Bradespar S.A. and Bradespar S.A. and Subsidiaries Financial statements at December 31, 2012 and independent auditor s report

Transcription

1 Bradespar S.A. and Bradespar S.A. and Subsidiaries Financial statements at December 31, 2012 and independent auditor s report

2 Independent auditor s report To the Board of Directors and Stockholders Bradespar S.A. We have audited the accompanying financial statements of Bradespar S.A. ( Parent Company ), which comprise the balance sheet as at December 31, 2012 and the statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. We have also audited the accompanying consolidated financial statements of Bradespar S.A. and its subsidiaries ( Consolidated ), which comprise the consolidated balance sheet as at December 31, 2012 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the parent company financial statements in accordance with accounting practices adopted in Brazil, and for the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion on the parent company financial statements In our opinion, the parent company financial statements referred to above present fairly, in all material respects, the financial position of Bradespar S.A. as at December 31, 2012, and its financial performance and its cash flows for the year then ended, in accordance with accounting practices adopted in Brazil. 27

3 Opinion on the consolidated financial statements In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bradespar S.A. and its subsidiaries as at December 31, 2012, and their financial performance and their cash flows for the year then ended, in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil. Emphasis of matter As discussed in Note 2 to these financial statements, the parent company financial statements have been prepared in accordance with accounting practices adopted in Brazil. In the case of Bradespar S.A., these practices differ from IFRS applicable to separate financial statements only in relation to the measurement of investments in subsidiaries, associates and jointly controlled entities based on equity accounting, while IFRS require measurement based on cost or fair value. Our opinion is not qualified in respect of this matter. Other matters Supplementary information statements of value added We also have audited the parent company and consolidated statements of value added for the year ended December 31, 2012, which are the responsibility of the Company's management. The presentation of these statements is required by Brazilian corporate legislation for listed companies, but is considered supplementary information for IFRS purposes. These statements were subjected to the same audit procedures described above and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole. São Paulo, March 19, 2013 PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5 Luís Carlos Matias Ramos Contador CRC 1SP171564/O-1 28

4 1. OPERATIONS Notes to the Financial Statements (In thousands of reais, unless otherwise stated) The main activity of BRADESPAR S.A. (BRADESPAR, the Company or Parent company), a publicly traded corporation headquartered at 1450, 9 th floor, Avenida Paulista, São Paulo, State of São Paulo, Brazil, is to invest in other companies as a partner or stockholder. The main direct and indirect investments are held in the following companies: a) Antares Holdings Ltda. (ANTARES) The main activity of this company is to manage, lease, purchase and sell its own assets and to invest in other companies as a quotaholder or shareholder. b) Brumado Holdings Ltda. (BRUMADO) The main activity of this company is to invest in other companies as a partner or shareholder. c) Millennium Security Holdings Corp. (MILLENNIUM) The main activity of this company is to participate in any acts or activities which are not prohibited by the legislation effective in the British Virgin Islands. d) Valepar S.A. (VALEPAR) The main activity of VALEPAR, a privately held corporation, is to invest exclusively as a stockholder in the capital of Vale S.A. (VALE). e) Vale S.A. (VALE) VALE is a publicly traded corporation principally engaged in the research, production and marketing of iron ore and pellets, nickel, fertilizers, copper, coal, manganese, iron alloys, cobalt, platinum group metals and other precious metals. The Company also acts in the energy, logistics and steel manufacturing industries. 2. FINANCIAL STATEMENT PRESENTATION We present the financial statements of BRADESPAR (Parent company) and of the Consolidated company, which include BRADESPAR, ANTARES, BRUMADO and MILLENNIUM as at December 31, 2012 and The parent company and consolidated financial statements were prepared and are presented in accordance with Brazilian Corporation Law (Law 6404/76) and the changes introduced by Laws 11638/07 and 11941/09 and also, where applicable, based on the international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB), implemented in Brazil through the Brazilian Accounting Pronouncements Committee (CPC), as well as the related technical interpretations (ICPCs) and guidelines (OCPCs) approved by the Brazilian Securities Commission (CVM). In conformity with CVM Decision 666/11, which approved CPC Technical Standard 19 (R1) for listed companies, establishing, in the case of joint ventures, the use of the equity method of accounting in the parent company financial statements of each joint controller and, in the consolidated statements, the use of either the equity method or the proportional consolidation method, BRADESPAR opted to use the equity method for the information for the years ended December 31, 2012 and

