Executive Summary / Key Takeaways

• Vertical integration provides a durable cost advantage but cannot fully insulate SID from Brazil's import crisis: While the company's control of mining, logistics, and energy delivers the lowest steel production costs in four years and record EBITDA in non-steel segments, record import penetration (45-63% across product categories) has compressed steel margins to single digits, threatening the core business.

• Deleveraging is working, but leverage remains the critical constraint: Net debt/EBITDA fell for the third consecutive quarter to 3.1x in Q3 2025, driven by R$4.4 billion in asset sales and R$3.3 billion in quarterly EBITDA. However, this remains well above management's long-term target of <2.0x and limits strategic flexibility until the planned CSN Infrastructure project unlocks additional billions in 2026.

• Segment divergence creates a tale of two companies: Mining (44% EBITDA margin), Cement (29% margin), and Logistics (>35% margin) all posted record Q3 2025 results, while Steel languished at sub-10% margins. This mix shift supports the deleveraging narrative but also highlights Steel's disproportionate impact on overall valuation if import pressures persist.

• The investment case hinges on external policy and internal execution: Management's guidance for Q4 2025 double-digit steel margins depends entirely on timely antidumping measures (scheduled through April 2026) and the CSN Infrastructure capital recycling project. Failure on either front would trap SID in a high-leverage, low-margin equilibrium.

• Valuation reflects distress, not the integrated moat: At $1.64 per share, SID trades at 5.67x EV/EBITDA and 0.26x price-to-sales, a discount to global peers despite superior mining integration. The negative net margin (-3.42%) masks strong operational cash flow (P/OCF 4.68x), suggesting the market prices in either permanent margin compression or leverage-induced equity dilution risk.

Setting the Scene: Brazil's Industrial Champion at a Crossroads

Companhia Siderúrgica Nacional, founded in 1941 during Getúlio Vargas's mandate and privatized in 1993, has evolved from a state-owned steel mill into Brazil's most integrated industrial conglomerate. The company generates value by controlling the entire production chain: it mines iron ore at its Casa de Pedra mine, processes it into steel at the Presidente Vargas plant, converts slag into cement, generates its own power, and distributes everything through owned railways and ports. This vertical integration is not merely a structural curiosity—it translates into tangible cost advantages, with management achieving the lowest steel production costs in four years by optimizing inputs across segments.

SID operates across five segments that serve as natural hedges: Steel (flat and long products for construction, automotive, and packaging), Mining (iron ore and tin), Cements (17 million tons per annum capacity, making it Brazil's second-largest player), Energy (2,011 MW of installed capacity achieving self-sufficiency), and Logistics (railways, ports, and road transport). This diversification provides multiple levers to pull when any single market faces headwinds. In 2025, while Steel battled what management calls a "record penetration of imported material," Mining shipped over 12 million tons for the first time, Cement posted its highest-ever EBITDA, and Logistics generated record freight volumes.

The company's strategic positioning within Brazil's industrial value chain is both its greatest strength and its most significant vulnerability. On one hand, SID's control of critical infrastructure—particularly the MRS railway and Sepetiba port terminal—creates a defensive moat that pure-play steel producers cannot replicate. On the other hand, approximately 70% of revenue remains exposed to Brazil's economic cycles, currency volatility, and policy decisions. The Brazilian steel market's robust underlying demand (domestic sales projected at BRL 12 million in 2025) should support growth, but this potential is trapped behind a wall of subsidized imports that reached 6.3 million tons, representing 45% of metal sheets, 40% of zinc, 55% of galvalume, and 63% of prepainted steel markets.

Technology, Products, and Strategic Differentiation: The Integration Moat

SID's competitive advantage does not stem from a single breakthrough technology but from the cumulative efficiency of its integrated operations. The Mining segment's C1 cash cost of less than $21 per ton in Q2 2025—down from $19.2 per ton in Q3 2024—reflects not just scale but operational excellence in extraction and logistics. This cost position is structural: owning the Casa de Pedra mine eliminates the margin volatility that plagues non-integrated competitors like Usiminas (USNZY), which must purchase ore on spot markets. When iron ore prices rise, SID captures the upside directly; when they fall, the Steel segment benefits from lower input costs. This natural hedge underpins the integrated model.

