Gerdau Cuts Budget and Reviews Iron Ore Expansion

Gerdau SA, Latin America’s largest steelmaker, reduced its 2014 investment plan for a second time and will review plans to expand its mining unit as the Brazilian economy stagnates and iron-ore prices fall.

Gerdau cut its annual budget by 13 percent to 2.1 billion reais ($835 million), the Porto Alegre, Brazil-based company said today in its third-quarter earnings report, the second consecutive investment revision. At the beginning of the year, the steelmaker had expected to spend 2.9 billion reais before trimming the forecast to 2.4 billion reais on July 30.

“There was a reduction in steel demand in Brazil due to the economic stagnation we are experiencing,” Chief Executive Officer Andre Gerdau Johannpeter told reporters during a conference call today. “We are reviewing the expansion of the mining operations.”

Brazil’s industrial production unexpectedly fell in September, declining 2.1 percent from the year before, while the central bank raises rates to combat above-target inflation amid the country’s first recession in five years. Prices for iron ore declined to the lowest in more than five years today amid a global surplus.

Gerdau’s iron-ore unit contributed to 6.2 percent of Gerdau’s earnings before interest, taxes, depreciation and amortization in the last 12 months.

Shares of Gerdau dropped 0.6 percent to 11.38 reais at the close in Sao Paulo, the biggest loss since Oct. 30.

Welcome Reduction

“For months, some investors have been questioning the level of capex,” Banco BTG Pactual SA analysts led by Leonardo Correa said in a note to clients today. “We welcome the capex reduction.”

Third-quarter net income dropped 58 percent to 252.2 million reais from 595.1 million reais a year earlier, Gerdau said in the earnings release. Net revenue rose 2 percent to 10.7 billion reais, in line with analysts’ estimates, as a 7.3 percent increase in revenue from Gerdau’s North American unit helped offset the weakness in its Brazilian business.

“We are adapting our investments according to the market and the demand we are seeing,” CEO Gerdau Johannpeter said on the call, adding that the company is reassessing the plan to boost its iron-ore production capacity. “We had a plan to reach 18 million tons by 2016 and 24 million tons by 2020 and that’s what we are reviewing at this stage.”

The steelmaker forecasts similar levels of investments of between 2.1 billion reais to 2.3 billion reais next year, he said.

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