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¹ Iron ore sales volumes include 100% of the stake in NAMISA until November 2015 and 100% of the stake in Congonhas Minérios as of December 2015.

² Adjusted EBITDA is calculated based on net income/loss, plus depreciation and amortization, income tax, net financial result, results from investees, other operating income (expenses) and includes the proportional share of EBITDA of the jointly-owned investees MRS Logística and CBSI. Adjusted EBITDA includes the 60% stake in Namisa, 33.27% in MRS and 50% in CBSI until November 2015 and the 100% stake in Congonhas Minérios, 37.27% in MRS and 50% in CBSI as of December 2015.

³Adjusted net debt and adjusted cash include the 33.27% stake in MRS, 60% in Namisa and 50% in CBSI until November 2015. As of December 2015 these lines include the 100% stake in Congonhas Minérios, 37.27% in MRS and 50% in CBSI, and exclude Forfaiting and Debtor Risk operations.

 

CSN’s Consolidated Result

 

·         Net revenue totaled R$4,519 million in 4Q16 and R$17,149 million in 2016, 1% and 12% up on 3Q16 and 2015, respectively. The improved performance was influenced by the increase in steel product prices, while the increase in the mining segment in 2016 was due to the higher iron ore sales volume, together with the upturn in ore international prices.

 

·         COGS amounted to R$3,170 million in 4Q16, remaining flat over the previous quarter, while in 2016, COGS came to R$12,640 million, 8% up on 2015, mostly influenced by the mining sales volume.

 

·         Fourth-quarter gross profit totaled R$1,349 million, 3% up on 3Q16, accompanied by a gross margin of 29.9%, 0.5 p.p. higher quarter-on-quarter. In 2016, gross profit amounted to R$4,510 million, 28% more than in 2015, with a margin of 26.3%, corresponding to a 3.2 p.p. increase.

 

·         Selling, general and administrative expenses (SG&A) totaled R$585 million in 4Q16, 12% more than in 3Q16. In 2016, SG&A expenses amounted to R$2,215 million, 17% higher than 2015, due to an iron ore sales mix with freight expenses included.

 

·         Other operating income (expenses) reached R$114 million in the 4Q16, versus a negative impact of R$1.8 million in 3Q16. In 2016, other operating income (expenses) came in as expense of R$413.2 million, versus income of R$2,269 million due to the business combination gain as explained in “Business Combination from Mining”.

 

 

 

 

 

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·         In 2016 the net financial result was negative by R$ 2,612 million, in 4Q16, the net financial result was negative by R$701 million, due to: i) financial expenses of R$ 828 million were partially offset by a financial revenue of R$127 million.

 

¹ The managerial financial result includes the 60% stake in Namisa, 33.27% in MRS and 50% in CBSI until November 2015 and the 100% stake in Congonhas Minérios, 37.27% in MRS and 50% in CBSI as of December 2015.

 

·         CSN’s equity result was positive by R$65 million in 2016, versus income of R$1,160 million in 2015. This result was chiefly influenced by the non-recognition of the equity result by Namisa, with its merger into CSN Mining (formerly Congonhas Minérios), in 4T15 as shown below:

 

 

·         CSN recorded fourth-quarter net loss of R$55,7 million, versus a net loss of R$67 million in 3Q16. In 2016, the Company posted a net loss of R$853 million, versus net loss of R$1,216 million in 2015.

 

¹ The Company discloses its adjusted EBITDA excluding stake in investees and other operating revenue (expenses) as it understands that these amounts should be excluded from the calculation of recurring operating cash flow.

 

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·         Adjusted EBITDA amounted to R$1,249 million in 4Q16, versus R$1,239 million in the previous quarter, accompanied by a margin of 26.3%, 0.1p.p. higher. In 2016, adjusted EBITDA totaled R$4,075 million, versus R$3,251 million in 2015, with a margin of 22.5%, 2.7p.p. higher YoY.

 

Adjusted EBITDA (R$ million) and Adjusted EBITDA Margin (%)

 

 

 

¹ The adjusted EBITDA margin is calculated based on adjusted EBITDA divided by adjusted net revenue, which includes the 60% stake in Namisa, 33.27% in MRS and 50% in CBSI until November 2015 and the 100% stake in Congonhas Minérios, 37.27% in MRS and 50% in CBSI as of December 2015.

 

Debt

 

On December 31, 2016, consolidated net debt totaled R$25,831 million, while net debt/EBITDA ratio was 6.3x, based on LTM adjusted EBITDA.

 

 

 

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Foreign Exchange Exposure

 

The FX exposure of our consolidated balance sheet on September 30, 2016 was US$1,740 million, as shown in the table below. It is important to mention that the net FX exposure includes a liability totaling US$1.0 billion in the Loans and Financing line related to the Perpetual Bonds, which, due to their nature, will not require disbursements for the settlement of the principal amount in the foreseeable future.

