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CompanhiaVale do Rio Doce (NYSE:RIO)

Q3 2007Earnings Call

October 26,2007 10:00 am ET

Executives

FabioBarbosa - CFO

Jose Auto LancasterOliveira - Executive Officer of Non-Ferrous Minerals

Jose Carlos Martins - Executive Officer of Ferrous Minerals

Analysts

Felipe Hirai - Merrill Lynch

Jorge Beristain - Deutsche Bank

Oscar Cabrera - Goldman Sachs

Carlos de Alba - Morgan Stanley

Fred Dubay - Nomura

Sunil Diptendra - Sentinel Asset Management

John Tumazos - John Tumazos Very Independent Research

Julian Chu - Benefit Investment Bank

Operator

Good morning ladies and gentlemen. Thank you for standing byand welcome to the CVRD's Conference Call to discuss Third Quarter 2007Earnings Results. If you do not have a copy of the relevant press release, itis available at the Company's website at www.cvrd.com.br at the investor'slink. At this time all participants are in a listen-only mode. Later we willconduct the question-and-answer session and instructions will be given at thattime. (Operator Instructions). The replay will be available until November 6,2007. To access the replay, please dial 55-11-4688-6312, access code 687. The file will also be available at theCompany's website at www.cvrd.com.br at the investor relations section.

This conference call and the slide presentation are beingtransmitted via Internet as well. You can access the webcast by logging ontothe Company's website, www.cvrd.com.br, investor relations section or at www.prnewswire.com.br.Before proceeding, let me mention that forward-looking statements are beingmade under the Safe Harbor of the SecuritiesLitigation Reform Act of 1996. Actual performance could differ materially fromthat anticipated in any forward-looking comments as a result of macroeconomic conditions,market risk and other factors.

With us today, in Rio de Janeiro is Mr. Fabio Barbosa, CVRD's ChiefFinancial Officer. First, Mr. Barbosa will proceed to the presentation andafter that we will open up for questions-and-answers. It is now my pleasure toturn the call over to Mr. Barbosa. Sir, you may now begin.

Fabio Barbosa

Thank you very much. Good afternoon ladies and gentlemen. Thankyou all for attending this conference call today. We are going to discuss firstvery briefly our quarterly results that we released yesterday, and then we'llshare with you our views about the long-term fundamentals of our market.

Starting with this quarter, we did have a very goodperformance. We despite as a good challenging environment, we delivered very strongresults with records in iron ore and pellet production with 78.3 million tonsand 4.4 million tons respectively, bauxite record at $2.6 billion, meaning thatour Paragominas investment is starting to actually produce in the trend that weexpected. Record iron ore and pellet shipment, 78.5 million. And this thirdquarter post sale was best ever third quarter of our history with [standalone]record in revenues, net earnings and adjusted EBITDA reaching $4 billion.

At the same time as you can see in the next chart, we havebeen able to again deliver cost reduction on the basis of adjustment forvolumes and exchanged variation. If you recall when we just started this [fair]division of costs and more on a suspended basis we refused to indicate a singlefigure to our target for our cost reduction for the future.

And I am happy to tell you that after 12 months we achieved$276 million [without any announcement] that actually delivering the resultsthat we are pursuing. So if you consider the environment that we are goingthrough right now is with a very strong demand for everything, be it labor, fewequipments and materials, not to mention oil prices, you will see that themajor effort in place to contain costs. So we are very happy to deliver -- toactually deliver this result.

At the same time our EBITDA continues to grow in the thirdquarter of '07 on a 12 month basis reaching $16.9 billion and a nice splitbetween Ferrous and non-ferrous, minerals in our nine months composition. Soalmost in balance in both areas showing a much more diversified profile that wehave been aiming at there for some time.

In terms of the ferrous division they are increasing theshipments was the major driver for the good results achieved and of course costreduction was presently $80 million, as residual price adjustments are $52million and then we were able to deliver $2.2 billion in EBITDA for the ferrousdivision this year.

For the non-ferrous I think in the fiscal year showing theeffects after the price reduction in nickel compared to the previous quarterwhen nickel prices reached record levels.

