20-F 1 s103080_20f.htm FORM 20-F

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 20-F

 

 

 

¨ Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

 

or

 

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015

 

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

or

 

¨ Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number: 001-32734

 

 

 

TERNIUM S.A.

(Exact Name of Registrant as Specified in its Charter)

 

 

N/A

(Translation of registrant’s name into English)

 

Grand Duchy of Luxembourg

(Jurisdiction of incorporation or organization)

 

29, Avenue de la Porte-Neuve — 3rd floor

L-2227 Luxembourg

(Address of registrant’s registered office)

 

Alejandra Hryszkiewicz

29, Avenue de la Porte-Neuve — 3rd floor

L-2227 Luxembourg

Tel. +352 26 68 31 52, Fax. +352 26 53 83 49, e-mail: luxembourg@ternium.com

(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act: 

     

Title of Each Class

 

Name of Each Exchange On Which Registered

American Depositary Shares   New York Stock Exchange
Ordinary Shares, par value USD1.00 per share   New York Stock Exchange*

 

 

 

* Ordinary shares of Ternium S.A. are not listed for trading but only in connection with the registration of American Depositary Shares which are evidenced by American Depositary Receipts.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

2,004,743,442 ordinary shares, par value USD1.00 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

 

Note—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer  x                 Accelerated Filer  ¨                Non-accelerated filer  ¨

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

  Other  ¨

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow    Item 17  ¨    Item 18  ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

Please send copies of notices and communications from the Securities and Exchange Commission to:

 

Cristian J.P. Mitrani   Robert S. Risoleo, Esq.
Mitrani, Caballero, Ojam & Ruiz Moreno Abogados   Sullivan & Cromwell LLP
Alicia Moreau de Justo 400, 3rd Floor   1700 New York Avenue, N.W., Suite 700
C1007AAH — Buenos Aires, Argentina   Washington, D.C. 20006-5215
(54-11) 4590-8600   (202) 956-7500

 

 

 

 

TABLE OF CONTENTS

 

PART I 6
   
Item 1. Identity of Directors, Senior Management and Advisers 6
   
Item 2. Offer Statistics and Expected Timetable 6
   
Item 3. Key Information 6
   
Item 4. Information on the Company 23
   
Item 4A. Unresolved Staff Comments 58
   
Item 5. Operating and Financial Review and Prospects 59
   
Item 6. Directors, Senior Management and Employees 77
   
Item 7. Major Shareholders and Related Party Transactions 86
   
Item 8. Financial Information 88
   
Item 9. The Offer and Listing 91
   
Item 10. Additional Information 92
   
Item 11. Quantitative and Qualitative Disclosures About Market Risk 103
   
Item 12. Description of Securities Other Than Equity Securities 106
   
PART II 107
   
Item 13. Defaults, Dividend Arrearages and Delinquencies 107
   
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 107
   
Item 15. Controls and Procedures 107
   
Item 16A. Audit Committee Financial Expert 108
   
Item 16B. Code of Ethics 108
   
Item 16C. Principal Accountant Fees and Services 108
   
Item 16D. Exemptions from the Listing Standards for Audit Committees 109
   
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 109
   
Item 16F. Change in Registrant’s Certifying Accountant 110
   
Item 16G. Corporate Governance 111
   
Item 16H. Mine Safety Disclosure 112
   
PART III 112
   
Item 17. Financial Statements 112
   
Item 18. Financial Statements 112
   
Item 19. Exhibits 113

 

 

 

 

CERTAIN DEFINED TERMS

 

In this annual report, unless otherwise specified or if the context so requires:

 

References to the “Company” are exclusively to Ternium S.A., a Luxembourg public limited liability company (société anonyme);

 

References in this annual report to “Ternium,” “we,” “us” or “our” are to Ternium S.A. and its consolidated subsidiaries;

 

References to the “Ternium companies” are to the Company’s manufacturing subsidiaries, namely Ternium México S.A. de C.V., or “Ternium Mexico”, a Mexican corporation, Siderar S.A.I.C., or “Siderar”, an Argentine corporation, Ferrasa S.A.S., or “Ferrasa”, a Colombian corporation, Ternium Internacional Guatemala S.A., or “Ternium Guatemala”, a Guatemalan corporation, Ternium USA Inc., or “Ternium USA”, a Delaware corporation, Las Encinas S.A. de C.V., or “Las Encinas”, a Mexican corporation, and Consorcio Minero Benito Juárez Peña Colorada S.A. de C.V., or “Consorcio Peña Colorada”, a Mexican corporation, and their respective subsidiaries;

 

References to “Tenaris” are to Tenaris S.A., a Luxembourg public limited liability company (société anonyme) and a significant shareholder of the Company;

 

References to “San Faustin” are to San Faustin S.A., a Luxembourg corporation and the Company’s indirect controlling shareholder;

 

References to “Ternium Internacional” are to an international group of companies wholly owned by Ternium that market and provide worldwide distribution services for products offered primarily by Ternium;

 

References to “Exiros” are to Exiros B.V., a Netherlands corporation, and its subsidiaries under the brand “Exiros”;

 

References to “Tecpetrol” are to Tecpetrol International S.A., a wholly-owned subsidiary of San Faustin;

 

References to “Tenigal” are to Tenigal S.R.L. de C.V., a Mexican company in which Ternium holds a 51% ownership and Nippon Steel & Sumitomo Metal Corporation holds the remaining 49%;

 

References to “Usiminas” are to Usinas Siderúrgicas de Minas Gerais S.A. – USIMINAS, a Brazilian corporation in which we own 32.9% of the ordinary shares. For further information on our investment in Usiminas, see note 3 to our consolidated financial statements included elsewhere in this annual report;

 

References to “ADSs” are to the American Depositary Shares, which are evidenced by American Depositary Receipts, or ADRs;

 

References to “finished steel products” when used in connection with production capacity are to finished steel products and semi-finished steel products intended to be sold to third parties;

 

References to “tons” are to metric tons; one metric ton is equal to 1,000 kilograms, 2,204.62 pounds or 1.102 U.S. (short) tons; and

 

References to “billions” are to thousands of millions, or 1,000,000,000.

 

 3 

 

 

PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION

 

Accounting Principles

 

We prepare our consolidated financial statements in conformity with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), and adopted by the European Union (“EU”). IFRS differ in certain significant respects from generally accepted accounting principles in the United States, commonly referred to as U.S. GAAP.

 

This annual report includes our audited consolidated financial statements for the years ended December 31, 2015, 2014 and 2013. Information as of and for the year ended December 31, 2014 included in this annual report is derived from our audited restated consolidated financial statements for the year ended December 31, 2014.

 

Currencies

 

In this annual report, unless otherwise specified or the context otherwise requires:

 

“dollars,” “U.S. dollars,” “USD” or “US$” each refers to the United States of America dollar;

 

“Mexican pesos” or “MXN” each refers to the Mexican peso;

 

“Argentine pesos” or “ARP” each refers to the Argentine peso; and

 

“Brazilian reais” or “BRL” each refers to the Brazilian real.

 

On December 31, 2015, the U.S. dollar sell exchange rate in Mexico (as published by Banco de México, or the Mexican Bank) was MXN17.2487=USD1.0000, the U.S. dollar sell exchange rate in Argentina (as published by Banco Central de la República Argentina, or the Argentine Central Bank) was ARP13.005=USD1.0000, and the U.S. dollar sell exchange rate in Brazil (as published by Banco Central do Brasil, or the Brazilian Central Bank) was BRL3.9048=USD1.0000. Those rates may differ from the actual rates used in preparation of the Company’s consolidated financial statements. We do not represent that any of these currencies could have been or could be converted into U.S. dollars or that U.S. dollars could have been or could be converted into any of these currencies.

 

Rounding; Comparability of Data

 

Certain monetary amounts, percentages and other figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

 

Industry Data

 

Unless otherwise indicated, industry data and statistics (including historical information, estimates or forecasts) in this annual report are contained in or derived from internal or industry sources believed by Ternium to be reliable. Industry data and statistics are inherently predictive and are not necessarily reflective of actual industry conditions. Such statistics are based on market research, which itself is based on sampling and subjective judgments by both the researchers and the respondents, including judgments about what types of products and transactions should be included in the relevant market. In addition, the value of comparisons of statistics for different markets is limited by many factors, including that (i) the markets are defined differently, (ii) the underlying information was gathered by different methods and (iii) different assumptions were applied in compiling the data. Such data and statistics have not been independently verified, and the Company makes no representation as to the accuracy or completeness of such data or any assumptions relied upon therein.

 

Our Internet Site is Not Part of this Annual Report

 

We maintain an Internet site at www.ternium.com. Information contained in or otherwise accessible through this website is not a part of this annual report. All references in this annual report to this Internet site are inactive textual references to this URL, or “uniform resource locator” and are for your informational reference only. We assume no responsibility for the information contained on this website.

 

 4 

 

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

This annual report and any other oral or written statements made by us to the public may contain “forward-looking statements” within the meaning of and subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. This annual report contains forward-looking statements, including with respect to certain of our plans and current goals and expectations relating to Ternium’s future financial condition and performance.

 

Sections of this annual report that by their nature contain forward-looking statements include, but are not limited to, Item 3. “Key Information,” Item 4. “Information on the Company,” Item 5. “Operating and Financial Review and Prospects” and Item 11. “Quantitative and Qualitative Disclosures about Market Risk.”

 

We use words such as “aim,” “will continue,” “will likely result,” “contemplate,” “seek to,” “future,” “objective,” “goal,” “should,” “will pursue,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and words and terms of similar substance to identify forward-looking statements, but they are not the only way we identify such statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These factors include the risks related to our business discussed under Item 3. “Key Information—D. Risk Factors,” and among them, the following:

 

uncertainties about the behavior of steel consumers in the markets in which Ternium operates and sells its products;
  
changes in the pricing environments in the countries in which Ternium operates;
  
the impact in the markets in which Ternium operates of existing and new competitors whose presence may affect Ternium’s customer mix, revenues and profitability;
  
increases in the prices of raw materials, other inputs or energy or difficulties in acquiring raw materials or other inputs or energy supply cut-offs;
  
the policies of, and the economic, political and social developments and conditions in, the countries in which Ternium owns facilities or other countries which have an impact on Ternium’s business activities or investments;
  
inflation or deflation and foreign exchange rates in the countries in which Ternium operates;
  
volatility in interest rates;
  
the performance of the financial markets globally and in the countries in which Ternium operates;
  
the uncertainties associated with the performance of our investment in Usiminas (including those concerning the operating and financial performance of Usiminas and the Brazilian economy in general and the trading price of Usiminas’ ordinary and preferred shares), with the ongoing controversies relating to our acquisitions of Usiminas shares in January 2012 and October 2014, and with the existing conflicts within the Usiminas’ control group and its board. See Item 8. “Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” and Item 4. “Information on the Company—C. Organizational Structure—Other Investments—Usiminas”;
  
changes in domestic and foreign laws and regulations, including changes relating to tax, trade and foreign exchange matters;
  
regional or general changes in asset valuations;
  
uncertainties as to the result of our iron ore exploration activities or the successful exploitation of our mines;
  
our ability to successfully implement our business strategy or to grow through acquisitions, greenfield and brownfield projects, joint ventures and other investments; and
  
• other factors or trends affecting the steel and mining industries generally and our financial condition in particular.

 

 5 

 

 

By their nature, certain disclosures relating to these and other risks are only estimates and could be materially different from what actually occurs in the future. As a result, actual future gains or losses that may affect Ternium’s financial condition and results of operations could differ materially from those that have been estimated. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this annual report. Except as required by law, we are not under any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A.Selected Financial Data

 

The selected consolidated financial data set forth below have been derived from our consolidated financial statements for each of the years and at the dates indicated herein. Information as of AND FOR THE YEAR ENDED December 31, 2014 included in this annual report is derived from our audited restated consolidated financial statements for the year ended December 31, 2014. Our consolidated financial statements were prepared in accordance with IFRS, and were audited by PricewaterhouseCoopers, société coopérative (formerly PricewaterhouseCoopers S.à r.l.), Cabinet de révision agréé, or “PwC Luxembourg,” an independent registered public accounting firm that is a member firm of the PwC International Ltd. network.

 

For a discussion of the currencies used in this annual report, exchange rates and accounting principles affecting the financial information contained in this annual report, see “Presentation of Certain Financial and Other Information—Accounting Principles” and “Currencies.”

 

 6 

 

 

In thousands of U.S. dollars  For the year ended December 31, 
(except number of shares and per share data)  2015   2014   2013   2012(1)   2011(1)(2) 
Selected consolidated income statement data                    
                     
Net sales   7,877,449    8,726,057    8,530,012    8,608,054    9,122,832 
Cost of sales   (6,477,272)   (6,925,169)   (6,600,292)   (6,866,379)   (7,016,322)
                          
Gross profit   1,400,177    1,800,888    1,929,720    1,741,675    2,106,510 
Selling, general and administrative expenses   (770,292)   (816,478)   (843,311)   (809,181)   (839,362)
Other operating income (expenses), net   9,454    71,751    23,014    (11,881)   (11,495)
                          
Operating income   639,339    1,056,161    1,109,423    920,613    1,255,653 
                          
Finance expense   (89,489)   (117,866)   (132,113)   (150,302)   (105,570)
                          
Finance income   7,981    7,685    9,517    17,047    25,563 
                          
Other financial income (expenses), net   (17,922)   40,731    (12,879)   11,623    (220,414)
Equity in (losses) earnings of non-consolidated companies (3)   (272,810)   (751,787)   (31,609)   (346,833)   10,137 
                          
Income before income tax expense   267,099    234,924    942,339    452,148    965,368 
Income tax expense   (207,320)   (339,105)   (349,426)   (261,227)   (312,555)
                          
Profit (Loss) for the year   59,779    (104,181)   592,913    190,921    652,813 
                          
Attributable to:                         
Owners of the parent   8,127    (198,751)   455,425    142,043    517,668 
Non-controlling interest   51,652    94,570    137,488    48,878    135,145 
                          
Profit (Loss) for the year   59,779    (104,181)   592,913    190,921    652,813 
                          
Depreciation and amortization   433,788    414,797    377,133    370,855    395,988 
Weighted average number of shares outstanding (4)   1,963,076,776    1,963,076,776    1,963,076,776    1,963,076,776    1,968,327,917 
                          
Basic earnings (losses) per share (in USD per share) (5) (6)   0.00    (0.10)   0.23    0.07    0.26 
Dividends per share (in USD per share)   0.090    0.090    0.075    0.065    0.075 

 

(1)Starting on January 1, 2013, Consorcio Peña Colorada and Exiros have been proportionally consolidated. Comparative amounts for the years ended December 31, 2012 and 2011 show them as investments in non-consolidated companies and their results are included within “Equity in (losses) earnings of non-consolidated companies” in the consolidated income statement.
(2)Ternium changed prospectively the functional currency of its Mexican subsidiaries to the U.S. dollar, effective as of January 1, 2012. For the period ended December 31, 2011 the functional currency for the Company’s Mexican subsidiaries was the Mexican peso.
(3)Equity in losses of non-consolidated companies include write-downs of our investment in Usiminas, as a result of the performance of impairment tests, of USD275.3 million in 2012, USD739.8 million in 2014, and USD191.9 million in 2015.
(4)Of the 2,004,743,442 shares issued as of December 31, 2015, the Company held 41,666,666 that were repurchased from Usiminas on February 15, 2011. Such shares were not considered outstanding for purposes of the calculation of the weighted average number of shares.
(5)International Accounting Standard N° 1 (IAS 1) (Revised) requires that income for the year as shown in the income statement includes the portion attributable to non-controlling interest. Basic earnings per share, however, continue to be calculated on the basis of income attributable solely to the owners of the parent.
(6)Diluted earnings per share (expressed in USD per share), equals basic earnings per share.
 7 

 

 

In thousands U.S. dollars  At December 31, 
(except number of shares and per share data)  2015   2014   2013   2012   2011 
Selected consolidated balance sheet data                    
                     
Non-current assets   5,480,389    6,341,290    7,153,162    7,211,371    5,195,688 
Property, plant and equipment, net   4,207,566    4,481,027    4,708,895    4,438,117    3,969,187 
Other non-current assets (1)   1,272,823    1,860,263    2,444,267    2,773,254    1,226,501 
Current assets   2,582,204    3,348,869    3,219,462    3,655,628    5,547,374 
Cash and cash equivalents   151,491    213,303    307,218    560,307    2,158,044 
Other current assets (2)   2,419,046    3,120,810    2,894,474    3,083,303    3,378,956 
Non-current assets classified as held for sale   11,667    14,756    17,770    12,018    10,374 
                          
Total assets   8,062,593    9,690,159    10,372,624    10,866,999    10,743,062 
                          
Capital and reserves attributable to the owners of the parent (3)   4,033,148    4,697,201    5,340,035    5,369,183    5,711,495 
Non-controlling interest   769,849    937,502    998,009    1,065,730    1,077,055 
                          
Non-current liabilities   1,558,979    1,964,070    2,185,421    2,306,640    1,975,129 
                          
Borrowings   607,237    900,611    1,204,880    1,302,753    948,495 
Deferred tax liabilities   609,514    670,523    605,883    657,211    719,061 
Other non-current liabilities   342,228    392,936    374,658    346,676    307,573 
                          
Current liabilities   1,700,617    2,091,386    1,849,159    2,125,446    1,979,383 
                          
Borrowings   913,786    1,264,208    797,944    1,121,610    1,047,641 
Other current liabilities   786,831    827,178    1,051,215    1,003,836    931,742 
                          
Total liabilities   3,259,596    4,055,456    4,034,580    4,432,086    3,954,512 
Total equity and liabilities   8,062,593    9,690,159    10,372,624    10,866,999    10,743,062 
                          
Number of shares (3)   1,963,076,776    1,963,076,776    1,963,076,776    1,963,076,776    1,963,076,776 

 

(1)Includes goodwill mainly related to the acquisition of our Mexican subsidiaries for a total amount of USD662.3 million as of December 31, 2015, 2014 and 2013, and USD663.8 million as of December 31, 2012 and 2011.
(2)As of December 31, 2015, 2014, 2013, 2012 and 2011, includes financial assets with maturity of more than three months for a total amount of USD237.2 million, USD150.0 million, USD169.5 million, USD160.8 million and USD281.7 million, respectively.
(3)The Company’s share capital as of December 31, 2015, 2014, 2013, 2012 and 2011 was represented by 2,004,743,442 shares, par value USD1.00 per share, for a total amount of USD2,004.7 million. Of the 2,004,743,442 shares, as of December 31, 2015, the Company held 41,666,666, repurchased from Usiminas on February 15, 2011.

 

B.Capitalization and Indebtedness

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

Not applicable.

 

D.Risk Factors

You should carefully consider the risks and uncertainties described below, together with all other information contained in this annual report, before making any investment decision. Any of these risks and uncertainties could have a material adverse effect on our business, financial condition and results of operations, which could in turn affect the price of the Company’s shares and ADSs.

 

Risks Relating to the Steel Industry

 

A downturn in global or regional economic activity would cause a reduction in worldwide or regional demand for steel and would have a material adverse effect on the steel industry and Ternium.

 

Steel demand is sensitive to trends in cyclical industries, such as the construction, automotive, appliance and machinery industries, which are significant markets for Ternium’s products and are also affected by national, regional or global economic conditions. A downturn in economic activity would reduce demand for steel products. This would have a negative effect on Ternium’s business and results of operations. A recession or depression affecting developed economies (such as the global downturn in 2008 and 2009 and the downturn in Europe in 2012), or slower growth or recessionary conditions in emerging economies (such as the slowdown being experienced by the Chinese economy since 2014 or the current recession in Brazil) would exact a heavy toll on the steel industry and adversely affect our business and results of operations.

 

 8 

 

 

A protracted fall in steel prices would have a material adverse effect on the results of Ternium, as could price volatility.

 

Steel prices are volatile and are sensitive to trends in steel demand and raw material costs, such as iron ore and metallurgical coal costs. Historically, the length and nature of business cycles affecting steel demand and raw material costs have been unpredictable. For example, steel prices in the international markets, which had been rising quickly during the first half of 2008, fell sharply beginning in the second half of 2008 and first half of 2009 as a result of collapsing steel demand. A subsequent upward trend, in a context of stronger steel demand and higher raw material costs, lasted until the first quarter of 2011 when international steel prices reached values that almost doubled those prevailing during the first half of 2009. International steel prices have since followed a downward trend that accelerated during 2015, reaching fresh multi-year lows at the beginning of 2016, reflecting a slowdown in steel demand and a sharp reduction in steel production costs. Decreasing steel prices adversely affect Ternium’s operating results by means of lower revenues and could also lead to inventory write-downs. Even if raw material costs decreased in sync with steel prices, the resulting decrease in steel production costs would take several months to materialize in our operating results as the company would first consume older inventories acquired prior to such raw material cost decreases.

 

Regional or worldwide excess steel production capacity may lead to unfair trade practices in the international steel markets and/or to intense competition, hampering Ternium’s ability to sustain adequate profitability.

 

In addition to economic cycles, the steel industry is also affected by regional or worldwide production over-capacity. Historically, the steel industry has suffered, especially on downturn cycles, from substantial over-capacity. Currently, as a result of a slowdown in steel demand growth and protracted increase in steel production capacity in recent years, there are signs of over-capacity in all steel markets, particularly in China, which is impacting the profitability of the steel industry and Ternium. Excess steel production capacity may require several years to be absorbed by demand and, as a consequence, may contribute to an extended period of depressed margins and industry weakness.

 

International trade of steel products conducted under unfair conditions is especially prevalent during downturn cycles and as a result of production over-capacity. Unfair trade practices may result in the imposition by some countries (that are significant producers and consumers of steel) of antidumping and countervailing duties, and may cause fluctuations in international steel trade. The imposition of such trade remedies or temporary tariffs against major steel exporters in significant producing countries’ markets could in turn exacerbate pressures in other steel markets, including Ternium’s, as these exporters target other steel markets to compensate, at least partially, for the loss of business resulting from the imposition of trade remedies.