5 The accounting practices adopted in Brazil applied to the parent company financial statements differ from IFRS applicable to separate financial statements only in relation to the measurement of investments in subsidiaries, associates and jointly controlled entities which is based on equity accounting, while IFRS would require measurement based on cost or fair value. The accounting estimates used for preparing the financial statements related to deferred tax assets and liabilities, provisions and contingent liabilities consider the most appropriate available evidence and are based on assumptions existing at the year-end closing dates. Actual results, after realization, could differ from the estimated amounts. BRADESPAR has evaluated the subsequent events up to March 19, 2013, which is the date on which the financial statements were authorized for issue. 3. SIGNIFICANT ACCOUNTING PRACTICES a) Consolidation principles The consolidated financial statements reflect the balances and transactions of the parent company and its direct and indirect subsidiaries. The investment in the joint venture is recorded based on the equity method of accounting. The accounting practices of the subsidiary and associated companies are adjusted to ensure that they are consistent with the policies adopted by the parent company. Transactions between the consolidated companies and the related balances and unrealized gains and losses are eliminated. The consolidated financial statements of BRADESPAR include the following direct and indirect subsidiaries: Companies At December 31 BRADESPAR s direct and indirect percentage ownership ANTARES BRUMADO MILLENNIUM b) Segment reporting BRADESPAR is a holding company and its main activity is to invest as a partner or stockholder in other companies and, accordingly, it does not present its information by segment. c) Functional currency and reporting currency The financial statements are presented in reais which is BRADESPAR s functional currency. d) Cash and cash equivalents Cash and cash equivalents are used by the Company to manage its short-term commitments and comprise cash in local currency and investments in investment funds, with maturities at the original investment dates equal to or less than 90 days and which present an immaterial risk of change in fair value and are readily convertible into cash. The market value of the investment funds is determined based on the price of the quota on the last day of the reporting period, as disclosed by the fund administrator. The analysis of the available funds and investments recorded in cash and cash equivalents is presented in Note 7. e) Financial assets The Company classifies its financial assets in accordance with the purpose for which they were purchased and determines their classification at initial recognition in the following categories: 30

6 Loans and receivables these are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The principal and interest of the redeemable preferred shares of Valepar are classified in this category. The analysis of receivables from redeemable shares is presented in Note 8. Available for sale these are non-derivative assets that are initially recognized at cost of acquisition, which is the fair value of the price paid, including transaction costs. Subsequent to initial recognition, they are re-measured at fair value based on their market value at the balance sheet date, as a counter entry to equity, less tax effects. When these securities are sold or become impaired, the accumulated fair value adjustments, recorded in equity, are recognized in the income statement as financial income or expense at the time of the sale, or in other expenses at the time of the impairment. The shares of CPFL Energia S.A. (CPFL Energia) are classified in this category and the dividends to which they are entitled are recorded as Operating income. f) Investments Investments in subsidiaries and joint ventures are accounted for under the equity method and, where applicable, net of the provision for impairment. The analysis of these investments is presented in Note 9. g) Impairment of financial assets i. Assets measured at amortized cost At each balance sheet date, the Company assesses whether there is any objective evidence of the impairment of its financial assets. Any loss identified is recognized in the results for the period when the carrying amount of the financial asset exceeds its recoverable amount. The criteria used by the Company to determine whether there is objective evidence of loss or impairment include the following: Significant financial difficulty of the issuer or borrower Breach of contract, such as default or arrears in the payment of interest or principal A probable situation in which the borrower declares bankruptcy or other financial rearrangement The disappearance of an active market for the related financial asset as a result of financial difficulties Observable data indicating that there has been measurable decrease in the estimated future cash flows, based on a portfolio of financial assets, from the initial recognition of those assets, even though this decrease cannot be identified in the portfolio s individual financial assets, including: adverse changes in the borrower s payment status in the portfolio and in the national or local economic conditions which are correlated with defaults in the portfolio assets. The amount of the impairment loss is measured as the difference between the assets carrying amount and the present value of the estimated future cash flows (excluding future credit losses which have not been incurred), discounted at the financial assets original effective interest rate. The asset's carrying amount is decreased and the amount of the loss is recognized in the statement of income. If, in a future period, the amount of the impairment loss is decreased and this decrease can be related objectively to an event which occurred subsequent to the date on which the impairment was recognized (such as an improvement in the borrower s credit rating), the previously recognized impairment loss should be reversed and the amount of the reversal recognized in the statement of income. 31