The Steel segment's achievement of its lowest production cost in four years—targeting R$3,000 per ton in Q4 2025—demonstrates the tangible benefits of this integration. By maximizing purchase of plates at favorable prices, reducing pellet and coke consumption, and running blast furnace 3 at full capacity, SID has created a cost floor that imports struggle to undercut sustainably. However, even with this cost advantage, steel EBITDA margins remained in single digits throughout 2025 because Chinese exporters, facing closed European markets, are dumping product at prices that only cover 7-8% margins on 45% of their export volume. This creates a temporary but severe margin compression that integration alone cannot solve.

The Cement segment showcases SID's ability to monetize industrial synergies. By using slag from steel production as a raw material, CSN Cimentos achieves a 29% EBITDA margin—significantly above the sector average—while building a 17 million ton capacity base across Brazil's highest-growth regions. The acquisition of LafargeHolcim Brasil (LHN) in 2022 added aggregates and concrete, creating a full-service construction materials offering that competitors cannot match without building an entirely new supply chain. This verticalization transforms a byproduct (slag) into a high-margin revenue stream while providing a natural hedge against steel demand cycles.

In Energy, the 2022 acquisitions created a 2,011 MW generation portfolio that delivers 35% EBITDA margins while eliminating the single largest cost variable for steel production: power. This self-sufficiency is not just a cost play; it transforms SID into a net seller of electricity, generating R$54 million in quarterly EBITDA from surplus commercialization. The Logistics segment completes the integration loop: controlling the Tora Group's road transport, MRS railway, and Sepetiba port means SID can deliver steel, cement, and iron ore to customers at lower cost and higher reliability than competitors dependent on third-party logistics.

Financial Performance & Segment Dynamics: A Story of Diverging Margins

The Q3 2025 consolidated results tell a story of successful diversification masking core business pressure. EBITDA grew 26% year-over-year to R$3.3 billion, with the margin expanding 330 basis points to 27%. This improvement was not driven by steel recovery but by Mining (+57% EBITDA), Cement (record R$388 million), and Logistics (record R$550 million). This divergence stems from steel prices remaining suppressed by imports, while iron ore prices rose, cement demand proved resilient amid housing programs, and logistics volumes hit record levels due to operational efficiency gains.

The Steel segment's financial metrics reveal the depth of the import crisis. Net revenue fell to R$5.29 billion in Q3 2025 from R$6.04 billion in the prior year, yet gross profit actually increased to R$351 million from R$335 million due to cost reduction. This paradox—lower sales but higher gross profit—demonstrates management's strategic shift from "value over volume" to prioritizing market share retention. The segment's operating result before financial income and taxes collapsed to R$69 million from R$134 million, however, as the company absorbed higher commercial costs to redirect sales channels and compete with subsidized imports. The EBITDA margin recovered to "solid growth" in Q3 after hitting 11% in Q4 2024 and 10.8% in Q2 2025, but this remains well below historical norms and management's double-digit target.

Mining's performance provides the counterbalance. Shipping over 12 million tons for the first time, the segment generated R$1.9 billion in EBITDA at a 44% gross margin. This was not merely a price story—volume grew 5% quarter-over-quarter while costs remained below $21 per ton, demonstrating operational leverage. For investors, Mining now contributes nearly 60% of consolidated EBITDA, making SID more of a mining company with steel operations than a traditional steelmaker. This shift de-risks the story but also changes the valuation paradigm: mining assets trade at different multiples than steel mills.

Cement's record R$388 million EBITDA at a 29% margin validates the acquisition strategy. The segment's performance was driven by market resilience, vertical integration advantages, and the ability to "sell less to more clients" through an expanded distribution network. With the Brazilian cement market expected to close 2025 at 66-67 million tons and infrastructure investments accelerating, this segment provides a stable, high-margin foundation that reduces SID's dependence on steel cyclicality.

Logistics delivered record R$550 million EBITDA at margins exceeding 35%, driven by the highest freight volumes in history and the successful integration of the Tora Group. This performance is not just a COGS reduction for SID's other segments; it's a standalone profit center that benefits from Brazil's infrastructure development regardless of steel demand. The planned CSN Infrastructure vehicle aims to monetize these assets, potentially unlocking billions in 2026 to accelerate deleveraging.

The balance sheet shows both progress and remaining challenges. Net debt/EBITDA fell to 3.1x from 3.5x at year-end 2024, but this remains elevated relative to global peers (Gerdau (GGB): 0.37x, Ternium (TX): 0.14x). The company maintains a comfortable BRL 18.8 billion liquidity position covering three years of obligations, and management has actively extended debt maturities to 2030. However, adjusted cash flow was negative R$815 million in Q3 2025, impacted by working capital needs and investment in the P15 project. The decision to suspend dividends in 2025 demonstrates disciplined capital allocation but also highlights the urgency of deleveraging.