 

China is now the largest steel-producing country in the world, accounting for approximately half of worldwide steel production. Since the Chinese economy began to slow down in 2014, China’s steel consumption decreased and Chinese exports expanded rapidly. Exports of steel products from China to Latin America, the second-largest destination for Chinese steel product exports, represented approximately 13% of the region’s steel consumption in 2015. Recently, Chinese exports of steel products, including exports to Europe, the United States and Mexico, have been subject to several antidumping and countervailing investigations, and to the imposition of antidumping and countervailing duties. Further decrease in steel consumption in China may further stimulate aggressive Chinese steel export offers, exerting downward pressure on sales and margins of steel companies operating in other markets and regions, including those in which Ternium operates. A downturn in global or regional economic activity, including the current slowdown in the Chinese economy, has stimulated and may continue to stimulate unfair steel trade practices and, accordingly, may adversely affect our business and results of operations. For further information, see Item 4. “Information on the Company—B. Business Overview—Regulations—Trade regulations.”

 

Sales may fall as a result of fluctuations in industry inventory levels.

 

Inventory levels of steel products held by companies that purchase Ternium’s products can vary significantly from period to period. These fluctuations can temporarily affect the demand for Ternium’s products, as customers draw from existing inventory during periods of low investment in construction and other industry sectors that purchase Ternium’s products and accumulate inventory during periods of high investment and, as a result, these companies may not purchase additional steel products or maintain their current purchasing volume. Accordingly, Ternium may not be able to increase or maintain its current levels of sales volumes or prices.

 

Intense competition could cause Ternium to lose its share in certain markets and adversely affect its sales and revenues.

 

The market for Ternium’s steel products is highly competitive, particularly with respect to price, quality and service. In both global and regional markets, Ternium competes against other global and local producers of steel products, which in some cases have greater financial and operating resources, or direct and indirect governmental support. Competition from such steel producers could result in declining margins and reductions in sales volumes and revenues.

 

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Ternium’s competitors could use their resources against Ternium in a variety of ways, including by making additional acquisitions, implementing modernization programs, expanding their production capacity, investing more aggressively in product development, and displacing demand for Ternium’s products in certain markets. To the extent that these producers become more efficient, Ternium might confront stronger competition and might fail to preserve its current share of the relevant geographic or product markets. In addition, there has been a trend in the past toward steel industry consolidation among Ternium’s competitors, and current smaller competitors in the steel market could become larger competitors in the future. For example, in June 2006, Mittal Steel and Arcelor merged to create the world’s largest steel company, ArcelorMittal, and in October 2012 Nippon Steel Corporation and Sumitomo Metal Industries merged to form Nippon Steel & Sumitomo Metal Corporation, or NSSMC, the world’s second largest steel company; and in February 2014, ArcelorMittal and NSSMC acquired ThyssenKrupp Steel USA, a steel processor based in Alabama, through a 50/50 joint venture. Regional players in Ternium’s markets have also experienced consolidation through acquisitions. For further information, see Item 4. “Information on the Company—B. Business Overview—Competition.”

 

Moreover, competition from alternative materials (including aluminum, wood, concrete, plastic and ceramics) could adversely affect the demand for, and consequently the market prices of, certain steel products and, accordingly, could affect Ternium’s sales volumes and revenues.

 

Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability.

 

Like other manufacturers of steel-related products, Ternium’s operations require substantial amounts of raw materials, energy and other inputs from domestic and foreign suppliers. In particular, Ternium’s companies consume large quantities of iron ore, scrap, ferroalloys, electricity, metallurgical coal, natural gas, oxygen and other gases in operating their blast and electric arc furnaces. In addition, Ternium is a large consumer of slabs, which are used as inputs in the production process. The prices of these raw materials, slabs, energy and other inputs can be volatile. Also, the availability and price of a significant portion of such raw materials, slabs, energy and other inputs Ternium requires are subject to market conditions and government regulation affecting supply and demand. For example, shortages of natural gas in Argentina and the consequent supply restrictions imposed by the government could lead to higher costs of production and eventually to production cutbacks at Siderar’s facilities in Argentina. Similarly, in Mexico, existing constraints in natural gas transportation capacity have led to increased imports of liquefied natural gas, which, from April 1, 2013, resulted in increased natural gas transportation costs and, thus, higher steel production costs. In the past, Ternium has usually been able to procure sufficient supplies of raw materials, slabs, energy and other inputs to meet its production needs; however, it could be unable to procure adequate supplies in the future. Any protracted interruption, discontinuation or other disruption of the supply of principal inputs to the Ternium companies (including as a result of strikes, lockouts or other problems) would result in lost sales and would have a material adverse effect on Ternium’s business and results of operations. For further information related to raw materials, slabs, energy and other inputs requirements, see Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

 

Ternium’s companies depend on a limited number of key suppliers.

 

Ternium’s companies depend on certain key suppliers for their requirements of some of their principal inputs, including Vale for iron ore and ArcelorMittal for slabs. In general, there is a trend in the industry towards consolidation among suppliers of iron ore and other raw materials. Ternium’s companies have entered into long-term contracts for the supply of some (but not all) of their principal inputs and it is expected that they will maintain and, depending on the circumstances, renew these contracts. However, if any of the key suppliers fails to deliver or there is a failure to renew these contracts, the Ternium companies could face limited access to some raw materials, slabs, rolled steel products, energy or other inputs, or higher costs and delays resulting from the need to obtain their input requirements from other suppliers.

 

Risks Relating to our Business

 

If Ternium does not successfully implement its business strategy, its opportunities for growth and its competitive position could be adversely affected.

 

Ternium plans to continue implementing its business strategy of enhancing its position as a competitive steel producer, focusing on higher margin value-added products, pursuing strategic growth opportunities, implementing Ternium’s best practices in acquired and new businesses, providing services to a wider range of customers in the local and export markets, and improving utilization levels of our plants, increasing efficiency and further reducing production costs. Any of these components or Ternium’s overall business strategy could be delayed or abandoned or could cost more than anticipated, any of which could impact its competitive position and reduce its revenue and profitability. For example, Ternium could fail to develop its projects and/or to make acquisitions to increase its steel production capacity, or may lose market share in its regional markets. Even if Ternium successfully implements its business strategy, it may not yield the desired goals.

 

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Future acquisitions or other significant investments could have an adverse impact on Ternium’s operations or profits, and Ternium may not realize the benefits it expects from these business decisions.

 

A key element of Ternium’s business strategy is to identify and pursue growth-enhancing opportunities, and as part of that strategy we regularly consider acquisitions, greenfield and brownfield projects and other significant investments. However, any growth project will depend upon market and financing conditions. We must necessarily base any assessment of potential acquisitions or other investments on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Furthermore, we may fail to find suitable acquisition targets or fail to consummate our acquisitions under favorable conditions.

 

In the past, Ternium acquired interests in various companies, including Hylsamex, one of the main steel producers in Mexico; Grupo Imsa, a leading steel processor with operations in Mexico, the United States and Guatemala; and Ferrasa, a Colombian steel producer and processor. Together with Nippon Steel (currently, NSSMC) Ternium has also formed Tenigal for the manufacturing and sale of hot-dip galvanized and galvannealed steel sheets to serve the Mexican automotive market. In 2012, Ternium acquired a participation in the control group of Usiminas, the largest flat steel producer in Brazil, and in 2014, Ternium acquired a significant additional stake in that company. Our acquisitions or other investments may not perform in accordance with our expectations and could have an adverse impact on our operations and profits (see Item 5. “Operating and Financial Review and Prospects—Overview—Useful lives and impairment of property, plant and equipment and other long-lived assets”). Furthermore, we may be unable to successfully integrate any acquired businesses into our operations, realize expected synergies or accomplish the business objectives that were foreseen at the time of deciding any such investment. Moreover, we may also acquire, as part of future acquisitions, assets unrelated to our business, and we may not be able to integrate them or sell them under favorable terms and conditions. These risks, and the fact that integration of any acquired businesses will require a significant amount of time and resources of Ternium’s management and employees, could have an adverse impact on Ternium’s ongoing business and could have a material adverse effect on its business, financial condition and results of operations.

 

Ternium may be required to record a significant charge to earnings if it must reassess its goodwill, other amortizable intangible assets, or investments in non-consolidated companies.

 

In accordance with IFRS, management must test for impairment all of Ternium’s assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets subject to testing include goodwill, intangible assets and investments in non-consolidated companies. In addition, management must test for impairment goodwill at least once a year whether or not there are indicators of impairment. IFRS requires us to recognize a non-cash charge in an amount equal to any impairment.

 

We recorded significant goodwill in connection with the acquisition of our Mexican subsidiaries, as well as in our investments in non-consolidated companies in connection with our acquisition of a participation in Usiminas. We performed several impairment tests on our investment in Usiminas and, as of December 31, 2012, September 30, 2014 and December 31, 2015, wrote it down by USD275.3 million, USD739.8 million and USD191.9 million, respectively (see Item 5. “Operating and Financial Review and Prospects—Overview—Useful lives and impairment of property, plant and equipment and other long-lived assets”).

 

As of December 31, 2015, goodwill in connection with our Mexican subsidiaries amounted to USD662.3 million and, following the above-mentioned write-downs of our investment in Usiminas, our investment in non-consolidated companies as of December 31, 2015 amounted to USD250.4 million. For further information on the Usiminas impairment risk and its implications, see “—If Usiminas is not able to continue as a going concern, or successfully implement its business strategy, or if the business conditions in Brazil or in the global steel and mining industries were to be worse than we expected, the Company may be required to record a significant charge to earnings in the form of an impairment to its investment in Usiminas, which could have a material adverse effect on Ternium’s results, financial condition or net worth”.

 

If Ternium’s management determines in the future that the goodwill from our acquisitions or our investments in non-consolidated companies are impaired, Ternium will be required to recognize a non-cash charge against earnings, which could materially adversely affect Ternium’s results of operations and net worth.

 

If Usiminas is not able to continue as a going concern, or successfully implement its business strategy, or if the business conditions in Brazil or in the global steel and mining industries were to be worse than we expected, the Company may be required to record a significant charge to earnings in the form of a further impairment of its investment in Usiminas, which could have a material adverse effect on Ternium’s results, financial condition or net worth.

 

On January 16, 2012, Ternium, together with its subsidiary Siderar, acquired a participation in the control group of Usiminas, the largest flat steel producer in Brazil, for a total consideration of USD2.2 billion. On October 30, 2014, Ternium acquired additional ordinary shares of Usiminas for a total consideration of USD249.0 million. Ternium owns approximately 32.9% of Usiminas’ ordinary shares, holds 35.6% of the voting rights within Usiminas’ control group and has a 16.8% participation in Usiminas’ results. For further information on the Usiminas transactions, see note 3 to our consolidated financial statements included elsewhere in this annual report.

 

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Between 2012 and until September 2014, Usiminas improved its performance and results of operations as a result of the implementation of certain changes in its strategy and business practices. However, results deteriorated starting in the fourth quarter of 2014 as Brazilian steel-intensive industrial sectors such as the capital goods, durable goods, vehicles and machinery and equipment sectors were adversely affected by low investments, weak consumption, strong imports and high inventories.

 

Usiminas’ financial statements as of December 31, 2015, described a downgraded economic scenario for the company that caused a significant impact on its financial leverage and cash generation. In addition, KPMG, Usiminas’ external auditors included in their report on these financial statements an emphasis of matter paragraph, which, without qualifying their opinion, indicated the existence of “a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern” as a result of the risk of not achieving an action plan defined by Usiminas’ management to equalize its financial obligations with cash generation. On March 17, 2016, Usiminas entered into a standstill agreement with its financial creditors with a term of 120 days. On April 18, 2016, Usiminas’ shareholders’ meeting approved an issuance of ordinary shares in an amount of up to BRL1 billion (approximately USD285.7 million). Existing shareholders, including Ternium and NSSMC, have preemptive rights to subscribe the proposed capital increase at any time prior to May 23, 2016. Ternium has not yet decided whether or not it will participate in the capital increase; NSSMC, in turn, has undertaken to subscribe the capital increase in its entirety; however, NSSMC has conditioned its undertaking to the completion of a restructuring of Usiminas’ financial debt. If either the restructuring or the capital increase are not completed, Usiminas will not be able to pay its financial debt.

 

Ternium’s subscription rights, if exercised, entitle it to subscribe up to 33.6 million ordinary shares at a price of BRL5 per share for a total amount of up to BRL168.2 million (approximately USD48.1 million), and to subscribe (pro rata with other subscribing shareholders) any ordinary shares not subscribed by Usiminas’ current shareholders, also at BRL5 per share. Depending on whether or not it exercises its subscription rights and generally on the outcome of the subscription process, Ternium may end up with a higher, equal or lower participation in Usiminas’ capital and voting rights.

 

In addition to a capitalization of Usiminas, further changes to Usiminas’ strategy and business practices will be required in the future in order to recover profitability, and we cannot assure you that such changes will take place or be successful. Under the shareholders agreement governing the rights of the members of Usiminas’ control group, Ternium cannot, without the consensus of one or more of the other shareholder groups party to that agreement, cause the control group to adopt any decision at Usiminas’ shareholders’ meetings or cause the directors nominated by the control group to adopt any decision at Usiminas’ board of directors’ meetings (see Item 4. “Information on the Company—C. Organizational Structure—Other Investments—Usiminas”). Accordingly, no control group member can, without the consent of other shareholder group or groups, implement any change to Usiminas’ business strategy, and therefore any necessary changes may not take place or fail to be implemented. In addition, a conflict has arisen within the Usiminas control group and its board with respect to the governance of Usiminas, including with respect to the rules applicable to the appointment of senior managers, and the company’s strategy, which may make it more difficult to reach consensus within the control group. For further information related to the conflict within the Usiminas control group, see Item 4. “Information on the Company—C. Organizational Structure—Other Investments—Usiminas.”

 

The Company reviews periodically the recoverability of its investment in Usiminas. To determine the recoverable value, the Company estimates the value in use of the investment by calculating the present value of the expected cash flows or its fair value less costs of disposal.

 

Many of the drivers of the estimated recoverable value of Usiminas have exhibited a high degree of volatility in the past and may continue to do so in the future, as they are affected by fluctuations in Brazil’s macroeconomic variables. Brazil has experienced from time to time varying degrees of economic, political, social and regulatory developments, including fluctuating prices of commodities, fluctuating trade balances, inflation, devaluation, civil unrest, tax increases, changes (including retroactive changes) in the enforcement or interpretation of tax laws and other retroactive tax claims or challenges, and changes in laws or regulations, creating uncertainty regarding the country’s future macroeconomic environment. Furthermore, the business conditions in Brazil or the global steel and mining industries could turn out to be worse than those we expected when assessing the value of our investment in Usiminas, which could in turn modify our expectations for the financial return on our investment in Usiminas.

 

For example, as of December 31, 2012, September 30, 2014, and December 31, 2015, Ternium wrote down its investment in Usiminas by USD275.3 million, USD739.8 million and USD191.9 million, respectively. As of December 31, 2015, the value of Ternium’s investment in Usiminas was USD240.0 million. The closing price of Usiminas’ ordinary shares as quoted on the São Paulo stock exchange, BM&FBovespa S.A – Bolsa de Valores, Mercadorias e Futuros on December 31, 2015, was BRL4.02 (approximately USD1.03) per share, giving Ternium’s ownership stake a market value of approximately USD171.0 million as of that date.

 

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Ternium reviews the economic policies of Brazil and the expectations relating to the BRL against USD exchange rate on an ongoing basis and will continue to evaluate their impact in the drivers used for calculating the value in use of Ternium’s investment in Usiminas. These matters could lead to further reductions in the carrying value of Ternium’s investment in Usiminas, either through currency translation adjustments or impairment charges. Any further write-downs to Ternium’s investment in Usiminas could have a material adverse effect on Ternium’s results of operations or net worth.

 

Labor disputes at Ternium’s operating subsidiaries could result in work stoppages and disruptions to Ternium’s operations.

 

A substantial majority of Ternium’s employees at its manufacturing subsidiaries are represented by labor unions and are covered by collective bargaining or similar agreements, which are subject to periodic renegotiation. Strikes or work stoppages could occur prior to or during the negotiations leading to new collective bargaining agreements, during wage and benefits negotiations or, occasionally, during other periods for other reasons. Ternium could also suffer plant stoppages or strikes if it were to implement cost reduction plans.

 

From time to time, Ternium takes measures in order to become more competitive in Mexico, Argentina and Colombia; none of the measures taken in the past have resulted in significant labor unrest. However, we cannot assure that this situation will remain stable or that future measures will not result in labor actions against us. Any future stoppage, strike, disruption of operations or new collective bargaining agreements could result in lost sales and could increase Ternium’s costs, thereby affecting our results of operations. For more information on labor relations and collective bargaining agreements, see Item 6. “Directors, Senior Management and Employees—D. Employees.”

 

Ternium’s related party transactions with companies controlled by San Faustin may not always be on terms as favorable as those that could be obtained from unaffiliated third parties.

 

Some of Ternium’s sales and purchases are made to and from other companies controlled by San Faustin. These sales and purchases are primarily made in the ordinary course of business, and we believe that they are made on terms no less favorable than those we could obtain from unaffiliated third parties. Ternium will continue to engage in related party transactions in the future, and these transactions may not be on terms as favorable as those that could be obtained from unaffiliated third parties. For information concerning the principal transactions between Ternium and related parties see Item 7. “Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

 

Changes in exchange rates or any limitation in the ability of the Ternium Companies, including associates, to hedge against exchange rate fluctuations could adversely affect Ternium’s business and results.

 

The operations of the Ternium companies expose them to the effects of changes in foreign currency exchange rates and changes in foreign exchange regulations. A significant portion of Ternium’s sales are carried out in currencies other than the U.S. dollar. As a result of this foreign currency exposure, exchange rate fluctuations impact the Ternium companies’ results and net worth as reported in their income statements, statements of comprehensive income and statements of financial position in the form of both translation risk and transaction risk. In the ordinary course of business, Ternium’s companies enter from time to time into exchange rate derivatives agreements to manage their exposure to exchange rate changes. Future regulatory or financial restrictions in the countries where Ternium operates may affect its ability to mitigate its exposure to exchange rate fluctuations, and thus cause an adverse impact on Ternium’s results of operations, financial condition or cash flows. For information concerning the effect of the changes in exchange rates on Ternium’s business and results, see Item 5. “Operating and Financial Review and Prospects—Overview.”

 

Risks Relating to Our Mining Activities

 

Mining is one of Ternium’s two reporting segments, and iron ore is one of the principal raw materials used by Ternium’s operating subsidiaries in its steelmaking segment. Ternium has equity interests in two iron ore mining companies in Mexico: a 100% interest in Las Encinas and a 50% interest in Consorcio Peña Colorada. In addition, Ternium may seek to expand its mining activities in the future depending upon, among other factors, market conditions and strategic needs. Our present and future mining activities are or would be subject to particular risks, as follows:

 

Unexpected natural and operational catastrophes may impact the environment or cause exposure to hazardous substances, which could adversely impact our operations and profitability and result in material liabilities to us.

 

We operate extractive, processing and logistical operations, including tailing dams, in many geographic locations. Our operations involve the use, handling, storage, discharge and disposal into the environment of hazardous substances and the use of natural resources. The iron ore mining industry is generally subject to significant risks and hazards, including environmental pollution, such as spilling of polluting substances or other hazardous materials; operational incidents, such as open-cut pit wall failures or rock falls in mining operations; and transportation incidents involving mobile equipment or machinery, slurry pipes or cable transportation. The industry may also be subject to unexpected natural catastrophes.

 

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This could result in environmental damage, damage to or destruction of properties and facilities, personal injury or death, and delays in production. We may be subject to claims under federal and local laws and regulations for toxic torts, natural resource damages and other damages as well as for the investigation and clean-up of soil, surface water, sediments, groundwater and other natural resources. Such claims for damages and reclamation may arise out of current or former conditions at sites that we own, lease or operate currently; inactive sites that we currently own; leased land sites and third-party waste disposal sites. We may be named as a responsible party at other sites in the future. We also could be subject to litigation for alleged bodily injuries arising from claimed exposure to hazardous substances allegedly used, released or disposed of by us.

 

Environmental impacts as a result of our operations could result in costs and liabilities that could materially and adversely affect our margins, cash flow and profitability. Third-party claims arising from these events may exceed the limit of liability of the insurance policies we have in place.

 

Required governmental concessions could be subject to changes or termination, and permits and rights of use and occupancy could be difficult to obtain or maintain, all of which could adversely affect our mining activities and operating costs.

 

Our mining activities are subject to specific regulations and depend on concessions and authorizations granted by governmental authorities. Amendments to applicable laws and regulations in Mexico may change the terms pursuant to which we are required to pursue our exploration, mining and ore processing activities. For example, on January 1, 2014 a comprehensive tax reform became effective in Mexico, including the enactment of new taxes and royalties over mining activities, which in the case of Ternium’s iron ore mining subsidiaries resulted in a 7.5% royalty on mining profits, calculated on a special tax basis. Additional changes to Mexican laws and regulations may result in new taxes or royalties or require modifications to the processes and technologies used in our mining activities, leading to unexpected capital expenditures and higher costs. If the relevant government authority determines that we are not in compliance with our obligations as concessionaires, it may terminate our concession.

 

Furthermore, in order to explore or exploit mines it is necessary to obtain the right of use and occupancy of the land where the mines are situated. Even though government regulations frequently establish provisions intended to facilitate the establishment of such rights, in some cases it may be difficult to reach and maintain agreements with the landowners or such agreements may be excessively onerous. If we are unable to establish use and occupancy rights on acceptable terms, our mining activities may be compromised. For example, during 2014, Consorcio Peña Colorada’s shareholders approved the investments required to increase the processing capacity of its crushing, grinding and concentration facilities, aimed at increasing the facility’s processing capacity. If Consorcio Peña Colorada is unable to obtain the relevant environmental permits, this expansion project could be compromised. For further information on the Consorcio Peña Colorada project see Item 4. “Information on the Company—B. Business Overview—Mining Production Facilities—Consorcio Peña Colorada.”

 

Our reserve estimates may differ materially from mineral quantities that we may be able to actually recover, or our estimates of mine life may prove inaccurate; and market price fluctuations and changes in operating and capital costs may render certain ore reserves uneconomical to mine in the future or cause us to revise our reserve estimates.

 

Ternium’s reserves are estimated quantities of ore that it has determined can be economically mined and processed under present and anticipated conditions to extract their mineral content. There are numerous uncertainties inherent in estimating quantities of reserves and in projecting potential future rates of mineral production, including factors beyond our control. Reserve calculations involve estimating deposits of minerals that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Reserve estimates also depend on assumptions relating to the economic viability of extraction, which are established through the application of a life of mine plan for each operation or project providing a positive net present value on a forward-looking basis, using forecasts of operating and capital costs based on historical performance, with forward adjustments based on planned process improvements, changes in production volumes and in fixed and variable proportions of costs, and forecasted fluctuations in costs of raw material, supplies, energy and wages. These forecasts and projections involve assumptions and estimations that, although we believe are reasonable at the time of estimating our reserves, may change in the future and may fail to anticipate geological or other environmental factors or events that could make it difficult or unprofitable to mine certain ore deposits.

