'fY. 2 36d.0 23.Y 1.) 9-fJ110 1,rlH#tWfZINAMIURAAa/rliRn 40.1 2.19Y4 264111 1119.0 177.11 179.5

CrRD DJ)r:llTURlsI 16 * 2.0 DR.0 - -OTHM'll!( CUlI) LOANS

rnFItn3 361 .4 100 '

LOCAL 24. O 0.B - - - - - - - -

_ ..... ..... . ... ........ ......... .......... ..... .. .......

rtaTo st6ti891f 452.- 934.7 93VJ.3 63V.7 2 12.0 204.4

mt-rtrrlVtsrcs bivimwobo/NEW III4AOR ICAPITAI. 32.2 6. 75.0 9.- - 36.5 42.1 44.0

I1THFIR 9011111(CFS 2.6 f4.4 12.7 12.7 12.7 10.I3 3.3 3.4 .1.4 J.

--0. 9 1I,692.3 1Afi1 .9 1,766, 3 1,372.4 1 4'29-.2 1 574, 7 1 1147.9 '2041. 1 2,235.9

APftt ICATI(INS- _..-..... .........

iWVEtrlNTtT(I IN FIlXED AllffETllCARAJAC, 354.0 769.5 1 211.1 1 t010.7 433. 6 253.2 0.2 - 6.00Tt1HER 247.3 3J47 .2 2.f7 1 139.1 86.6 120.6 67.7 70.9 75.2 79.9SUr-- ftUTAl. 601.3 1t 16.7 1 435,2 11 149.0 520.2 374.0 67.9 70.9 11.2 tt4.1Cl1TilY COINTRIBUTIOrNS0 TO1U3'1IDIAR1E & I A3FfStC. t:lf IMI'ANiI 62.11 79.6 129.0 100.2 79.5 N6.11 79.3 67-.0 31.:5 11.2KIr RELP'AYMENT1CAkA.Af- - 6.6 59.3I 203.S7 311.9 ;S32.7 341.ttTtlF.R 71. 1 103.0 7n.5s 71.4 12.9. 123. 1 124,8 114.0 99.5 42.4

uBU- rlrAI. 75. 1 0I. 0 78.5 71.4 135 9 1182.4 3211.5 425S.9 432.2 383.6tW:/)3r(: IN WORKING, CAPI TALCi%A-JAt - 30.6 72.4 197.11 141.3 i.0 (107.4)OTHfR Ill .. 210. 5 91.1 1111.6 3t1t.3 (3.7) 119.7 ( 16.3) 22.5 60.1StiL-TrlrA I 1.3 250.5 91. 1 118.6 6R.9 611.7 317.3 132.0 30.5 (47.1)

13COdME TAX - 10.6 - t;3.4 102.2 115.3 58.6 117.1 150.9 19.0livi7911NDS 32.2 41.0 96.7 129.4 161.2 146.3 129,0 113.7 224.3 260,8ttTHER APPLrtICATIONHS 23.2 - - - - - - - - -

TtTALT APPLICrAIONS.------------ ----- 905.9 1,601.4 1.850.5 1,622.8 1 067.9 943.5 980.8 997.4 950.6 851.2

ANtWIAI. MMSH iltRPLtlff/DEFIC1: - 90.9 31.4 143.5 304.5 4it5.7 593.9 850.5 1.090.5 1,404*.CMtiI. CASH SURP LIS1/D1EFIC:IT - 90.9 122.3 265.8 370.3 1,OS6.0 1,649.9 2,500.4 3,590.9 4,9995.

DED7 SERVICI: E :OVERAGtICTIMER) 2.5 3.1 3.5 3.5 3.0 2.9 2.9 2.8 3.2 4.0

I NDIIS,TRY DEPARI iENTRPlURT lREPlARr D:06/21/82

117-


(11.i $ N11-1.1ON *- C1W1(ID1' T tERM311

19(31 190R2 I'/F.E 191/4 19S151 19116 1I17 191111H 1189Y 1990

OPFAr(tIN 1:ifI BAtL.ANC:E 0 .5 16. 6 19.11" /1 .3 2 6. 3 31. 7 2114/ 312.31 2/3.3 1 i'l 11.(IACCOINTrO RECE IVEAKILE 263.13 30 1 , 31(0.11 436 .2 130.1 613 4 716.1 7 8111. HP 341 * 5 9 01. 5IHVkKT(IRXl7% 1617,.6 2011.0O 2 391,.9 262.4 320.3 339. 9 .17. 3117.2 416.4 447.5OTHER cmomwrsNT1 A1111t1q 121 .%1 1273,7 112 .1 1 30 * S1 13$96l 1 43.6 (157 1 166.*9 177.0 I13(7. 7

SUR-TOYAL 5512 .7 41,1. 4 76 2.I3 900.4 1,017,1 1,133. 6 1 401-6.6 1,6512.2 1..712.4 1.696.5

MXIEIiB CAsH - 90,9 122.3 265.3 2 70,3 1,016.0 1.649.9 2. ". 4 A. 5".9 4,9V%.&

TOIAL CUIRRENT ASSECTS 952.7 739,3 IM4.6 1,166,2 1. 547. 4 2,109.6 3,136.5 4,152.6 5,303.3 6,692.1

0fitims( rimlr.. AsIE-1 2,012,1 3,12(3, 13 4r1114d) 11', 733.331 6. 2$4.( 6 6213. 0 6,6911,9 4.766,33 6.(431.0 6,932.1ACIAUt 33L ATE3 f`j('VP Pj7P IAVXjI ,Na A(okrxi(Arioof 674.9 7913.7 9114.1 1.1)31, 6 1 367.6 1 1313. 0 2,419.2 2,91152,3 3,43(6.2 4,020.1

mEr FIXEr. ASrICt1 I,337. 2 2.s337. 11 3,669. 469(8,2 4 13116, 4 4 .7CS .0 4.276,7 S,3PI14 .11.3,61 .31 2,912.0

