Brazil, June 30, 2021 – Companhia Siderúrgica Nacional (CSN, Ba3 stable) announced that its fully owned cement subsidiary CSN Cimentos S.A. had entered an agreement to purchase Elizabeth Cimentos S.A. and Elizabeth Mineração Ltda. (collectively, Elizabeth Cimentos) for BRL1.08 billion ($220 million). The deal is credit positive for CSN because the additional capacity in the cement segment will help diversify its cash flow and foster growth, while hardly affecting its balance sheet and liquidity. The acquisition requires customary approvals, including from Brazil’s antitrust authority CADE.
CSN had a robust cash position of BRL18.2 billion at the end of March 2021, including its shares of Usinas Siderurgicas de Minas Gerais (Usiminas, Ba3 stable), and will report historically low leverage and generate free cash flow north of BRL10 billion in 2021, offsetting leverage and liquidity risks coming from this transaction. Additionally, the acquisition could be self-financed at CSN Cimentos’ level, assuming the successful conclusion of the subsidiary’s initial public offering (IPO), which will generate an estimated BRL2.5 billion and give CSN additional flexibility to pursue growth while also reducing debt during the peak of the steel and iron ore industries’ cycle this year.
The transaction involves the acquisition of a plant with an annual production capacity of 1.3 million tons that serves Brazil’s northeastern markets in the states of Paraíba and Pernambuco. This plant complements CSN Cimentos’ existing 4.7 million production capacity in Brazil’s southeast region in the states of Minas Gerais and Rio de Janeiro.
Pro forma for the transaction, CSN’s cement revenue has the potential to increase by about 30%, and the share of the cement segment in CSN’s consolidated results would increase to 3% of total revenue from 2% currently. Although still small relative to the group’s overall size, a larger footprint and scale in the cement business will provide a buffer to CSN’s consolidated cash flow during future downturns in the steel and iron ore markets, which contribute 51% and 42% to the company’s total revenue, respectively.
CSN’s adjusted EBITDA increased to BRL14.4 billion in the 12 months that ended March 2021 from BRL6.3 billion in 2019, and adjusted leverage declined to 2.4x from 4.8x on positive industry momentum. We expect CSN’s adjusted leverage ratios to decline to around 1x-2x over the next 12-18 months and to be within the 3.0x-4.5x range over time based on a range of price scenarios for iron ore 62% Fe of $70-$100 per ton and normalized steel operations. Net leverage, assuming a recurring BRL10 billion cash position, will fall to below 1x in 2021 and settle around 2-3x over time. Leverage ratios could strengthen depending on how much debt reduction the company pursues this year.
CSN’s credit quality and liquidity have improved materially since late 2020 amid a robust increase in cash and cash flow coming from strong steel and iron ore operations, and several liquidity-enhancing initiatives carried out by the company. These include the IPO of its mining subsidiary, the around BRL4 billion reduction in gross debt so far this year, the sale of about half of its preferred shares in Usiminas for BRL1.3 billion, the issuance of $850 million in new 10-year notes to tender the $925 million notes maturing in 2023, and the ongoing refinance of BRL3.4 billion in debt with Banco do Brasil S.A. and Caixa Economica Federal that come due in 2021-22.
Still, CSN’s track record of aggressive financial policies, including a highly leveraged capital structure, appetite for growth and dividend requirements to service debt payments at the parent level are key risks. However, we acknowledge that CSN is proving to be more conservative in its financial management and in preserving its credit quality even while pursing opportunistic acquisitions.
The acquisition will also help to consolidate Brazil’s fragmented cement market, improving the competitive landscape by rationalizing competition. Brazil has an annual installed cement production capacity of about 102 million tons, and had an annual consumption of 60 million tons in 2020. That is an improvement from the 2018 trough of 53 million tons, but still below the 2014 peak of 73 million tons peak. The sector has struggled with sequential contractions in cement demand since 2014, which led domestic cement prices to drop to a low of BRL25 per 50 kilogram bag in 2017-19, from nearly BRL35 in 2011.
Cement demand in Brazil was hard hit by lower residential construction derived from the country’s economic recession in 2015-16 and a retrenchment of public and private investments. In 2020, cement demand grew 10.9% from the previous year because of the strong performance of the self-construction segment and a pick-up of real estate construction activity, which together contribute to around 80% of the total cement consumption in Brazil. For 2021, cement demand growth will soften, reflecting less disposable income available for self-construction with the phase out of government support to individuals but still firm residential construction activity.
Credit Outlook: 5 July 2021. Pg. 8
Moodys
Atlantic Investors Service 