Outlook, Management Guidance, and Execution Risk

Management's guidance for Q4 2025 and beyond rests on three pillars: steel margin recovery, continued non-steel segment outperformance, and capital recycling. The steel outlook is cautiously optimistic: "It's still early to say that the worst has passed, but it's the first time in a long while that we are seeing a better prospect for the steel industry as a whole." This optimism is based on three factors: Chinese export price recovery reducing import volumes, the first antidumping measures taking effect, and SID's own 5% price adjustment implemented in October 2025.

The antidumping timeline is specific and critical: prepainted steel measures approved November 27, 2025; coated by December 2025 or January 2026; cold laminate by January 2026; metal sheets by April 26, 2026; and hot laminate by March 26, 2026. Management acknowledges the process has been painfully slow—tinplate measures took 18 months from March 2024 to August 2025—but believes the government has "learned out of pain" and will accelerate. If these measures effectively reduce import penetration from the current 24-25% level, SID can capture market share and restore double-digit margins; if circumvention (e.g., from India) or delays persist, steel will remain a drag on the entire enterprise.

Mining guidance assumes iron ore prices between $100-120 per ton and C1 costs remaining near $21 per ton. The P15 project, expected operational by 2028, will change iron ore quality and generate "phenomenal EBITDA." This timeline is important: it means mining's current margin strength must sustain the company for three years before this major growth driver materializes. Any delay in P15 or iron ore price collapse below $90 would jeopardize the deleveraging trajectory.

Cement is projected to maintain margins above 30%, supported by the federal government's "Minha Casa Minha Vida" housing program and infrastructure investments ahead of potential Olympic Games and World Cup projects. This segment's stability provides a valuation floor, but its growth rate is limited by Brazilian GDP expansion.

The CSN Infrastructure project represents the most significant near-term catalyst. Management describes it as "in advanced stages" and expects it to provide "significant liquidity (BRL billions) to deleverage the group in 2026." While details remain scarce, the monetization of logistics assets could reduce net debt by 20-30% if executed at market multiples. The risk is execution: infrastructure investors demand stable cash flows, and any regulatory or operational hiccup could delay or devalue the transaction.

Management's long-term target of <2.0x leverage and investment grade status is ambitious but achievable if all pillars hold. The company has already reduced leverage from 3.5x to 3.1x through organic EBITDA growth, demonstrating that operational improvement—not just asset sales—drives the story. However, achieving 2.0x requires either R$5-7 billion in debt reduction or EBITDA growth to R$15+ billion annually, a tall order without steel margin recovery.

Risks and Asymmetries: What Can Break the Thesis

The most material risk is that antidumping measures prove ineffective against structurally subsidized Chinese exports. Management's own data shows that only 45% of China's exported steel volume generates positive margins of 7-8%, meaning producers are willing to dump at losses to maintain market share and employment. If Brazil's government response remains slower than peers—or if circumvention through India and other routes accelerates—SID's steel margins could remain stuck in single digits despite cost leadership. This would trap the company in a high-leverage, low-growth equilibrium, making the 3.1x debt ratio a permanent feature rather than a temporary condition.

Leverage itself remains a critical vulnerability. While 3.1x is down from recent peaks, it is materially higher than all direct competitors (Gerdau (GGB): 0.37x, Ternium (TX): 0.14x, ArcelorMittal (MT): 0.26x). At current debt levels, a 10% EBITDA decline would push leverage back above 3.5x, potentially triggering covenant concerns and limiting management's ability to invest in growth projects like P15. The cost of debt at 10% of CDI (approximately 13-14% in nominal terms) consumes roughly 20% of EBITDA, creating a persistent drag on equity returns.

Brazil concentration risk is quantifiable: approximately 70% of revenue is exposed to local economic cycles, currency volatility, and political decisions. While the "Minha Casa Minha Vida" program supports cement demand, any fiscal tightening or interest rate spike could crush construction activity. The real's depreciation helps exports but hurts dollar-denominated debt service—a tension that complicates hedging strategies.