INVUS1T31(311( (31 SO)M1IDIEARIESAND ASi'I(:(ArEl-J COMIHANXITSI 111. 1 19ts I9. 1 7233. 1 (13231,3 907.3 1 994,6 1 .07.5.9 1,141,7 1. 173 .2 1,1144.4

LON31 71(31r AI;CIET( 722.0 174.6 161 .9 149,2 136.11 126.2 122.9 1 19.115 116.1 112.6

TOIAL ((ONI f(EIM AiSSEITS 7411,11 7731. 7 3190.0 977. 5 1.044,3 1 ,1I2,33 1.19 6 ,31 1,261.2 1 .219. I 1.297. 0

TOTAL ASSCTS1 --- ~~~~~~~~~~~~~~~~~~2,6M114 3,141,1 I 5,443.0n 6,8141.9 7.5111331 33,0111. 4 31.610.0 9, 2211. 3 9.9514.4 10.901l.1

LIAMIL1I (ES

Acr.13144r1 PAYAB3.1E 294.4 13if3,115 162.1 177 .3 220.11 263.57 294,7 323.11s 3411.1 .174.3TAXIS PAYAW E 1.1- 64.1. 1111.0 911.9 631.0 13,)'.9y 1711.1I 1114.4 192.2IrfY1I:NCHW P'AYABLEI 1,1. 4 124.11 11111. 7 136,15 170.1 149.9 21.3.6 260.7 30(3 * : .512. 0ClikituNI I'OR(TIIN OFI I r PEST O1030 7(3.5 71.4 I-351.9 133?. 4 3213.11i 4211.9 432.2 3313,i 6 223.2OTN*R GORREHr L.EABILETEVS 61,7 62.31i 62.0 66.3 70 .9 711 .1 Is 10.0 1(4. 13 t 11.9 5.31

TOTAL. CWRlRNt L.IAVIIL.II. 1177.6s 404.:i s 1111.3 6134.0O 742.11 fil' 331.6 1.110, 1, II 27~6. 3 1.305,3: 1.3267.0

LOWni- II 04 I 1A61.11 r (rES

CASMA.PS LOANS 67.1 3(21.0 1. 774,3 2,40)7.4 2.1140.9 2,561.6 ;2.249, 7 1.917.0 1 , 5 ?5,3 1. I322,6AOTNI k CVORII C ANS 61 7.I2 719.11 6411. 1 511113.3 3911. 7 270.9 1114 .9 137.4 111.0 12.0

TOITAI, I(13; IE 04 t. X A1 13(II85E 63(4 .- 11140 .1 2 y4 2.2.4 ?, 926. 2 2.9156.6 2.1332,11 2.406,6 1,974.4 1,1190.31 1.337,6

114A0[ I:AP1TAL ~~~~~~~ ~~~~~~~336.81 396.31) 471 .13 SO11.3 it 61,11I 1161.a3 .51 111.3 600.3 642.33 606,6aftS:u:ft',roIRITAINIo EARNINHGS 1.0319.7 1,1506.1 2,034.3 2,669.9 3,2516.9 3,2711,1 4,491.11 11,377 .3 68,411,11 7,.S09,9

TOTAl. COOlIT 1,426.11 1,903,3 2.1106.1 3.231.7 3.0111.7 4,337.3 5.0513.3 5,977.6 72.0114 .3 33,294.1

TOTAl.I. LIARI. I IE!; A CtItUlrY- -. ~~~~~~~~~~~~~~~~2.6301.4 3.33411.4 14 43 . 6.3141.9 7, 511ft.1 0110111,4 31.610,0 9. 2233.3 Y9,914.4 10.901.1

cu3(REN3 RATIO, IEXCL. SUR(PLUS CAMI 1.0 1.6 1 .1 1.3 1.4 1 .3 1.3 1.3 J 1I,3 1,3

LOIO trERM DEDT/ 0 .32 0, 41 0.49 0.433 0.44 0.401 0.32 0 .21 0.1I3 0.14E&UI3X'Y RATIn 0,63 0.155 0.111 0.112 0.116 0.60 0.63 0,73 0.32 0.06

1N111)8 tRY ocPARrMUNTREPIIORt VPR?YARE896/21/312

- 118 -

ANNE 8-3Dk AA XI. Page 1 of 3

CAIWIA,3A5 XI hN SNrI P;~Ri: '-3

CARlA.JAI I NIIMIE 3TAT:MIEN'T

C US9 34(1.I.XON I:iUk3:IJCT 3M)

19112 194 191., &14 19345 1906 1 19117 193311~ 1(9 1 ) Y90

ORIU PROOI)OT CON C mmTr) 4 7 20 *r 3 31 *7 351 !* 0) 315 0 3I13 OkEK S AL ES I(MM I' - - - 5.0 20. :i4) i .5 :ss,o 3 s.o . ; PR I C I EO Y(1354 /3i 34 26.)30 211.3, 30.6) 3 2.9 35.!4 3.1'I

NETr SALES I:3:NtR3L I - 314 7 156 6.4 964 0s 4 1 151 I/ 1. i' *s 1 334 *0

"I H,: 1 4.0 V54.9 132. 1 916.3 1113.1I 11(0.RAILROAD - -231.13 91.1;1 ±30.3 1511 .60 164 .2 1.7/. 9PORT: 6.0 24.4 3 15.7 31198 42 .2 4r5. 2

