SID to End Railway Project in 2012 - Analyst Blog

Companhia Siderurgica Nacional (SID), one of the leading Brazilian steel makers, announced that it expects its Transnordestina railway and logistics project to be fully operational by the end of 2012. The $2.6 billion project will enable CSN to transport over 30 million tons of cargo annually in the northeastern part of Brazil. 

 

Earlier in August 2006, Companhia Siderurgica's affiliate Companhia Ferroviária do Nordeste, or CFN, merged with state-owned Transnordestina S.A., with the resulting entity named as Transnordestina Logística S.A., or Nova Transnordestina. Transnordestina Logística S.A. has a 30-year concession granted in 1998 to operate the Northeastern Railroad of the RFFSA with 4,238 km of railway track. As of December 31, 2009, Companhia Siderurgica owned 84.3% of the capital stock of Transnordestina Logística S.A.

 

The Nova Transnordestina Project includes an additional 1,728 km (1,080 miles) of large gauge, state-of-the-art railway track. The project cost estimated to be around $2.6 billion will be 60% funded through debt and 40% through capital injections. Estimated cost per kilometer is roughly 2.9 million reais. Companhia Siderurgica currently owns 56% of the project's equity, the other major partners being the federal government and state-controlled development bank BNDES.

 

Companhia Siderurgica intends to realize over 50% operating margins and over 13% return on this investment. It expects to break even with the four advanced contracts signed ahead of its completion. The project will help the company attain high efficiency levels by owning its own infrastructure for transporting various products, such as iron ore, limestone, soy beans, cotton, sugar cane, fertilizers, oil and fuels.

 

We believe the growth prospect of Companhia Siderurgica is encouraging due to various projects being carried out by the company. According to the World Steel Association, global steel demand in 2010 is likely to hike by 10.7% and 5.3% in 2011. Moreover, the company's entrance into the cement business is also encouraging.

 

In 2010, Companhia Siderurgica plans capital expenditures to approximate $2,305 million versus $930 million in 2009. Of the total spending, the company allocated $502 million for the Casa de Pedra mine expansion, $352 million for Itaguaí Port expansion and $178 million in running capex. The company also allocated $808 million for the Transnordestina S.A project.

 

Despite these positives, we prefer to remain on the sidelines at current levels with regard to results in the quarters ahead that appear to be less promising and more depressed, attributable to falling domestic sales and higher manufacturing costs. High inventory levels in the supply chain will force steelmakers to export more leading to lower domestic sales (88.5% of sales). Also, Companhia Siderurgica's debt levels are escalating ascribed primarily to funding the company's investment plans. Moreover, high cyclicality and growing competition in the industry are major hindrances to growth. 

 

Based on all these factors and anticipating a lack of any positive share price driver, we maintain an Underperform rating.