 

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In addition, our reserve estimates are of in-place material after adjustments for mining depletion and mining losses and recoveries, with no adjustments made for metal losses due to processing. As a result, no assurance can be given that the indicated amount of ore will be recovered from our reserves, or that it will be recovered at the anticipated rates, or that extracted ore will be converted into saleable production over the mine life at levels consistent with our reserve estimates. Reserve estimates may vary from those included in this annual report, and results of mining and production subsequent to the date of an estimate may lead to future revisions of estimates.

 

Estimates of mine life may require revisions based on actual production figures, changes in reserve estimates and other factors. For example, fluctuations in the market prices of minerals, reduced recovery rates or increased operating and capital costs due to inflation, exchange rates, mining duties or other factors could affect our mine life projections. To the extent that market price fluctuations or changes in our operating and capital costs increase our costs to explore, locate, extract and process iron ore, we may be required to lower our reserve estimates if certain ore reserves become uneconomical to mine in the future.

 

Our exploration activities are subject to uncertainties as to the results of such exploration; even if the exploration activities lead to the discovery of ore deposits, the effective exploitation of such deposits remains subject to several risks.

 

Exploration activities are highly speculative, involve substantial risks and may be unproductive. We may incur substantial costs for exploration which do not yield the expected results. The failure to find sufficient and adequate reserves could adversely affect our business. In addition, even if ore deposits are discovered, our ability to pursue exploitation activities may be delayed for a long time during which market conditions may vary. Significant resources and time need to be invested in order to establish ore resources through exploration, define the appropriate processes that shall be undertaken, obtain environmental licenses, concessions and permits (including water usage permits), acquire land, build the necessary facilities and infrastructure for greenfield projects and obtain the ore or extract the metals from the ore. If a project does not turn out to be economically feasible by the time we are able to exploit it, we may incur substantial write-offs.

 

Our expected costs and capital expenditure requirements for exploration or exploitation activities may vary significantly and affect our financial condition and expected results of operations.

 

We may be subject to increased costs or delays relating to the acquisition of adequate equipment for the exploration and exploitation of ore deposits. We may also fail to obtain any necessary permits, or experience significant delays in connection with the issuance of such permits. Moreover, we may face increasing costs or capital expenditure requirements related to several factors, including diminished iron ore reserve grades, deeper pits and operational sections of our mines, iron ore deposits within the pit area that are more difficult to locate or extract and increased energy supply requirements that may be difficult to obtain. Adverse mining conditions and other situations related to the operation of the mine, whether permanent or temporary, may lead to a significant increase in our planned capital expenditures and our costs, as well as affect our ability to produce the expected quantities of mineral. If this occurs, our financial condition and expected results of operations may also be negatively affected.

 

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Difficulties in relationships with local communities may adversely affect our mining activities and results of operations.

 

Communities living or owning land near areas where we operate may take actions to oppose and interfere with our mining activities. Although we make significant efforts to maintain good relationships with such communities, actions taken by them (or by interest groups within those communities) may hamper our ability to conduct our mining activities as planned, request the government to revoke or cancel our concessions or environmental or other permits, prevent us from fulfilling agreements reached with the government in connection with our mining activities, or significantly increase the cost of exploring and/or exploiting the mines, thereby adversely affecting our business and results of operations. For example, in Aquila, Mexico, in 2011, 2012 and 2013, members of certain native communities blocked roads demanding higher compensation for the use of land for mining activities (and these actions prevented Ternium from transporting iron ore from the mines to the pelletizing facilities for periods of time that on some occasions ultimately resulted in a technical stoppage of the mining activities in Aquila). More recently, in July 2015, a group of people demanding additional benefits for the native community entered and occupied certain facilities of Consorcio Peña Colorada located in Colima and Jalisco, Mexico, blocked the principal accesses and impeded the entrance and exit of the employees for more than 8 hours. In 2013, local communities initiated legal actions aimed at the cancellation of certain permits granted to Las Encinas and to Consorcio Peña Colorada. Although those legal actions did not succeed, Mexican legislation affords judges the power to preemptively suspend environmental or other permits or concessions, or to take certain other measures, in order to protect the ejidos (land jointly owned by native communities) until a legal action is resolved. An adverse legal decision suspending or cancelling our permits or the illegal occupation of our facilities could adversely impact our mining activities and results of operations.

 

Risks Relating to the Structure of the Company

 

As a holding company, the Company’s ability to pay cash dividends depends on the results of operations and financial condition of its subsidiaries and could be restricted by legal, contractual or other limitations.

 

The Company conducts all its operations through subsidiaries. Dividends or other intercompany transfers of funds from those subsidiaries are the Company’s primary source of funds to pay its expenses, debt service and dividends and to repurchase shares or ADSs. The Company does not and will not conduct operations at the holding company level.

 

The ability of the Company’s subsidiaries to pay dividends and make other payments to the Company will depend on their results of operations and financial condition and could be restricted by, among other things, applicable corporate and other laws and regulations, including those imposing foreign exchange controls or restrictions on the repatriation of capital or the making of dividend payments, and agreements and commitments of such subsidiaries. If earnings and cash flows of the Company’s operating subsidiaries are substantially reduced, the Company may not be in a position to meet its operational needs or to pay dividends. In addition, the Company’s ability to pay dividends is subject to legal and other requirements and restrictions in effect at the holding company level. For example, the Company may only pay dividends out of net profits, retained earnings and distributable reserves and premiums, each as defined and calculated in accordance with Luxembourg laws and regulations.

 

The Company’s controlling shareholder may be able to take actions that do not reflect the will or best interests of other shareholders.

 

As of March 31, 2016, San Faustin beneficially owned 62.02% of our outstanding voting shares and Tenaris, which is also controlled by San Faustin, held 11.46% of our outstanding voting shares. Rocca & Partners Stichting Administratiekantoor Aandelen San Faustin, or “RP STAK”, controls a significant portion of the voting power of San Faustin and has the ability to influence matters affecting, or submitted to a vote of, the shareholders of San Faustin. As a result, RP STAK is indirectly able to elect a substantial majority of the members of the Company’s board of directors and has the power to determine the outcome of most actions requiring shareholder approval, including, subject to the requirements of Luxembourg law, the payment of dividends. The decisions of the controlling shareholder may not reflect the will or best interests of other shareholders. For example, the Company’s articles of association permit the board of directors to waive, limit or suppress preemptive rights in certain cases. Accordingly, our controlling shareholder may cause our board of directors to approve an issuance of shares for consideration without preemptive rights, thereby diluting the minority interest in the Company. See “—Risks Relating to our ADSs—Holders of our shares and ADSs in the United States may not be able to exercise preemptive rights in certain cases” and Item 7. “Major Shareholders and Related Party Transactions—A. Major Shareholders.”

 

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Non-controlling interests in our subsidiaries could delay or impede our ability to complete our strategy.

 

We do not own one hundred percent of the interests in certain of our subsidiaries.

 

As of March 31, 2016, 26.03% of Siderar is held by Administración Nacional de la Seguridad Social, or “ANSeS”, Argentina’s governmental social security agency and 13.03% is publicly held. ANSeS became a significant shareholder of Siderar in the last quarter of 2008 as a result of the nationalization of Argentina’s private pension system, which caused assets under administration of Argentina’s private pension funds—including significant interests in publicly traded companies, such as Siderar, held by such funds—to be transferred to ANSeS.

 

Ternium holds a 51% ownership interest in Tenigal, and NSSMC holds the remaining 49%. We also have a participation in the control group of Usiminas. For further information on the Usiminas investment, see Item 4. “Information on the Company—C. Organizational Structure—Other Investments—Usiminas.”

 

The existence of non-controlling interests in these companies could prevent Ternium from taking actions that, while beneficial to Ternium, might not be beneficial to each relevant subsidiary, considered separately. As a result, we could be delayed or impeded in the full implementation of our strategy or the maximization of Ternium’s competitive strengths.

 

Risks Relating to the Countries in Which We Operate

 

Negative economic, political and regulatory developments in certain markets where Ternium has a significant portion of its operations and assets could hurt Ternium’s shipment volumes or prices, increase its costs or disrupt its manufacturing operations, thereby adversely affecting its results of operations and financial condition.

 

The results of Ternium’s operations are subject to the risks of doing business in emerging markets, principally in Mexico and Argentina and to a lesser extent in Colombia, and have been, and could in the future be, affected from time to time to varying degrees by economic, political, social and regulatory developments, such as nationalization, expropriation or forced divestiture of assets; restrictions on production, domestic sales, imports and exports; interruptions to essential energy inputs; restrictions on the exchange or transfer of currency, repatriation of capital, or payment of dividends, debt principal or interest, or other contractual obligations; inflation; devaluation; war or other international conflicts; civil unrest and local security concerns that threaten the safe operation of our facilities; direct and indirect price controls; tax increases, changes (including retroactive) in the enforcement or interpretation of tax laws and other retroactive tax claims or challenges; changes in laws or regulations; cancellation of contract rights; and delays or denial of governmental approvals. Both the likelihood of such occurrences and their overall effect upon Ternium vary greatly from country to country and are not predictable. Realization of these risks could have an adverse impact on the results of operations and financial condition of Ternium’s subsidiaries located in the affected country and, depending on their materiality, on the results of operations and financial condition of Ternium as a whole.

 

Mexico

 

Ternium has significant manufacturing operations and assets located in Mexico and a majority of its sales are made to customers in this country. The majority of Ternium’s revenues from its Mexican operations, therefore, are related to market conditions in Mexico and to changes in its economic activity. Ternium’s business could be materially and adversely affected by economic, political and regulatory developments in Mexico.

 

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Economic and social conditions and government policies in Mexico could negatively impact Ternium’s business and results of operations.

 

In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. Furthermore, the Mexican national economy tends to reflect changes in the economic environment in the United States. If problems such as deterioration in Mexico’s economic conditions reemerge (for example, as a result of lower revenues due to oil price decline) or there is a future reemergence of social instability, political unrest, reduction in government spending or other adverse social developments, foreign exchange and financial markets may exhibit continued volatility, which, depending on its severity and duration, could adversely affect the business, results of operations, financial condition or liquidity of Ternium. Moreover, adverse economic conditions in Mexico could result in, among other things, higher interest rates accompanied by reduced opportunities for refunding or refinancing, reduced domestic consumption of Ternium’s products, decreased operating results and delays in the completion of ongoing and future capital expenditures.

 

Regulatory changes in Mexico could adversely impact our results of operations and net results.

 

Mexico has recently experienced a period of economic reform. In December 2012, new labor regulations became effective. The most relevant aspects of those regulations were a reassessment of the status of third-party workers, changes in rest periods, and an increase in the amounts of fines and penalties applicable for violations of the regulations. In addition, in 2014 a comprehensive tax reform became effective in Mexico. Among other things, the reform maintained the corporate income tax at 30% (eliminating a scheduled reduction to 28%); repealed the tax consolidation regime, limiting Ternium’s ability to perform fiscal consolidation among its Mexican subsidiaries beginning as of January 1, 2014; introduced a 10% withholding tax on dividend distributions; and created a new royalty over mining activities, which in the case of Ternium’s iron ore mining subsidiaries resulted in a 7.5% royalty on mining profits calculated on a special tax basis. These measures resulted in a deferred tax loss of USD22.3 million in Ternium’s 2013 results. Any additional new changes to Mexican regulations could adversely impact our results of operations and net results.

 

Violence and crime in Mexico could negatively impact Ternium’s business and operations.

 

In recent years there have been high incidences of violence and crime related to drug trafficking in Mexico, including the Monterrey areas, where our main facilities are located, and Michoacán, where some of our mining facilities are located. Security issues could affect our day-to-day operations and could also result in an economic slowdown, reducing domestic demand for our products and thereby having an adverse effect on our business. A deterioration of the security situation could result in significant obstacles or additional costs to the implementation of our growth plans in Mexico, including delays in the completion of capital expenditures.

 

Argentina

 

Siderar has significant manufacturing operations and assets located in Argentina and a significant portion of its sales are made in Argentina. Most of Siderar’s sales revenue is affected by market conditions in Argentina and changes in Argentina’s gross domestic product, or GDP, and per capita disposable income. Accordingly, Siderar’s business could be materially and adversely affected by economic, political, social, fiscal and regulatory developments in Argentina. For more information on Ternium’s sales in Argentina, see Item 4. “Information on the Company—B. Business Overview—Sales—Southern Region.”

 

Economic and political instability in Argentina, which on several occasions resulted in economic uncertainties and recession, may occur in the future, thereby adversely affecting our business, financial condition and results.

 

Our business and results of operations in Argentina depend on macroeconomic conditions, among other factors. Domestic sales of Siderar were severely affected by Argentina’s political and economic crisis in 2001-2002. Steel shipments to the Argentine domestic market were again disrupted during the 2008-2009 downturn in the global economy. More recently, steel shipments to the Argentine domestic market stagnated starting in 2012, as economic growth in Argentina slowed down significantly.

 

The Argentine economy is currently facing significant challenges. Inflation is high, as further discussed below, leading to labor unrest. In addition, in the last decade the economy has been affected by supply constraints and capital investment in general has declined significantly due to, among other factors, political, economic and financial uncertainties and government actions, including price and foreign exchange controls, import restrictions, export taxes, an increased level of government intervention in, or limitations to, the conduct of business in the private sector, and other measures affecting investor confidence. For example, in February 2011, the Argentine government imposed controls on the price of steel products sold in Argentina, including products sold by Siderar, and required that sales of steel products be invoiced in Argentine pesos. Although Ternium believes that price controls are illegal under Argentine law and these measures were ultimately revoked, other price controls or similar measures could be imposed in the future. Inflation and declining capital investment may affect growth and, accordingly, cause demand for our local subsidiary’s products in the domestic market to drop.

 

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Furthermore, certain bondholders that did not participate in Argentina’s restructurings of a substantial portion of its sovereign indebtedness following the Argentine default in 2002, which took place in 2005 and 2010, have sued Argentina for full payment. This litigation, which was ultimately settled, has, until recently, limited Argentina’s access to international capital markets. Although Argentina has recently made a USD16.5 billion bond issuance in the international markets, Argentina is expected to continue to have significant financial needs. A lack of financial alternatives could impair Argentina’s ability to sustain the economy’s activity level and foster economic growth.

 

Economic conditions in Argentina have deteriorated rapidly in the past and may deteriorate rapidly in the future. The Argentine economy may not continue to grow and economic instability may increase. Our business and results of operations in Argentina could be adversely affected by rapidly changing economic conditions in Argentina or by the Argentine government’s policy response to such conditions.

 

Inflation may undermine economic growth in Argentina and impact our costs, thereby adversely affecting our results of operations and financial position.

 

In the past, inflation has undermined the Argentine economy and the government’s ability to stimulate economic growth. Beginning in 2004, inflation indicators began showing significant year-over-year increases, signaling a trend characteristic of an inflationary economy. The pace of inflation has increased rapidly and significantly over the last few years. Since 2007, Argentina’s official inflation data published by the Instituto Nacional de Estadística y Censos, or INDEC, Argentina’s national statistics institute, have been subject to changes in calculation; following the implementation of such changes, the official inflation figures were consistently disputed by independent economists. Recently, the INDEC announced it would cease to publish many of its statistics, including inflation measurements, until it redesigns the methodology for their calculation. Based on statistics published by the city of Buenos Aires, as of December 2013, 2014 and 2015, the consumer price index of the city increased by 26.6%, 38.0% and 26.9% year-over-year, respectively.

 

Sustained high inflation in Argentina could negatively impact our results of operations and financial position, as peso-denominated costs (mainly labor-related costs) at Siderar increase, thereby affecting its cost-competitiveness and adversely affecting its margins. In addition, a high inflation economy could undermine Argentina’s foreign competitiveness in international markets and negatively affect the economy’s activity and employment levels. Argentine inflation rate volatility makes it impossible to estimate with reasonable certainty the extent to which activity levels and results of operations of Siderar could be affected by inflation in the future.

 

The Argentine government has increased taxes on Argentine companies and could further increase the fiscal burden in the future, which could adversely affect our results of operations, net results and financial condition.

 

Since 1992, the Argentine government has not permitted the application of an inflation adjustment on the value of fixed assets for tax purposes. As a result of the substantial devaluation of the Argentine peso against the U.S. dollar and significant inflation over the last decade, the amounts that the Argentine tax authorities permit Siderar to deduct as depreciation for its past investments in plant, property and equipment have been substantially reduced in real terms, thus creating artificial gains for tax purposes which result in effective tax rates that are higher than statutory tax rates. In addition, provincial taxes on Siderar’s sales have increased over the last few years. More recently, in September 2013 the Argentine government enacted a new 10% withholding tax on dividend distributions in Argentina. This measure resulted in a deferred tax loss of USD24.0 million in Ternium’s 2013 results. If the Argentine government continues to increase the tax burden on Siderar’s operations, Ternium’s results of operations, net results and financial condition could be adversely affected.

 

Argentine exchange controls could prevent Ternium from paying dividends or other amounts from cash generated by Siderar’s operations.

 

In the past, the Argentine government and the Argentine Central Bank introduced several rules and regulations to reduce volatility in the ARS/USD exchange rate, and implemented formal and informal restrictions on capital inflows into Argentina and capital outflows from Argentina. In addition, Siderar is currently required to repatriate U.S. dollars collected in connection with exports from Argentina (including U.S. dollars obtained through advance payment and pre-financing facilities) into Argentina and convert them into Argentine pesos at the relevant exchange rate applicable on the date of repatriation. In the last quarter of 2011 and until recently, the Argentine government tightened its controls on transactions that would represent capital outflows from Argentina, prohibiting the purchase of foreign currency for saving purposes and limiting formally or informally the ability of Argentine companies to transfer funds (including in connection with the purchase of goods or services, or the payment of interest, dividends or royalties) outside of Argentina. Although most restrictions were lifted in December 2015 following a change in administration, such controls could be restablished, or additional restrictions of the kind described above could be imposed in the future, and could expose Ternium to the risk of losses arising from fluctuations in the exchange rate and adversely affect Ternium’s ability to finance its investments and operations in Argentina or impair Ternium’s ability to convert and transfer outside Argentina funds generated by Siderar, for example, to fund the payment of dividends or to undertake investments and other activities that require offshore payments. For additional information on Argentina’s current exchange controls and restrictions, see Item 10. “Additional Information—D. Exchange Controls.”

 

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Restrictions on the imports of key steelmaking inputs for Siderar’s operations in Argentina could adversely affect Siderar’s production and, as a result, revenues and negatively impact Ternium’s results of operations.

 

Some of Siderar’s key steelmaking inputs, including iron ore and coking coal, are imported into Argentina. In the past, the Argentine government implemented significant import restrictions that, if reinstated, may affect the availability of key steelmaking inputs for our operations in Argentina. Among other restrictions, all payments on imports of goods and services were required to be approved by the Argentine federal tax authority and other authorities, such as the Secretary of Commerce. Although such restrictions were lifted in December 2015, such import restrictions, if reinstated, could delay imports and adversely affect our business, operations and growth projects in Argentina. In addition, they could affect Siderar’s exports from Argentina, considering that foreign countries could adopt and implement counter-trade measures.

 

Restrictions or an increase of the costs on the supply of energy to Siderar’s operations in Argentina could curtail Siderar’s production and negatively impact Ternium’s results of operations.

 

In recent years, there has been an insufficient level of investment in natural gas and electricity supply and transport capacity in Argentina, coupled with a substantial increase in demand for natural gas and electricity. This in turn resulted in shortages of natural gas and electricity to residential and industrial users, including Siderar, during periods of high demand. Such shortages may, in the future, result in significant price increases for gas and electricity. Siderar’s operations experienced constraints in their natural gas supply requirements and interruptions in their electricity supply at peak hours on many occasions. If demand for natural gas and electricity increases and a matching increase in natural gas and electricity supply and transport capacity fails to materialize on a timely basis, Siderar’s production in Argentina (or that of its main customers and suppliers) could be curtailed, and Siderar’s sales and revenues could decline. In addition, the Argentine government has recently reduced the government’s subsidies to the price of the natural gas and electricity, thus increasing Siderar’s energy costs, and could reduce them further in the future. An increase in Siderar’s energy costs may adversely affect Siderar’s results of operations. See “—Risks Relating to the Steel Industry—Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability” above.

 

Colombia

 

Economic, political and regulatory developments in Colombia could adversely affect Ternium’s business.

 

Ternium has manufacturing operations and assets located in Colombia and some of its sales are made in Colombia. The majority of Ternium’s revenues from its Colombian operations, therefore, are affected by market conditions in Colombia and by changes in Colombia’s GDP, and per capita disposable income. In addition, Colombia has experienced internal security issues and political tensions with some of its neighboring countries, in particular Venezuela and Ecuador, which have had or could have a negative effect on the Colombian economy. Accordingly, Ternium’s business could be adversely affected by economic, political and regulatory developments in Colombia.

 

Certain Regulatory Risks and Litigation Risks

 

International trade actions or regulations and trade-related legal proceedings could adversely affect Ternium’s sales, revenues and overall business.

 

International trade-related legal actions and restrictions pose a constant risk for Ternium’s international operations and sales throughout the world. We purchase steel products, including significant quantities of steel slabs, for our operations in Mexico (which we obtain from various suppliers in Mexico and overseas), and we also purchase steel products for our operations in Colombia (which we obtain from our subsidiaries overseas and from various suppliers in Colombia and overseas). Steel products generally have zero or low import duties. However, specifically given the current excess capacity in the steel industry and resulting pressures on steel prices, the Mexican, Argentine or Colombian governments may apply temporary relief measures in the form of increased import duties. As an example, Mexico imposed temporarily increased import duties on many flat steel products in October 2015 for six months, and extended these increases in April 2016 for another six months.

 

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Increased trade liberalization has reduced certain of Ternium’s imported input costs and increased Ternium’s access to many foreign markets. However, greater trade liberalization in its domestic markets is increasing competition for Ternium in such markets. In recent years, as a consequence of the global downturn and the economic slowdown in China, the number of antidumping and countervailing actions limiting trade has increased substantially. Accordingly, producers from certain countries find themselves excluded from certain markets and in need to find alternatives for their products. As a result, Ternium’s domestic market share could be eroded in the face of foreign imports, and Ternium’s increased exports to foreign markets where import barriers have been reduced may not completely offset domestic market share losses resulting from increased foreign competition.