1tID'O lCJA L - 471.11 171. 1 2.433. 1 2117 .4 30 94." W33. 9LESS~ INVENTORY AJOJIJSIENT 12 .4 7 .4 2.1I 0 .9 ('. .6 081

TODIAl. OrIICIAT INS lCOSTS 31 . 4 1 63.*2 246. C' 2336, 5 3 0 9 C 33. 4

GROSSI XNCOML. I 100. 402.*Y 7 111. 0 (365. 2 9Th.~5 Ii 1000.6

GENE1RAL. ADMXNISTrRATI:ON - 1.33 6.6 7 .6 33. 2 33.9/1 97SEIAT.txN ElX3'c1:N,SCS I -13 5.3;7S 1 l.? 10.c7 1 1.5 1 2.4TOWNS(TE I I :5.1 1185 1.3 1 6, O 133.1 19I.2DrPRI7: IAI (XON/63MO031431X 33 -' 2 16 *) 3 401 471; 4350 * 4 430 *4 430 * 4, 4:30.4LOCAL T(Ax 2.7 11.7 1 9.11 3685 644.3 69.1

UP I`13 TOTAL - 25*2 4 4 c) .4 4 8240 502 46 Is33 42 5i40 *

nOPIERATXINI IN4COME - -(1 2 4.93 (37.7) 236,0 362.6 e 397 ,3 4109.8

F I1WAN I AL CHIARGSES

I50 BRY 133. 9 7371 34. I 30.331 274e. 24.3EEC 25I.2 I '39.11) 4/. 6 438 39. 2 34.6JAPANFSEF LOANS - * *- 2 1.6 43.2 41.7 311).1I 33.6 20.6tKFW - - - 77 15. 3 1 4.5 11.0 1 1.5 9.9OTH14R J730RI715Wr LOANS *-7. 17.9 17.3 14.1 B 12.3 S 97

BOIF/S/ I NAMLK-/OAZA)/( fIHE'RS - -. 37.3 339,2" 9247 134 *7 7642 6742

CVRI:l OIE7IAENlJ17NS - 13.1) 2745 27*5 19, C 9 *7-

NET INCIME OLEFORIE TAXIES) - 257.01 Z (17.7) 3:9. 4 11133.4 133/2 2135 .

DUI[.r:T13313, IIEN AL.I(3WANCES - --. J5.33- 6334(3 1.15 * 7 1 311.2 1 41 *7

TAXACSL1: I w:OME .--- 2.] 4; . C' 1:'. 6.1

A 1 DO)1 OPI-TI IIN EV - -T. 15r 6310 11.7 31332 1 43. 7

NET INCIlME Af1VT[.l AXES - (570)(37.7) (39 . 4 I 1 I13. f337 .2 2(3 '5.

I NPO!TRY n'D3lThiTM;IINTREPORr PREPAREI:I.:0t/21/332

-119 -


CARA.JAS ZIt(ON ORE• PRO.JVCT

CARA.JAS CLOW OF FUNDS STATErmENTi

(I '5$ MILI.(IN CURRE-NT TERimS

THRIJ I196l,2 1983 19814 1 9 5 I1986) 198? 19883 19839 1990

MET IwNCME_ tEFOrE TAxES- - (257.0) (317.7) (39.41) 11t,41 1017.2 285).51DEPREN CIAIXOM/AmU3TXZAEXON - --- 2 16.3 405'.3 404 4,50. 4 43.o.4 4310. 4

CARAJAS INT. CASH 6EWE (40.73 817.6 391I. 0 54`(4 H 8 & 67 .6 715.9l

FURL ION ((OANSIDRa)RD '572 " 52 * 9 98.0 I 1.4 15.0- - -

EEC .1 2813.0c I 12 .0 120 .0 - - - --

JAPANESE- 144.0 1 93,. 7 115 7 .7 KFW 141 .6 49. 4 359. 0- -- -

OTHER FOREIGN 27.0D 1.7 49. 2 36.0 23.9 19V.9 -I-

LOICAL. 1.(36N)N3)ES/F I NAME/3IAZA/OTHERS ~~~40 * 1 239,4 268.3 1 1(9 77 . 55 179 *1 . -- -

CvYRO mPEItENT,muRrs 162. 0 88.0 --- ---

SO3i1. cI'OTAl. 67.1 75i3 .9 95 3.3 639 .7 1 2 .81 204 .4 - --

INT. GElNIERATE7O rUFNE'S 524 .8 20. 0 125.4 2811.0 293. 7 9?2 .9I 18. 7 --

RETY(19v/NEW SO AITl 312 .2 60. 0 75, .0 90 .0 - --. 38 .5 42.5 44. 0

TOTAL. SOURCES 62 4.1 83 3.9 11 5 3,7 1,0(3,?7 470, 8 384 .9 401,.7 87.3 660.1 75,7.9

APPIL. I CAl I'XNS

FIY1E)) ASSETS3 613~,4 702 I 1I1 0591 .6 765.0 287,S 2153.2 0.2 *

PRE.-PROFUC318N E'XPENS"ES e, 6.7 7.6 16). 1 214.8 13.3 - - --

INTEREST OU(R IN6 CONSTIZ, 4.0 5i9. (3 142. 4 220. 9 1312,S RE7PL.ACE(ME'NT 1N INVI~rENT - - - - - - -. . 0 4, 2INC/11'E IN WORKIN(i CAPITAL - - - 30. 6 72. 4 19 7,.13 1481,3 8t,8 (107. 6)

suIl4ToJrAL 6,24.1 7 69 . 1,21(3.1t 10 10C.7 464,2 3,25,6 191, 0 14()3.3 14, 0 Il('3. 4