This shows you the nice aspect of what I justified profile.We did have very strong performance in the quarter associated with nickel. Nowwith the nickel prices being at the lower level, we're able to add this impactto deliver very strong volume performance in our iron ore and pellet division.

So you know, we are mitigating the risk related to ourEBITDA in the long-term as we expected.

And finally, I would like to mention that again consistentlywith what the message we have been conveying, our leverage wasn't used and ourtotal debt EBITDA reached to a level of 1.2 times in the third quarter and theend of September. The quarter ended in September.

We are chiefly consistent with what we have in Brazilianmarket and despite the major effort that we have been doing in investment andalso in dividend payment.

Turning now to our views on the long-term fundamentals ofour market. First, this first chart, (inaudible) is showing, and again now weexpanded, we stretched the focus to longer periods in order to [assess CAGRcosts based] on with our own strategic plan that we just announced.

But you can see there, you can see that as you take 2002 thereference year, it's also [in red]. It means that the world economy grew byalmost 10 years in a row above long downtrend.

Now this is something that has happened, the last time thatit happened was in the 60s and it grow the years including 60. So, what we areactually leaving and we have been also stressing at this point in severalopportunities is that business there it's a very long-term phenomenon. There isstretch or change that is taking place and growth in our view will continue tobe there. Although, it may be a little bit more moderate in the following yearsbut still, well above their long-term trend that we just observed in the lastfour years. So, this is great news for our market.

The next chart is also an interesting aspect of the currentGDP, global GDP growth, which is the lower volatility that is embedded in thecharacteristics of the growth [so far].It means that the whole company is highly [scattered] like CVRD and all othermining sectors.

Its natural or its logical that something raising up itsmultiple associate and if they lower implied risk plan associated with ourbusiness. So, given that the shock of fluctuations of demand, aggravate demandand currently the global economy less lightly. So, we should [be let it been].So, it means that as less riskier market ahead of us according to this chartthat we just quantitative of. And to the same -- and on the same note, I wouldalso point out the great share of the emerging market economies in global GDPfrom 39% or so into the 1980s now to almost 50%, 48% in 2006 and should beabout 50 this year. So, what it means is that the growth is more concentratedin emerging market economies and the marginal growth rate that you can see inthe next page, shows you precisely there that about three quarters of thetypical growth rate is today associated with the emerging market economies, outof which China is responsible for 22% of the total GDP growth.

It means that if we consider that the developing economiesare the major drivers for the whole GDP growth, it means that those granted bythe position they are in and the development stage that is different from theirdeveloped [countries] by definition. So they need to think that developingcompanies no longer near to the same [advancement] there, economies like China, India do.

So associated with this growth and it is a majorcharacteristic of this long cycle that we are living through right now is thefact that there is a major [organization] in the industrialization processtaking place. And the logical results of it, is major demand for minerals andmetals also in place. It means that if we do believe that the structuralchanges continue and if there is a cycle it will be actually as long as we[mitigate]. It means that there's much more to come in our market and it's notclear what would be the -- if there is no point in the long-term.

So in other words, it's hard to say when this cycle willpeak right now. So in our view again, strategies point this process could takemuch more years -- many more years than they are doing. We are indicating andparticularly as we indicated in previous conferences if countries like Indiawith its size and population at a development stage, enters the process in amore effective way in terms of the minerals and metals market as we do expect.

China'seconomy in 2007, you just saw yesterday we released that figures, GDP growth11.5% the same for the whole year. So it's a dynamic economy. And it's really-- its well above our expectation. We expected GDP growth in the beginning --we targeted GDP growth in the beginning of the year to be around 10%, now it'swell above this rate. And we don't see any sign of deceleration.

And with that, we -- again, we expect the importance -- therelative importance of Chinain the global demand on minerals and metals, to increase further. So our annual[agenda] is 45% of the seaborne trade in 2006. In 2011, our expectation is thatthis share will be 54%, nickel, 31% from 4.9% in 2000 -- just 4.9% in 2000,aluminum 41% and copper 30%.