7 ii. Assets classified as available for sale At each balance sheet date, the Company assesses whether there is any objective evidence of the impairment of its financial assets. In the case of investments classified as available for sale, a significant or prolonged decrease in the fair value of the security to below its cost also serves as evidence that the assets are impaired. If this type of evidence exists in the case of available-forsale financial assets, the cumulative loss, which is measured as the difference between the purchase cost and the current fair value, less any impairment loss in the financial asset previously recognized in results, is eliminated from equity and recognized in the statement of income. Impairment losses recognized in the statement of income are not reversed. There were no impairment losses for the years ended December 31, 2012 and h) Financial liabilities These are stated at known or estimated amounts including the related charges and monetary and exchange variations (on a daily pro rata basis), where applicable. The Company classifies its financial liabilities in the following categories: At amortized cost these are the financial liabilities which are not measured at fair value through profit or loss. Initially they are recognized at their fair value and, subsequently, they are remeasured at amortized cost. At fair value through profit or loss designated at initial recognition these are recorded and measured at fair value and the corresponding changes in fair value recognized immediately in the income statement. In the Company, the variation in the fair value of the financial liabilities through profit and loss, is due only to the change in market risk based on interest rate variations, and is not attributable to credit risk. Debentures issued by the Company are classified in this category. The analysis of the debentures is presented in Note 10. i) Provisions, contingent assets and liabilities and legal obligations The recognition, measurement, and disclosure of the provisions, contingent assets and liabilities and legal obligations are based on the criteria defined by CPC 25, approved by CVM Decision 594/09, as follows: Contingent assets: these are not recorded except when management has full control of the situation or when there are real guarantees or favorable unappealable court sentences, characterizing an almost certain gain and through confirmation of recoverability through receipt or offset against another liability. When a successful outcome is deemed probable, the contingent assets are disclosed in the notes to the financial statements. Provisions: these are recorded taking into consideration the opinion of the legal advisors, the nature of the lawsuits, similarity with prior lawsuits, complexity and the Court's position, whenever the loss is evaluated as probable, resulting in the likely outflow of funds to settle the obligations and when the amounts involved can be reliably estimated. Contingent liabilities: pursuant to CPC 25, the term contingent is used for liabilities which are not recognized, since their existence will only be confirmed upon the occurrence of one or more future and uncertain events which cannot be fully controlled by Management. Contingent liabilities do not meet the criteria for recognition since they are considered as a possible loss and are only disclosed in the notes to the financial statements when individually significant. Those classified as a remote loss require neither provision nor disclosure. Legal obligations Provision for tax risks: these arise from lawsuits contesting the legality or constitutionality of the tax liabilities and which, regardless of the evaluation of their probability of success, are recorded as a provision in the financial statements at the full amounts in dispute. 32

8 The details on the legal proceedings, as well as the activity of the amounts recorded, are presented in Note 11. j) Pension plan obligations The Company sponsors supplementary a private pension plan of the defined contribution type for its board members. Under this plan, the Company pays fixed contributions into an open private pension fund and has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees entitlements to receive benefits related to management services provided during present and prior periods. Bradespar contributes on a voluntary basis to the defined contribution plan and has no further obligation to make payments after the contribution has been made. The contributions are recorded monthly as an expense for benefits to employees. k) Income tax and social contribution Deferred tax assets are recorded at their probable realizable amounts and comprise income tax and social contribution benefits related to tax losses and temporary differences and are recognized, where applicable, in current and non-current assets - long-term receivables. The provision for federal income tax is calculated at the standard rate of 15% of taxable income, plus a 10% surcharge, where applicable. The provision for social contribution is recorded on taxable profit at the rate of 9% of pre-tax income. Provisions for other taxes and social contributions were recorded pursuant to the specific applicable legislation. l) Determination of the results of operations Results are determined on the accrual basis of accounting, which establishes that income and expenses should be included in the determination of results for the periods in which they occur, always simultaneously when they are correlated, irrespective of receipt or payment. In transactions for obtaining funds through the issuance of securities, the related expenses are recorded as a discount to the corresponding liability account and appropriated to results over the term of the transaction. m) Earnings per Share Net earnings per share are calculated by dividing the amount of the income attributable to the Company s stockholders by the weighted average number of outstanding shares (total number of shares less treasury shares). There are no profit dilution factors. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The presentation of financial statements in accordance with the principles of recognition and measurement based on the accounting standards issued by CPC and IASB requires Company Management to make judgments, estimates and assumptions that may affect the amounts of the assets and liabilities presented. These estimates are based on management s best current knowledge for each period and on the actions plans to be implemented and are constantly reviewed based on available information. Changes in facts and circumstances could lead to a review of the estimates and accordingly actual future results could differ from these estimates. We present below the significant estimates and assumptions used by Company Management: 33