ThR3)Y- - 2. 25. 4 25. 4 2!5 4 .4EEC - -- el1, 25. 4 3 6 .3 3 6.3 36. 3JAPANESE; LOANS Z -- * -* 4 . 3 40~. 2' SS, 2 57 * 91KFW - - - - - - 13.0 13. 13.0 1)I3. 0O)THER roFORXI(N L-OANS - ---- 3. * 20, 4 20. 4 20 .4 28. 4PIFlNOE/F, I NAME/// TES- --- 6.6) 18. 4 85 * 2 9 1 7 I?73 I lc)0Jo.2

suE' I0 rAL - 6 59 * 3 203, 7 311' I 9 32 7 3~41 * 2

TOTAL_ APPLICATIrONS 6 24 .1 76 9.5 1,21I,1 1 .I('1O7 4 70.03 384. 401 .7 460,2 :.346.,7 23.-. .... ..... _: : ::::4 :: :; : : : := I: - . . i�. .-- ..-_= . - ~ .- t-7~ . = ` =

ANN.* CASHi SURPLUSJ(/)FA XCI T - 64 4 (64. 4) I -- 27 1. 313,~~ 4 521- ICON.k CASH1- sURPLUA/OCr I C IT -. 64 .4 - - .1`7 .1 44'). * 962 *1 6

DBE :rT SER V IC COY.GI -U (IM ES I - .7 1.-1 1 .4 1 ,4 1. 5 t .7

I NDU(STRY ItEAR VNENTREP'ORTr:j~~(f 0/10

-120 -

ANNE 8-3bRAZIl. ~~~~Pale 3 of 3

C ARAJ0.96 I RON991 (krR9.

CARAJAS IIAL.AItI 894IN1C1

(1954 94l lL. IW 9994 c wIrEN C -tw9911

1981 19902 1SI83, 11994 1 91,11 1 9936 1993? 1988 1989 1990

A9(131 TS

0P9:94ATIN9 CM6130 93AIANCE .A .5 5 .11 I 133I,0 249.1 24 .0 I 1119.0

659199419 915 1699.t-- - 2IAIE9.0 12446 212.*1 259 . 4 27?2. 7 "94. 5OAf. (ITIIIKII4 I 10.93 14.0 1 4. 2 15. I0 1 6,0( .17.CrIN9IMAMIAfl.1 (tIlLA. 1L9'VA91`3 - -, 16 6.6 9 .7 I11.3 1 2. 2 13 I.0

SLID-, tOlAL -- - 425,9 111150 :469.9 11291 14,9 4 4i.

EXI;rU11 ChUb . 64.4 *.-127. 1 440.5 967.6

70l1Oil CIJIREMI A8999:r 64.4 42. 9 I311. 0 .169.93 615.5,9 9993A. 4 1.404,I6

CR10098 FIXiro AsirsIl 6,24 .1 I 1, 9:'..6 2 61AI. 7? 6,622, 4 4,0156). 0 4,3109. 2 4.3099. 4 4 r309,.4 4P,315. 4 4,I 3119. 6AC::9941IL.AlT? : to [9r c:IAfI£0 NIAfi9INTIZI 61N9 Or I 9.5- * 216.7. 621 .6 1 , VI0V, 0 I,482,.4 1 912,1It 2 343.52NITl Fl4&9 5118 62 4 .I I39 1a9,6 2,611,7 3sj622.,4 3 8.9. 7 2,699l76 es 9,2!07 ,4 P.,927.0 2 402. 6 1,976. 4

6 24.9 I 1I4093. 0 2. 61 1 .' 3,62.2 .4 3.93992. 6 3 VIM.996 3, 62 2.2 3,4192.91 31, 396, 0 3, 31111. 0

L I A93 I L. XI 11F18

AC11M99N9N 3>8A9M3L9: - 12 .7. 499, 0 69 .0 791. 7 0115 8 92. 5CIIIMa?9r'. I'u OIi cI U O 1.19ONGT E AM xiT r-, 6.6 !9.31 237 311.9 d 332V. 7 341.2 2b3. 2

TOTrAL. coURI:NT rI. ABxi'L I [1 x9 r e 6.1 71,6 2015 . 7 7.9l0 .9 412?.4 42? . 0 345 .7

I 3RD - 37.2 190.1 29191, 1 274 .1 2.1-'.7., 2 293, 3 202.9 1 77. 5 1152. 1EEC *. 1 2990 9. 400ft ( 4g.0( 30199.4A 3e.sI4 :96:9,0 :927 290o.4 211 4 .1 21 7,1

JAV'ANIZ!3 Mi.AN 144,.0 '.3'!7.7 49t0,4 490.1I4 4641. 1 41 2.9 7.57 . 7 299 .1 241,9KFW - 4 1 .6 91,0( 3 io,ot It 1 0 17 .0c I0 1.140 91 .0 78,0 6 , 0orm4113 r9)99:30N LOANS 217.0 20 3,7 7 7. 9 1 13, 9 133.913 ~V I3.,4 1 113.0 92 .6 72.2 :5I. sRNM Irt:99/r 19I461M117/ )1' A%flA/91 TWER S 40 .1 279, i 1i04 7.16 720 .0 19319.1 9W39. 4 09191.7 794.14 694 . 2 3194 * 0cvRYI: WkcEi999d: UF1S -. 16 2.9, 2.1(4.0 250L * ( 2 5(40 .(4 2,( . 0 ;:' 7, 1 till.,0

TOALL9N991191f7jM 117it 1a 6.A 1 921, .0 1,77 4 .7 2,49)7,4 2 ,00.9 2 ,041, .6 Ž2 4 Y. 7 1,~9 1 7,0 1,575,8 1, I322. 6