 

The hedge accounting adopted by CSN correlates the projected export inflows in dollars with part of the scheduled debt payments in the same currency. Therefore, the exchange variation of the dollar-denominated debt is temporarily booked in shareholders’ equity, flowing through P&L when revenues in USD from exports occur.

 

 

Capex

 

Investments totaled R$452 million in 4Q16 and R$1,638 million in 2016, 25% decrease on a YoY basis.

 

 

Working Capital

 

To calculate working capital, CSN adjusts its assets and liabilities as demonstrated below:

                                                                                                                                                                                               

·         Accounts Receivable: Excludes Dividends Receivable, Advances to Employees and Other Credits.

·         Inventories: Includes Estimated Losses and excludes Spare Parts, which are not part of the cash conversion cycle, and will be booked in Fixed Assets when consumed;

·         Recoverable Taxes: Composed only by the Income (IRPJ) and Social Contribution (CSLL) Taxes amount included in Recoverable Taxes;

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·         Taxes Payable: Composed by the Current Liabilities account Taxes Payable plus Taxes in Installments;

·         Advance from Clients: Subaccount of Other Liabilities recorded in Current Liabilities;

·         Suppliers: Includes Forfaiting and Drawee Risk.

 

As a result, working capital applied to the Company’s businesses totaled R$2,870 million in 4Q16, R$ 444 million lower than the 4Q15, mainly due to the strong reduction in inventories by R$ 809 million, offset by an increase of R$ 471 million in Accounts Receivable. On the same comparison basis, the average repayment term increased by 6 days, while the payment and inventory maturities fell by 1 and 32 days, respectively. In this way the financial cycle was reduced in 25 days. 

 

 

Results by Segment

 

The Company maintains integrated operations in five business segments: steel, mining, logistics, cement and energy. The main assets and/or companies comprising each segment are presented below:

 

   

 

Notes: As of 2013, the Company no longer reports the proportional consolidation of its jointly-owned investees Namisa, MRS and CBSI. For the purpose of preparing and presenting the information by business segment, Management decided to maintain the proportional consolidation of its jointly-owned subsidiaries, as historically presented. For the purpose of reconciliation of CSN’s consolidated results, these companies’ results are eliminated in the "corporate/elimination expenses" column.

As of the end of 2015, after the combination of CSN’s mining assets (Casa de Pedra, Namisa and Tecar), the consolidated result includes all this new company’s information.

 

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Net revenue by segment in 2016 (R$ million)

 

 

 

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Steel

 

According to the World Steel Association (WSA), global crude steel production totaled 1.628 billion tonnes in 2016, 0.8% more than in 2015. According to the Brazilian Steel Institute (IABr), domestic crude steel production fell 9.2%, to 30.2 million tonnes. Domestic flat rolled steel production totaled 20.9 million tonnes, 7.7% down on 2015, while apparent steel consumption fell 14.4%, to 18.2 million tonnes, accompanied by domestic sales of 16.5 million tonnes and imports of 1.9 million tonnes. Exports amounted to 13.4 million tonnes, 2.1% down on 2015.

 

According to INDA (the Brazilian Steel Distributors’ Association), in 4Q16 purchases from the distribution segment decreased 3%, while sales fell 4% compared with the 3Q16 figure, totaling 731.4 million and 726.0 million tonnes, respectively. Inventories stood at 900,500 tonnes at the close of 4Q16, 2% less than in the previous month, while inventory turnover widened to 4.1 months.

 

Automotive

 

According to ANFAVEA (the Auto Manufacturers’ Association), vehicle production totaled 2.1 million units in 2016, 11% down year-on-year. On the same comparison basis, new light vehicle, truck and bus licensing fell by 20.2%, to 2.0 million units. Vehicle licensing is expected to increase by 4.0% in 2017, accompanied by sales of 2.13 million units  and production of 2.41 million units, an 11.9% increase over 2016.

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Construction

 

According to ABRAMAT (the Construction Material Manufacturers’ Association), 2016 sales of building materials fell 11.5% compared to the previous year. The Association expects the sector’s revenue to remain stable in 2017.

 

Home Appliances

 

According to the Brazilian Institute of Geography and Statistics (IBGE), home appliance production until December 2016 fell by 7.9% over the same period in the previous year.

 

Results from CSN’s Steel Operation

 

 

 

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·         COGS inched up by 1.5% over the previous quarter, to R$2,334 million. In 2016, COGS totaled R$9,393 million, 3% higher than 2015.

 

·         The production cost amounted to R$1,770 million in 4Q16, 22% more than in 3Q16, particularly due to the increase by 28% in the production of slabs and 12% in flat steel production. In 2016, the parent company’s production costs totaled R$5,644 million, 13% less than in 2015.