So, again, this -- if one believes that chart and wecontinue to grow along that the, months associate with this growth is theincrease in demand for minerals and metals. And, again, you should be awarethat there is an upside link associated with India demand that is not yetreflected in prices or the conditions of market in minerals and metals.

And for the short-term, spot prices in iron ore surgedreaching almost $180 per ton for the Indian ore. The Chinese spot is aroundthat figure of 172, and even with a much high spot of freight dollar tonnage (inaudible).What it means more than that figure itself, is that the market is not balanced.The market is not cleared, and if you consider the average size realized in ourFOB basis, $46 per ton. You'll see that a major imbalance taking place as itmakes [polished] iron ore even when adjusted for the freight cost, it's around,20% or 25% less than the prices that are being paid for India and Chinese ore,both of lower quality than ours.

We do believe that the benchmark pricing system is the onethat provides us the more accurate -- the most accurate signs to the market ingeneral, in terms of, mining companies and steel companies. And, in a way,allow us to invest massively as we do. As we just announced in our investmentprogram that we are involving $59 billion over the next five years, and ironore being expanded to 450 million [tons for] 300 million tons this year. So,it's our view that this market will continue to be -- to perform very strongly.And we have to catch up and to discuss with our clients the best way to findmutual beneficial agreements in this area over the next few years.

After turning to -- now, to the stainless steel. After asharp reduction in third quarter of '07, as you see and it's a little bit --it's sort of seasonal reduction. Although, this year it's more intense, it hasbeen more intense than the previous year. But the fact that it is seasonallydue to the summer season into -- not behind this year there is a reduction inproduction. There has been a reduction in production. And now, out here that'sthe understanding to production is starting (inaudible). And so nickel pricesare also bouncing back, reflecting the healthy fundamentals that we put there.So, the growth is there. The world growth is there. Asiais growing and again demand would -- it's a matter of time that demand willreflect this situation is different in the nickel market.

Overall, we have a very, full of confidence to the long-termglobal fundamentals. And that's why we put together this $59 billion program asa [notion] before the investment program for the next five years. The largestinvestment program for a mining company ever announced. We definitely focus onorganic growth with project development and mineral exploration. And we have toexplore and enjoy the fact that the competitive advantage of having the bestand largest of several materials particularly iron ore, nickel and bauxite.

We are also working hard to enhance our infrastructure,logistics and power generation. And in this connection is explained -- a goodpart of the increase in our CapEx is based on costs that we announced the lastweek. Of course, what we are talking about now is our investment there are in away transforming our production capability over the long-term and that moreinfrastructure, more logistics, more ports are required in order to shift allthe material that we are going to get over the next few years.

In the next chart is of our pipeline of projects but I won'tdiscuss all of them but it shows the powerful drill capacity that we do have isvery true, large projects they are not all of them that are listed here but themost important ones and it's a clear sign of our cost events in the future ofour industry and our company in particular. We do have options to grow. Thoseare not strictly plans with the project that are being implemented orelaborated that will be submitted to our Board, but the fact that as we putthat we do have fewer options to grow over the long-term.

And finally, a brief reminder of how effective we have beenin delivering good returns of [capital investments] in the last 12 months andduring the third quarter of '07, our return on capital investment was 52.1%. Sowe are happy to deliver these results despite the difficulties in some areasinvolved and difficult reproductions in some business areas but we do believethat those results were very satisfactory, very positive and indicative of thestrength of our company.

I will be available for the questions that you may have.Thank you very much.

Question-and-AnswerSession

Operator

Thank you sir. (Operator Instructions). Our first questioncomes from Felipe Hirai with Merrill Lynch. Please go ahead.

Felipe Hirai -Merrill Lynch

Thank you, good morning everyone. Good morning, Fabio. Ihave a question regarding your nickel business. We saw a decline in productionin the third quarter, but you changed your guidance for the remainder of theyear and also during the [consolidation] theory it seems that you expect the productionfor the fourth quarter to increase by 22%.

Could you comment if that's feasible or not and what driventhese declining production what could be the trigger for the decrease inproduction fourth quarter?