1999 191 INILY 999l9497916tEI' 17wtNr1; 524.99 ." 04 4.99 17) . 2 9011 * 2 1249. 1.7. '42 .1 1) .7.0 0 1,X5 'o7,S 1 0At 1MVLSI[1TI91 DV 101949; /t99.7914 5062EC AllxrAL 7.2 .2 92. 2 1 67.2 25 72 201;7,2 2527. 2 25;7. 290. -7 3399,2 :1112 .2A51:IINLLArII1:1 V.AR9I NGS - - - -. (570 (1574.7) (6 14.1 490i.7) 9d9011,9) (22. 01

[197AL. FLMtLXY 51; 7 .4 627.L) 9937.4 1 20139.4 1,20)).- 1 1,25 .3 927e.6 1, I :i.ol 1.48:9,.2 1,712, 7

TOTAL 1..XAP19 IMS19 3 t0U91ITY62 4. 1,I45111,0 2, 61 1.7 3622.4 3,, 1892.,6 3.997.11. 3, 62.7 .2 3499412.9 3Z, M96,0 3,3991,. 0

CURIMIET RAr191 9319(,1I-. stRiRPiAs CASH el - (, 0 .. 1.9 1.7. 1.7. 1. 3

[19o19 11919 11L9r/ .3.11 0,96 0.'8 (17 o).67 0.71 .9.69 0,.62 0.5133 04 4E9)9991 ry 6139 0 .09 (4,44 (4.7.2 0 .7.7. (.33 0. 942' 0.31I 0.7.9 4. 4 7 ('.5t,6

949*499C [9Y 9119>611 RMENT

REP919r P3199:69f:91:06/21/932

- 121 -

ANNEX o-4Page 1 of 7


Financial Rate of Return--Assumptions and Calculations

1. The rate of return, both for the financial and economic return, havebeen calculated on an incremental basis. The analysis compares cost/benefitstreams for a scenario "with" Project with the cost/benefit streams that wouldhave occurred "without" Project. The streams have been calculated in real1982 terms through 2015.

2. Real Devaluation of Cruzeiro. Both scenarios take into account theprojected real devaluation of the Cruzeiro against the US Dollar, as describedin para. 8.22. Accordingly, local streams have been adjusted by the followingfactors: 0.956 in 1982, 0.888 in 1983, and 0.877 from 1984 on. The breakdownin foreign and local sub-streams is shown in the table below, in line withpara. 9 of Annex 8-1:

Foreign and Local Breakdown of Rate of Return Streams

Foreign Local

Capital Costs 28 72Working Capital 20 80Replacements 20 80Operating Costs 30 70

3. Cost Adjustment to 1982 Terms. Since revenue streams are based on1982 iron ore prices, whereas the original cost streams reflect end-1981 termsthe latter have been inflated to 1982 terms for the rate of return analysis.

A. Scenario "With Project"

1. Carajas

4. Replacements. The rate of return streams includes replacementexpenditures of US$1,093 million in 1982 real terms as follows: US$4 millionin 1989, US$339 million in each of 1990-99, US$613 million in each of 2000-09,and US$137 million in each of 2010-15. The annual replacement expendituresare based on detailed replacement schedules for equipments and works, thatwere prepared by CVRD and reviewed by Bank staff during appraisal.

5. Carajas Discount. The Carajas discount has been applied for 24.7million tpy of sinter feed from 1985-99, in line with the duration of thecontracts benefitting from the discount.


6. Mineral Extraction Tax (IUM) Rebate. The IUM rebate by the State ofPara for the cost of the road from Maraba to Carajas (para. 13 of Annex 8-1)has been taken into account, totalling US$74 million from 1985-89.

7. Expansion to 50 million tpy. The expected timing, costs andbenefits of increasing the sales volume to 50 million tpy are shown in thetable below:

Caraja_k--Expansion to 50 million tp(US$ million--1982 real terms)

1989 1990 1991 1992 1993

Sales Volume (million) 35.0 35.0 35.0 38.3 50.0Sales Revenue 791 803 803 862 1,123Capital Costs of Expansion 7 114 153 97 -Additional Working Capital 2 1 - 10 38Operating Costs 225 228 228 238 302

Capital and operating costs of the expansion are based on detailed CVRDestimates. Working capital is based on the assumptions given in para. 15 ofAnnex 8-1. Sales revenues are based on (i) in 1992, 3.3 million tons ofpellet feed; (ii) from 1993, a product mix of 7 million of lumpy ore; 39.7million of sinter feed; and 3.3 million of pellet feed, reflecting physicalproduction conditions; (iii) Carajas' prices without discount for theadditional sales volume; and (iv) pellet feed priced at 80% of sinter feed.

II. CVRD's Southern Operations

8. Production Volume. With Carajas coming on stream in 1985, thefollowing production schedules have been assumed for CVRD's southernoperations: Production Schedule of CVRD's Southern Operations 'With" Project

(Million tonM

------------------ CVRD Mines ------ ------ -- Purchases ---…Acesirs-J

Year Caue Deposits Timbopeba Conceicao Other Capanemls-/ Others Total

1982 32.6 - 1.8 22.0 5.0 1.5 4.1 67.01983 30.2 2.3 c/ 7.5 21.1 4.7 8.6 4.8 79.21984 27.4 2.8 c/ 7.5 21.5 4.7 8.5 5.4 77.81985 25.4 4.9 7.5 21.6 4.3 8.5 5.8 78.01986 25.4 6.0 7.5 21.7 4.3 8.5 5.4 78.81987 23.2 6.0 7.5 21.7 4.3 8.5 5.4 78.81988 23.2 6.0 7.5 21.7 4.3 8.5 5.4 76.6

1990 23.2 6.0 7.5 21.7 4.3 8.5 5.4 76.6

1994 17.2 10.0 7.5 21.7 4.3 8.5 5.4 74.61995 17.2 15.3 7.5 21.7 4.3 8.5 5.4 79.9

2000 17.2 15.3 7.5 21.7 4.3 8.5 5.4 79.9

2003 17.2 15.3 - 21.7 4.3 8.5 5.4 72.4

2005 17.2 7.5 - 21.7 4.3 8.5 5.4 64.62006 17.2 7.5 - 21.7 4.3 8.5 5.4 57.12007 17.2 - - 21.7 4.3 - 5.4 48.6

2015 17.2 - - 21.7 4.3 - 5.4 48.6

a/ Mainly Piriquito and Chacrinha.b/ Joint venture with Kawasaki Steel.

c/ Acesita production during 1983-84 will be stocked and only sold in 1985when delivery of Carajas contracts starts (para. 8.08).