 

·         The slab production cost reached R$1,179/t, 6% up on 3Q16. In 2016, average slab production cost was R$1,147/t, 17% higher than in 2015.

 

·      Adjusted EBITDA totaled R$545 million in the fourth quarter, increasing by 1% over the R$552 million posted in 3Q16. The adjusted EBITDA margin dropped from 18.4%, 0.9 p.p. lower than in the previous quarter. In 2016, adjusted EBITDA amounted to R$1,887 million, 5% up on 2015. The EBITDA margin increased from 16% in 2015 to 16.4% in 2016, equivalent to a 0.4 p.p. gain.

 

  

 

 

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Mining

 

The closing of low-efficiency steelmakers fueled the industry’s capacity utilization which, in addition, combined with higher demand for steel, contributed to boost margins and iron ore prices. Given this scenario, ore prices rose 5.3% in 2016 over 2015, averaging US$58.45/dmt (Platts, Fe 62%, N. China).

 

Demand remained high in the fourth quarter. The seasonal replenishment of inventories before the Chinese New Year's celebration played a crucial role in the increase in iron ore prices in December to over US$80.00/dmt. As a result, the commodity’s price averaged US$70.76/dmt (Platts, Fe 62%, N. China) at the close of 4Q16, 21% up quarter-on-quarter.

 

Maritime freight on Route BCI-C3 (Tubarão-Qingdao) averaged US$8.98/t in 2016, 20% down on the previous year. The first half of 2016 was a period of record lows in terms of ship chartering prices and fleet utilization which, combined with crude oil low prices, greatly contributed to the Route's decline on an annualized basis. In the fourth quarter, in turn, maritime freight was positively impacted by the seasonal upturn in seaborne volumes and higher crude prices, particularly after the OPEC announced production cuts in December. As a result, Route BCI-C3 (Tubarão-Qingdao) closed the fourth quarter averaging US$11.84/t, 18% up on 3Q16.

 

 

Results from CSN’s Mining Operation

 

·         CSN’s fourth-quarter iron ore production came to 7.8 million tonnes, 9% less than in 3Q16. In 2016, iron ore production totaled 32.2 million tonnes, 15% more than the 27.9 million recorded in 2015.

 

·         Iron ore purchases reached 609,000 tonnes in 4Q16, 24% down on 3Q16, while in 2016 over 2015, this line contracted by 27%, to 3.4 million tonnes.

 

·         Iron ore sales came to 9.2 million tonnes in 4Q16, 10% less than in 3Q16. Shipped iron ore came to 7.0 million tonnes in the fourth quarter, 19% down over the previous quarter, due to quarter seasonality. CSN Mining sold 1.3 million tonnes of iron ore to the President Vargas Steelworks (UPV). In 2016, iron ore sales to third parties amounted to 32,863,000 tonnes, 28% more YoY. CSN Mining sales to UPV amounted to 4,120,000 tonnes.

 

 

¹ Production and sales volumes include the 100% stake in NAMISA until November 2015 and 100% in Congonhas in December 2015.

² As of December 2015, Congonhas Minérios began selling iron ore to CSN’s President Vargas Steelworks (UPV).

 

·           Net revenue from mining operations totaled R$1,317 million in 4Q16, remaining flat over 3Q16 due to the lower sales volume. CFR+FOB unit revenue rose to US$52,9/t in 4Q16, 12% higher over the previous quarter. In 2016, net revenue from mining operations came to R$4,582 million, 44% up on 2015, due to the increase in ore prices and sales volume. In 2016, CFR+FOB revenue stood at US$43,4/t, while the iron ore price index (Platts, 62% Fe, N. China) moved up by an average of 5% in the same comparison.

 

·           In the fourth quarter, mining segment COGS amounted to R$797 million, 2% down quarter-on-quarter, reflecting the efforts to cut production costs. In 2016, COGS from mining operations came to R$3,099 million, 33% higher than in 2015, due to increase in sales volume.

 

·          Adjusted EBITDA amounted to R$511 million in 4Q16, 15% down on 3Q16, accompanied by a margin of 39%, 7.0 p.p. lower than in 3Q16, chiefly influenced by the reduction in total sales volume. In 2016, adjusted EBITDA totaled R$1,759 million, 50% more than in 2015, with an adjusted EBITDA margin of 38%, 1.6 p.p. up on 2015.

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Cost without depreciation of Iron Ore from CSN Mining

(CFR + FOB - US$/wmt delivered in China)

 

 

*From the 4Q16, the company will report the price realized considering the sum of CIF and FOB values.

 

 

From the 4Q16, the company will report the price realized considering the sum of CIF and FOB values, as seen in above. 