9 Classification and measurement of financial assets The classification of financial assets is based on management s intention, on the date of their acquisition, to hold or trade these securities. The accounting treatment of the securities depends on how they are classified by the Company. Fair value is estimated using quoted market prices, where available. The amount may be affected by the volume of shares traded and, moreover, may not reflect the control premium arising from the shareholder agreements. Nevertheless, Management considers that prices quoted in the market are the most appropriate fair value indicators. In determining fair value when there are no market price quotations available, management uses its own judgment, since the models depend on how the different factors are weighted and the quality of the information received. This judgment should also establish whether a decrease in fair value to below the adjusted cost of an available-for-sale security is temporary or not, so that a devaluation in the adjusted cost can be recognized and the decrease can be reflected as an expense. Upon analysis, if a devaluation is deemed not to be temporary, Management decides which historical period should be considered and how severe a loss should be recognized. These measurement methods may lead the Company to present different results should the assumptions and estimates used not be confirmed subsequently. Provisions and contingent liabilities Accounting provisions are recorded taking into consideration the opinion of the legal advisors, the nature of the lawsuits, similarity with prior lawsuits, complexity and the Court's position, whenever a loss is deemed probable, resulting in the likely outflow of funds to settle the obligations and when the amounts involved can be reliably estimated. The contingent liabilities classified as a possible loss are not recorded and are only required to be disclosed in the financial statements when individually significant, while those classified as remote require neither provision or disclosure. The legal proceedings are permanently monitored to evaluate, among other factors: (i) their nature and complexity; (ii) the development of the proceedings; (iii) the opinion of the legal advisors and (iv) the Company s experience in similar lawsuits. For the purpose of determining whether a loss is probable and in estimating its amount, the following are also taken into consideration: the probability of loss arising from lawsuits which were filed prior to, or on the balance sheet date, but which were identified by the Company subsequent to the reporting date of these statements but prior to their publication the need to disclose processes filed or events which occurred subsequent to the date of the financial statements, but prior to their publication. 5. ACCOUNTING PRONOUNCEMENTS The Company prepared its consolidated financial statements pursuant to the standards that have been issued by CPC and ratified by CVM. The Company will not be an early adopter of the standards which have been set by IASB, but not yet issued by CPC and accordingly not ratified by CVM. The new standards, interpretations or guidelines issued and/or updated by CPC, which came into effect in 2012 had no impact on the Company s financial statements. We present below the standards and interpretations which have been issued and/or updated by IASB but not yet ratified by CVM, and consequently, not adopted by the Company: IAS 1 Presentation of Financial Statements: the main change is that the components of other comprehensive income are separated into two groups: (i) those which will be realized against income and (ii) those which will remain in equity. The change to this standard is applicable as from January 1,

10 IFRS 9 - Financial Instruments: The main change is that, in cases where the fair value option is used for financial liabilities, the amount of the change in fair value resulting from an entity s own credit risk is recorded in other comprehensive income and not in the income statement, except in specific situations established by the standard. The full impact of IFRS 9 is under analysis by the Company. The standard is applicable as from January 1, Other IFRS/CPC standards, such as: IFRS 10 (CPC 36 R3), IFRS 11 (CPC 19 R2), IFRS 12 (CPC 45) and IFRS 13 (CPC 46) will become effective in 2013 and will not have a significant impact on the Company. 6. RISK MANAGEMENT The Company considers that risk management is essential for strategic planning and financial flexibility. Accordingly, its risk management strategy has been developed to provide an integrated view of the risks to which it is exposed. BRADESPAR is a holding company in which income is originated mainly from equity in the results of its subsidiaries and joint ventures. Accordingly, the Company is subject, principally, to the impact of the variable rates negotiated in the financial market on the results of the business (market risk), the risk arising from the obligations assumed by third parties with the Company (credit risk), those inherent to internal processes (operational risk) and those arising from economic factors (liquidity risk). Liquidity risk management The liquidity risk arises from the possibility that the Company may not be able to settle its contractual obligations on the established due dates, or may face difficulties in meeting its cash flow requirements given the market s liquidity constraints. To mitigate this risk, the Company s receivables from redeemable preferred shares have scaled maturity dates to ensure that the liabilities assumed with third parties are settled on a timely basis. Moreover, these shares comprise the guarantees offered on issuance of the debentures by the Company. Credit risk management Credit risk arises from potential negative effects on the Company s cash flows as a result of uncertainty in the ability of counterparties to meet their contractual obligations. Accordingly, credit risk arises mainly from cash and cash equivalents and from credit exposure to outstanding accounts receivable. The Company considers that the credit risk exposure originated by the financial investments classified as "cash and cash equivalents is low, since the amounts invested are not significant and dividends and/or interest on stockholders equity are regularly distributed to shareholders during the year, and the interest and/or principal of the debentures issued is settled on a timely basis. Exposure to counterparties The Company mainly uses a qualitative risk analysis which takes into consideration the payment history of the counterparties, their commercial relationship with BRADESPAR and their strategic position in the corresponding economic sector. VALE's parent company VALEPAR is the Company s main investee and provides its most important cash flow. Depending on the specific counterparty, the Company uses its corporate guarantee strategy to mitigate credit risk. The Company controls its receivables to ensure that there are no principal or interest amounts pending settlement by the counterparties. 35