Fabio Barbosa

Thank you, Felipe. The triggers that we have overcome, andthe problems that we had particularly in our Canadian operations and we dobelieve that we'll be able to deliver these figures. We revised dollars on ourannual estimates but implying a more aggressive number for the fourth quarterof '07 that is particularly feasible enough.

Felipe Hirai -Merrill Lynch

Okay. And I have a second question regarding the logisticsyou announced to be true for the CapEx of your logistic infrastructure. Couldyou comment if fees for the next few years for these -- all of theseinvestments in logistics ramp up, if these would be a professional bottleneckfor your current production?

Fabio Barbosa

No we are moving ahead in some places, we are moving ahead,and we'll [build] our capacity ahead of the production of our mine. In terms oflogistics in iron, we're increasing our current (inaudible) to 125 million tonsby 2011 if I’m not mistaken. And at the same time we are building a new pierand a (inaudible) pier on the northern shore.

Today currently for instance, we have idle capacity -- notidle, but available capacity now for the (inaudible) so it's a combination. Weare working hard. This year has been a very tight year. You will remember thatthat first two quarters we lost shipments, and most likely, we will not be ableto pull all the shipments that we lost.

We operated very efficiently in the first quarter we areslowing that now, but I would say that today we are operating on tighterconditions there will be in the next few years, so we are bringing morecapacity to be very well somewhat together.

Operator

And thank you Mr. Hirai for your question. The next questioncomes from Jorge Beristain with Deutsche Bank. Please go ahead.

Jorge Beristain -Deutsche Bank

Hi. Good morning, Fabio. It's Jorge Beristain with DeutscheBank here. Two questions, one is just following up on that nickel commentearlier. I was wondering in terms of the unit cash costs that we saw, we didsee another up tick quarter-on-quarter going into the third quarter. Is thatsomething that you view actually coming down in the fourth quarter on highervolumes because of the fixed nature of the cash costs in the nickel businessthat's my first question?

Fabio Barbosa

Yes, Jorge, you are right, we should produce more fixedcosts associated with the portion that you mentioned that we should expect adecline in the fourth quarter, yes.

Jorge Beristain -Deutsche Bank

Okay. My second question is just regarding the outlook forthe nickel market in terms of prices. We saw an incredible collapsequarter-over-quarter in your revenue into Asia particularly in Japan, in Korea, on I guess lower nickelsales there, could you comment a little bit about what you are seeing from thestainless steel producers themselves in terms of how they finished thede-stocking phase? And secondly, as more nickel volumes are made available byyou to the market, do you believe we'll see lower prices or do you think thatprices have more or less stabilized in the $14 a pound range right now?

Fabio Barbosa

Well, I think the demand has been picking up. It's growingafter this de-stocking process, after the adjustments took place and clearlydemand is much stronger today than it was in the previous month. So we arede-stocking that currently throughout Asia,you know. So, now on the demand side I would say that it's natural to expect abad performance as well. And we hope to be able to deliver all the nickel ifthis demanded by our client and the market. As for prices, we do not have aforecast, we do not give this sort of guidance in terms of prices but what I'dsay is that, I would say is that prices have -- nickel prices have beingshowing some sort of resistance point around the current level. I'm not sure ifthis is something more permanent or just [shape] a little bit current situationof the market. But the fact is that the prices are as we put they are hoveringaround this $32,000 per ton. And I would not say to you what would be the --what is our forecast for the next two months, but I would say that demand isstronger now than in the third quarter. And we are trying to catch up withdemand by our clients. This is a matter for Jose.

Jose Auto Lancaster Oliveira

Yes. I'dlike to highlight one important issue about the cost of the nickel operations.As a matter of fact, nickel cash costs increased in the third quarter, but iflooking to the whole cost of the nickel operations, you should know as it wasexpressed in the press release that we managed to reduce them by $150 milliondue to decreasing purchase of nickel intermediate products and finished nickel.We are replacing [trade back] product with our production relatively to 2006.This is an important measure in order to reduce our costs.

Fabio Barbosa

Okay, Jorge.

Jorge Beristain -Deutsche Bank

Thank you.

Operator

Yes. Thank you for your question Mr. Beristain.Our next question comes from Oscar Cabrera with Goldman Sachs.