 

Countries can impose restrictive import duties and other restrictions on imports under various national trade laws. The timing and nature of the imposition of trade-related restrictions potentially affecting Ternium’s exports are unpredictable. Trade restrictions on Ternium’s exports could adversely affect Ternium’s ability to sell products abroad and, as a result, Ternium’s profit margins, financial condition and overall business could suffer. One significant source of trade restrictions results from countries’ imposition of so-called “antidumping” and “countervailing” duties, as well as “safeguard measures.” These duties can severely limit or altogether impede an exporter’s ability to export to relevant markets. In several of Ternium’s export destinations, such as the United States or Europe, safeguard duties and other protective measures have been imposed against a broad array of steel imports in certain periods of excess global production capacity, as is currently the case. Furthermore, certain domestic producers have filed antidumping and/or countervailing duty actions against particular steel imports. Some of these actions have led to restrictions on Ternium’s exports of certain types of steel products to certain steel markets. As domestic producers’ filing of such actions is largely unpredictable, additional antidumping duties, countervailing duties or other such import restrictions could be imposed in the future, limiting Ternium’s export sales to and potential growth in those markets. See Item 4. “Information on the Company—B. Business Overview—Regulations—Trade regulations.”

 

The cost of complying with environmental regulations and potential environmental and product liabilities may increase our operating costs and negatively impact our business, financial condition, results of operations and prospects.

 

Our steelmaking and mining activities are subject to a wide range of local, provincial and national laws, regulations, permit requirements and decrees relating to the protection of human health and the environment, including laws and regulations relating to hazardous materials and radioactive materials and environmental protection governing air emissions, water discharges and waste management due to the risks inherent in the industries in which we operate. Laws and regulations protecting the environment have become increasingly complex and more stringent in recent years, leading to higher costs of compliance.

 

Environmental laws and regulations may, in some cases, impose strict liability rendering a person liable for damages to natural resources or threats to public health and safety without regard to negligence or fault. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances. These laws and regulations may expose us to liability for the conduct of, or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed.

 

Compliance with applicable requirements and the adoption of new requirements could have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. The ultimate impact of complying with environmental laws and regulations is not always clearly known or determinable since regulations under some of these laws have not yet been promulgated or are undergoing revision. The expenditures necessary to remain in compliance with these laws and regulations, including site or other remediation costs, or costs incurred from potential environmental liabilities, could have a material adverse effect on our financial condition and profitability. While we incur and will continue to incur expenditures to comply with applicable laws and regulations, there always remains a risk that environmental incidents or accidents may occur that may negatively affect our reputation or our operations.

 

Some of the activities for which Ternium supplies products, such as canning for consumption, construction and the automotive industry, are subject to inherent risks that could result in death, personal injury, property damage or environmental pollution, and subject us to potential product liability risks that could extend to being held liable for the damages produced by such products. Furthermore, Ternium’s products are also sold to, and used in, certain safety-critical appliances. Actual or claimed defects in our products may give rise to claims against us for losses suffered by our customers and expose us to claims for damages. The insurance we maintain may not be adequate or available to protect us in the event of a claim, its coverage may be limited, canceled or otherwise terminated, or the amount of our insurance may be less than the related impact on enterprise value after a loss.

 

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Risks Relating to our ADSs

 

The market price for our ADSs could be highly volatile.

 

Volatility in the price of our ADSs may be caused by factors within or outside of our control and may be unrelated or disproportionate to Ternium’s operating results. In particular, announcements of potentially adverse developments, such as proposed regulatory changes, new government investigations or the commencement or threat of litigation against Ternium, as well as announcements of transactions, investments, or changes in strategies or business plans of Ternium or its competitors, could adversely affect the trading price of our ADSs, regardless of the likely outcome of those developments. Broad market and industry factors could adversely affect the market price of our ADSs, regardless of their actual operating performance. As an example of this volatility, the price of our ADSs closed at USD45.18 on June 2, 2008, and fell to a low of USD4.55 on November 20, 2008. In 2009 and 2010, the price of our ADS recovered to a high closing price of USD43.26 on January 5, 2011, but then fell to a 2011 low of USD15.54 on November 29, 2011. The price of our ADSs was in the range of USD11.7 to USD21.7 in 2015. See Item 9. “The Offer and Listing—A. Offer and Listing Details.”

 

Furthermore, the trading price of our ADSs could suffer as a result of developments in emerging markets. Although the Company is organized as a Luxembourg corporation, almost all of its assets and operations are located in Latin America. Financial and securities markets for companies with a substantial portion of their assets and operations in Latin America are, to varying degrees, influenced by political, economic and market conditions in emerging market countries. Although market conditions are different in each country, investor reaction to developments in one country can have significant effects on the securities of issuers with assets or operations in other emerging markets, including Mexico, Argentina and Colombia. See “—Risks Relating to the Countries in Which We Operate.”

 

In deciding whether to purchase, hold or sell our ADSs, you may not be able to access as much information about us as you would in the case of a U.S. company.

 

There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, Luxembourg regulations governing the securities of Luxembourg companies may not be as extensive as those in effect in the United States, and Luxembourg law and regulations in respect of corporate governance matters might not be as protective of minority shareholders as state corporation laws in the United States. Furthermore, IFRS differ in certain material aspects from the accounting standards used in the United States.

 

Holders of our ADSs may not be able to exercise, or may encounter difficulties in the exercise of, certain rights afforded to shareholders.

 

Certain shareholders rights under Luxembourg law, including the right to vote, to receive dividends and distributions, to bring actions, to examine the books and records and to exercise appraisal rights may not be available to holders of ADSs, or may be subject to restrictions and special procedures for their exercise, as holders of ADSs only have those rights that are expressly granted to them in the deposit agreement. The Bank of New York Mellon, or BNY Mellon, as depositary, through its custodian agent, is the registered shareholder of the deposited shares underlying the ADSs and therefore only the depositary can exercise the shareholders rights in connection with the deposited shares. For example, if we make a distribution in the form of securities, the depositary is allowed, at its discretion, to sell that right to acquire those securities on your behalf and to instead distribute the net proceeds to you. Also, under certain circumstances, such as our failure to provide the depositary with voting materials on a timely basis, you may not be able to vote by giving instructions to the depositary. In the circumstances specified in the deposit agreement, if the depositary does not receive voting instructions from the holder of ADSs or the instructions are not in proper form, then the depositary shall deem such holder to have instructed the depositary to give, and the depositary shall give, a proxy to a person designated by the Company with respect to that amount of shares underlying such ADSs to vote that amount of shares underlying such ADSs in favor of any proposals or recommendations of the Company (including any recommendation by the Company to vote that amount of shares underlying such ADSs on any issue in accordance with the majority shareholders’ vote on that issue) as determined by the appointed proxy. No instruction shall be deemed given and no proxy shall be given with respect to any matter as to which the Company informs the depositary that (x) it does not wish such proxy given, (y) substantial opposition exists, or (z) the matter materially and adversely affects the rights of the holders of ADSs.

 

Holders of our shares and ADSs in the United States may not be able to exercise preemptive rights in certain cases.

 

Pursuant to the Luxembourg law of August 10, 1915 on commercial companies (“Luxembourg Companies Law”), existing shareholders of the Company are generally entitled to preemptive subscription rights in the event of capital increases and issues of shares against cash contributions. Under the Company’s articles of association, the board of directors is authorized to waive, limit or suppress such preemptive subscription rights until 2020. The Company, however, may issue shares without preemptive rights only if the newly issued shares are issued:

 

for, within, in conjunction with or related to, an initial public offering of the shares of the Company on one or more regulated markets (in one or more instances);

 

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for consideration other than cash;

 

upon conversion of convertible bonds or other instruments convertible into shares of the Company; provided, however, that the preemptive subscription rights of the then-existing shareholders shall apply in connection with any issuance of convertible bonds or other instruments convertible into shares of the Company for cash; or

 

subject to a certain maximum percentage, as compensation to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries or its affiliates, including without limitation the direct issuance of shares or the issuance of shares upon exercise of options, rights convertible into shares or similar instruments convertible or exchangeable into shares issued or created to provide compensation or incentives to directors, officers, agents or employees of the Company, its direct or indirect subsidiaries or its affiliates.

 

For further details, see Item 10. “Additional Information—B. Memorandum and Articles of Association.”

 

Furthermore, holders of our shares and ADSs in the United States may, in any event, not be able to exercise any preemptive rights, if granted, for shares unless those shares are registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”) with respect to those rights or an exemption from registration is available. We intend to evaluate, at the time of any rights offering, the costs and potential liabilities associated with the exercise by holders of shares and ADSs of the preemptive rights for shares, and any other factors we consider appropriate at the time, and then to make a decision as to whether to register additional shares. We may decide not to register any additional shares, requiring a sale by the depositary of the holders’ rights and a distribution of the proceeds thereof. Should the depositary not be permitted or otherwise be unable to sell preemptive rights, the rights may be allowed to lapse with no consideration to be received by the holders of the ADSs.

 

It may be difficult to obtain or enforce judgments against the Company in U.S. courts or courts outside of the United States.

 

The Company is a public limited liability company (société anonyme) organized under the laws of Luxembourg, and most of its assets are located outside of the United States. Furthermore, most of the Company’s directors and officers named in this annual report reside outside the United States. As a result, investors may not be able to effect service of process within the United States upon the Company or its directors or officers or to enforce against the Company or them in U.S. courts judgments predicated upon the civil liability provisions of U.S. federal securities law. Likewise, it may be difficult for a U.S. investor to bring an original action in a Luxembourg court predicated upon the civil liability provisions of the U.S. federal securities laws against the Company, its directors or its officers. There is also uncertainty with regard to the enforceability of original actions in courts outside the United States of civil liabilities predicated upon the civil liability provisions of U.S. federal securities laws. Furthermore, the enforceability in courts outside the United States of judgments entered by U.S. courts predicated upon the civil liability provisions of U.S. federal securities law will be subject to compliance with procedural requirements under applicable local law, including the condition that the judgment does not violate the public policy of the applicable jurisdiction.

 

Item 4. Information on the Company

 

Overview

 

Ternium is a leading steel producer in Latin America. We manufacture and process a broad range of value-added steel products, including galvanized and electro-galvanized sheets, pre-painted sheets, tinplate, welded pipes, hot-rolled flat products, cold-rolled products, bars and wire rods as well as slitted and cut-to-length offerings through our service centers. Our customers range from large global companies to small businesses operating in the construction, automotive, home appliances, capital goods, container, food and energy industries.

 

With approximately 16,700 employees and an annual production capacity of 11.0 million tons of finished steel products and 4.0 million tons of iron ore pellets (most of which are used in our steelmaking activities) as of December 31, 2015, Ternium has production facilities located in Mexico, Argentina, Colombia, the southern United States and Guatemala, iron ore mines in Mexico, and a network of service and distribution centers throughout Latin America that provide it with a strong position from which to serve its core markets. In addition, Ternium participates in the control group of Usiminas, a leading steel company in the Brazilian steel market. Our proximity to local steel-consuming markets enables us to differentiate from our competitors by offering valuable services to our customer base across Latin America. Our favorable access to iron ore sources and proprietary iron ore mines in Mexico provide reduced logistics costs, and our diversified steel production technology enables us to adapt to fluctuating input-cost conditions.

 

Ternium primarily sells its steel products in the regional markets of the Americas. Ternium provides specialized products and delivery services, mainly to customers in Mexico, Argentina, Colombia and various Central American countries, through its network of manufacturing facilities and service centers. We believe that Ternium is the leading supplier of flat steel products in Mexico and Argentina, a significant supplier of steel products in Colombia and in various other countries in Latin America, and a competitive player in the international steel market for steel products. Through its network of commercial offices in several countries in Latin America, the United States and Spain, Ternium maintains an international presence that allows it to reach customers outside its local markets, achieve improved effectiveness in the supply of its products and in the procurement of semi-finished steel, and maintain a fluid commercial relationship with its customers by providing continuous services and assistance.

 

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In 2015, 55.6% of Ternium’s net sales of steel products were made to Mexico, 32.8% to the Southern Region (which is comprised of sales to customers in Argentina, Bolivia, Chile, Paraguay and Uruguay), and 11.6% to other markets (including major shipment destinations, such as Colombia, the United States and Central America, as well as other international destinations). In 2015, Ternium’s net sales were USD7.9 billion, operating income was USD639.3 million, and net income attributable to owners of the parent was USD8.1 million.

 

A.History and Development of the Company

 

The Company

 

Our legal and commercial name is Ternium S.A. The Company was organized as a public limited liability company (société anonyme) under the laws of the Grand-Duchy of Luxembourg on December 22, 2003. Our Luxembourg office is located at 29, Avenue de la Porte-Neuve – 3rd floor, L-2227 Luxembourg, telephone number +352 2668 3152. Our agent for U.S. federal securities law purposes is Ternium International U.S.A. Corporation, located at 2200 West Loop South, Suite 945, Houston, TX 77027, United States.

 

Ternium

 

Ternium’s origins began in September 1961 with the founding of Propulsora Siderúrgica, or Propulsora, by San Faustin’s predecessor in Argentina. Propulsora began its operations as a producer of cold-rolled coils in December 1969 and in the early 1990s began to evolve through a series of strategic investments aimed at transforming Propulsora into an integrated steel producer. In 1993, Propulsora merged with Aceros Paraná S.A. (a company formed by the Argentine government in connection with the privatization of Somisa, at that time the main integrated producer of flat steel in Argentina) and three other affiliated steel industry companies. After the merger, Propulsora changed its name to Siderar S.A.I.C. San Faustin held a controlling interest in Siderar, with the remainder being held mainly by Usiminas, certain former employees of Somisa, and the public.

 

In December 1997, a consortium formed by San Faustin, Siderar, Usiminas, Hylsamex and Sivensa won the bid in the privatization of a controlling interest in Sidor, the largest steel company in Venezuela.

 

As part of a multiple-step corporate reorganization in 2005, San Faustin reorganized its investments in steel manufacturing, processing and distribution businesses by contributing its controlling interests in Siderar, Sidor and Ternium Internacional to the Company, and Usiminas and Sivensa exchanged their interests in Siderar and Sidor for shares of the Company. In 2005, we acquired, together with Siderar, an indirect 99.3% interest in the Mexican company Hylsamex and its subsidiaries.

 

On January 11, 2006, the Company launched an initial public offering of 24,844,720 ADSs, each representing 10 shares of the Company, in the United States, and subsequently granted the underwriters of the Company’s initial public offering an option to purchase up to 3,726,708 additional ADSs to cover over-allotments in the sale of the ADSs.

 

On December 28, 2006, we acquired an additional 4.85% interest in Siderar from CVRD Internacional S.A, thereby increasing our ownership interest in Siderar to 60.93%.

 

On April 29, 2007, the Company entered into an agreement with Grupo Imsa and Grupo Imsa’s controlling shareholders pursuant to which Grupo Imsa came under our control on July 26, 2007. Under the agreement, the Company, through a wholly-owned subsidiary, made a cash tender offer under applicable Mexican law for all of the issued and outstanding share capital of Grupo Imsa, which resulted in the acquisition of 25,133,856 shares, representing 9.3% of the issued and outstanding capital of Grupo Imsa. Concurrently with the consummation of the tender offer, on July 26, 2007, all the shares of Grupo Imsa that were not tendered into the tender offer (including the shares owned by Grupo Imsa’s majority shareholders), representing 90.7% of Grupo Imsa’s issued and outstanding share capital, were redeemed for cash pursuant to a capital reduction effected at the same price per share. Following this capital reduction, we became the sole shareholder of Grupo Imsa.

 

In 2007, Grupo Imsa was renamed Ternium Mexico and, effective March 31, 2008, Hylsamex merged with and into Ternium Mexico. In connection with this merger, Siderar became a shareholder of Ternium Mexico with a 28.7% interest.

 

On April 29, 2008, the National Assembly of Venezuela passed a resolution declaring that the shares of Sidor, together with all of its assets, were of public and social interest, and authorizing the Venezuelan government to take any action it deemed appropriate in connection with any such assets, including expropriation. On May 11, 2008, the President of Venezuela issued Decree Law 6058 ordering that Sidor and its subsidiaries and associated companies were transformed into state-owned enterprises (“empresas del Estado”), with Venezuela owning not less than 60% of their share capital. On May 7, 2009, Ternium completed the transfer of its entire 59.7% interest in Sidor to Corporación Venezolana de Guayana, or CVG, a Venezuelan state-owned entity.

 

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On August 25, 2010, Ternium completed the acquisition of a 54% ownership interest in Ferrasa and, on April 7, 2015, Ternium acquired the remaining 46% minority interest. Ferrasa has a 100% ownership interest in Siderúrgica de Caldas S.A.S. and Perfilamos del Cauca S.A.S., both of which are also Colombian companies. Through this investment, Ternium expanded its business and commercial presence in Colombia.

 

In November 2010, Ternium and NSSMC established Tenigal, with each company holding 51% and 49% participations, respectively. Tenigal completed the construction of a hot dip galvanizing plant in the vicinity of Monterrey City, Mexico, which commenced production in the third quarter of 2013. Tenigal was designed to produce high grade and high quality galvanized and galvannealed automotive steel sheets, including outer panel and high strength qualities.

 

On January 16, 2012, the Company’s wholly-owned Luxembourg subsidiary Ternium Investments S.à r.l., or “Ternium Investments,” Siderar and its wholly-owned subsidiary Prosid Investments S.A. or “Prosid,” and Confab Industrial S.A., a subsidiary of Tenaris, or “TenarisConfab,” joined the existing control group of Usiminas, a leading steel company in the Brazilian flat steel market, through the acquisition of 84.7, 30.0, and 25.0 million ordinary shares, respectively, and formed the so called Ternium/Tenaris (T/T) Group. Ternium Investments, Siderar (and Prosid) and TenarisConfab entered into an amended and restated Usiminas shareholders agreement with NSSMC, Mitsubishi and Metal One (comprising the so-called “Nippon Group”) and Previdência Usiminas or “CEU,” Usiminas’ employee pension fund. The shareholders agreement governs the rights and obligations of Ternium Investments, Siderar (and Prosid) and TenarisConfab within the Usiminas control group.

 

On October 30, 2014, Ternium Investments acquired 51.4 million additional ordinary shares of Usiminas from Caixa de Previdência dos Funcionários do Banco do Brasil —PREVI. Following this transaction, Ternium, through its subsidiaries Ternium Investments, Siderar and Prosid, owns 166.1 million ordinary shares of Usiminas, representing 32.9% of Usiminas’ ordinary shares (and a 16.8% participation in Usiminas’ results). Of these, 114.7 million ordinary shares are subject to the shareholders agreement that governs the rights and obligations of the members of Usiminas’ control group (representing a 35.6% interest within that group), while the 51.4 million shares acquired in October 2014 as described above are not subject to the shareholders agreement, although during the term of that agreement Ternium is required to vote such shares in accordance with the control group’s decisions. For further information on the Usiminas investment, see note 3 to our consolidated financial statements included elsewhere in this annual report.

 

On April 18, 2016, Usiminas’ shareholders’ meeting approved an issuance of ordinary shares in an amount of up to BRL1 billion (approximately USD285.7 million). Existing shareholders, including Ternium and NSSMC, have preemptive rights to subscribe the proposed capital increase at any time prior to May 23, 2016. Ternium has not yet decided whether or not it will participate in the capital increase; NSSMC, in turn, has undertaken to subscribe the capital increase in its entirety; however, NSSMC has conditioned its undertaking to the completion of a restructuring of Usiminas’ financial debt. Ternium’s subscription rights, if exercised, entitle it to subscribe up to 33.6 million ordinary shares at a price of BRL5 per share for a total amount of up to BRL168.2 million (approximately USD 48.1 million), and to subscribe (pro rata with other subscribing shareholders) any ordinary shares not subscribed by Usiminas’ current shareholders, also at BRL5 per share. Depending on whether or not it exercises its subscription rights and generally on the outcome of the subscription process, Ternium may end up with a higher, equal or lower participation in Usiminas’ capital and voting rights.

 

For information on Ternium’s capital expenditures, see “—B. Business Overview—Capital Expenditure Program.”

 

B.Business Overview

 

Our Business Strategy

 

Our main strategic objective is to enhance shareholder value by strengthening Ternium’s position as a competitive producer of steel products, in a manner consistent with minority shareholders’ rights, while further consolidating Ternium’s position as a leading steel producer in Latin America and a strong competitor in the Americas. The main elements of this strategy are:

 

Focus on higher-margin value-added products. We intend to continue to shift Ternium’s sales mix towards higher margin value-added products, such as cold-rolled sheets and coated and tailor-made products, and services, such as just-in-time delivery and inventory management;

 

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Pursue strategic growth opportunities. We have a history of strategically growing our businesses through acquisitions and joint ventures. In addition to pursuing organic growth, we intend to identify and actively pursue growth-enhancing strategic opportunities to consolidate Ternium’s presence in its main markets and expand it to the rest of Latin America, increase its upstream integration, expand its offerings of value-added products, increase its steel production, and increase its distribution capabilities. For a description of some of the risks associated with Ternium’s growth strategy, see Item 3. “Key Information—D. Risk Factors—Risks Relating to our Business—Future acquisitions or other significant investments could have an adverse impact on Ternium’s operations or profits, and Ternium may not realize the benefits it expects from these business decisions;”

 

Implement Ternium’s best practices. We believe that the implementation of Ternium’s managerial, commercial and production best practices in acquired and new businesses should generate benefits and savings;

 

Maximize the benefits arising from Ternium’s broad distribution network. We intend to maximize the benefits arising from Ternium’s broad network of distribution, sales and marketing services to reach customers in major steel markets with a comprehensive range of value-added products and services and to continue to expand its customer base and improve its product mix; and

 

Enhance Ternium’s position as a competitive steel producer. We are focused on improving utilization levels of our plants, increasing efficiency and further reducing production costs from levels that we already consider to be among the most competitive in the steel industry through, among other measures, capital investments and further integration of our facilities.

 

Our Products

 

The Ternium companies produce mainly finished and semi-finished steel products and iron ore, which are sold either directly to steel manufacturers, steel processors or end-users, after different value-adding processes.

 

In the steel segment, steel products include slabs, billets and round bars (steel in its basic, semi-finished state), hot-rolled coils and sheets, bars and stirrups, wire rods, cold-rolled coils and sheets, tin plate, hot dipped galvanized and electrogalvanized sheets and pre-painted sheets, steel pipes and tubular products, beams, roll-formed products, and other products. Galvanized and pre-painted sheets can be further processed into a variety of corrugated sheets, trapezoidal sheets and other tailor-made products to serve Ternium’s customer requirements.