 

 

Logistics

Railway Logistics: fourth-quarter net revenue totaled R$324 million, generating EBITDA of R$137 million and a margin of 42%. In the full year, net revenue amounted to R$1,320 million, accompanied by EBITDA of R$550 million and an EBITDA margin of 42%.

 

Port Logistics: in the fourth quarter, Sepetiba Tecon handled 338,000 tonnes of steel products, in addition to 7,000 tonnes of general cargo and approximately 35,000 containers. Fourth-quarter net revenue came to R$62 million, accompanied by EBITDA of R$26 million and an EBITDA margin of 41%. In 2016, Sepetiba Tecon handled 804,000 tonnes of steel products, 24,000 tonnes of general cargo and 140,000 containers. In the full year, net revenue from port logistics totaled R$208 million, while EBITDA came to R$54 million, accompanied by an EBITDA margin of 26%.

 

 

 

Cement

 

According to IBGE’s Monthly Survey of Industry (PIM-PF), Brazil’s cement production recorded year-on-year reduction of 14.5% in the last twelve months, in line with the civil construction segment’s performance.

 

Preliminary figures from SNIC (the Cement Industry Association) indicate local cement sales of 57 million tonnes in 2016, 11.7% less than in the previous year. The SNIC expects cement sales to fall by between 5% and 7% over 2016.

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Results from CSN’s Cement Operation

 

In 4Q16, cement sales amounted to 799,000 tonnes, 6% down on 3Q16, accompanied by net revenue of R$128 million. EBITDA totaled R$2 million, with an EBITDA margin of 2%. In 2016, CSN sold 2,814,000 tonnes of cement, 29% more than in 2015. In 2016, net revenue totaled R$491 million, while EBITDA came to R$22 million, with an EBITDA margin of 4%.

 

 

Energy

 

According to the Energy Research Company (EPE), Brazilian electricity consumption recorded year-on-year reduction of 0.9% in 2016, to 460TWh. Consumption in the industrial and commercial segments fell by 2.9% and 2.5%, respectively, while the residential segment registered a 1.4% increase, due to the unfavorable economic environment, remaining below the average of the period between 2004 and 2015.

 

Results from CSN’s Energy Operation

 

In 4Q16, net revenue from energy operations totaled R$67 million, EBITDA stood at R$17 million and the EBITDA margin was 25%. In 2016, net revenue reached R$269 million, EBITDA totaled R$65 million and the EBITDA margin was 24%.

 

 

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Restatement of the Financial Statements of December 31, 2015

 

The Company is restating its financial statements for the fiscal year ended December 31, 2015 due to a detailed revision of all aspects of the business combination held on November 30, 2015, in which the Company's mining activities were restructured and concentrated into one main company, CSN Mineração S.A.  This revision occurred after the first resubmission, on November 14, 2016, of the financial statements for the 2015 fiscal year due to a change in interpretation of the allocation of gains to the controlling and non-controlling shareholders.

 

In addition to the review of the business combination transaction, the Company reviewed the studies that support the recognition and maintenance of long-lived assets and resubmitted the balances of deferred Income Tax and Social Contribution.

 

Due to the sale of Companhia Metalic do Nordeste in November 2016, CSN also decided to reclassify this subsidiary’s result as discontinued operations for comparability purposes.

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We will also detail the items that led management to decide for the second restatement of the financial statements for the fiscal year ended December 31, 2015, which will be identified as follows.

 

1. Business Combination between CSN Mineração and NAMISA;

2. Expected realization of tax credits from income tax and social contributions;

3. Reclassification of the 2015 accounting balances for Companhia Metalic do Nordeste;

 

1. Business Combination

The Company is restating its financial statements for the fiscal year ended December 31, 2015 due to a detailed revision of all aspects of the business combination held on November 30, 2015, in which the Company's mining activities were restructured and concentrated into one main company, CSN Mineração S.A.  This revision occurred after the first resubmission, on November 14, 2016, of the financial statements for the 2015 fiscal year due to a change in interpretation of the allocation of gains to the controlling and non-controlling shareholders.

 

In this review, the Company identified errors in the assumptions used to determine the fair values ​​of the entities involved, Namisa and CSN Mineração, as well as in the accounting of the investment agreement clause signed in December 2014, which refers to Namisa's assets excluded from the transaction (Fernandinho, Cayman and Pedras Pretas - the spun-off assets). Under this clause, Fernandinho, Cayman and Pedras Pretas assets used in the valuation to determine the fair value of Namisa should have been transferred directly to another entity and no to CSN Mineração. They were incorrectly integrated into Namisa’s main assets acquired by CSN Mineração, which were then subsequently transferred from CSN Mineração to Mineração Nacional S.A. Finally, the revision culminated in a change of interpretation in determining the gain or loss in the settlement of the pre-existing ratio between the acquiring and acquired companies as provided for in Technical Pronouncement CPC15/IFRS3.