Oscar Cabrera -Goldman Sachs

Good morning everybody. Fabio, first question is withregards to your coal business. During the -- in your press release for theannouncement of the $59 billion investment, there you have an estimate forcoal, would you be able to give us a breakdown of the met-coal and the thermalcoal that you have for these numbers. They go from 2.9 to 15.2 expanding 2007to 2012. I will follow-up with another one please. Hello?

Fabio Barbosa

Sorry, I got your question. And so for the coal, what we dohave its production estimated for this year around 3 million tons. Yes,according to the consolidation that we did in our acquisition of AMCI (inaudible)and our goal would be 30 million tons involving basically the Moatize projectwith 11 million tons or so. We are over there with 8 million tons. And we alsohave with early stakes in the Chinese joint venture that would also addassuming our costs -- some 3 million tons to this project. Hello?

Oscar Cabrera -Goldman Sachs

Yeah. Right. But would it be possible for you guys to giveus the breakdown of what or at least the metallurgical coal component of those?

Fabio Barbosa

75% ofmetallurgical.

Oscar Cabrera - Goldman Sachs

Okay.

Fabio Barbosa

75%. It's our best estimate. So,in a way, if we put together we would have some -- all the operations that wehave in Australia right now plus, the future operations we will have some 19 --18 million to 19 million tons of coal we produce there, and 10 million tons --11 million tons in Moatize plus 2 million tons in China. And the distributionwould be around a figure 80% or so metallurgical. Okay?

Oscar Cabrera -Goldman Sachs

Okay. Thank you, Fabio. The second question it's withregards to the iron ore business. You know, you've got a great cost control,you know, considering the appreciation of the Reais, I was just curious would,you know, what -- where are you seeing some of these savings coming from? Is it-- have you been able to split your mines now and that's why your shippingratio is lower, therefore, your cost are lower or has it, you know, becausethey have to do with more of the supply chain and the way you are managing youroperations at the moment? Thanks.

Operator

This is the conference operator please continue to hold. Wewill reconnect the conductor shortly.

Please be patient as we reconnect Mr. Barbosa'slocation. Thank you for holding.

Excuse me Mr. Barbosa rejoins at theconference.

Fabio Barbosa

Yes. Thank you. Oscar, could you repeatthe question for clarification, please?

Operator

And I do apologize, sir. I do apologize, Mr. Barbosa, we do not have that party in the queue. (OperatorInstructions). Mr. Cabrera you may ask you second question.

Oscar Cabrera -Goldman Sachs

Great, thank you. Thanks Fabio.

Fabio Barbosa

Oscar, sorry about that we had technical problems, could yourepeat the whole question please?

Oscar Cabrera - GoldmanSachs

Yeah, no problem. You know, I was just saying that you guyshave shown extraordinary cost control at your iron ore operations, despite high[appreciation] of the Reais and I was just wondering, if you could provide alittle bit more color as to the source of this cost containment, is it the fact that you guys have beenable to just continue to strip your minds, I remember last call you said thatthere were issues with [drilling], you had to go deeper under the -- deepen thepits or is it more on your supply chain and the fact that you have payingsynergies there by consolidating some of these operations?

Fabio Barbosa

Well, I think, you got it right, I think we are doing a lotof things altogether. We actually are facing various cost pressures and theissue of we are increasing -- we are dealing with that with increase ofcommission, its something that we have nearly [declined] in the last few years.Also, we are redesigned and if you know this in the press release we informedabout the structure of our shared services that some costs there outside to theoperations and either within assignments, costs were down at the operationallevel. So, we are improving the way we used to do, we used to do the operationand also we are at the same time exploiting the synergies that we indicated inthe past with MBR, the MBR operations were resulting in some inconsistencies.So, we have always wanted to consolidate this company and because we did see alot of potential value to be captured within MBR, in a way, collecting theresults that's out there and that where there to be collected so we arebelieving. I'll also know that we are changing the way we operate reducingoutsourced services and then if you are talking an out services provision,particularly waste removal and this is -- it has been -- its in the past thiswas cheaper to bring outsourced service to do this kind of job, but now withstrength of demand for other services it became more expensive, so we decidedto do it in-house and we should have more results in the future. The pointsthat you'll miss and there would be (inaudible) because the run rate is[inflation] it is not playing a role yet often. We do believe that this rolewill be more effective moving forward as we implement all the investments thatwe have in our pipeline.