 

In the mining segment, iron ore is sold as concentrates (fines) and pellets.

 

Steel products

 

Slabs, billets and round bars: These products are semi-finished steel forms with dimensions suitable for its processing into specific product types. Slabs are processed into hot-rolled flat products. The use of slabs is determined by their dimensions and by their chemical and metallurgical characteristics. Billets are processed into long steel products, such as wire rods, bars and other shapes. Round bars are processed into seamless tubes.

 

Hot-rolled products: Hot-rolled flat products are used by a variety of industrial consumers in applications such as the manufacturing of wheels, auto parts, pipes, gas cylinders and containers. They are also directly used for the construction of buildings, bridges and railroad cars, and for the chassis of trucks and automobiles. Hot-rolled flat products can be supplied as coils or as sheets cut to a specific length. These products also serve as inputs for the production of cold-rolled products. Merchant bars include specific shape features, such as rounds, flats, angles, squares and channels, which are used by customers to manufacture a wide variety of products such as furniture, stair railings and farm equipment. Reinforcing bars (rebars) and stirrups, obtained from the mechanical transformation of rebars, are used to strengthen concrete highways, bridges and buildings. Rods are commonly drawn into wire products or used to make bolts and nails. Wire rod can be produced in different qualities according to customers’ demands.

 

Cold-rolled products: Cold-rolled products are applied mainly to the automotive, home appliance and capital goods industries, as well as to galvanizers, drummers, distributors and service centers. Cold-rolled coils are sold as coils or cut into sheets or blanks to meet customers’ needs. These products also serve as inputs for the production of coated products.

 

Coated products: Galvanized sheets are produced by adding a layer of zinc to cold-rolled coils, which are afterwards cut into sheets. Galvanized sheets are used in the automotive, construction and home appliances industries. Galvanized coils can also be further processed with a color coating to produce pre-painted sheets, resulting in a product that is mainly sold for building coverings, manufacturing of ceiling systems, panels, air conditioning ducts, refrigerators, air conditioners, washing machines and several other uses. Ternium also offers, under the trademark Zintroalum in Mexico and Cincalum in Argentina, a distinctive type of galvanized product with coating composition that contains approximately 55% aluminum and 44% zinc to improve product performance for the construction industry, including rural, industrial and marine sites. Tinplate, given its resistance to corrosion and its mechanical and chemical characteristics, is mainly sold to the packaging industry for food canning, sprays and paint containers. Tinplate is produced by coating cold-rolled coils with a layer of tin.

 

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Roll-formed and tubular products: These products include tubes for general use, structural tubes, tubes for mechanical applications, conduction tubes, conduction electrical tubes, oil tubes and pre-engineered metal building systems. Tubular products, uncoated or galvanized, have applications in several sectors including home accessories, furniture, scaffolding, automotive, bicycles, hospital equipment, posts for wire mesh garden and poultry tools, handrails, guard-rails, agricultural machinery, industrial equipment, conduction of water, air, gas, oil, high-pressure liquids and special fluids and internal building electrical installations. Beams, including C and Z section steel profiles (purlings) and tubular section beams, are obtained by roll-forming of steel strips and have applications in window frames, stilts, mainstays, crossbeams, building structures, supports, guides and crossbars for installing windows, doors, frames and boards. Other products include insulated panels, roofing and cladding, roof tiles and steel decks. Obtained from the mechanical transformation of flat steel, uncoated, galvanized or pre-painted, these products are used mainly in the construction industry in warehouses, commercial and industrial refrigeration installations, grain storage, poultry and porcine confinement facilities, roofing and side walls for buildings, and terraces and mezzanine floorings. Pre-engineered metal building systems are steel construction systems designed for use in low-rise non-residential buildings, and are constructed from the mechanical transformation of flat steel such as frames, secondary steel members, roofs and walls panels, as well as finishing and accessories.

 

Other products: Other products include mainly pig iron, a semi-finished product obtained in the blast furnace that is mostly used as metallic charge in the steel shop for the production of crude steel, and also marketed to other steel producers and to manufacturers of iron-based cast products.

 

Within each of the basic product categories, there is a range of different “items” of varying qualities and prices that are produced either to meet the particular requirements of end users or sold as commodity items.

 

Iron ore products

 

Concentrates (fines) and pellets: These products are raw materials used for the production of steel. Iron ore concentrates are iron ore fines with high iron content. Iron ore pellets are produced from iron ore concentrates. Ternium ships most of the pellets to its own steel manufacturing operations and it also markets the surplus portion of its iron ore pellets and concentrates, if any, to other steel manufacturers.

 

Production Facilities and Processes

 

Ternium has steel production facilities, service centers, distribution centers, or “DCs,” and mining operations in Mexico, steel production facilities and service centers in the Southern Region, and steel production facilities, service centers and DCs in other markets, specifically Colombia, the United States and Central America.

 

Ternium’s aggregate production capacity of finished steel products as of December 31, 2015, calculated based on management estimates of standard productivity, product mix allocations, the maximum number of possible working shifts and a continued flow of supplies to the production process, was approximately 11.0 million tons, of which 7.2 million tons correspond to facilities located in Mexico, 2.9 million tons correspond to facilities located in the Southern Region and 0.9 million tons correspond to facilities located in other markets. Ternium’s aggregate production capacity of iron ore pellets as of December 31, 2015, was 4.0 million tons. Such iron ore products are mainly sold inter-company for the production of steel products by our steel segment.

 

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Steel production facilities, service centers and distribution centers

 

The assets described in this section are owned by Ternium’s operating subsidiaries. The following table provides an overview, by type of asset, of Ternium’s production capacity as of December 31, 2015:

 

Production asset  Quantity  Capacity (thousand tons per year)1 
      Mexico   Argentina   Other   Total 
Coke Plant  4        1,100         1,100 
Sinter Plant  1        1,480         1,480 
Direct Reduced Iron Plant  3   2,710              2,710 
Blast Furnace  2        3,220         3,220 
Electric Arc Furnace  5   4,010         190    4,200 
Basic Oxygen Furnace  3        3,500         3,500 
Vacuum Degassing  2   840    1,200         2,040 
Thin Slab Continuous Caster  1   2,330              2,330 
Slab Continuous Caster  2        5,630         5,630 
Billet Continuous Caster  3   1,600         190    1,790 
Hot-rolling Mill (flat products)  4   5,990    2,850         8,840 
Skin-Pass Mill  4   2,630    990         3,620 
Hot-rolling Mill (long products)  4   1,110         200    1,310 
Pickling Line  9   5,150    1,910         7,060 
Cold-Rolling Mill (Tandem or Reversing)  10   3,620    1,840         5,460 
Electrolytic Cleaning  5   1,940    230         2,170 
Annealing Line  5   1,590    1,330         2,920 
Temper Mill  7   2,040    2,020         4,060 
Tension-Leveling / Inspection Line  9   1,130    1,150         2,280 
Electro-Tinplating line  1        160         160 
Hot Dip Galvanizing Line  13   1,830    600    380    2,810 
Electro-Galvanizing Line  1        110         110 
Color-Coating Line  8   620    120    190    930 
Slitter  32   1,940    500    310    2,750 
Cut to length  36   570    1,000    190    1,760 
Roll forming Line  34   510    540    220    1,270 
Panel Line  4   80              80 
Profile Line  17   170    80    110    360 
Tube Line  20   520    190    60    770 
Wire drawing Lines  13             100    100 
Wire Mesh Lines  2             40    40 
Rebar Processing Lines2  41             180    180 

 

1In this annual report annual production capacity is calculated based on management estimates of standard productivity, product mix allocations, the maximum number of possible working shifts and a continued flow of supplies to the production process.

2Includes shears, straighteners, stirrup benders and shaping centers.

 

Mexico. Ternium has twelve steel production and/or processing units in Mexico, consisting of three integrated steel-making plants (two of which produce long steel products and one of which produces flat steel products and includes two steel service centers), five downstream flat steel processing plants, combining hot-rolling, cold-rolling and/or coating facilities (two of which include steel service centers), and four steel service centers. In addition, Ternium has ten distribution centers in this region, aimed at serving customers mainly in the construction sector.

 

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The following table sets forth key items of information regarding Ternium’s principal production locations and production units:

 

    Type of Plant  
Unit   Country   Integrated   Downstream  

Service

Center

 

Distribution

Center

  Location
Guerrero   Mexico   X       X       San Nicolás d.l.G., Nuevo León
Norte   Mexico   X               Apodaca, Nuevo León
Puebla   Mexico   X               Puebla, Puebla
Juventud   Mexico       X   X       San Nicolás d.l.G., Nuevo León
Churubusco   Mexico       X   X       Monterrey, Nuevo León
Monclova   Mexico       X           Monclova, Coahuila
Universidad   Mexico       X           San Nicolás d.l.G., Nuevo León
Pesquería   Mexico       X           Pesquería, Nuevo León
Apodaca Industrial   Mexico           X       Apodaca, Nuevo León
Apodaca Comercial   Mexico           X       Apodaca, Nuevo León
Varco-Pruden   Mexico           X       Ciénaga de Flores, Nuevo León
San Luis   Mexico           X       San Luis, San Luis Potosí
DC Chihuahua   Mexico               X   Chihuahua, Chihuahua
DC BC   Mexico               X   Tijuana, Baja California
DC Norte   Mexico               X   Escobedo, Nuevo León
DC Puebla   Mexico               X   Puebla, Puebla
DC Guadalajara   Mexico               X   Guadalajara, Jalisco
DC Mexico   Mexico               X   Tultitlán, Estado De México
DC Culiacán   Mexico               X   Culiacán, Sinaloa
DC Veracruz   Mexico               X   Veracruz, Veracruz
DC Mérida   Mexico               X   Mérida, Yucatán
DC Tuxtla   Mexico               X   Tuxtla Gtz, Chiapas

 

Guerrero unit: Located in the metropolitan area of Monterrey, Nuevo León, Mexico, the Guerrero unit produces hot-rolled and cold-rolled coils for the industrial, construction and home appliance sectors and for further processing in other Ternium Mexico’s units. It also produces slitted and cut-to-length products for the industrial sector, and profiles and tubes for the industrial and construction sectors. This unit includes two steel service centers, a slab-rolling mill, and an integrated facility based on direct reduced iron, or DRI, mini-mill steelmaking and thin-slab casting/rolling mill technologies that uses iron ore pellets and steel scrap as main raw materials. The facility sources all of the iron ore from Ternium Mexico’s mining operations and the electricity and natural gas from the Mexican grid. In addition, the facility sources its net requirements of slabs from Mexican and international producers. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

 

During 2015, Ternium continued advancing on its investment plan in this unit. Launched in 2013, the plan encompasses improvements in industrial safety and environmental sustainability, as well as maintenance and facilities’ overhaul. During 2015, the direct reduction units improved their process control standards and achieved higher processing yields following the completion of the technological upgrade of their iron ore feeding systems and the commissioning of a new briquetting facility for the recycling of metallic fines. Other environmental-improvement projects advanced during 2015 included a new hydrochloric acid regeneration plant, which stores and process acid used by the pickling lines of the cold-rolling mills, and the installation of a secondary de-dusting system in the steel shop, which enhances emission control. Ternium also made progress on several improvements in the processing and handling of steel slag in the steel shop. Other ongoing complementary investments include the replacement of pickling tanks, improvements in the treatment of sludge and upgrading of raw material storage yards, and safety improvements for vehicular traffic. For more information on Ternium’s environmental and safety projects see “—B. Business Overview—Capital Expenditure Program.”

 

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Norte unit: Located in Nuevo León, Mexico, the Norte unit produces billets and rebar for the construction industry. It is an integrated facility based on mini-mill steelmaking technology that uses steel scrap as its main raw material. The facility sources electricity from the Mexican grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

 

Puebla unit: Located in Puebla, Mexico, the Puebla unit produces rebar, wire rod and round bar mainly for the construction and industrial sectors, including high-carbon, low-carbon and micro-alloyed wire rod. It is an integrated facility based on DRI and mini-mill steelmaking technologies that uses iron ore pellets and steel scrap as main raw materials. The facility sources all of the iron ore from Ternium Mexico’s mining operations and the electricity and natural gas from the Mexican grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

 

Juventud unit: Located in Nuevo León, Mexico, the Juventud unit produces galvanized and color coated coils for the construction, home appliance and other industries and has a steel service center that produces slitted and roll-formed products, panels and tubes for the construction and industrial sectors. This plant processes hot-rolled and cold-rolled coils received from Ternium Mexico’s units in Nuevo León.

 

Churubusco unit: Located in Nuevo León, Mexico, the Churubusco unit produces hot-rolled and cold-rolled coils for the industrial, construction and home appliance sectors and for further processing in other Ternium Mexico’s units. It also produces slitted and cut-to-length products for the industrial sector. The facility sources its requirements of slabs from other Mexican producers and from the international markets. Ternium’s procurement policy for slabs is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

 

Monclova unit: Located in Coahuila, Mexico, the Monclova unit produces galvanized and color coated sheets for the home appliance industry. This plant processes cold-rolled coils mainly received from Ternium Mexico’s units in Nuevo León.

 

Universidad unit: Located in Nuevo León, Mexico, and across the street from the Guerrero unit, the Universidad unit produces galvanized and color coated coils for the construction, home appliance and industrial sectors. This plant, which also has a cold-rolling mill, processes hot-rolled coils received from Ternium Mexico’s units in Nuevo León.

 

Pesquería industrial center: Located in Nuevo León, Mexico, the Pesquería industrial center produces cold-rolled and galvanized coils for the automotive industry, among other industrial sectors. The cold-rolling mill processes hot-rolled coils sourced from Ternium Mexico’s Churubusco and Guerrero units, and third parties. Tenigal purchases hot-rolled coils mainly from NSSMC; hot-rolled coils are processed at the Pesquería cold-rolling mill and then used in the production of galvanized products.

 

Apodaca Industrial unit: Located in Nuevo León, Mexico, the Apodaca Industrial unit is a steel service center that produces slitted and cut-to-length products for industrial customers. This plant processes coated coils mainly received from Ternium Mexico’s units in Nuevo León.

 

Apodaca Comercial unit: Located in Nuevo León, Mexico, the Apodaca Comercial unit is a steel service center that produces slitted and roll-formed products, profiles and tubes for the construction industry. This plant processes coated coils mainly received from Ternium Mexico’s units in Nuevo León.

 

Varco-Pruden unit: Located in Nuevo León, Mexico, the Varco-Pruden unit produces metal building systems for commercial construction. This plant processes heavy plates procured from the local and international markets and coils received from Ternium Mexico’s units in Nuevo León.

 

San Luis unit: Located in San Luis Potosí, Mexico, the San Luis unit is a steel service center that produces slitted and cut-to-length products for the home appliance and other industries. This plant processes coated coils received from Ternium Mexico’s units in Nuevo León.

 

Southern Region. Ternium has eight steel production and/or processing units in this region, located in Argentina, consisting of one integrated flat steel-making plant, four downstream flat steel processing plants, comprising cold-rolling, coating or tube making facilities (three of which include steel service centers), and three steel service centers.

 

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The following table set forth key items of information regarding Ternium’s principal production locations and production units:

 

    Type of Plant  
Unit   Country   Integrated   Downstream  

Service

Center

 

Distribution

Center

  Location
San Nicolás   Argentina   X               Ramallo, Buenos Aires
Canning   Argentina       X   X       Canning, Buenos Aires
Haedo   Argentina       X   X       Haedo, Buenos Aires
Florencio Varela   Argentina       X   X       Florencio Varela, Buenos Aires
Ensenada   Argentina       X           Ensenada, Buenos Aires
Rosario   Argentina           X       Rosario, Santa Fe
Serviacero III   Argentina           X       Ramallo, Buenos Aires
Sidercrom   Argentina           X       Ramallo, Buenos Aires

 

San Nicolás unit: Located in the Province of Buenos Aires, Argentina, the San Nicolás unit produces hot-rolled, cold-rolled and tinplate coils for the construction, industrial and packaging sectors and for further processing in other Siderar units. The San Nicolás unit includes an integrated facility based on blast furnace and basic oxygen furnace technologies, supplemented with a sinter plant, coking batteries, a by-product plant and a power plant. It uses metallurgical coal and iron ore lumps, pellets and fines as main raw materials. The facility sources all of its coal and iron ore needs from the international markets, shipped to its own port on the banks of the Paraná river. It sources its natural gas from the Argentine grid, produces most of its electricity needs in its own power plant and sources its net requirements of electricity from the Argentine grid. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview— Raw Materials, Slabs, Energy and Other Inputs.”

 

Canning and Haedo units: Located in the Province of Buenos Aires, Argentina, the Canning and Haedo units produce galvanized sheets, slitted and roll-formed products and profiles for the construction and home appliance sectors. In addition, the Canning facility produces color coated sheets for such markets. Both plants process cold-rolled coils received from Siderar’s San Nicolás and Ensenada units.

 

Florencio Varela unit: Located in the Province of Buenos Aires, Argentina, the Florencio Varela unit produces electrogalvanized sheets, blanks and slitted products for the automotive, construction and other industries. This plant processes cold-rolled coils received from Siderar’s San Nicolás and Ensenada units.

 

Ensenada unit: Located in the Province of Buenos Aires, Argentina, the Ensenada unit produces cold-rolled coils for the construction and industrial sectors and for further processing in Siderar’s own facilities. This plant processes hot-rolled coils received from Siderar’s San Nicolás unit.

 

Rosario unit: Located in the Province of Santa Fe, Argentina, the Rosario unit is a steel service center that produces tubes for the construction industry. This plant processes hot-rolled coils received from Siderar’s San Nicolás unit.

 

Serviacero III unit: Located in the Province of Buenos Aires, Argentina, the Serviacero III unit is a steel service center that produces cut-to-length products for the construction and industrial sectors. This plant processes hot-rolled coils received from Siderar’s San Nicolás unit.

 

Sidercrom unit: Located in the Province of Buenos Aires, Argentina, the Sidercrom unit is a steel service center that produces cut-to-length and slitted products for the packaging sector. This plant processes tinplate coils received from Siderar’s San Nicolás unit.

 

Other Markets. Ternium has thirteen steel production and/or processing units in Colombia, Central America and the United States, consisting of one integrated long steel-making plant, two downstream flat steel processing plants, comprising coating facilities (one of which includes a steel service center), and ten steel service centers. In addition, Ternium has four steel retail distribution centers aimed at serving customers mainly in the construction sector.

 

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The following table set forth key items of information regarding Ternium’s principal production locations and production units:

 

    Type of Plant  
Unit   Country   Integrated   Downstream  

Service

Center

 

Distribution

Center

  Location
Shreveport   USA       X           Shreveport, Louisiana
Manizales Acasa   Colombia   X               Manizales, Caldas
Barranquilla   Colombia           X       Malambo, Atlántico
Bogotá   Colombia           X       Bogotá, Cundinamarca
Cali Perfilamos   Colombia           X       Puerto Tejada, Cauca
Cali Ferrasa   Colombia           X       Cali, Valle del Cauca
Itagüí   Colombia           X       Itaguí, Antioquía
Manizales Ferrasa   Colombia           X       Manizales, Caldas
Montería   Colombia           X       Montería, Córdoba
DC Bucaramanga  

Colombia

              X   Bucaramanga, Santander
DC Medellín  

Colombia 

              X   Medellín, Antioquía
Villa Nueva   Guatemala       X   X       Villa Nueva, Guatemala
DC Norte   Guatemala               X   Guatemala, Guatemala
DC Occidente   Guatemala               X   Mazatenango, Suchitepéquez
San Salvador   El Salvador           X       San Salvador, San Salvador
Managua   Nicaragua           X       Managua, Managua
San José   Costa Rica           X       San José, Costa Rica

 

Shreveport unit: Located in Louisiana, United States, the Shreveport unit produces galvanized and color coated sheets. It processes cold-rolled coils procured in the international markets.

 

Manizales Acasa unit: Located in Caldas, Colombia, the Manizales Acasa unit produces billets and rebar for the construction industry. It is an integrated facility based on mini-mill steelmaking technology that uses steel scrap as its main raw material. The facility sources all of its scrap and electricity needs from local suppliers. Ternium’s procurement policy for these products is described in greater depth in Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs.”

 

Barranquilla unit: Located in Atlántico, Colombia, the Barranquilla unit is a steel service center that produces slitted, cut-to-length, drawn wire, wire mesh and customized rebar-based products for the construction industry. This plant processes wire rod purchased in the international market and rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets. Hot-rolled and cold-rolled coils are received mainly from Ternium Mexico’s units in Nuevo León.

 

Bogotá, Cali Ferrasa, Manizales Ferrasa and Montería: The Bogotá unit in Cundinamarca, Colombia, the Cali Ferrasa unit in Valle del Cauca, Colombia, the Montería unit in Córdoba, Colombia and the Manizales Ferrasa unit in Caldas, Colombia, are steel service centers that produce customized rebar-based products for the construction industry. These plants process rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets.

 

Cali Perfilamos unit: Located in Cauca, Colombia, the Cali Perfilamos unit is a steel service center that produces profiles, tubes and structural beams for the construction industry. This plant processes hot-rolled and cold-rolled coils received mainly from Ternium Mexico’s units in Nuevo León and purchased in the international markets.

 

Itagüí unit: Located in Antioquía, Colombia, the Itagüí unit is a steel service center that produces drawn wire, wire mesh and customized rebar-based products for the construction industry. This plant processes wire rod purchased in the international markets and rebar received from Ferrasa’s Manizales unit and rebar purchased in the international markets.

 

Villa Nueva unit: Located in Guatemala, Guatemala, the Villa Nueva unit produces galvanized sheets for the construction industry and for further processing in other Ternium Mexico’s units in Central America. It also has a steel service center that produces slitted, roll-formed and cut-to-length products, and profiles for the construction industry. This plant processes hot-rolled, cold-rolled and coated coils received from Ternium Mexico’s units in the Nuevo León area and from the international markets.

 

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San Salvador and Managua units: The San Salvador unit in San Salvador, El Salvador, and the Managua unit in Managua, Nicaragua, are steel service centers that produce roll-formed products for the construction industry. These plants process coated coils received mainly from Ternium Mexico’s Villa Nueva unit.