 

On November 30, 2015, CSN Mineração incorporated Namisa and applied the CPC15/IFRS3 ruling on the accounting for the business combination by the acquisition method.

 

The legal implementation of the transaction occurred on November 30, 2015, in which new CSN Mineração shares were issued and paid by the Asian Consortium for its shares held by Namisa after the spin-off. Subsequent to the payment, CSN Mineração and CSN signed a shareholders’ agreement granting Namisa's unilateral control to CSN Mineração on the same date. With the disproportionate spin-off, the consortium’s stake in Namisa was 40.24% and CSN’s stake was 59.76% (prior to the split, the stakes where 40% and 60%, respectively). In this context, subsequently, Namisa post-split was merged into CSN Mineração, extinguishing the aforementioned shareholders' agreement.

 

The application of the acquisition method in the business combination, which resulted in net gains of R$2.9 billion in the financial results for the period for CSN Mineração (acquirer) and CSN Parent and Consolidated, have been recalculated as R$2.2 billion for CSN Mineração and R$3.0 billion for CSN Parent and Consolidated after the review of the transaction, with the following breakdown::

 

 

 

		CSN Mineração (In R$ Million)
		As Published		Restated
Gain in the fair value remeasurement of the 60% ow nership previously held		2.791		2.516
Gain (loss) in liquidation of the pre-existing relationship		622		(493)
Income Tax and Social Contribution		(528)		168
Net Gains		2.885		2.191

 

 

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		CSN Parent Company (In R$ Million)
		As Published		Restated
Equity Results		2.885		2.191
Gain in the Fair Value Remeasurement of the 60% ow nership previously held in the excluded assets				1.274
Income Tax and Social Contribution				(433)
Net Gains		2.885		3.032
		CSN Parent Company (In R$ Million)
		As Published		Restated
Gain in the Fair Value Remeasurement of the 60% ow nership previously held in the excluded assets ,		2.791		3.790
Gain (loss) in Liquidation of the Pre-Existing Releationship		622		(493)
Income Tax and Social Contribution		(528)		(265)
Net Gains		2.885		3.032

 

 

As a result of the reassessment of business combination aspects that led to the identification of assumption errors used in determining the fair value of Namisa, the Company identified that the purchase price considered for accounting purposes, previously as R$13.4 billion, is now R$17.5 billion, as illustrated in the table below:

 

 

 

 

On the other hand, in implementing the transaction, CSN recorded in its financial statements restated on November 14, 2016, a direct gain of R$1.6 billion in shareholders' equity resulting from its variation in stake ownership, was adjusted to R$2.9 billion, as illustrated below:

 

				R$ (Million)
Events		As Published		Restated
Asia Consortium's Contribution to CSN Mineração		2.619		4.034
CSN's Interest - 87,52% (1)		2.292		3.531
Aquisition by CSN of 4,16%		2.727		2.727
Financial Adjustment of w orking capital and debt (closing)				6
Assets transferred and liabilities assumed		2.727		2.733
Asia Consortium's Interest - 12,48% (2)		(340)		(341)
Adjustment in the ow nership interest variation % (3)		(360)		(274)
Others effects arrisen from the corporate restructuring (4)		(7)		27
Total gain of the transaction between shareholders (1+2+3+4)		1.585		2.943

 

 

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CSN paid for the spun-off assets Fernandinho, Cayman and Pedras Pretas in its wholly-owned subsidiary Minérios Nacional for the book value of R$60 million. The amount of the remeasurement of these assets at fair value remained recorded in CSN in the Investment account, supported by the mining right in the amount of R$2.2 billion.

 

The aspects that led to the above adjustments in the earnings of the fiscal year and in the Company's net equity are as follows:

 

a) Assumptions of maritime freight in the legal reports that established the fair values ​​of Namisa and CSN Mineração;

b) Comparable companies used to establish the discount rate used in the valuation reports of the fair values ​​of Namisa and CSN Mineração;

c) Application of the provisions of CPC15/IFRS3 related to the liquidation of pre-existing relationships between the acquiring and acquired entities;

d) Application of the article of the Investment Agreement that established the exclusion of certain assets (spun-off assets) from the transaction; and

e) Assumptions of railway freight when establishing the fair values ​​of the spun-off assets of Fernandinho, Cayman and Pedras Pretas.