Today given the result of the market, we are operating withmines with very high marginal costs, costs that in some cases they triple, thecost of a mine like Branco II, so but we have to operate it because it providesthe material that is required to supply our client and we have no alternative.If they increase in our perfection reaching 450 million tons it is natural tohave a power trend in our operational costs as we will have a much lower[street way] so in the future given the requirement of the mines that we aregoing to develop. Okay.

Operator

Yes. Thank you for your question, Mr. Cabrera. Our nextquestion comes from Carlos de Alba with Morgan Stanley. Please go ahead.

Carlos de Alba -Morgan Stanley

Good morning gentlemen. A quick question on SG&A theincrease substantially year-over-year and in the press release you went throughsome of the details on what drove that increase. However this deal of about $47million of the increase that is almost 40% of the higher expenses that were notquantified, so I wonder if you could comment on that please?

Fabio Barbosa

Your question is about SG&A and with actually the (inaudible)as we put there. We have several different, [cost frames] to explain it. Iwould highlight what we already quoted the price would be and its fairly [andsurprising] and we spent some $90 million more in this quarter as we felt itrather [procreates] to show in a more effective way what the company was doingparticularly here in Brazil. Particularly in the social acts and that thecorporate structure responsibility actions that we had in our plans.

The perception that we had is that, we were not as keen asmuch as we would like to be in this area, and this is a very poor account areafor our company that it spreads out in several states here in Brazil. So we thought that wasnecessary. The another important point is that we now in particular (inaudible)trying to rollout our, the structure that we have here in is to be added. Sowe're expanding more, we are trying to upgrade our IC capabilities and we havethe challenge of having more companies to connect repeatedly to be probably --I would think that those are most the important ones regarding to this [costyear to-date] increase.

Carlos de Alba -Morgan Stanley

And thank you. And is there a number that you do think willbe a more sustainable SG&A going forward?

Jose Carlos Martins

It'sCarlos. You should expect of course [of the five reviews] has to do withthe perception about the government, of the company, by people in the Brazilianenvironment, okay.

But as far as they should expect a continuous pressure onthis area, as we are upgrading and improving our facilities and we have morecompanies, we are a bigger company, and even the need that we identify and, sowe have to really spend some money there for two quarters, yes. Thank you.

Operator

Yes. Thank you for your question Mr. de Alba. Our nextquestion comes from [Fred Dubay] with Nomura. Please go ahead.

Fred Dubay - Nomura

Hi. I just had a small question on the nickel volumes. As Iunderstand you said that nickel production would be higher in the fourthquarter but during the press release of 2008 CapEx you have given a guidancefor nickel production for 2007 as 260,000 tons. I just wanted to justunderstand that if the nickel production is going to go up in fourth quarterwhy would the overall nickel volumes would be so low compared to the previousguidance of 287,000 tons? Thank you.

Fabio Barbosa

Could you please repeat the question? I'll be so glad.Please.

Fred Dubay - Nomura

Yeah, I said that in the press release for 2008 CapExguidance you have given the nickel production guidance as 260,000 tons. But asI understand you also said the nickel volume production in the fourth quarterwould be increasing. So, I really don't understand if the production in fourthquarter is increasing, then, how come your revised guidance is lower than youroriginal guidance of 287,000 tons? In short could you -- whenever guide like --how much overall production for nickel you are expecting for the whole year?

Fabio Barbosa

Our -- due to the problems that we had in operations that wereleased or we informed in our press release -- our own production would bearound 244,000 tons -- [246,000] tons this year. And if using third party thisyear would be 14,000 tons. In total it would be 260 short of our initial dealof 287, due to the problems that we observed in several of our operations inour nickel division.

Fred Dubay - Nomura

Okay. So, I guess even -- since the volumes would be down inthe fourth quarter even your upper unit cash costs would also be highercompared to this quarter, is that right?