 

San José unit: Located in San José, Costa Rica, is a steel service center that produces roll-formed products and profiles for the construction industry. This plant processes hot-rolled, cold-rolled and coated coils received from Ternium Mexico’s units in Nuevo León and from the Villa Nueva unit.

 

Mining Production Facilities

 

Ternium has iron ore production facilities in Mexico. We have a 100% interest in Las Encinas, and a 50% interest in Consorcio Peña Colorada, and conduct our mining activities through these companies. Most of our iron ore production is consumed internally and small quantities are sold to third parties. The following table provides an overview of Ternium’s active mining operations:

 

Company   Location   Type of Mine
Las Encinas   Aquila, Michoacán   Open pit
Consorcio Peña Colorada   Minatitlán, Colima   Open pit

 

In addition, Las Encinas owns four other mines: Las Palomas, which is expected to start operations during 2016; and El Chilillo, El Encino and Cerro Nahuatl, which are substantially exhausted.

 

The following table provides an overview, by type of facility, of Ternium’s production capacity as of December 31, 2015:

 

Production facility  Las Encinas   Consorcio Peña Colorada(1) 
   Quantity   Capacity(2)   Quantity   Capacity(2) 
Crushing Plant   2    5,300    1    11,000 
Concentration Plant(3)   1    3,500    1    10,000 
Pelletizing Line   1    1,900    2    4,100 

 

(1)Figures correspond to total capacity. Ternium has a 50% interest in Consorcio Peña Colorada.

(2)In thousands of tons per year. Crushing capacity for Las Encinas includes crushing lines located in Aquila and in El Encino.

(3)The concentration plant capacity figures refer to the plants’ iron ore processing capacity. The plants’ actual iron ore concentrate production depends on the iron ore grade of the processed material.

 

Las Encinas

 

Las Encinas produces iron ore pellets and magnetite concentrate in Mexico. At present, Las Encinas operates the Aquila open pit mine located in Michoacán and the El Chilillo open pit mine located in Jalisco.

 

The Las Encinas facilities include two crushing plants (located close to each of the Aquila and El Encino mines), and a concentration and pelletizing plant located in Alzada, Colima, approximately 160 kilometers from Aquila. Its major processing facilities (crushing, concentration and pelletizing facilities) include two primary crushers and a dry cobbing plant in Aquila, and horizontal and vertical ball mills and several stages of magnetic separation in Alzada. The iron ore pre-concentrate is transported from Aquila to a transfer station at Tecoman, Colima, by truck and from Tecoman to Alzada by rail and truck for processing in the concentration plant. In addition, El Encino may receive, from time to time, magnetite iron ore purchased by Las Encinas from other local concessionaires. The iron ore pellets produced in Alzada are transported by rail to Ternium Mexico’s integrated facilities in Monterrey and Puebla. The Aquila and El Encino operations and the Alzada facilities receive electrical power from the Comisión Federal de Electricidad, or “CFE,” the Mexican state-owned electric utility.

 

Active mines

 

At the Aquila site, Las Encinas holds mining rights for the extraction of iron ore over 73 hectares. The Aquila operations (including an open pit mine and crushing facilities) stand on 383 hectares, which are leased to Las Encinas by the local community of San Miguel de Aquila. The lease agreement allows Las Encinas to perform all mining activities, including the extraction of iron ore, necessary to exploit the ore located in the 73 hectares granted to Las Encinas by the Mexican federal authorities until the permanent closure of the mine. Las Encinas has operated this mine since 1998.

 

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Aquila is a mine composed predominantly of magnetite with a hematite roof and sulphides and silicates gangue. The form of mineralization is massive and disseminated (mineralized hornfels, endoeskarn), with mineralized gaps. The mine site is hosted along a large failure line and between the contact of an intrusive diorite and limestone, and the shape of the deposit is slightly amorphous, crossed by a countless number of dams and mainly controlled by geological structures.

 

Mines not yet active

 

During 2015, Las Encinas obtained the environmental permits required to conduct mining activities at the Las Palomas iron ore deposit in Jalisco. The mine, with iron ore reserves of approximately 15 million tons on a run-of-mine basis, is expected to start operations during 2016.

 

Mines under exploration

 

Las Encinas holds mining rights over other areas scattered throughout Michoacán, Jalisco and Colima, Mexico. In recent years, Las Encinas conducted exploration activities mainly in Michoacán and Jalisco and identified certain additional iron ore resources in Sierra del Alo, Jalisco. However, exploration activities decreased significantly as a result of the current price and the expected medium-term price of iron ore. In the future, Las Encinas may continue pursuing the development of small to mid-sized mining operations similar to Las Palomas, as a way to diversify its sources of iron ore and to make effective use of its mining rights in the region.

 

Exhausted mines

 

The El Chilillo open pit mine was operated until 2015. The El Chilillo core reserves were exhausted and the mine’s operations have been suspended. Ternium is currently evaluating the steps required to proceed with its permanent closure, but no date for such closure has been scheduled.

 

The El Encino open pit and underground mine was operated until 2011. The El Encino core reserves were exhausted and the mine’s operations have been suspended. Ternium is currently evaluating the steps required to proceed with its permanent closure, but no date for such closure has been scheduled. The crushing and transfer facilities at El Encino are still in operation and will remain active to receive, process and transfer to the Alzada pelletizing plant iron ore that Las Encinas buys from time to time from other local concessionaires.

 

The Cerro Nahuatl open pit mine located in Colima, Mexico, operated until 2008. The Cerro Nahuatl core reserves were exhausted and the mine’s operation has been suspended. Ternium is currently evaluating the steps required to proceed with its permanent closure.

 

Consorcio Peña Colorada

 

Consorcio Peña Colorada produces iron ore pellets and magnetite concentrate in Mexico, and Consorcio Peña Colorada is a company owned 50% by Ternium and 50% by ArcelorMittal. Consorcio Peña Colorada operates the Peña Colorada open pit mine as well as a concentrating facility and a two-line pelletizing facility. Consorcio Peña Colorada owns part of the property where its mine and processing facilities stand, and leases 1,202 hectares adjacent to the mine that are used to deposit material removed as part of the regular short-term and long-term life of mine plan.

 

Consorcio Peña Colorada has operated since 1974 and holds mining rights over 39,813 hectares. The Peña Colorada mine is a complex polyphase iron ore deposit. Several magmatic and hydrothermal events produced iron mineralization, garnet-rich rocks (granatites) as skarns or skarnoids, and late dikes and faults that crosscut the mineralized bodies. The main mineralization events are a massive ore body, a disseminated ore body, a layered barren exoskarn/skarnoid, a polymictic breccia, mineralized conglomerates and late andesitic dikes.

 

The concentration plant is located at the mine in Minatitlán, Colima, and the pelletizing plant is located near the Manzanillo seaport on the Pacific coast in Colima, 50 kilometers from Minatitlán. Consorcio Peña Colorada’s major processing facilities include a primary crusher, a dry cobbing plant, one autogenous mill, horizontal and vertical ball mills, several stages of magnetic separation and two pelletizing lines. The concentrate is sent as a pulp through a pipeline from the mine and mineral processing plant in Minatitlán to the pelletizing plant in Manzanillo. The Peña Colorada mine and the pelletizing plant receive electrical power from the CFE.

 

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Ternium is required to buy from Consorcio Peña Colorada half of the mine’s annual production. See Item 4. “Information on the Company—B. Business Overview—Raw Materials, Slabs, Energy and Other Inputs—Mexico—Iron Ore.” Iron ore concentrate and pellets sold to Ternium are shipped by rail from the mine to Ternium’s facilities in Mexico or exported.

 

As the iron grade of Peña Colorada’s ore deposits is diminishing over time (and, as a result, the facility’s concentrate production is diminishing accordingly), during 2014 Consorcio Peña Colorada’s shareholders approved certain investments required to increase the processing capacity of its crushing, grinding and concentration facilities to restore iron ore concentrate production to the previous 4.5 million tons per year level at an estimated total cost of USD320 million. The project, expected to be completed during 2016, requires Consorcio Peña Colorada to obtain environmental and other permits as well as additional electrical power from CFE.

 

Iron ore reserves

 

The table below details Ternium’s estimated proven and probable iron ore reserves as of December 31, 2015. The classification of the iron ore reserve estimates as proven or probable is based on drill hole spacing and reflects the variability in the mineralization at the selected cut-off grade, the mining selectivity and the production rate and ability of the operation to blend the different ore types that may occur within each deposit. Reserves are reported as Run of Mine (ROM). Tonnage is reported on a wet metric ton basis.

 

Iron ore reserves (1) as of  December 31, 2015   December 31, 2014 
   Proven   Probable   Total   Total 
   Million tons   % Fe   Million tons   % Fe   Million tons   % Fe   Million tons   % Fe 
Las Encinas (2)   24    40    -    -    24    40    23    41 
Peña Colorada (3)   104    22    122    22    226    22    241    23 

 

(1)In Peña Colorada, proven iron ore reserve estimates are based on drill hole spacing ranging from 25m x 25m to 100m x 100m, and probable iron ore reserve estimates are based on drill hole spacing ranging from 50m x 50m to 300m x 300m. In Las Encinas, drill hole spacing may be more distanced.

(2)Includes exclusively the Aquila, the El Chilillo and the La Paloma mines.

(3)Reported figures represent the total reserves at the Peña Colorada mine. Ternium has a 50% interest in Consorcio Peña Colorada.

 

The table below provides additional information on iron ore production and average estimated mine life.

 

Operations/Projects  %
Ownership
   In Operation
Since
   2015 Run of
Mine
Production
(Million tons)
   2015 Saleable
Production (Million
tons) (1)
   Estimated
Mine Life
(Years) (2)
 
Las Encinas (3)   100    1970    3.1    1.9    8 
Consorcio Peña Colorada (4)   50    1974    7.9    3.5    16 

 

(1)Saleable production is constituted of a mix of direct shipped ore (DSO), concentrate, pellet feed and pellet products which have an iron content of approximately 65% to 66%.

(2)Mine life is derived from the life of mine plans and corresponds to the duration of the mine production scheduled from ore reserve estimates only. The production varies for each operation during the mine life and as a result the mine life is not necessarily the total reserve tonnage divided by the 2015 production.

(3)Includes exclusively the Aquila, the El Chilillo and the La Paloma mines.

(4)Reported figures represent the total production of Consorcio Peña Colorada, in which Ternium has a 50% interest. Production does not include certain volumes of fines located in the mine, which were extracted years ago. These volumes of fines were used during 2015 mixed with raw mineral originated from the mine.

 

Changes in iron ore reserve estimates (2015 versus 2014)

 

Las Encinas’s iron ore reserve estimates as of December 31, 2015 were 24 million tons on a run-of-mine basis (with a 40% average iron grade), increasing by 1 million tons compared to those recorded as of the end of 2014. This increase in tonnage was due mainly to the addition of the Las Palomas reserves, partially offset by the depletion of reserves during the year.

 

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Peña Colorada’s iron ore reserve estimates as of December 31, 2015, were 226 million tons on a run-of-mine basis (with a 22% average iron grade), decreasing by 15 million tons compared to those recorded as of the end of 2014. This decrease in tonnage was due mainly to the depletion and downward adjustment of reserves during the year due to the revision of our models and the mining plan.

 

The estimates of proven and probable ore reserves at our mines and the estimates of the mine life included in this annual report have been prepared by Ternium’s experienced engineers and geologists. Ternium has not commissioned an independent verification of the methods and procedures used to determine reserves, nor has it commissioned independent audits on iron ore reserve estimates.

 

The reserve calculations were prepared in compliance with the requirements of SEC Industry Guide 7, under which:

 

Reserves are the part of a mineral deposit that could be economically and legally extracted or produced at the time of the reserve determination.

 

Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches or working or drill holes; grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established.

 

Probable reserves are reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

 

The demonstration of economic viability is established through the application of a life of mine plan for each operation or project providing a positive net present value on a cash forward-looking basis. Economic viability is demonstrated using forecasts of operating and capital costs based on historical performance, with forward adjustments based on planned process improvements, changes in production volumes and in fixed and variable proportions of costs, and forecasted fluctuations in costs of raw material, supplies, energy and wages. Ore reserve estimates are updated annually in order to reflect new geological information and current mine plan and business strategies. Our reserve estimates are of in-place material after adjustments for mining depletion and mining losses and recoveries, with no adjustments made for metal losses due to processing. For a description of risks relating to reserves and reserve estimates, see Item 3.D. “—Risk Factors—Risks Relating to our Mining Activities—Our reserve estimates may differ materially from mineral quantities that we may be able to actually recover, or our estimates of mine life may prove inaccurate; and market price fluctuations and changes in operating and capital costs may render certain ore reserves uneconomical to mine in the future or cause us to revise our reserve estimates.”

 

Our mineral leases are of sufficient duration (or convey a legal right to renew for sufficient duration) to enable all ore reserves on the leased properties to be mined in accordance with current production schedules. Our ore reserves may include areas where some additional approvals remain outstanding but where, based on the technical investigations we carry out as part of our mine planning process and our knowledge and experience of the approvals process, we expect that such approvals will be obtained as part of the normal course of business and within the timeframe required by the current life of mine schedule.

 

Property, Plants and Equipment

 

The table below details Ternium’s mining segment property, plants and equipment value as of December 31, 2015.

 

In millions of U.S. dollars  Property, Plants and Equipment (PPE) 
Las Encinas   126.6 
Consorcio Peña Colorada   134.7 

 

Production process

 

Ternium specializes in manufacturing and processing finished steel products. In addition, Ternium extracts and processes iron ore.

 

Ternium’s facilities use different technologies and have different levels of integration. The basic inputs for steel production are iron ore and energy. Iron ore is used in three different formats: fines and lumps, which are purchased in the marketplace, and pellets, which are partly purchased in the marketplace and partly produced by Ternium. Ternium’s steel production processes consume energy mainly in the form of natural gas, coal and electricity.

 

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Iron ore extraction and processing. The iron ore pellet production process begins with the sourcing of iron ore from Ternium’s own mines in Mexico. The ore is extracted from open pit mines. Extraction consists of removing waste and ore from the surface with explosives and loading and transporting it by truck to the crushing facilities where it is resized to a specified size.

 

After crushing, the ore goes through several grinding and concentration stages. Grinding reduces the size and changes the shape of the ore while concentration, through magnetic drums, separates the iron from the sterile material to obtain an iron ore concentrate with high iron content. This process is carried out using water as an auxiliary element. Excess water is afterwards eliminated through a filtering process, leaving only the necessary humidity for the formation of pellets using pelletizing disks. Pellets are separated according to their size and are then hardened in ovens and shipped to the steel producing facilities.

 

Steel production. Ternium produces semi-finished steel in the form of thin slabs, slabs, billets and round bars through the electric arc furnace and the blast furnace methods.

 

Under the electric arc furnace method, which is used in Mexico and Colombia, the iron metal charge is heated with other elements to obtain molten steel. The molten steel is then cast, using the continuous casting method, into billets and thin slabs. The iron metal charge in the Norte and Manizales plants is steel scrap, and the iron metal charge in the Monterrey and Puebla plants is a mix of DRI and steel scrap. The DRI results from the conversion of pellets in the DRI modules. One of Monterrey’s DRI plants includes Hytemp® technology, which permits the hot discharge of the DRI to the electric arc furnace, generating significant energy savings and improving productivity.

 

Under the blast furnace method, which is used in Argentina, iron ore pellets, lumps, sinter (a mixture of iron ore fines and limestone produced in our sinter plant) and coke (a solid residue obtained from the distillation of coal produced in our coking batteries) are mixed in the blast furnaces in a process that melts and reduces the iron ore, obtaining pig iron. The molten pig iron is then mixed with steel scrap and other products in a basic oxygen furnace through a process that removes impurities from the pig iron by injecting pure oxygen at high pressure into the molten metal, burning off carbon and other elements. The molten steel is then cast using the continuous casting method, into slabs.

 

Steel processing. Semi-finished steel is then processed into finished products using hot-rolling, cold-rolling, coating, tubing, paneling, slitting and cut-to-length facilities among other processes. Ternium purchases semi-finished steel in the marketplace in the form of slabs, as its steel processing capacity in Mexico is higher than its steel-making capacity in the country. It may purchase hot-rolled and cold-rolled coils as well for further processing in its lines.

 

Thin-slabs, slabs and billets are processed in the hot-rolling mills in Mexico, Argentina and Colombia to obtain hot-rolled products using different technologies. In the case of flat products, hot-rolled coils are obtained from thin or conventional slabs. Thin slab hot-rolling, a technology Ternium uses only in Mexico, requires less energy than conventional slab hot-rolling, as it does not require a roughing section at the mill and does not need to be reheated from room temperature to reach rolling temperature. In the production of long products, which is carried out in Mexico and Colombia, billets are reheated and taken to rolling temperature. The softened steel is processed in the rolling trains to obtain wire rods and rebars as finished long products and, depending on its final use, rebars can be further processed into stirrups and other customized shapes in our service centers in Colombia and Panama.

 

Depending on its final use, the hot-rolled coils are then tempered and/or pickled, both in Mexico and Argentina, before being sent for sale as coils or cut into steel sheets. Alternatively, the hot-rolled coils may be sent to a cold-rolling mill where they are put under a deformation process at room temperature to reduce their thickness and obtain cold-rolled coils. Cold-rolled coils can be sold in crude form to the market (full hard) or processed in the reheating ovens, annealing bays and temper lines to modify their metallurgic and physical characteristics. The tempered products can be sold as coils or sheets or further processed by adding coatings.

 

Cold-rolled coils can be further processed into tin plate at Siderar’s facility in Argentina (by adding a thin layer of tin), into galvanized or electrogalvanized sheets at several of Ternium’s facilities in Mexico, the United States and Guatemala and at Siderar’s facility in Argentina (by adding a thin layer of zinc to the products through different processes) or into pre-painted products. Some of these products can be further processed into slitted, cut-to-length and tailor-made products according to customers’ needs at Ternium’s service centers, which are located in several countries. In addition, coated, cold-rolled and hot-rolled coils can be further processed into tubular products, such as welded pipes, insulated panels and architectural panels, among other products.

 

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Sales

 

Net Sales

 

Ternium is organized into two reportable segments: Steel and Mining. The Steel segment includes the sales of steel products and the Mining segment includes the sales of iron ore products, which are primarily inter-company. The Steel segment comprises three operating segments: Mexico, the Southern Region and Other Markets. For further information on our reportable operating segments, see note 5 to our consolidated financial statements included elsewhere in this annual report. Ternium primarily sells its steel products in Latin America and the United States, where it can leverage its strategically located manufacturing facilities to provide specialized products, delivery services to its customers and reduced freight costs. In addition, it sells small quantities of iron ore to third parties, as it consumes internally most of the iron ore it produces.

 

Our total consolidated net sales of steel and mining products amounted to USD7.9 billion in 2015, USD8.7 billion in 2014 and USD8.5 billion in 2013. For further information on our net sales of steel and mining products, see Item 5. “Operating and Financial Review and Prospects—A. Results of Operations.”

 

The prices of our steel products generally reflect international market prices for similar products. We adjust prices for our products periodically in response to changes in the import prices of foreign steel, export prices, and supply and demand. See Item 5. “Operating and Financial Review and Prospects—Overview.” The actual sales prices that we obtain for our products are also subject to the specifications, sizes and quantity of the products ordered.

 

The following table shows Ternium’s net sales by reportable operating segment, Steel and Mining, for the years indicated:

 

In millions of U.S. dollars  For the year ended December 31, 
   2015   2014   2013 
Mexico   4,354.8    4,863.9    4,230.1 
Southern Region   2,567.2    2,641.5    2,944.7 
Other Markets   905.4    1,159.3    1,251.2 
Total steel products net sales   7,827.4    8,664.8    8,426.0 
Other products (1)   47.7    35.8    33.9 
Total steel segment net sales   7,875.2    8,700.5    8,459.9 
                
Total mining segment net sales   203.1    313.2    386.5 
                
Intersegment eliminations   (200.8)   (287.6)   (316.4)
                
Total Net Sales   7,877.4    8,726.1    8,530.0 

 

(1)The item “Other products” primarily includes pig iron.

 

The following table shows, where applicable, Ternium’s shipment volumes by reportable operating segment, Steel and Mining, for the years indicated:

 

In thousands of tons  For the year ended December 31, 
   2015   2014   2013 
Mexico   5,933.4    5,632.2    4,984.9 
Southern Region   2,552.2    2,510.9    2,633.1 
Other Markets   1,114.6    1,238.5    1,370.3 
Total steel products sales volumes   9,600.3    9,381.5    8,988.4 
                
Total mining segment sales volumes   3,635.6    3,857.3    4,243.0 

 

Steel

 

Mexico.

 

Sales to customers in Mexico accounted for 55.6% of Ternium’s net sales of steel products during 2015, 56.1% during 2014 and 50.2% during 2013. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2015 compared to Fiscal Year Ended December 31, 2014—Net Sales” and “—Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Net Sales.”

 

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Most of Ternium’s Mexican customers are located near its plants. Flat steel non-coated products are mainly sold in Mexico to construction companies, industrial customers in the automotive, packaging, electric motors and service center industries, as well as distributors. The principal segments in the Mexican coated steel market are construction, automotive, home appliances and manufacturing (air conditioning, lamps and furniture). Ternium serves industrial customers, who require high-quality specifications, as well as commercial customers through service centers and warehouses. Rebar and wire rod markets in Mexico are characterized by a large number of orders of small volume, and competition is largely based on price. The customer base for bar and rod products in Mexico consists primarily of independent dealers and distributors, who in turn retail the products to their customers in the construction industry. Ternium markets its tubular products mainly through Mexican independent distributors, and the balance is sold directly to industrial customers.

 

Southern Region.

 

Sales to customers in the Southern Region, which encompasses sales in Argentina, Bolivia, Chile, Paraguay and Uruguay, accounted for 32.8% of Ternium’s net sales of steel products during 2015, 30.5% during 2014 and 34.9% during 2013. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations—Fiscal Year Ended December 31, 2015 compared to Fiscal Year Ended December 31, 2014—Net Sales” and “—Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Net Sales.”

 

Ternium’s sales are oriented toward the construction and agriculture sectors, the automotive industry, the packaging sector (for food, paints, sprays and petrochemicals), the tube and pipe sector (related to liquids and gas transportation and distribution networks), the capital goods sector and the home appliances sector.

 

The customer base in the Southern Region consists primarily of independent small and medium-sized companies and distributors, which in turn process or retail products to their customers in different market sectors. In addition, Ternium serves large industrial customers, such as customers in the automotive industry, that require customized products that Ternium can produce through its service centers and finishing facilities.