11 Market risk The Company is exposed to the variations in a number of market risk factors that could impact its cash flows, such as the risk of changes in the price of shares, arising from investments maintained as available for sale and interest rate risk arising from debentures issued linked to floating rates. This potential impact is evaluated periodically to provide support in the decision making process and the Company s growth strategy and to monitor the volatility of future cash flows. Operational risk Operational risk management is the structured approach used by BRADESPAR to manage uncertainty related to the possible inadequacy or weakness of internal processes, people, systems and external events. New controls are created and existing ones are improved to mitigate the operational risk. 7. CASH AND CASH EQUIVALENTS Parent Company Consolidated At December Funds in local currency Financial investment funds 249, , , ,195 TOTAL 249, , , , RECEIVABLES FROM REDEEMABLE PREFERRED SHARES In 2008, BRADESPAR subscribed 23,724,193 redeemable class C preferred shares of VALEPAR, with the following characteristics: a) They are not entitled to vote at VALEPAR s general meetings except when permitted by law. b) They are entitled to a cumulative fixed dividend to be paid semiannually from 2009, at a fixed rate of 16% p.a. c) They are redeemable semiannually between May 2011 and November d) They are not convertible into any other type or class of VALEPAR shares. In 2009, BRADESPAR sold 7,587,000 redeemable class C preferred shares to its indirect subsidiary BRUMADO, and remains with 16,137,193 shares. In 2012, BRADESPAR received the amount of R$ 166,824 (2011 R$ 209,097) from VALEPAR, related to the redemption of 2,876,274 (2011 3,605,128) preferred shares. BRADESPAR and its indirect subsidiary BRUMADO hold 17,242,791 redeemable class C preferred shares. At December 31, 2012, redeemable preferred shares held by BRADESPAR and its indirect subsidiary BRUMADO amount to R$ 999,995 ( R$ 1,166,819), of which the amount of R$ 192,657 (2011 R$ 166,824) is recorded in current assets and R$ 807,338 (2011 R$ 999,995) in non-current assets. The interest receivable on redeemable preferred shares of BRADESPAR and its indirect subsidiary BRUMADO amounts to R$ 24,444 (2011 R$ 29,930). 9. INVESTMENTS a) Equity accounting adjustments were recorded in Equity in the results of investees and corresponded for the year ended December 31, 2012, in the Parent Company, to earnings of R$ 527,630 (2011 R$ 2,071,854), and in the Consolidated company, for the same period, to earnings of R$ 382,805 ( R$ 1,947,329). 36

12 b) We present below BRADESPAR s direct investments, accounted for on the equity method: At December 31 Companies Capital Adjusted equity Adjusted result Number of shares held (thousand) Common (ON) Number of quotas held (thousand) Percentage capital ownership Total investments Equity accounting Adjustment (1) ANTARES (4) 322,700 1,086, , , ,086,745 1,244, , ,525 VALEPAR (2) (3) (4) 7,863,289 46,581,594 2,194, , ,123,830 7,581, ,805 1,947,329 Total 9,210,575 8,825, ,630 2,071,854 (1) Considers results determined by the companies and includes equity variations in the investees not derived from results, as well as adjustments arising from the equalization of accounting practices, where applicable. (2) Joint venture. (3) Adjusted equity includes R$ 700,656 relating to the change in the Parent company s accounting policy, regarding the amortization period of goodwill based on expected future profitability, which ceased to be amortized from 2009, as established by CPC 13. (4) Company whose information for the year ended December 31, 2012 was reviewed by the same independent auditor as BRADESPAR. c) Analysis of the Consolidated investments Company Total investments At December 31 Equity accounting Adjustment (1) VALEPAR 7,518,311 7,515, ,805 1,947,329 - VALEPAR - adjusted effect (2) 605,519 66, Total 8,123,830 7,581, ,805 1,947,329 (1) Considers results determined by the companies and includes equity variations in the investees not derived from results, as well as adjustments arising from the equalization of accounting practices, where applicable. (2) Carrying value adjustments, pursuant to Law 11638/07 and CPC Standards 2 and 8, which are recorded as a contra-entry to equity. 10. DEBENTURES PAYABLE In 2011, BRADESPAR conducted the third public issuance of 80,000 non-convertible debentures, with a unit par value of R$ 10, (ten thousand reais), totaling R$ 800,000, in two series as follows: (i) 29,000 debentures were allocated to the first series maturing in 366 days as from the date of issue, with interest corresponding to 103.8% of the accumulated variation in the average one-day over extra group DI (Interbank Deposit) rates, calculated and disclosed daily by CETIP, on a 252 business-day basis, expressed as an annual percentage ( DI rate ), payable on the unit par value of the debentures, and which were settled together with the principal amount on July 4, 2012 in the amount of R$ 322,066; and (ii) 51,000 debentures were allocated to the second series, maturing in 731 days as from the date of issue, i.e. on July 4, The interest on the second series will correspond to 105.5% of the DI rate, payable on the unit par value of the debentures, calculated as from the date of issue up to the end of the capitalization period on a pro rata basis. In 2012, BRADESPAR conducted the fourth public issuance of 35,000 non-convertible debentures, with a unit par value of R$ 10, (ten thousand reais), totaling R$ 350,000, maturing in 365 days as from the date of issue, i.e. July 4, The debentures will be entitled to interest corresponding to 103.5% of the accumulated variation in the average one-day over extra group DI (Interbank deposit) rates, calculated and disclosed daily by CETIP, on a 252-business day basis, expressed as an annual percentage ( DI rate ), payable on the unit par value of the debentures, calculated as from the date of issue up to the end of the capitalization period on a pro rata basis. At December 31, 2012, the adjusted balance totaled R$ 951,257 (2011 R$ 846,918). 37