 

On the following sections we discuss each of the above adjustments and present their individual impacts on the business combination:

 

•               Maritime Freight - Additional gain in the income of R$1,991 million and in the net equity of CSN of R$2,677 million

 

During the reviewing process of the business combination transaction, we identified that the prices of the maritime freight costs considered in the legal reports that established the fair values ​​of CSN Mineração and Namisa prepared at the time of the transaction, at the end of 2015, were overstated and had no connection to the historical curves when compared to the iron ore price curves and had no continuity in relation to the prices actually practiced by both CSN itself and by the market in transactions at that time. Were prepared new legal reports to establish the fair values for CSN Mineração and Namisa and a new price curve of maritime freight was calculated based on the variations of oil price that led to a freight/ore price ratio more compatible with the historical data and with the prices actually practiced. The change in the maritime freight curve increased CSN Mineração's discounted cash flow by R$8.0 billion and Namisa's by R$3.5 billion. This increase in Namisa's discounted cash flow generated an additional gain of R$1,496 million in CSN Mineração and R$495 million in the Parent Company, as previously presented in the consolidated financial statements restated on November 14, 2016.

 

•               Discount rate - additional gain in the consolidated income of R$48 million and in CSN's net equity of R$443 million

 

During the review of the business combination, we also identified that a company which was not related to iron ore activities was mistakenly considered when determining the cash flow discount rate. The switch in peer companies in the discount rate altered the rate from 14.36% to 13.83% for Namisa and from 13.91% to 13.19% for CSN Mineração, generating a discounted cash flow increase of R$3.6 billion for CSN Mineração and R$1.2 billion for Namisa. This increase in Namisa's discounted cash flow generated a loss of R$48 million in the financial results of CSN Mineração and a gain of R$96 million for the Parent Company when compared to the consolidated financial statements presented prior to the restatement on November 14, 2016. In addition, a direct increase of R$395 million in shareholders' equity was recognized, as illustrated in the summary table below:

 

•               Liquidation of pre-existing relationships - negative impact exclusively related to the prepaid portion of operating agreements of R$2,056 million in the income and R$1,799 million in CSN's net equity due to the reversal of a pre-tax gain of R$1,554 million for a pre-tax loss of R$1,225 million, when combined to the other effects related to the errors identified.

The consolidated financial statements that were disclosed prior to the restatement on November 14, 2016 considered, for purposes of calculating the settlement gain of pre-existing relationships between the acquiring and acquired companies, a comparison between the contractual prices with market prices, not taking into account that a portion of the contract price was prepaid in 2008 upon the signing of the operational contracts for ROM (Run of Mine) and port. When reviewing this procedure, it was concluded that the measurement of gains or losses for the settlement of these pre-existing relationships should consider only the remaining cash flows of these operating contracts. The change in comparison of remaining cash flows versus contractual and market prices reversed the settlement gain of pre-existing relationships from R$1,554 million to a loss of R$1,225 million.

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•               Excluded assets

 

After reevaluating Namisa to its fair value at the time of the transaction, the assets excluded from the transaction were spun off from Namisa (Fernandinho, Cayman and Pedras Pretas) to CSN and transferred to Minérios Nacional concurrently with Namisa’s main assets that were acquired by CSN Mining. Therefore, these spun-off assets should not have been initially transferred to CSN Mineração's shareholders' equity for subsequent transfer to Minérios Nacional, even if such transfers were executed on November 30, 2015, the same date as the transaction. 

 

Accordingly, the R$841 million net gain from the remeasurement of the stake already held by the Company in the acquisition for the control of Namisa’s spun-off assets is now reflected directly in the Parent Company.

 

 

•               Rail freight – ganho no resultado de R$235 milhões e de R$244 no patrimônio líquido da CSN.

 

The fair value report prepared at the time of the transaction, which determined the discounted cash flow of Namisa’s spun off assets, mistakenly considered an overvalued rail freight cost. The new report adjusted the rail freight prices for the spun off assets.

 

•               Other adjustments – loss of R$71 million in the income and of R$59 in CSN's net equity.

 

The new reports also adjusted the effects related to the non-inclusion of the CFEM/TFRM (Financial Compensation for Mineral Resource Exploitation/Control Fee, Monitoring and Supervision of Research, Development, and Exploitation Activities and the use of Mining Resources) in the discounted cash flow, and also adjusted the end balance used as the basis for determining the book value of Namisa's assets.

 

The table below summarizes the impacts described above by nature of the event and qualification of the error.