Fabio Barbosa

No. We should expect some decline in that cash cost becausewe are going to produce more competitive third quarter as we are going toproduce more on the fourth quarter than we produced, completed in thirdquarter.

Fred Dubay - Nomura

Okay. Thank you.

Operator

Thank you Mr. Dubay. Our next question comes from [Sunil Diptendra]with Sentinel Asset Management. Please go ahead.

Sunil Diptendra -Sentinel Asset Management

Yeah. Just -- you mentioned in the opening commentary thatgrowth may moderate in the following years, is it possible? Can you elaborateon that what you meant by this that you are looking for certain countriesgrowth to moderate or certain growing countries to moderate or what was the --could you elaborate on this?

Fabio Barbosa

Sorry, could you repeat, the sound is not good here, couldyou repeat please. Sorry.

Sunil Diptendra -Sentinel Asset Management

Yeah. In the opening comments, you mentioned that growth maymoderate in the following year, but the long-term growth maybe -- but mayremain above the long-term trend of the last four years. Is it possible thatyou can elaborate on what, where the growth moderation is being seen by you?What areas you are seeing or what regions you are seeing there might be growthmoderation, is it in certain commodities, certain regions or what do you seebasically going forward?

Fabio Barbosa

Okay. I got it. Thank you. Sorry, about that.

Sunil Diptendra -Sentinel Asset Management

Thanks.

Fabio Barbosa

All our major views as for what you'll next year would besome deceleration in the USeconomy that would drive reduction in the [year more], consolidated growth rateprobably will decline. Instead of 5% it should be more or should be closer to4% or 4.2%. So -- but even that at this level it's right above the 3.5% that weobserved in the, after the 70s up to very recently. So in '08, if we take thisaverage of the standards with the local trend and the less (inaudible) percentof the 80s and 90s you'll see that 4% -- 4.2% -- 4.5% is well above thesestandards. And the other reason is precisely the environment, mostly eveneconomies in particular. Chinaright now is growing. It continues to grow at a very fast pace. And in ourview, it's progressing with [new solidity], but it will continue to grow atvery high rates compared to the Asian standards.

We have growing economies like Cambodia,like Vietnamthat are also joining the party. You have Japan with more economy that it'sreally more than the [elusive bands] and other source of growth. And you havethe major upside represented by Indiain our view, because Indiais a very large economy. It's 1.2 billion people with -- in a stage ofdevelopment but is still very behind for instance, what China has achieved. So -- and theyare growing 9% to 10%. This does mean that the impact of the Indian growth inthe total GDP growth is still small. But this would change in the future, andin a way we really share this view that India has still a more importantrole in the global arena. And it would have a more relevant impact in metal andminerals markets.

So if we could divide the world in two parts, in two pieces,I would say roughly speaking, where the accelerated growth would take place inthe eastern part of the globe combined with very (inaudible), but more moderategrowth rate in the western part of the world, western Europe, US, Americasincluded.

So and in the more long-term perspective, we could have [Alaska] also playing arole, several countries there due to this very rich environment of -- in ourindustry particularly. There is a map of it and they are wealthy in resourcesthat they have there it's not -- it could be also very more of the perspective,another source of structured growth moving forward as often is the [nextstage], but this continent it is very few, we have lower debt as experienced inthe subcontinent of the Asia-Pacific region.

Sunil Diptendra -Sentinel Asset Management

Yeah. So given the strong growth in those regions, probablythe US may not be a factor in your shipments in that case, which tells me thatgoing forward your shipments for next three years will continue to increasefrom the present levels, is that what one should make that assumption?

Fabio Barbosa

Yeah.

Sunil Diptendra -Sentinel Asset Management

Is that the correct way to think about it?