13 11. PROVISIONS, CONTINGENT ASSETS AND LIABILITIES AND LEGAL OBLIGATIONS a) Contingent assets No contingent assets were recorded, however, there are a number of lawsuits the successful outcome of which is deemed probable, amongst which the most important are as follows: - COFINS R$ 9,694 (2011 R$ 9,374): claiming the refund or offset of COFINS, paid under the terms of Law 9718/98, during the period from January to October 2001, in excess of that which would be payable on revenues. - Social Integration Program (PIS) - R$ 2,100 (2011 R$ 2,031): claiming the refund or offset of PIS, paid under the terms of Law 9718/98, during the period from January to October 2001, in excess of that which would be payable under the terms of Complementary Law 7/70 (PIS Repique) or, when less, in excess of that which would be payable on revenues. b) Provisions classified as probable loss and legal obligations The companies comprising the Consolidated company are parties to tax suits arising in the normal course of their business activities. Management considers the following when recording the provisions: the opinion of the legal advisors, the nature of the lawsuits, similarity with prior lawsuits, complexity and the Court s position, whenever a loss is evaluated as probable. BRADESPAR s Management considers that the provision recorded is sufficient to cover losses that may arise from the related legal proceedings. The liability related to the legal obligation in dispute is maintained until the case is won, based on favorable judicial decisions, against which there can be no further appeals, or until expiry of the corresponding limitation period. I) Provisions Pursuant to the Agreement for the Sale of Shares of Bradesplan Participações Ltda. (BRADESPLAN), entered into with Banco Bradesco S.A. (BRADESCO) in May 2006, BRADESPAR is liable for the tax suits (PIS and COFINS) of its former subsidiary BRADESPLAN, and a provision for contingencies was recorded in the amount of R$ 49,774, of which an amount of R$ 21,960 was reversed, following a favorable final and unappealable sentence related to the PIS and COFINS lawsuits. At December 31, 2012, the adjusted amount was R$ 38,333 (2011 R$ 35,941). The balance of judicial deposits, at December 31, 2012, includes an amount of R$ 20,931 related to COFINS under dispute in the proceedings described above. II) Legal obligations BRADESPAR is challenging in the courts the legality and constitutionality of certain taxes and contributions, for which provisions have been recorded in the full amount, despite the likelihood of a successful medium and long-term outcome, based on the opinion of their legal advisors. The main issues are as follows: - PIS and COFINS R$ 226,114 (2011 R$ 168,550): claiming the non-inclusion in the calculation bases of PIS and COFINS, of interest on stockholders equity received from the investees, since these amounts are legally considered dividends, and accordingly not subject to these taxes. 38

14 - COFINS R$ 10,475 (2011 R$ 10,098): claiming the right to calculate and pay COFINS, from November 2001 to January 2004, based on the actual revenues, as established in Article 2 of Complementary Law 70/91, without considering the unconstitutional increase in the calculation base established by paragraph 1, Article 3 of Law 9718/98. III) Activity in provisions and legal obligations At December 31 Parent company and Consolidated At the beginning of the year 214, ,541 Additions, net of amounts reversed 45,489 41,026 Indexation 14,846 15,066 At the end of the year 274, ,633 c) Contingent liabilities classified as possible losses BRADESPAR maintains a system to monitor all the administrative and legal proceedings in which it is the plaintiff or defendant and, based on the opinion of its legal advisors, classifies the lawsuits in accordance with the expectation of an unfavorable outcome. As a result, the contingent lawsuits assessed as having a risk of possible loss are not recognized in the books and disclosed only in the notes to the financial statements. BRADESPAR is party to an Arbitral Procedure moved by Elétron S.A. (ELÉTRON) against the Company and Litel Participações S.A. (LITEL), in which ELÉTRON seeks recognition of its rights to: (i) acquire a specific number of shares of VALEPAR, which may not exceed 37,825,097 common shares and (ii) receive indemnification for possible pain and suffering. On October 3, 2011, the Court of Arbitration, based on the prior interim sentence, decided by majority vote that BRADESPAR and LITEL are obliged to: (i) to proceed with the sale of the shares of VALEPAR to ELÉTRON for the amount of R$ 632,007, which should be adjusted based on the UFIR-RJ rate, from June 12, 2007 to the date of effective payment and (ii) recoup the dividends and interest on stockholders' equity distributed by VALEPAR, from June 12, 2007, which amounted to R$ 170,705 at December 31, 2012, including adjustments based on the CDI rate. The claim for pain and suffering was rejected by the Court of Arbitration. The Company filed an action for annulment of the sentence given by the arbitration court of the Rio de Janeiro judiciary district and considers that the amount which could affect its financial statements will not exceed 2% of its equity at December 31, ANTARES, a direct subsidiary of BRADESPAR, was assessed by the Brazilian Federal Revenue authority, since it is the successor to the split-off portion of VBC Participações S.A. (VBC), as regards the offset in the latter of income tax and social contribution losses and at the time of its splitoff and subsequent winding up, in an amount exceeding the 30% limit imposed by Law 8981/95. These assessments, at December 31, 2012, total R$ 180,278 (2011 R$ 173,778), of which R$ 132,781 for income tax (2011 R$ 127,994) and R$ 47,497 for social contribution on net income ( R$ 45,784). 39