9. The production pattern for the Caue mine reflects the decreasingreserves and availability of hematite that have to be mixed with the itabiriteto produce the desired product mix of sinter fines and pellet feed in the Caueconcentrator. Remaining mineable hematite reserves in the Caue mines, about90 million tons, will be depleted by 1994 if the hematite/itabirite miningratio is kept at an acceptable level (about 0.4:1). During 1983-87, theAcesita deposits (mainly the Piriquito/Chacrinha mines), CVRD-s main strategichematite reserves in the South, will produce 18.5 million tons to enable CVRDto meet the Caajas contractual obligations between 1985 and 1987 (para. 8.08).It is further assumed that the Acesita deposits will continue to produce athighest possible rate allowed for by the market and the physical constraintsin the Acesita mines as well as the maximum throughput possible in the Cauebeneficiation plant (32.5 million tpy). Thus, output from 1988 through 1993from the Acesita deposits is 6 million tpy, the limiting factor for thisperiod being the market and that CVRD will not be able to increase its marketshare. In 1993-94, production from the Acesita deposits will increase to 15.3million tpy (i) to compensate the ceased hematite production from the Cauemine and (ii) to reach maximum throughput of 32.5 million tpy in the Cauebeneficiation plant. CVRD's production in the Southern State will then peakat about 80 million tpy during 1995 to 2002 and then gradualy drop to 48.6million tpy by 2007 and onwards due to the depletion of the Acesita (year2003), Timpopeba (year 2002) and Capanema (year 2006) deposits.

10. Cost Streams. Incremental capital costs for the production increasesat the already developed Piriquito/Chacrinha mines (Acesita deposits) havebeen taken into account at US$87 million. Based on expected Minas Geraisreplacements in 1982, replacement costs have been calculated at US$0.64 perannual production ton. Based on 1981 data from the Minas Gerais mines,operating costs have been calculated at US$5.49 per ton. The streams includeIUM and income tax, calculated in line with the applicable Brazilian regula-tions. Working capital has been calculated at US$3 per additional ton, inline with the Carajas assumption.

11. Revenue Stream. Sales revenues have been calculated based on (i)the projected real term prices for CVRD's Minas Gerais mines; (ii) a productmix of 80% sinter feed and 20% lumpy ore; and (iii) applying the 3% Carajasdiscount to the 18.5 million tons from the Piriquito/Chacrinha mines (Acesitadeposits) (para. 9). Out of these 18.5 million tons, 10 million tons areassumed to be sold in 1985, 5 million in 1986 and 3.5 million in 1987, asrequired by the Carajas start-up curve.

B. Scenario "Without Project"

12. Production Volume. The following production schedules have beenassumed for CVRD's southern operations in the event that there would be noCarajas:

- 124 -


Production Schedule of CVRD's Southern Operations "Without" Project(million tons)

…--------------CVRD Mines …---- Purchases --

AcesitaYear Caue Deposits Timbopeba Conceicao Other Epanema Others Total

1982 32.6 - 1.8 22.0 5.0 1.5 4.1 67.01983 30.2 2.3 a/ 7.5 21.1 4.7 8.6 4.8 79.21984 27.4 2.8 7.5 21.5 4.7 8.5 5.4 77.81985 27.2 5.3 7.5 21.6 4.3 8.5 5.8 80.21986 23.2 9.3 7.5 21.7 4.3 8.5 5.4 79.91987 23.2 9.3 7.5 21.7 4.3 8.5 5.4 79.91988 23.2 9.3 7.5 21.7 4.3 8.5 5.4 79.91989 23.2 9.3 7.5 21.7 4.3 8.5 5.4 79.91990 23.2 9.3 7.5 21.7 4.3 8.5 5.4 79.9

1994 17.2 15.3 7.5 21.7 4.3 8.5 5.4 79.9

2000 17.2 15.3 7.5 21.7 4.3 8,5 5.4 79.9

2003 17.2 11.1 - 21.7 4.3 8.5 5.4 68.22004 17.2 - - 21.7 4.3 8.5 5.4 57.1

2007 17.2 - - 21.7 4.3 - 5.4 48.6

2008 17.2 - - 21.7 4.3 - 5.4 48.62009 17.2 - - 21.7 4.3 - 5.4 48.6

2010 17,2 - - 21.7 4.3 - 5.4 48.62011 17.2 - - 21.7 4.3 - 5.4 48.6

2015 17.2 - - 21.7 4.3 - 5.4 48.6

a/ Acesita production in 1983-84 is assumed to be stockpiled and sold only in1985 as the market strengthens.