Fabio Barbosa

You have every deciding way that you should think about it.Our shipments will increase, and the driver will be Asia.It's Asia and both Europe and US where we havevery small presence, that the growth will be there, but the demand would not bethe major driver of additional demand. What you see for instance in India the steel production allows 50 milliontons the year and very ambitious target to reach triple of this stock in [Italyas a whole]. So, and something that we don't see in the US economy for instancewe are not that specific -- it could happen here, there, the production isaround 110 million tons per year. But in India it could be tripling, therein the production over the next 10 years or so and to be taken by thegovernment plan. And Chinawill continue to grow as their capital structure and is still lower than whatwe have done in the western countries clearly (inaudible). So, not unusual, wewill continue to be more evident in the eastern parts of the world. So ourshipments to that region should increase over the next few years.

Operator

And thank you for your question Mr. Diptendra. Our nextquestion comes from John Tumazos with John Tumazos Very Independent Research.Please go ahead.

John Tumazos - JohnTumazos Very Independent Research

Congratulations on all of your progress, could you update uson the plan to move from 300 million to 450 million metric tons of iron ore andspecifically the issues of [real delivery the bottleneck] and where you mightbe moving to double track from single track and building bridges and civilengineering issues?

Fabio Barbosa

Thank you very much. Well, our production capacity will beoperating at 450 million tons capacity by the end of 2012. So, our view is thatthe market will be, you demand even more than that or that's what we can do tofreeze our customers. We are investing heavily as you'll call it and the newproject, that again they have a different characteristics, of implied and the[rigorous] of our infrastructure, view the new logistics and this is moreexpensive than ordinary last year's expenses and in the case of the doubletrack designation, we are almost -- double tracking almost 500 kilometers thatfar Carajas railroad and building several yards to accommodate longer trainsthat we are using in our operation.

So in the northern shore we are building a new pier andthough we have included new ship loaders in order to again make Carajas capabledelivery 220 million tons in the next five years, after five years. We arebuying car dumpers. We are really thinking on enhancing to [cutback the falsestock] in Tuberao port. We are using the Litorania Sul a railroad and there isa new branch of that will be connected to Tuberao port and we'll connectTuberao port to the new [Ubu] port where the new steel plant that we are buildingit's position will be located and that port would be also an important (inaudible)logistic facility that we are building. So it's a major, major effort in placeand that's explains our -- the new consideration of our CapEx fiscal comparedto what we used to do in the press release.

John Tumazos - JohnTumazos Very Independent Research

Thank you very much.

Operator

Thank you. Our next question comes from [Julian Chu withBenefit Investment Bank]

Julian Chu - BenefitInvestment Bank

(inaudible). Good morning gentlemen. I just in line of theprevious question. I believe that you are quite confident of delivering the 450million tons of iron 2011 -- 2012 sorry. I need to know what kind of risk youmay we should monitor for a possible delay in this schedule?

Fabio Barbosa

Thank you Julian. While I think that is associated with theenvironmental permits to the [Nebel] project. Also the availability ofcontractors and equipments. So we are trying to speed up our orders. We areincreasing the anticipation of not famous of the several projects in order tosingularly ensure that the (inaudible) of the requirement will complete on atimely fashion. But I would say that those are -- they are reaching for permitscontractors and equipment.

Julian Chu - BenefitInvestment Bank

So I can consider that [slowly has cut the mind]?

Fabio Barbosa

We'll be able or so far we have been progressing on scheduleand we believe that on the supply side we'll be able to do the new (inaudible)and on demand side as we have commented before it's very strong and actually weshould move ahead of our capacity to deliver all the orders requested by ourclients.

Julian Chu - BenefitInvestment Bank

Okay. Thank you very much.

Fabio Barbosa

Thank you, Juliana.

Operator

Thank you, Ms. Chu for your question. This concludes today'squestion-and-answer session. Mr. Barbosa, at this time you may proceed withyour closing statement, sir.

Fabio Barbosa

Well thank you very much. And I'm very happy to be heretoday on the 26th of October. This is also a great Q for us that we're able todeliver our quarterly results, thanks to our team in accounting and theinvestor relations. We are able to deliver this result earlier for you.

So if you have any further questions please let us know andwe'll be happy to answer them. Thank you very much.

Operator

Thank you again. That does conclude our CVRD third quarter2007 earnings conference for today. Thank you very much for your participation.You may now disconnect.

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Source: Companhia Vale do Rio Doce Q3 2007 Earnings Call Transcript
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