 

 

	Note	As Published	Parcel of pre payment operacional contract	Weighted average capital cost (WACC)	Maritime Freight	Railway Freight	CFEM e TFRM	Updating of closing balance	Restated
Shareholder's Equity of CSN Mineração before business combination		173							173
Accounting Contribution regarding asset of CdP, TECAR, MRS and 60% of NAMI		157							157
Capital Contribution of CSN Mineração realized by Consortium's		2.619		440	975				4.034
Gain of remeasurement of 59,76% in NAMISA after-existing		1.859		376	1.099			(86)	3.248
Gain (loss) in liquidation of the pre-existing relationship		1.554	(2.743)	(566)	530				(1.225)
Rate of gain (loss) in liquidation of the pre-existing relationship		(528)	687	142	(133)				168
Capital Contribution by transfer (cindidos) assets		(282)		(30)	(156)	(74)	(6)	1	(547)
Transfer Assets and LiabilIties Incurred		2.733							2.733
Shareholder's Equity of CSN Mineração ajusted before business combination		8.285	(2.056)	362	2.315	(74)	(6)	(85)	8.741
Parcel of Shareholder's Equity attributed to minority partners (a)	12,48%	1.034	(257)	45	289	(9)	(1)	(11)	1.090
Fair Value of issued stock by CSN Mineração to Consortium's (b)	3.3 a ii	2.619		440	975				4.034
Gain of transaction between shareholders (b - a)	3.4	1.585	257	395	686	9	1	11	2.944
Effects of income statement:
CSN Mineração (gain in the remeasurement of remain assets and disposal contracts, free of taxes)		2.885	(2.056)	(48)	1.496			(86)	2.191
Parent Company (gain in the remeasurement of pre-existing assest, free taxes)				96	495	235	18	(3)	841
Consolidated		2.885	(2.056)	48	1.991	235	18	(89)	3.032
Final result of Shareholder's Equity of CSN	3.5	4.470	(1.799)	443	2.677	244	19	(78)	5.976

 

2. Estimated Credit Losses with Deferred Income Tax and Social Contribution

 

The Company is restating the balances of credits of income tax and social contribution deferred in its financial statements for the fiscal year ended on December 31, 2015 after the technical review, during the year 2016, of the negative and positive aspects that underlined its maintenance. The main change in the decision-making process for this restatement is the exclusion of the sale of certain non-core assets from credit recovery studies, reducing the future taxable base of the estimates, together with the greater weight on the negative aspect attributed to the observable evidence of tax losses in recent years, as interpreted by technical approval IAS 12/CPC 32. As established in the standard, in the event of a recent history of successive or alternate losses in several fiscal years, this becomes the primary evidence for the evaluation of the maintenance or registration of tax credits that can be offset with future taxable income, therefore, the study of estimates of these profits are used as a source of secondary evidence and with less weight in the evaluation.

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Accordingly, the Company opted to maintain in the asset an amount of tax losses and negative social contribution base equivalent to 30% of the balance of deferred income tax liability, which is to be used as the deferred tax liability becomes current income to be paid. As a result, all credits arising from temporary differences were provisioned and held in stock of credits in the Company's fiscal books for subsequent use. This system of maintenance of tax credits equivalent to 30% of deferred income tax liability will remain until a new background of taxable income is installed and the studies on future profits estimates are once again a primary evidence for recording tax credits, moment when the Company will recognize the temporary differences and the higher amounts of tax losses and negative basis of social contribution that will be used to offset the payable income tax arising from future taxable income.

 

 

The table below shows the effects of this change in valuation, as detailed:

 

Consolidated					Parent Company
31/12/2015							31/12/2015
	As Published		Restated		As Published		Restated
Income Tax and Social Contribution
Current	(380.831)		(135.671)		2.469		2.469
Deferred	192.207		(2.767.545)		557.443		(2.824.757)
	(188.624)		(2.903.216)		559.912		(2.822.288)

 

 

 

3. Reclassification of accounting balances of 2015 - Metalic

 

The Company reclassified the results of Cia Metalic Nordeste in the amount of R$1,911 for discontinued operations, for comparison purposes. Additionally, it moved the 2015 cash flow hedge result from the financial result line to the other operating income line in the amount of R$11,439 for comparison purposes, considering the classification used in 2016.

 

Table with the impacts on the financial statements as of December 31, 2015

 

The tables below illustrate the impacts on the balances of the consolidated balance sheet and the income statement for the 2015 fiscal year:

 

·       Income Statement

 

 

 

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·       Balance Sheet

 

 

 

 

1. Business Combination between CSN Mineração and NAMISA;

2. Expected realization of tax credits from income tax and social contributions;

3. Reclassification of the 2015 accounting balances for Companhia Metalic do Nordeste;

 

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Impairment of TRANSNORDESTINA LOGÍSTICA S.A. (“TLSA”) in 2016

 

 TLSA tested its own long-term assets for impairment using the discounted cash flow method.