Technological gaps in green steel present a longer-term risk. ArcelorMittal (MT) and Ternium (TX) are investing heavily in decarbonization, while SID's older assets generate higher emissions per ton. If Brazil introduces carbon pricing or if global customers begin demanding green steel premiums, SID could face either margin compression from carbon taxes or required capex of R$5-10 billion to modernize facilities—funds that would otherwise go to debt reduction.

On the upside, successful antidumping implementation combined with CSN Infrastructure monetization could create a powerful rerating scenario. If import penetration falls back to 15-18% (historical norms), steel margins could recover to 12-15%, adding R$1-1.5 billion in annual EBITDA. A R$5 billion infrastructure deal would reduce leverage to 2.5x overnight, potentially unlocking a 30-40% equity revaluation as the stock trades from distressed to industrial multiples.

Valuation Context: Pricing Distress vs. Operational Reality

At $1.64 per share, SID trades at an enterprise value of $8.83 billion, representing 1.1x TTM revenue of $8.00 billion and 5.67x EBITDA. These multiples place SID at a discount to global steel peers (ArcelorMittal (MT) trades at 7.44x EV/EBITDA, Ternium (TX) at 5.74x) despite superior mining integration. The discrepancy reflects two concerns: negative net margins (-3.42%) and high leverage (3.07x debt-to-equity).

However, the negative net margin is misleading. It includes R$474 million in net losses driven by financial costs and non-cash items, while operational metrics show a healthier picture: gross margin of 26.86% and operating margin of 14.10% are competitive with peers. More importantly, operating cash flow of $1.58 billion translates to a price-to-operating-cash-flow ratio of 4.68x, indicating the market values the actual cash generation at less than 5x—typical of deep distress rather than operational health.

Free cash flow of $577.7 million provides a 26.6% free cash flow yield, extraordinarily high for any industrial company. This suggests either the market expects cash flow to collapse or it is applying a massive discount for leverage and country risk. The current ratio of 1.32x and quick ratio of 0.86x indicate adequate liquidity, while return on assets of 3.11% shows the asset base is generating acceptable returns despite the debt overhang.

Peer comparisons highlight SID's relative position. Gerdau (GGB) trades at 0.69x EV/Revenue with a debt-to-equity ratio of just 0.37x, reflecting its geographic diversification and lower leverage. Usiminas (USNZY) trades at 0.31x EV/Revenue with negative margins (-12.52%), showing the market's punishment for pure-play steel exposure without integration benefits. Ternium (TX) trades at 0.45x EV/Revenue with superior margins and leverage of 0.14x, commanding a premium for its cost leadership and Latin American diversification.

SID's valuation implies a binary outcome: either the import crisis permanently impairs the steel business, making the integrated model worthless, or the company successfully navigates the deleveraging path and restores margins, warranting a peer-level multiple. The market is pricing the former; the operational data suggests the latter is achievable.

Conclusion: Integration's Last Stand

CSN's vertical integration moat—spanning mining, steel, cement, energy, and logistics—has never been more valuable and never more challenged. The Q3 2025 results demonstrate that this diversification works: when steel margins collapse under import pressure, mining, cement, and logistics generate record profits to sustain the enterprise. The deleveraging from 3.5x to 3.1x net debt/EBITDA proves management's capital discipline, while the suspension of dividends signals commitment to the balance sheet.

Yet the investment thesis remains hostage to external forces. The timeline for antidumping measures stretches through April 2026, and even then, circumvention through India or other routes could persist. The CSN Infrastructure project promises billions in liquidity but lacks concrete details. The P15 mining project won't contribute until 2028. These uncertainties explain why a company generating R$3.3 billion in quarterly EBITDA trades at 5.67x EV/EBITDA while peers command 7-8x.

For SID to rerate, two conditions must materialize: antidumping measures must effectively reduce import penetration below 20%, and the infrastructure asset sale must deliver at least R$5 billion in net proceeds. If both occur, leverage could fall below 2.5x by mid-2026, steel margins could recover to double digits, and the stock could revalue toward $2.50-3.00 per share, reflecting its integrated moat. If either fails, SID risks remaining a high-yield steel play trapped by leverage and import competition.

The core asymmetry is clear: downside is capped by tangible assets (mines, railways, ports) generating R$3+ billion in quarterly EBITDA, while upside depends on policy execution and asset monetization. For investors willing to underwrite Brazilian policy risk and management's capital recycling ability, SID offers a rare combination of operational excellence and distressed valuation. The next six months—antidumping implementation and infrastructure project announcement—will determine whether this integration story ends in rerating or restructuring.