15 12. EQUITY a) Share capital in number of shares Fully subscribed and paid-up capital comprises nominative book-entry shares, with no par value, as follows: At December Common 122,523, ,523,049 Preferred 227,024, ,024,896 Total 349,547, ,547,945 At the Extraordinary General Meeting held on April 27, 2012, approval was given for a capital increase of R$ 680,000, from R$ 3,220,000 to R$ 3,900,000, through the capitalization of the balance of the Revenue reserve Statutory" account, with no new issue of shares. b) Revenue reserves (i) The legal reserve comprises 5% of net income for the year, up to 20% of paid-up capital. The purpose of the legal reserve is to ensure the integrity of capital and may only be used to offset losses or to increase capital. (ii) The statutory reserve is designed to maintain the operational margin compatible with the development of the Company s asset operations and may be recorded at 100% of the net income remaining after statutory appropriations, as per proposed by the Executive Board and approved by the Board of Directors and authorized by the General Meeting, with the balance limited to 95% of paid-up capital. c) Interest on stockholders equity and/or dividends Non-voting preferred shares are entitled to all rights and benefits attributed to common shares as well as, in conformity with the bylaws, priority to repayment of capital and 10% additional interest on stockholders equity and/or dividends, in accordance with the provisions of paragraph 1, item II, of Article 17 of Law 6404/76, as reworded by Law 10303/01. In conformity with the by-laws, stockholders are entitled to interest on stockholders equity and/or dividends which total at least 30% of net income for the year, adjusted in accordance with Brazilian corporate legislation. We present below the calculation of interest on stockholders equity paid, for 2012: % (1) Net income for the year 476,737 Legal reserve (23,837) Adjusted calculation base 452,900 Interest on stockholders' equity paid 220,034 Withholding tax on interest on stockholders equity (33,005) Interest on stockholders equity (net) in , Interest on stockholders equity (net) and dividends accrued for , (1) Percent interest on stockholders' equity/dividends applied to the adjusted calculation base. 40

16 In the pursuit to improve its Corporate Governance practices and with the objective of facilitating the projection of stockholders compensation, BRADESPAR adopted, in 2006, the Indicative Policy of Minimum Annual Compensation to be distributed in the form of dividends and/or interest on stockholders equity, based on the Company s projected cash flows as follows: The Company s Executive Board announces, up to the last business day of February of each year, a proposal to be presented to the Board of Directors for payment of a minimum compensation to stockholders, stipulated in US dollars, in two semiannual installments due by May 15 and November 15. The amounts approved are translated into local currency at the US dollar selling rate (Ptax-opção 5), published by the Brazilian Central Bank on the last business day prior to that of the Board of Directors meetings during which the declaration and payment of this compensation are decided. Further, the Executive Board may also propose to the Board of Directors, based on an analysis of the growth in the Company s cash flows, the declaration and payment of dividends and/or interest on stockholders equity in addition to the minimum compensation to be announced. On May 15, 2012, Bradespar paid the first installment of the stockholders annual compensation in the amount of US$ 160,000, benefitting Company stockholders registered at April 27, 2012, as follows: Dividends in the amount of R$ 236,936, at R$ per common share and R$ per preferred share. Interest on stockholders equity in the amount of R$ 65,000, at the gross amount of R$ per common share (R$ , net of withholding income tax) and at R$ per preferred share (R$ , net of withholding income tax). On November 14, 2012, Bradespar paid the second installment of the Stockholders Annual Compensation in the amount of US$ 160,000, as follows: Dividends, in the amount of R$ 105,134, corresponding to the balance payable for profit distribution for 2011, comprising R$ per common share and R$ per preferred share. These dividends were declared at the Ordinary General Meeting held on April 27, 2012, benefitting the stockholders who were registered at April 27, Interest on stockholders equity in the amount of R$ 220,034, at R$ per common share (R$ , net of withholding income tax) and at R$ per preferred share (R$ , net of withholding income tax), benefitting the stockholders who were registered at October 31, d) Treasury shares BRADESPAR has a program for the acquisition of own shares to be held in treasury and subsequently sold or cancelled. The Company's Executive Board is authorized, over a six-month period, to acquire up to 1,500,000 nominative book-entry shares, with no par value, comprising 500,000 common and 1,000,000 preferred shares. The authorizations are renewed semiannually by the Board of Directors. 13. TAXES RECOVERABLE OR AVAILABLE FOR OFFSET AND DEFERRED TAX ASSETS I) Parent Company a) Taxes recoverable and available for offset comprise mainly prior-year income tax and social contribution, and withholding tax on financial investments and interest on stockholders equity received, in the amount of R$ 135,288 ( R$ 98,858). 41