13. The "without" scenario assumes that the Acesita deposits are phasedinto production at the highest possible rate allowed for by the market and thephysical constraints in the mining areas and the Caue beneficiation plant.The market forecast (para. 3.21) indicates that an iron ore surplus on themarket will remain through the first half of the 1980s. Thus, it is assumedthat production from the Acesita deposits will be sold only from 1985 onwards.In 1977, the hematite/itabirite mining ratio in the Caue mine was 0.35:1. The1980 mining plan showed a decreased ratio, 0.31:1, for the remaining hematitereserves. The 1981 plan indicated that Caue would have to produce at a ratioof 0.43:1 in order to maintain the product mix which would imply that by themid-1980s an unacceptable ratio 0.23:1 would be at hand thereafter. To remedythe latter situation the Caue mine will produce at an acceptable ratio up to1985 when the hematite ores in the Acesita deposits will be phased in, at arate of 9.3 million tpy in 1986 to compensate for the low Caue ratio as wellas operating the Caue beneficiation plant at the maximum output of 32.5 milliontpy. The remaining hematite reserves in Caue, about 90 million tons at theend of 1981, will be depleted by 1993, compensation for which will come fromadditional production, 6 million tpy, in the Acesita deposits. Production from


Conceicao mine as well as other small CVRD mines and purchases are expected toremain constant throughout the period. For about 17 years, CVRD will be ableto sustain a production of about 80 million tpy. However, during the years2003 to 2006 the Timbopeba, Acesita, and Capanema deposits will be depletedand CVRD production in the South will drop to 48.6 million tpy in 2007 andthereafter. The throughput of the Caue beneficiation plant cannot be increasedover the assumed 17.2 million tpy due to quality reasons (sinter feed) andexcess production of non-marketable pellet feed.

14. Cost Streams. The same assumptions as in the "with" case have beenapplied.

15. Revenue Streams. The same prices as in the "with" case have beenapplied, except for the Carajas discount, which has not been taken intoaccount.

C. Rate of Return Streams

16. In the process of calculating the incremental rate of return, thoseportions of CVRD's southern operations that remain the same "with" and "without"the Project, are eventually netted out. Consequently, the streams have beencalculated for (i) the costs and benefits resulting from the Acesita deposits(mainly Piriquito/Chacrinha mines), which have very different productionprofiles in the "with" and "without" case, and (ii) the production differencesbetween the "with" and "without" scenarios mainly in the Caue and Conceicaomines from 1983-85.

17. The financial cost/benefit streams "with" and "without" Project arepresented on the next two pages.

ANNEX 8-4- 126 - Page 6 of 7


Financial Cost/Benefit Streams "With Project"(US$ million--1982 real terms)

Capital Operating-/ Net Sales-/Year Costs Replacements Costs Revenues

1981 682.0 c1982 698.0 - -1983 1,006.7 2.3 11.81984 677.2 1.3 13.5 -1985 280.3 2.3 72.0 254.01986 260.1 4.5 193.1 562.01987 36.0 2.8 232.0 789.01988 14.4 2.8 250.4 879.01989 - 6.4 264.4 893.01990 - 5.6 278.2 906.01991 - 11.9 278.2 906.01992 - 12.8 278.2 906.01993 - 6.4 278.2 906.21994 49.3 9.1 301.1 974.01995 54.6 39.3 332.3 1,064.01996 - 51.2 332.3 1,064.01997 - 39.3 332.3 1,064.01998 - 49.3 332.3 1,064.01999 - 147.1 332.3 1,064.02000 - 75.8 332.3 1,064.02001 - 61.2 332.3 1,064.02002 - 37.4 332.3 1,064.02003 - 37.4 332.3 1,064.02004 - 107.8 332.3 1,064.02005 -21.4 41.5 245.8 894.02006 -20.0 31.0 241.5 803.02007 - 29.3 241.5 803.02008 - 48.4 241.5 803.02009 - 139.0 241.5 803.02010 - 71.4 241.5 803.02011 - 44.8 241.5 803.02012 - 6.4 241.5 803.02013 - 0.9 241.5 803.02014 - - 241.5 803.02015 -127.0 -365.6 241.5 803.0

a/ Including Mineral Extraction Tax (IUM).b/ Net Sales Revenue = Gross Sales Revenue - Income Tax; Income Tax = (Gross

Sales Revenue - Operating Costs - Depreciation - Depletion Allowance)* 0.35c/ Capital expenditures shown reflect the aggregate amount spent between 1978

1981 in 1982 terms, adjusted further by 10% to reflect the expenditurepattern prior to 1982, the first year of the return calculation.


ANNEX 8-4

- 127 - Page 7 of 7


Financial Cost/Benefit Streams "Without Project"(US$ million--1982 real terms)

Capital Operating- Net Sales-Year Costs Replacements Costs Revenues

19811982 - _1983 15.7 1.4 13.81984 23.8 1.8 15.5 -1985 40.0 4.5 41.1 200.01986 6.4 5.5 55.0 155.01987 - 5.5 55.0 158.01988 - 5.5 55.0 160.01989 - 5.5 55.0 162.01990 - 5.5 55.0 165.01991 - 5.5 55.0 165.01992 - 5.5 55.0 165.01993 _ 5.5 55.0 165.01994 62.0 9.1 90.8 271.01995 - 9.1 90.8 271.01996 - 9.1 90.8 271.01997 - 9.1 90.8 271.01998 - 9.1 90.8 271.01999 - 9.1 90.8 271.02000 - 9.1 90.8 271.02001 - 9.1 90.8 271.02002 - 9.1 90.8 271.02003 -11.8 6.4 66.0 197.02004 -29.7 - - -2005 - -2006 - - - _2007 - - - _2008 - -2009 - - - -2010 -2011 - -2012 -2013 -2014 -2015 -

a/ Including Mineral Extraction Tax (IUM).bI Net Sales Revenue = Gross Sales Revenue - Income Tax; Income Tax (Gross

Sales Revenue - Operating Costs - Depreciation - Depletion Allowance)* 0.35




Economic Cost/Benefit Streams "With Prolect /(US$ million--1982 real terms)