 

Ternium’s principal customers in the region are located near Siderar’s production facilities in Argentina. Ternium’s net sales in Argentina represent approximately 31.5% of Ternium’s total net sales. We also sell a small portion of our production to customers in Bolivia, Chile, Paraguay and Uruguay.

 

Other Markets.

 

Sales to customers in other markets, which include mainly shipments to Colombia, the United States and Central America, accounted for 11.6% of Ternium’s consolidated net sales of steel products during 2015, 13.4% during 2014 and 14.9% during 2013. See Item 5. “Operating and Financial Review and Prospects—A. Results of Operations-Fiscal Year Ended December 31, 2015 compared to Fiscal Year Ended December 31, 2014—Net Sales” and “—Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Net Sales.”

 

Customers in Colombia are served directly through Ferrasa’s facilities and through Ternium Internacional’s Bogotá commercial office. Our main markets in Colombia are the construction industry and the energy-related sectors. Ternium offers a variety of customized products through its various service centers in the country.

 

Customers in the United States are served directly through the Shreveport plant and through Ternium Internacional’s Houston commercial office. The Gulf Coast and a large portion of the West Coast, in particular, are regions for which our Mexican facilities have distribution advantages. Our main markets in the United States are the construction industry and the energy-related sectors.

 

Customers in Central America are served directly through Ternium Internacional Guatemala’s facilities in Guatemala, El Salvador, Nicaragua and Costa Rica. Our main market in Central America is the construction industry. Ternium offers a variety of customized products through its various service and distribution centers in the region.

 

Mining

 

Ternium’s shipments of iron ore mainly include those made by Las Encinas and 50% of those made by Consorcio Peña Colorada. Iron ore shipments are destined mainly for internal consumption within Ternium’s Steel segment and surpluses, if any, are destined for the export market.

 

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Marketing

 

Steel

 

Our marketing strategy in our steel segment is to expand higher-margin value-added products and services in Ternium’s sales mix. Over time, we expect to increase Ternium’s offerings of value-added products, such as cold-rolled sheets and coated and tailor-made products, and services, such as just-in-time deliveries and inventory management. In order to do so, Ternium may increase processing capacity and will continue to work with its customers to anticipate their needs and develop customized products for particular applications and maintain a strategic presence in several steel markets through its network of commercial offices. A principal component of Ternium’s marketing strategy is establishing lasting and close relationships with customers. This allows Ternium to provide assistance to its customers in their use of steel products and to obtain downstream information that can be applied to future product development.

 

Ternium adapts its marketing strategy according to the different regions it serves. Its sales force specializes in different regional requirements, ranging from product specifications to transport logistics.

 

In order to strengthen Ternium’s positioning in regional markets and offer services to customers, Ternium manages its exports from countries where it has manufacturing facilities through Ternium Internacional’s network of commercial offices. Ternium Internacional operates through strategically located subsidiaries, providing customers with services and support. Ternium Internacional has extensive experience promoting steel products. Its marketing expertise helps Ternium to expand its position in current markets and to develop new ones.

 

Mexico.

 

Several local and foreign steel producers direct part of their sales efforts to the Mexican market. Ternium’s steel customers in Mexico are in the construction industry, the automotive industry, the energy sector and the home appliances sector, among other industries. In Mexico, we offer customized services through our network of service and distribution centers.

 

Through our service centers, located in northern and central Mexico, Ternium can cut and roll-form its products to specific client requirements. Customized products include metallic roofing, sheets and strips used in the automotive industry and cut-to-length products used in the home appliance and construction industries. Ternium has several distribution centers and commercial offices in the country, which provide services such as logistics, stock management and customer assistance, as well as analysis of businesses opportunities in their respective markets.

 

Ternium Mexico has a department focused on the development of small and medium-sized companies in Mexico under a program created by the Techint group for the development of its local customers and suppliers (“Propymes”). The objective of the program is to improve their competitiveness, to increase their exports and to allow them to substitute imports with local products. Approximately 360 companies are part of this program in Mexico, which provides support for industrial, training, and institutional requirements of the participating companies.

 

Ternium’s experienced sales force specializes in the needs of each market sector and focuses on value-added products and services. In this competitive and end-user oriented market, the extensive use of well-known commercial brands allows customers to clearly recognize Ternium’s products. Ternium seeks to increase its competitive advantage by providing value-added services, including the technical assistance related to steel use and production, and developing new steel products.

 

Southern Region.

 

Ternium’s sales force in this region is oriented toward serving the specific needs of different market sectors, such as the construction industry, the automotive industry, the home appliances sector, the packaging sector (for food, paints, sprays and petrochemicals), the agricultural equipment and capital goods sector, the tube and pipe sector (related to liquids and gas transportation and distribution), and steel processors.

 

Through Siderar’s service centers in Argentina, Ternium can cut, paint or roll-form its products to specific client requirements. Customized products include metallic roofing, auto parts, steel for agricultural machinery, different types of tin used to produce sprays and food containers and cut-to-length products used in the home appliance and construction industries.

 

Ternium has commercial offices in Argentina and Uruguay. These offices provide services such as market development, analysis of businesses opportunities, and customer support in their respective countries. Propymes was implemented in Argentina in 2002, with the objective of promoting the local industry. Approximately 780 companies are part of this program, which provides support for industrial, training, commercial, financial and institutional requirements of the participating companies.

 

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Other Markets.

 

Ternium’s steel customers in Other Markets are mainly in the construction and energy-related industries in Colombia, the United States and Central America. Several steel producers participate in these markets. In Colombia and Central America, we offer customized services through our network of service and distribution centers.

 

Through Ternium’s facilities and service centers located in Colombia, Costa Rica, El Salvador, Guatemala, Nicaragua and the southern United States, Ternium can cut, paint or roll-form its products to specific client requirements mainly in the construction industry.

 

Ternium has commercial offices in Colombia, Houston, Costa Rica, El Salvador, Guatemala, Nicaragua and Panama. These offices provide services that enable Ternium to offer differentiated services in their respective countries.

 

A small share of Ternium’s shipments is destined for steel markets outside the Americas. Sales to Europe, Asia and Africa are carried out mainly through Ternium Internacional’s office in Spain. Ternium Internacional is focused on trading activities, including the development of commercial and marketing activities.

 

Mining

 

Ternium’s mining activities are mainly aimed at securing the supply of iron ore for our steel-making facilities in Mexico. Surplus production of iron ore, if any, is commercialized to partially hedge the iron ore procurement requirements of Ternium’s facilities in Argentina. We export iron ore through the Manzanillo port that is located on Mexico’s Pacific coast, mainly to customers in the Chinese iron ore market.

 

Competition

 

Steel

 

The steel industry operates predominantly on a regional basis, with large industry participants selling the bulk of their steel production in their home countries or regions, where they have natural advantages and are able to more effectively market value-added products and provide additional customized services. Despite the limitations associated with transportation costs, as well as the restrictive effects of protective tariffs and other trade restrictions, international trade of steel has increased in the last decade with production shifting towards low-cost production regions. In addition, since 2002, several large steel manufacturers have merged with each other or acquired steel companies in other parts of the world. This wave of consolidation has resulted in a number of large, global producers with significant operations in several regions and/or continents, contributing to the increasing globalization of the steel industry. Considered as a whole, however, the steel industry still remains considerably fragmented, compared with market conditions characterizing certain of our suppliers and customers, e.g., iron ore suppliers and the automotive industry.

 

Steel consumption has historically been centered in developed economies, such as the United States, Western Europe and Japan. However, in the last decade steel consumption in Asia, and in particular China, has increased significantly.

 

There has been a trend in the last decade toward steel industry consolidation among Ternium’s competitors. Below is a summary of the most significant transactions:

 

June 2006: Mittal Steel and Arcelor merge to create ArcelorMittal, the world’s largest steel company.

 

March 2007: Votorantim acquires Colombia’s Aceria Paz del Rio.

 

April 2007: Tata Steel completes the acquisition of Corus.

 

July 2007: Gerdau acquires Chaparral Steel.

 

August 2007: US Steel acquires Stelco.

 

March 2008 to May 2008: Severstal acquires Sparrows Point, WCI Steel and Esmark (subsequently, during 2011, it divests Sparrows Point, Warren and Wheeling).

 

October 2012: Nippon Steel and Sumitomo merge to form NSSMC, the world’s second largest steel company.

 

February 2014: ArcelorMittal and NSSMC acquire ThyssenKrupp Steel USA, a steel processor based in Alabama, through a 50/50 joint venture.

 

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September 2014: AK Steel Corporation and Steel Dynamics Incorporated acquired OAO Severstal’s U.S. Dearborn and Columbus operations, respectively.

 

Despite this trend, the global steel market remains highly fragmented. In 2014, the most recent year for which statistics are available, the five largest steel producers, ArcelorMittal, NSSMC, Hebei Group, Baosteel Group and Wuhan Steel Group, accounted for 17% of total worldwide steel production, compared to 15% for the five largest steel producers in 2000.

 

Steel prices in general have exhibited significant volatility in the last decade. From 2000 to 2002, the industry, especially in North America, experienced fluctuating capacity utilization, low demand growth levels and other adverse conditions, which led to depressed steel prices, adversely impacting many steel producers’ profitability. Since 2003 steel prices strengthened worldwide, due to higher economic growth in most regions, particularly China and other developing countries, as well as higher raw material prices (for iron ore, ferroalloys and energy). During the first quarter of 2008, steel prices went up significantly due to higher demand for steel products and higher input costs resulting from constraints in the availability of raw materials. However, this trend reversed beginning in the second half of 2008 due to a global economic downturn, with prices and costs declining steeply. Since 2009, a number of events have contributed to continuously volatile steel price cycles, such as spikes and depressions in raw material prices, new steelmaking capacity additions (at a pace higher than steel demand growth), the idling and restart of steelmaking capacity, adverse economic conditions in Europe and a slowdown in China’s economic growth. Particularly during 2015, the steel industry continued to be characterized by significant overcapacity, mainly in China. This, together with a deceleration of China’s economic growth rate, led to an unprecedented level of low-priced Chinese steel exports, in many cases under unfair trade conditions, that exerted significant downward pressure on global steel prices.

 

Mexico.

 

Ternium competes in the Mexican steel market with domestic and international steel producers. According to Canacero, the Mexican chamber of the iron and steel industry, imports of hot-rolled, cold-rolled and galvanized steel products into Mexico accounted for approximately 39%, 39% and 38% of the Mexican market for those products in 2015, 2014 and 2013, respectively, as steel consumption in Mexico is higher than the installed steel capacity in the country.

 

Our largest Mexican competitor in the flat products market is AHMSA, an integrated steel producer located in Monclova, Coahuila, which produces a wide variety of steel products. AHMSA focuses on low value added products such as plate and commercial quality hot-rolled and cold-rolled coils. Other significant competitors with facilities in the country are Lámina y Placa Comercial S.A. de C.V. (Grupo Villacero), a producer of galvanized coils and a distributor of steel products, and POSCO, a Korean steel company with steel galvanizing facilities in Altamira, Tamaulipas.

 

In the rebar market, Ternium’s largest competitor is ArcelorMittal. To a lesser extent, Ternium also faces competition from Aceros San Luis and Deacero. In the low-carbon wire rod market, Ternium’s main competitors are Deacero, ArcelorMittal and, to a lesser extent, Talleres y Aceros and Aceros San Luis.

 

In the small-diameter welded pipe market, Ternium’s main competitors are Tubería Laguna, Maquilacero and imports. Orders in this market are usually small and cover a wide range of product specifications.

 

Southern Region.

 

Ternium’s most significant market in the Southern Region is Argentina. Siderar is the main producer of flat rolled steel products in Argentina. Its main competition in the Argentine flat steel market are imports, particularly from Brazil. The main Brazilian producers of flat steel value-added products are Usiminas, Companhia Siderúrgica Nacional and ArcelorMittal. Ternium maintains a leading position in the flat steel market of Paraguay and is present in the flat steel markets of Bolivia, Chile and Uruguay, where the location of Ternium’s facilities in neighboring Argentina provides a logistical advantage to supply these markets vis-à-vis its foreign competitors.

 

Other Markets.

 

In addition to its sales in Mexico and the Southern Region, Ternium sells its products in other markets, of which the most significant are Colombia, the southern United States and Central America.

 

Our subsidiary Ferrasa is the main flat steel processor in Colombia and is also a long steel producer. Its main competitors in the Colombian steel market are Acerías Paz del Río, Gerdau Diaco, Acerías de Colombia, Siderúrgica Nacional and Siderúrgica del Occidente, and it also faces competition from imports.

 

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Ternium has a very small participation in the U.S. steel market in comparison with U.S. domestic steel manufacturers and importers. It successfully competes in the Gulf Coast and a large portion of the West Coast where its facilities have logistical advantages.

 

Ternium maintains a significant position in the coated flat steel market of Central America, supported by logistical advantages provided by nearby facilities located in Costa Rica, El Salvador, Guatemala, Nicaragua and Mexico. Despite these advantages, Ternium has been facing strong competition in Central America from importers in an oversupplied steel market.

 

In addition, Ternium keeps an active presence in other regions in the Americas, including Ecuador and Peru, where it has also been facing strong competition from other importers.

 

Mining

 

The majority of iron ore supplies to the international seaborne market come from Australia and Brazil, from the major global miners Vale, Rio Tinto and BHP Billiton, as well as from iron ore junior companies in these countries. In Mexico, the main iron ore producers are AHMSA, ArcelorMittal and Ternium, which are, at the same time, major steel-making companies and iron ore consumers. Only a small portion of the iron ore obtained by these three players is made available for sale in the Mexican or export market. There are also other small iron ore mining concessionaries that sell their production mostly to local steel-making operations.

 

Capital Expenditure Program

 

The main objectives of Ternium’s current capital expenditure program are to:

 

increase steel production and processing capacity;

 

increase product range;

 

reduce production costs;

 

replace equipment;

 

improve product quality, equipment reliability and productivity;

 

comply with applicable safety and environmental standards; and

 

provide enhanced customer services.

 

Capital expenditures in Ternium’s facilities during 2015 amounted to USD467 million. The current status of the most significant projects is described below.

 

Steel

 

Mexico. During 2015, Ternium’s capital expenditures in the steel segment in the country amounted to USD211 million and were mostly related to the following projects:

 

Environmental and safety projects. During 2015, Ternium made progress on several projects aimed at further improving environmental and safety conditions throughout our main facilities, particularly at the Guerrero unit in Nuevo León, Mexico. Projects completed at the Guerrero unit included a technological upgrade of the iron ore feeding systems of the direct reduction modules, which enabled the improvement of the facilities’ process control conditions, and a new hydrochloric acid regeneration plant that stores and process acid consumed by the pickling lines of the cold-rolling mills. Projects advanced during 2015 included the construction of a briquetting plant to process metallic fines produced in the direct reduction modules; the installation of a secondary de-dusting system in the steel shop to enhance control over emissions; and several improvements in the processing and handling of steel slag in the steel shop. These projects, expected to be concluded during 2016, aim at further improving environmental conditions throughout the unit. Furthermore, the program includes complementary investments such as the replacement of pickling tanks, improvements in the treatment of sludge and raw material storage yards, and safety improvements in vehicular traffic. In addition, at the Puebla unit in Puebla, Mexico, Ternium advanced a project to replace obsolete equipment in the direct reduced iron plant in order to improve safety and operational reliability.

 

Expansion of service center processing capacity. The project involves the installation of sixteen cutting lines, including slitting facilities. The installation of the first slitting line was completed during 2013 in the Churubusco unit and the second slitting line is expected to be completed during 2016. Upon completion of this second line, Ternium’s annual processing capacity of slitted steel products is expected to increase by approximately 200,000 tons.

 

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Expansion and enhancement of hot-rolling capacity. During 2014, Ternium started the first stage of a project aimed at upgrading the Churubusco unit’s hot-rolling mill, in order to increase its production capacity and to expand its product range with high-quality steel products for the automotive industry. During 2015, the sheet cooling system was changed and a furnace was repaired. In addition, Ternium started the installation of a new furnace that, together with logistical improvements, will enable an increase in the mills annual processing capacity of 230,000 tons.

 

Southern Region. During 2015, Ternium’s capital expenditures in Argentina amounted to USD188 million. Ternium carried out a capital expenditure plan to maintain its equipment’s operating performance, continued with some projects and started new ones, the most significant of which involved Siderar’s San Nicolás unit, as follows:

 

Expansion of processing plant for by-products of metallurgical coal. During 2015 Siderar made progress in the revamping and expansion of the facilities. The investment is reducing bottlenecks, through an increased by-products processing capacity, thereby enabling the operation of the coke production batteries at full capacity.

 

Expansion of hot-rolling mill capacity. Siderar made progress in the revamping of its hot rolling mill; upon completion of this project, which includes the replacement of the main motors and the strip cooling system, hot-rolled annual production capacity is expected to increase by approximately 410,000 tons to reach 3.2 million tons.

 

Expansion of service center processing capacity. During 2015, Siderar made progress in the installation of a new profile line in the Canning unit, and made progress in the installation of a new profile line and a slitting line in the Haedo unit, aimed at expanding customized annual production capacity by approximately 230,000 tons, to reach 2.3 million tons.

 

Environmental and safety projects. During 2015, Siderar advanced on several projects aimed at further improving environmental and safety conditions. Investments during the year included a new hydrochloric acid regeneration plant in the Ensenada unit, and new emergency power units and emissions control facilities in the San Nicolás unit.

 

In addition, Air Liquide Argentina S.A. (ALASA), made progress in the installation of a new oxygen plant located in our San Nicolás unit. This facility, which is owned and will be operated by ALASA, will increase the current supply of gases to fulfill our steel shop projected requirements. Works are expected to be finished during 2016.

 

Other Markets. During 2015, Ternium’s capital expenditures in facilities located in countries other than Mexico or Argentina amounted to USD13 million, and mainly included projects related to the replacement of equipment, product quality and equipment reliability improvements, and overall processing capacity increases.

 

Mining

 

During 2015, Ternium’s capital expenditures in its mining segment in Mexico were USD54 million. Las Encinas’ capital expenditures amounted to USD9 million in the year, mainly related to maintenance activities. Ternium’s share in Consorcio Peña Colorada’s capital expenditures amounted to USD46 million, mainly related to maintenance and upgrade of equipment, as well as exploration activities. During 2014, Consorcio Peña Colorada’s shareholders approved the investments required to increase the processing capacity of its crushing, grinding and concentration facilities to raise iron ore concentrate production levels back to 4.5 million tons per year. The project is expected to be completed in 2016.

 

2016 Capital Expenditures

 

Ternium’s capital expenditures for 2016 are expected to range between USD370 and USD470 million. The main capital expenditure projects will relate to the following:

 

·Projects aimed at further improving environmental and safety conditions throughout our main facilities, particularly at the Guerrero unit in Nuevo León, Mexico;

 

·The expansion of hot-rolling capacity in the Churubusco and San Nicolás units;

 

·The expansion of service center capacity in several locations, of slitted, cut-to-length and profile processing facilities; and

 

·The project aimed at increasing the processing capacity of Consorcio Peña Colorada iron ore crushing, grinding and concentration facilities.

 

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Raw Materials, Slabs, Energy and Other Inputs

 

The main inputs for Ternium’s steelmaking facilities in Mexico are slabs, iron ore, steel scrap, electricity and natural gas; the main inputs for Siderar’s integrated steel facilities in Argentina are iron ore and metallurgical coal; and the main inputs for Ternium’s facilities in Colombia are steel products, steel scrap and electricity. Below is a more complete description of the supply conditions for raw materials, slabs, energy and other inputs at Ternium’s facilities in these countries. For a description of some of the risks associated with Ternium’s access to raw materials, slabs, energy and other inputs, see Item 3. “Key Information—D. Risk Factors—Risks Relating to the Steel Industry—Price fluctuations or shortages in the supply of raw materials, slabs and energy could adversely affect Ternium’s profitability.”

 

Mexico

 

In Mexico, Ternium’s manufacturing of finished steel products relies on the supply of crude steel from its steelmaking facilities, which are based on the mini-mill technology, and on the purchase of crude steel slabs from third parties. The mini-mill technology melts a variable combination of DRI and steel scrap to produce thin slabs, billets and round bars. Ternium’s production process in Mexico requires extensive use of natural gas and electricity. Third-party slabs are the largest component of production costs; iron ore, scrap, electricity and natural gas costs are also significant.

 

Slabs. Ternium’s Mexican subsidiaries have some non-integrated facilities that consume large quantities of slabs purchased from third-party steel suppliers. Currently, slabs are purchased both in Mexico (primarily from ArcelorMittal) and in the international markets. In addition, Siderar is able to supply slabs to our Mexican facilities, as it has excess steelmaking capacity, and it has done so from time to time. Slab consumption varies significantly from year to year in accordance with market conditions. Our Mexican subsidiaries purchased 3.4 million, 3.3 million and 2.5 million tons of slabs in 2015, 2014 and 2013, respectively. Slab purchase prices are market-based.

 

Iron ore. As described under “—Production Facilities and Processes—Mining Production Facilities” above, Ternium’s subsidiaries own interests in two mining companies in Mexico: 100% of the equity of Las Encinas and a 50% equity stake in Consorcio Peña Colorada. In 2015, Ternium’s Mexican facilities sourced 100% of their iron ore requirements from these two companies. Under our arrangement with Consorcio Peña Colorada, effective January 1, 2013, we are committed to off-take 50% of the annual production of the Peña Colorada mine. In 2015, almost all the iron ore production available to Ternium went to our own direct reduction plants. All of our iron ore shipments during 2015 were made on a spot basis. On average, we consume approximately 1.0 tons of iron ore to produce one ton of crude steel at our mini-mill facilities in Mexico.

 

Steel scrap. In 2015, approximately 57% of Ternium’s scrap requirements was obtained in the Mexican market through its own steel scrap collecting and processing operations and approximately 43% was purchased in the United States. Scrap is purchased at market prices. On average, we consume approximately 0.4 tons of scrap to produce one ton of crude steel at our mini-mill facilities in Mexico.

 

Electricity. Electric arc furnaces consume large quantities of electricity. During 2015, 63% of Ternium Mexico’s total consumption was supplied by the CFE, Mexico’s state-owned electricity company. The remainder was mostly purchased under a supply agreement with Tractebel Energía de Monterrey, S. de R.L. de C.V. and a supply contract with Iberdrola Energía Monterrey, S.A. de C.V. (“Iberdrola”), with electricity purchases under these contracts being made at prices linked to certain energy production input costs and at market prices less certain agreed discounts, respectively. For more information on Ternium’s commitments with Iberdrola and Tractebel, see note 24(ii) (e) and (f) to our consolidated financial statements included elsewhere in this annual report. On average, we consume approximately 0.7MWH of electricity to produce one ton of crude steel at our mini-mill facilities in Mexico.