17 b) Calculation of income tax and social contribution charges: INCOME TAX AND SOCIAL CONTRIBUTION Years ended December Income before income tax and social contribution 507,295 2,074,153 Total expense for income tax and social contribution at the statutory rates of 25% and 9%, respectively (172,480) (705,212) Effect of additions and deductions on the calculation of taxes: Investments in subsidiaries and joint ventures, taxed in the corresponding companies 179, ,430 Non-deductible expenses and provisions, net of non-taxable income 33,369 39,288 Interest on stockholders equity (received and receivable) (164,911) (154,218) Interest on stockholders equity (paid) 96, ,324 Unrecorded deferred tax assets and other amounts (2,842) (43,213) Income tax and social contribution expense for the year (30,558) (50,601) c) Deferred tax assets In 2011, deferred tax assets were written off, since no taxable income is expected to be recorded in the forthcoming periods. These assets comprised tax losses related to income tax of R$ 24,682, to social contribution of R$ 9,552 and temporary differences of R$ 768. The unrecorded deferred tax assets, at December 31, 2012, totaled R$ 472,385 (2011 R$ 491,412). II) Consolidated a) Taxes recoverable and available for offset comprise mainly prior-year income tax and social contribution, and withholding tax on financial investments and interest on stockholders equity received, in the amount of R$ 143,324 ( R$ 112,305). b) Calculation of income tax and social contribution charges INCOME TAX AND SOCIAL CONTRIBUTION Years ended December Income before income tax and social contribution 508,937 2,087,022 Total expense for income tax and social contribution at the statutory rates of 25% and 9%, respectively (173,039) (709,587) Effect of additions and deductions on the calculation of taxes: Results from investments in joint ventures taxed in the corresponding companies 130, ,092 Non-deductible expenses and provisions, net of non-taxable income 56,357 60,484 Interest on stockholders equity (received and receivable) (164,911) (163,716) Dividend (received) 24,978 22,032 Interest on stockholders equity (paid) 96, ,324 Unrecorded deferred tax assets and other amounts (2,651) (43,099) Income tax and social contribution expense for the year (32,200) (63,470) c) Deferred tax assets In 2011, deferred tax assets were written off, since no taxable income is expected to be recorded in the forthcoming periods. These assets comprised tax losses related to income tax of R$ 24,682, to social contribution of R$ 9,552 and temporary differences of R$ 768. The unrecorded deferred tax assets, at December 31, 2012, totaled R$ 510,900 (2011 R$ 530,047). 42

18 14. FINANCIAL RESULT Years ended December 31 Parent Company Consolidated Income from financial investments 16,837 16,689 22,299 19,381 Variation in the fair value of debentures (75,933) (93,833) (75,933) (93,833) Other (7,994) (6,334) (7,865) (6,226) Total (67,090) (83,478) (61,499) (80,678) 15. RELATED PARTIES I) The main balances and transactions between BRADESPAR and its subsidiaries are presented below: a) BRADESPAR Dividends on redeemable shares and interest on stockholders equity: Assets (liabilities) At December 31 Income (expenses) VALEPAR 425, , , ,328 Redeemable shares: - VALEPAR 559, , b) BRUMADO At December 31 Assets (liabilities) Income (expenses) Interest on redeemable shares - VALEPAR 10,755 11,287 67,545 73,680 Redeemable shares: - VALEPAR 440, , c) VALEPAR Dividends on redeemable shares and interest on stockholders equity: Assets (liabilities) At December 31 Income (expenses) BRADESPAR (425,967) (288,030) (585,994) (537,328) - BRUMADO (10,755) (11,287) (67,545) (73,680) Redeemable shares: - BRADESPAR (559,949) (729,773) BRUMADO (440,046) (440,046)