Year Capital Costs Replacements OPerating Costs Sales Revenues

1981 707.811/ -

1982 736.6 - -1983 1,072.5 2.5 11.31984 727.5 1.8 13.2 -1985 294.4 3.0 61.7 362.41986 274.4 4.7 175.6 717.61987 38.5 3.0 210.1 979.21988 15.0 3.0 223.7 1,087.21989 - 6.8 224.9 1,104.01990 - 6.0 226.9 1,120.81991 - 12.7 226.9 1,120.81992 - 13.6 226.9 1,120.81993 - 6.8 226.9 1,120.01994 52.5 9.7 243.1 1,225.21995 57.8 41.9 267.9 1,364.41996 - 54.6 267.9 1,364.41997 - 41.9 267.9 1,364.41998 - 52.5 267.9 1,364.41999 - 156.7 267.9 1,364.42000 - 80.8 267.9 1,364.42001 - 65.2 267.9 1,364.42002 - 39.8 267.9 1,364.42003 - 39.8 267.9 1,364.42004 - 114.8 267.9 1,364.42005 -22.2 44.7 227.9 1,160.42006 -21.0 33.0 196.6 963.62007 - 31.3 196.6 963.62008 - 51.6 196.6 963.62009 - 148.2 196.6 963.62010 - 76.2 196.6 963.62011 - 47.8 196.6 963.62012 - 6.8 196.6 963.62013 - 0.9 196.6 963.62014 - - 196.6 963.62015 -135.3 -389.6 196.6 963.6

a/ Streams reflect application of a standard conversion factorof 0.83 to foreign exchange costs and benefits.

b/ Capital expenditures shown reflect the aggregate amount spent between1978 and 1981 in 1982 terms, adjusted further by 10% to reflect theexpenditure pattern prior to 1982, the first year of the return calculation.


- 129 - ANNEX 9-1

Page 2 of 2


Economic Cost/Benefit Streams "Without Projectila/(US$ million--1982 real terms)

Year Capital Costs Replacements Operating Costs Sales Revenues

19811982 - - -

1983 16.7 1.5 12.21984 25.4 1.9 14.1 -1985 40.8 4.7 34.7 295.21986 6.8 5.9 45.3 229.21987 - 5.9 44.4 232.81988 5.9 44.4 236.41989 - 5.9 44.4 240.01990 - 5.9 44.4 243.61991 - 5.9 44.4 243.61992 - 5.9 44.4 243.61993 - 5.9 44.4 243.61994 65.8 9.7 71.3 400.81995 - 9.7 71.3 400.81996 - 9.7 71.3 400.81997 - 9.7 71.3 400.81998 - 9.7 71.3 400.81999 - 9.7 71.3 400.82000 - 9.7 71.3 400.82001 - 9.7 71.3 400.82002 - 9.7 71.3 400.8

2003 -12.4 6.8 50.9 290.42004 -30.9 - - 290.4

2005 _2006 -2007 -2008 -2009 _2010 -2011 -2012 -2013 -2014 -2015 -

a/ Streams reflect application of a standard conversion factotof 0.83 to foreign exchange costs and benefits.


- 130 -

ANNEX 9-2


Net Foreign Exchange Benefit at 35 million TPY(US$ Million--1982 Real Terms)

Capital Operating Net CumulativeYear Costs Costs Interest Revenue Benefit Benefit

1981 129.0 - 2.2 - (131.2) (131.2)1982 198.0 - 26.6 - (224.6) (355.8)1983 333.7 _ 76.9 - (410.6) (766.4)1984 256.5 - 134.9 (391.4) (1,157.8)1985 72.0 5.0 162.2 56.0 (183,2) (1,341.0)1986 58.0 27.0 163.3 407.0 158.7 (1,182.3)1987 7.0 36.0 155.2 622.0 423.8 (758.5)1988 2.0 41.0 140.5 709.0 525.5 (233.0)1989 - 41.0 124.2 720.0 554.8 321.81990 - 42.0 107.1 731.0 581.9 903.71991 2.0 42.0 90.3 731.0 596.7 1,500.41992 2.0 42.0 73.3 731.0 613.7 2,114.11993 - 42.0 56.0 731.0 633.0 2,747.11994 (3.0) 39.0 39.7 687.0 611.3 3,358.41995 26.0 45.0 25.7 803.0 706.3 4,064.71996 14.0 45.0 13.1 803.0 730.9 4,795.61997 10.0 45.0 3.4 803.0 744.6 5,540.21998 13.0 45.0 - 803.0 745.0 6,285.21999 45.0 45.0 - 803.0 713.0 6,998.22000 22.0 45.0 - 803.0 736.0 7,734.22001 17.0 45.0 - 803.0 741.0 8,475.22002 9.0 45.0 - 803.0 749.0 9,224.22003 13.0 50.0 - 895.0 832.0 10,056.22004 41.0 62.0 - 1,137.0 1,034.0 11,090.22005 6.0 59.0 - 967.0 902.0 11,992.22006 10.0 45.0 - 803.0 748.0 12,740.22007 10.0 45.0 - 803.0 748.0 13,488.22008 16.0 45.0 - 803.0 742.0 14,230.22009 46.0 45.0 - 803.0 712.0 14,942.22010 24.0 45.0 - 803.0 734.0 15,676.22011 15.0 45.0 - 803.0 743.0 16,419.22012 2.0 45.0 - 803.0 756.0 17,175.22013 - 45.0 - 803.0 758.0 17,933.02014 - 45.0 - 803.0 758.0 18,691.22015 (147.0) 45.0 - 803.0 905.0 19,596.2


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Documents

World Bank Document · PETPOBRAS - Petroleo Brasileiro S.A. SUCaR - Superintendencia de Implantacao do Projeto Carajas SUNOR - Superintendencia de Pre-Operacao Norte Industry Department