 

 In addition, CSN, as an investor, tested its interest in TLSA for impairment based on TLSA’s capacity to distribute dividends, a methodology known as Dividend Discount Model, or DDM, to compensate the capital invested by its shareholders. This test took into account several factors, including: 

 

·        The dividend flow was extracted from TLSA’s nominal cash flow;

 

 

 Another important factor that was taken into account in the impairment testing of CSN’s investment in TLSA was the assessment of the need to apply an additional risk to the discount rate on top of the one used to determine discounted cash flow at TLSA.  As investor risks are shared and the asset being tested represents its own cash-generating unit, which in turn equals the legal entity, the risk determined by CSN’s management is the same as the one applied by TLSA when assessing the investment of its own assets; therefore, no additional risk factor was applied.

 

 As a result of the test, the Company recorded a loss in the goodwill of the investment in TLSA in the amount of R$387,989 recorded under other operating income (expenses) and R$131,916 under deferred taxes.

 

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Certain of the statements contained herein are forward-looking statements, which express or imply results, performance or events that are expected in the future. These include future results that may be implied by historical results and the statements under ‘Outlook’. Actual results, performance or events may differ materially from those expressed or implied by the forward-looking statements as a result of several factors, such as the general and economic conditions in Brazil and other countries, interest rate and exchange rate levels, protectionist measures in the U.S., Brazil and other countries, changes in laws and regulations and general competitive factors (on a global, regional or national basis).

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	SALES VOLUME CONSOLIDATED (thousand tonnes)
		3Q16	4Q16	2015	2016	Change
						4Q16 x 3Q16	2016 x 2015
	Flat Steel	682	689	2,807	2,607	7	(201)
	Slabs	-	-	6	0	-	(6)
	Hot Rolled	233	243	1,065	921	10	(144)
	Cold Rolled	129	137	556	491	8	(65)
	Galvanized	218	207	818	826	(12)	9
	Tin Plates	102	102	362	370	1	8
	Long Steel UPV	49	47	161	176	(2)	15
	DOMESTIC MARKET	730	736	2,968	2,784	5	(184)
		3Q16	4Q16	2015	2016	4Q16 x 3Q16	2016 x 2015
	Flat Steel	282	270	1,297	1,298	(12)	1
	Hot Rolled	16	9	235	114	(7)	(120)
	Cold Rolled	19	18	204	89	(1)	(116)
	Galvanized	212	202	717	937	(11)	220
	Tin Plates	35	41	142	158	7	16
	Long Steel (profiles)	159	181	724	775	22	51
	FOREIGN MARKET	441	451	2,022	2,073	10	51
		3Q16	4Q16	2015	2016	4Q16 x 3Q16	2016 x 2015
	Flat Steel	964	959	4,105	3,906	(5)	(199)
	Slabs	-	-	6	0	-	(6)
	Hot Rolled	249	252	1,300	1,035	3	(265)
	Cold Rolled	148	155	759	580	7	(179)
	Galvanized	431	408	1,535	1,763	(22)	228
	Tin Plates	136	144	504	528	7	24
	Long Steel UPV	49	47	161	176	(2)	15
	Long Steel (profiles)	159	181	724	775	22	51
	TOTAL MARKET	1,172	1,187	4,990	4,857	15	(133)
	SALES VOLUME PARENT COMPANY (thousand tonnes)
		3Q16	4Q16	2015	2016	Change
						4Q16 x 3Q16	2016 x 2015
	Flat Steel	693	688	3,164	2,630	(5)	(534)
	Slabs	-	-	6	0	-	(6)
	Hot Rolled	240	242	1,209	923	2	(286)
	Cold Rolled	129	140	634	490	11	(144)
	Galvanized	229	202	943	848	(27)	(95)
	Tin Plates	95	104	371	369	9	(2)
	Long Steel UPV	49	47	160	176	(2)	16
	DOMESTIC MARKET	742	735	3,324	2,806	(7)	(518)
		3Q16	4Q16	2015	2016	4Q16 x 3Q16	2016 x 2015
	Flat Steel	119	231	1,077	788	111	(289)
	Hot Rolled	-	82	510	204	82	(305)
	Cold Rolled	0	1	139	5	1	(134)
	Galvanized	83	101	288	411	18	123
	Tin Plates	36	47	141	169	11	28
	Long Steel (profiles)	-	-	-	-	-	-
	FOREIGN MARKET	119	231	1,077	788	111	(289)
		3Q16	4Q16	2015	2016	4Q16 x 3Q16	2016 x 2015
	Flat Steel	813	919	4,241	3,418	106	(823)
	Slabs	-	-	6	0	-	(6)
	Hot Rolled	240	324	1,718	1,127	84	(591)
	Cold Rolled	129	141	773	495	12	(278)
	Galvanized	312	303	1,231	1,258	(9)	27
	Tin Plates	131	151	512	537	20	25
	Long Steel UPV	49	47	160	176	(2)	16
	Long Steel (profiles)	-	-	-	-	-	-
	TOTAL MARKET	861	966	4,401	3,595	105	(806)

 

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This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.

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