 

In addition, Ternium is participating in Techgen S.A. de C.V. (“Techgen”), a joint venture company that is building a power plant in the Pesquería area of the State of Nuevo León, Mexico. The plant is expected to be operational in the fourth quarter of 2016. Ternium agreed to enter into power supply and transportation agreements with Techgen, pursuant to which Ternium will contract 78% of Techgen’s power capacity of approximately 900 megawatts. As a result, Ternium will secure the supply of electricity to its facilities in Mexico and is expected to improve its cost competitiveness. For more information on the Techgen investment, see Item 4. “Organizational Structure—Other investments—Techgen.”

 

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Natural gas. Natural gas is mainly used as a reducing agent for the production of DRI and for the reheating of slabs and billets before the hot-rolling process. In Mexico, Ternium purchases natural gas from Pemex, the Mexican state-owned oil and gas company that is Mexico’s sole producer of natural gas, and from three distributors: Gas Industrial de Monterrey S.A. de C.V., or GIMSA, Compañía Mexicana de Gas S.A. de C.V., or CMG, and Gas Natural Mexico S.A. de C.V., or GNM. Natural gas prices for Ternium Mexico are determined pursuant to the methodology approved by the Comisión Reguladora de Energía or Energy Regulatory Commission, or CRE. Those prices are related to the market prices of natural gas in south Texas, plus transportation, distribution and service costs depending on the location of the delivery points in Mexico. Effective March 1, 2016, based upon a new methodology approved by CRE, average natural gas prices for Ternium Mexico were raised by approximately USD0.30 per million btu, mainly reflecting higher transportation charges. In addition, effective April 1, 2013, extraordinary charges were authorized by CRE to account for the incremental transportation costs derived from higher liquefied natural gas imports into Mexico. Such extraordinary charges, originally expected to remain in place for a maximum period of three years, may remain in place for two more years, but could be eliminated in a shorter period of time if CRE declares that the current bottlenecks in Mexico’s natural gas grid transportation capacity are resolved. The extraordinary charge set for February 2016 was USD0.1774 per million btu. On average, we consume approximately 8.6 million btu of natural gas to produce one ton of crude steel at our mini-mill facilities in Mexico.

 

For additional information regarding inputs affecting our operations in Mexico, see Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate—Mexico” and Item 3. “Key Information—D. Risk Factors—Risks Relating to our Mining Activities”

 

Argentina

 

In Argentina, Siderar produces crude steel through the use of blast furnace technology. The principal raw materials used to produce steel are iron ore and coal. The manufacturing process also requires significant quantities of electricity and natural gas.

 

Iron ore. Iron ore is purchased under long-term agreements from suppliers in neighboring Brazil. Prices under these contracts are determined in accordance with market conditions. Our main suppliers of iron ore, in the form of lumps, pellets and sinter feed fines, are Vale and Vetria. Our geographic location provides favorable access to high quality iron ore lump and fines produced in Brazil’s iron ore mines in the Pantanal Region (Mato Grosso do Sul state), resulting in a cost advantage for Siderar. In addition, Siderar’s steelmaking facility in Argentina receives iron ore pellets and fines from ports located on Brazil’s ocean coast. We consume approximately 1.3 tons of iron ore to produce one ton of crude steel in Argentina.

 

Coking coal and related materials. Siderar obtains its coke through the distillation of coking coal and petroleum coke in its coke ovens. Siderar requires different types of coal to produce coke. Coking coal is purchased under short-term contracts and on the spot market from several major international suppliers based mainly in Australia and the United States. Prices under contracts are determined in accordance with market conditions. Petroleum coke is sourced domestically from oil companies such as Axion Energy Argentina and YPF. The volume purchased from each supplier mainly depends on the technical quality requirements of the blast furnace operations. We consume approximately 0.5 tons of a mixture of coking coal and petroleum coke to produce one ton of crude steel in Argentina.

 

Electricity. Siderar consumes large quantities of electricity for its manufacturing activities, particularly in its San Nicolás and Ensenada facilities. Most of the electricity required by our San Nicolás facility is self-generated on site by a wholly-owned thermoelectric plant with an installed power capacity of 110 MW. This thermoelectric plant uses steam primarily generated from by-product gases obtained in the steelmaking process (blast furnace and coke oven gases) and also steam purchased under a long-term steam sales agreement, from a power plant located within the San Nicolás facility owned by Siderca S.A.I.C., a subsidiary of Tenaris. Additional fuel requirements for steam production are covered with natural gas purchased from different market vendors, and/or fuel oil bought at market prices. Siderar covers electricity shortfalls or sells surpluses, as the case may be, at spot prices in the wholesale market. Over the course of the last several years, demand for electricity in Argentina increased substantially, outpacing supply and resulting in shortages of electricity to residential and industrial users during periods of high demand. During these periods, Siderar’s energy purchases to cover its energy shortfalls suffered restrictions. We consume approximately 0.1 MWH of electricity to produce one ton of crude steel in Argentina.

 

Natural gas. Siderar also consumes substantial volumes of natural gas, particularly to operate its blast furnace and power generation facilities in San Nicolás. Siderar purchases natural gas at market prices mainly from Pan American Energy, Pluspetrol, Pampa Energía, Tecpetrol, a company controlled by San Faustin, and natural gas traders, including MetroEnergía, Albanesi, Energy Traders, Gas Patagonia, Alternativas Energéticas, Natural Energy, Gas Meridional, Cinergia and Energy Consulting Services S.A., a company in which San Faustin holds significant but non-controlling interest. In recent years, natural gas demand in Argentina increased significantly, outpacing supply and thus, as is the case with electricity, the provision of natural gas to industrial users (including Siderar) suffered restrictions during periods of high demand.

 

For its San Nicolás facility, Siderar has separate transportation and distribution agreements with Transportadora de Gas del Norte S.A., or TGN, and Litoral Gas, companies in which San Faustin holds significant but non-controlling interests. Siderar’s firm transportation contracts with TGN expire in April 2028, whereas its distribution agreement with Litoral Gas expires in December 2016. For its other facilities Siderar’s transportation and distribution needs are covered by the corresponding regional distributors Camuzzi Gas Pampeana S.A., Gas Natural Ban S.A. and Metrogas S.A. We consume approximately 1.7 million btu of purchased natural gas to produce one ton of crude steel in Argentina.

 

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Other inputs. Siderar has on-site oxygen, nitrogen and argon separation plants in order to extract these gases for use in the steelmaking process. Siderar’s separation plants are being managed by ALASA. Siderar is party to a long-term contract with ALASA for the supply of oxygen, nitrogen and argon. For further information on the contract with ALASA, see note 24 (ii) (d) to our consolidated financial statements included elsewhere in this annual report.

 

Colombia

 

In Colombia, Ternium’s manufacturing of finished steel products relies on two sources: (a) the production of steel in its steelmaking facilities, which are based on the electric arc furnace (“EAF”) technology; and (b) the purchase of steel products, both from our overseas subsidiaries and from third parties. The EAF technology melts steel scrap to produce steel billets, which are then rolled into various long products. Ternium’s production process requires extensive use of electricity. Steel products are the largest component of production costs; scrap and electricity costs are also significant.

 

Steel products. Ternium’s operations in Colombia include non-integrated facilities that process steel supplied by Ternium’s overseas subsidiaries and steel purchased from third-party suppliers procured in the domestic and international markets. We purchased from third parties approximately 360,000 tons of steel products in 2015, 374,000 tons of steel products in 2014 and 288,000 tons of steel products in 2013.

 

Steel scrap. Scrap is the main raw material for producing steel in our steelmaking facilities in Colombia. Ternium sources 100% of its steel scrap needs from the local scrap market. We consume approximately 1.1 tons of scrap to produce one ton of crude steel in Colombia.

 

Electricity. Manizales is our main electricity-consuming unit in Colombia, mainly due to its electric arc furnace-based steel production operations. Manizales purchases electricity from ISAGEN S.A. E.S.P., a Colombian power company, under a supply contract expiring in December 2018. The electricity price is based on a fixed rate adjusted by the wholesale price index with certain pre-set premiums or discounts in the event prevailing market prices reach a level above or below certain thresholds. We consume approximately 0.6 MWH of electricity to produce one ton of crude steel in Colombia.

 

Product Quality Standards

 

Ternium develops its products and services with a philosophy of continuous improvement and seeks to excel in its internal quality control of its products and processes. Ternium’s products are manufactured in accordance with proprietary standards and the requirements of customers, and within the specifications of recognized international standardization entities including the International Organization for Standardization, or ISO, the American Society for Testing and Materials, or ASTM, the European Standards, or EN, the Japanese Industrial Standards, or JIS, the Society of Automotive Engineers, or SAE, and the standards of the American Petroleum Institute, or API. Ternium also has product certifications based on international or local standards depending on the markets served.

 

Ternium established and implemented a Quality Management System, or “QMS,” and continuously improves its effectiveness in compliance with the requirements of the applicable ISO 9001:2008 and ISO / TS 16949:2009, intended for production of automotive supplies, and other specific requirements. Ternium’s QMS operates with aligned strategies, objectives and criteria throughout Ternium’s subsidiaries. To keep its ISO multisite certification, the QMS is audited annually by Lloyd’s Register Quality Assurance.

 

Ternium Mexico’s and Siderar’s metallurgical testing laboratories are accredited for the performance of various technical tests in accordance with ISO/IEC 17025:2005 General Requirements for the Competence of Testing and Calibration Laboratories or equivalent standards.

 

Research and Development; Product Development

 

Product research and development activities at Ternium are conducted through a central Product Development Department in coordination with local teams that operate in several of our facilities. Applied research efforts are carried out in-house and in conjunction with universities and research centers, as well as through participation in international consortiums. Applied research efforts seek to strengthen fundamental knowledge that enables the development of innovative products. Ternium also develops new products and processes in cooperation with its industrial customers, prioritizing an early involvement scheme.

 

In 2015, Ternium’s product research and development activities continued to focus mainly on the development of high-end flat steel products, aimed at consolidating our market positioning in the automotive, transportation, home appliance, agricultural and oil & gas sectors.

 

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During 2015, Ternium completed several projects aimed at increasing our product portfolio for our customers in the automotive, metal mechanic, home appliances, oil & gas and electric motors industries. These projects included the development of high-strength steel products for the automotive and metal mechanic industries, a new range of paintings for the home appliance industry and new steel qualities suitable for coiled tubing and high-strength steel products for welded pipes applications for the oil & gas industry.

 

Ternium developed and certified certain steel products in Mexico and Argentina to supply vehicle manufacturers, for current and new models. The initiative enabled Ternium to increase its share in the high-end steel market by substituting imported supplies. With that same purpose, Ternium developed new products with high nitrogen content to be used in post heat-treatment conditioning, double-phase steels and special steel qualities for hydroforming.

 

During 2015, Ternium developed new paint systems for home appliances manufacturers in Mexico and Argentina, aimed at yielding aesthetically pleasing results for applications in the high-end appliance market and new paint systems aimed at optimizing the manufacturing process.

 

With the aim of satisfying the demand derived from the operation of non-conventional natural gas fields, Ternium developed new steel qualities and expanded the size range of its product portfolio related to natural gas distribution projects.

 

In addition, to meet Ternium Mexico’s slab supply requirements, in 2015 we completed the development of new steel slab qualities to be produced at Siderar’s new continuous casting facilities.

 

Siderar bolstered during 2015 its technology service program, which aims at strengthening the competitiveness of its metal-mechanic industry customers vis-à-vis imported products. These programs, carried out in combination with Propymes, the ITBA (Instituto Tecnológico de Buenos Aires) and truck trailer manufacturers, brought support to the development of high-strength steel-manufactured trailers. The new resulting models were lighter and had higher freight capacity than the traditional models, which led to increased fuel consumption efficiency and vehicle amortization. In addition, together with a plate processor and its customer companies, Siderar is developing high-strength steel plates with the aim of enabling the design of ships and diverse capital goods with better performance.

 

Ternium’s product research and development plans are based on a continuing assessment of steel product performance and the emerging requirements of the industry, carried out in close collaboration with leading steel customers and institutions. Based on customer needs, we improve, adapt and create new applications and define future technology requirements at our facilities.

 

During 2015, we continued developing high-strength steel together with the Colorado School of Mines and the University of Pittsburgh, for applications in the pipe manufacturing and automotive industries. Moreover, Ternium continued with research projects on steel coatings performance together with the International Zinc Association and Canadian McMaster University. Developments included new coating technologies for several applications in the automotive industry and the optimization of processes through improvements in the galvanizing bath. Furthermore, Ternium continued developing several projects together with the Mexican Centro de Investigación en Materiales Avanzados (Advanced Materials Research Center) seeking the development of new coatings, Mexican Centro de Investigaciones y Estudios Avanzados (Advanced Research and Investigation Center) seeking improved hot-stamped steel coatings performance and electric steel efficiency performance, and with the Instituto Argentino de Siderurgia (Argentine Steel Institute) for high-strength steel casting and hot-rolling processing development for use in the automotive, transportation, agricultural and oil & gas industries.

 

Ternium has also supported universities’ research initiatives focused on the development of fundamental knowledge, which aims at acquiring the required know-how for the improvement of products and the development of new ones. During 2015, thirty students pursuing master and doctorate degrees in metallurgy participated in the development of different theses which they presented in symposiums organized by the Company. Joint projects included basic research on steel and steel coatings mechanical and chemical performance together with the Mexican Universidad Autónoma de Nuevo León (Nuevo León Autonomous University), and basic research on phase transformation of advanced steels together with the Mexican Universidad Autónoma de San Luis Potosí (San Luis Potosí Autonomous University).

 

During 2016, Ternium will continue focusing on the optimization of its current product range and expanding its usage base mainly focusing on the industrial market and intensifying its early-involvement strategy.

 

During the fourth quarter 2015, we completed the installation of a state-of-the-art run-out table in the hot-strip mill of the Churubusco unit. With this new cooling technology, Ternium will begin the development of new high-strength advanced steel products for the automotive industry in order to expand its hot-rolled steel product range for automotive, transportation and oil & gas industries applications.

 

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Regulations

 

Environmental Regulation

 

Ternium’s operations (including mining activities in Mexico) are subject to a broad range of environmental laws, regulations, permit requirements and decrees relating to the protection of human health and the environment, including laws and regulations relating to land use; air emissions; wastewater treatment and discharges; the use, handling and disposal of hazardous or toxic materials and the handling and disposal of solid wastes. Laws and regulations protecting the environment have become increasingly complex and more stringent and expensive to implement in recent years. International environmental requirements may vary. Ternium’s corporate environmental policy commits each of its business units to comply with all applicable environmental laws and regulations and aims to achieve the highest standards of environmental performance as a basis to enhance sustainable development. Compliance with environmental laws and regulations, and monitoring regulatory changes, is addressed primarily at the regional level.

 

Ternium reports to the World Steel Association eleven sustainability indicators, among which carbon dioxide emissions data is being reported on an annual basis as part of the association’s initiative to collect emissions data from member companies. We support the steel industry’s ongoing effort to develop innovative solutions to reduce greenhouse gas (GHG) emissions over the life cycle of steel products. According to the Intergovernmental Panel on Climate Change (IPCC), the steel industry accounts for approximately 6% to 7% of total world GHG emissions. Our steel production facilities in Mexico have achieved GHG-specific emission levels that are close to the theoretical minimum. In Argentina, Siderar’s GHG-specific emission levels are close to the industry average for blast furnace technology.

 

The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable since regulations under some of these laws have not yet been promulgated or are undergoing revision. In addition, new laws and regulations could emerge as a result of ongoing negotiations for new commitments on GHG emissions related to the second phase of the Kyoto Protocol, which expires in 2020. The expenditures necessary to remain in compliance with these laws and regulations, including site or other remediation costs, or costs incurred from potential environmental liabilities, could have a material adverse effect on our financial condition and profitability. While we incur and will continue to incur expenditures to comply with applicable laws and regulations, there always remains a risk that environmental incidents or accidents may occur that may negatively affect our reputation or our operations.

 

Ternium has not been subject to any material penalty for any environmental violations in 2015, and we are not aware of any current material legal or administrative proceedings pending against Ternium with respect to environmental matters which could have an adverse material impact on Ternium’s financial condition or results of operations.

 

Mining regulations in Mexico

 

Because our operations in Mexico include mining, we are also subject to Mexican regulations relating to mining and mining concessions. Under Mexican law, mineral resources belong to the Mexican nation and a concession from the Mexican federal government is required to explore for or exploit mineral reserves. Pursuant to the Ley Minera, or Mining Law, mining concessions may only be granted to Mexican individuals and to legal entities incorporated under Mexican law. Foreign investors may hold up to 100% of the shares of such entities.

 

A mining concession allows its holder to perform both exploration works (including identifying mineral deposits and quantifying and evaluating economically minable reserves) and exploitation works (including detaching and extracting mineral products from such deposits). Mining concessions are granted for a 50-year period from the date of their recording in the Public Mining Registry; following the expiration of the initial concession term, the concessions are renewable for an additional 50-year term in accordance with, and subject to, the procedures set forth in the Mining Law.

 

Mining concessions grant several specified rights to the concessionaire, including:

 

the right to dispose freely of mineral products obtained as a result of the exploitation of the concession;

 

the right to obtain the expropriation of, or an easement with respect to, the land where the exploration or exploitation will be conducted; and

 

the use of water in the mine to facilitate extraction.

 

In addition, a holder of a mining concession is obligated, among other things, to explore or exploit the relevant concession (including the achievement of minimum investment targets), to pay for any relevant mining rights, to comply with all environmental and safety standards, and to provide information to and permit inspections by the Secretariat of Economy. Mining concessions may be terminated if the obligations of the concessionaire are not satisfied.

 

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A company that holds a concession must be registered with the Public Mining Registry. In addition, mining concessions and permits, assignments, transfers and encumbrances must be recorded with the Public Mining Registry to be enforceable. We believe that our material mining concessions are duly registered in the Public Mining Registry.

 

For information regarding amendments to the Mining Law and regulations in Mexico, see Item 3. “Key Information—D. Risk Factors—Risks Relating to our Mining Activities—Required governmental concessions could be subject to changes or termination, and permits and rights of use and occupancy could be difficult to obtain or maintain, all of which could adversely affect our mining activities and operating costs.”

 

Trade regulations

 

Intense global competition in the steel industry can lead many countries to increase duties or impose restrictions on steel product imports to protect their domestic industries from trades that are not made under market conditions or that are otherwise unfair. Such measures protect domestic producers from increased imports sold at dumped or subsidized prices.

 

During a period of intense competition in 2001, some regions to which Ternium exports its products, such as the United States and Europe, implemented these measures as well as other general measures known as safeguards. While safeguards were lifted in December 2003, antidumping and countervailing duties remained in place. More recently, a new wave of protective measures has emerged due to increased steel imports from China. The ongoing slowdown of the Chinese economy has resulted in substantial overcapacity and intensified competitive pressures throughout the steel industry worldwide. At the same time, bilateral or regional free trade agreements have liberalized trade among some countries, providing for reduced or zero tariffs for many goods, including steel products.

 

The entry into force of various free trade agreements and certain countries’ imposition of trade remedy measures can and have both benefited and adversely affected Ternium’s home markets and export sales of steel products, as described below. See also Item 3. “Key Information—D. Risk Factors—Certain Regulatory Risks and Litigation Risks—International trade actions or regulations and trade-related legal proceedings could adversely affect Ternium’s sales, revenues and overall business.” Relevant free trade agreements and trade remedy measures, by country, are described below:

 

Mexico.

 

Imports of steel products to Mexico:

 

The Mexican government has imposed certain antidumping measures on imports of steel products that are similar to the ones produced by Ternium Mexico. The following antidumping measures are currently in effect:

 

Hot-rolled products: On March 28, 2000, the Mexican government imposed antidumping duties on the Russian Federation and Ukraine of 30.31% and 46.66%, respectively, on hot-rolled products. The measure was extended three times for 5 years each, on March 17, 2006; on September 8, 2011 (modifying the duties to 21% and 25% for Russia and Ukraine respectively) and on January 28, 2016. On July 19, 2013, the Mexican government initiated an anti-circumvention investigation on imports of boron-alloyed hot-rolled products from Russia. On March 21, 2014, Mexico’s Secretariat of Economy published the final resolution on the investigation, by which boron-alloyed hot-rolled products from Russia are now subject to a 21% antidumping duty. Furthermore, on December 22, 2015, the Mexican government published the final antidumping resolution imposing definitive and specific antidumping duties on China (USD335.60 per ton, USD354.92 per ton), Germany (USD137 per ton, USD166.01 per ton) and France (USD67.54 per ton, USD75.59 per ton), on hot-rolled products.

 

Plate in coils: Since June 1996, an antidumping duty of 29.3% has been in place on imports from Russia. Following its most recent extension, the measure will remain in place until November 2017. On July 5, 2013, the Mexican government initiated an anti-circumvention investigation on imports of boron-alloyed plate in coil imports from Russia. On February 19, 2014, Mexico’s Secretariat of Economy published the final resolution on the investigation by which boron-alloyed plate in coil imports are now subject to a 29.3% antidumping duty. Such resolution has been appealed and judicial procedures are ongoing in Mexican courts.

 

Cold-rolled products: In June 1999, Mexico imposed antidumping duties on cold-rolled steel sheets from the Russian Federation (15%) and Kazakhstan (22%). Following its most recent extension, the measure will remain in place until July 2020. In addition, on October 1, 2012, the Mexican government initiated a dumping investigation on cold-rolled steel imports from South Korea. On December 26, 2013, Mexico’s Secretariat of Economy published a suspension agreement under which Korean exporters, POSCO and Hyundai, voluntarily undertook to limit their cold-rolled products exports to the Mexican market. Furthermore, on June 19, 2015, Mexico imposed antidumping duties on cold-rolled steel products from China of between 65.99% and 103.41%, with rates depending on the Chinese exporting company. On December 2015 Mexico initiated a circumvention inquiry against cold-rolled steel products with boron added from China, a final determination is expected in 2016.

 

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Coated flat products: On December 17, 2015, the Mexican government initiated an antidumping investigation on coated flat products from China and Taiwan. A preliminary determination is expected by mid-2016.

 

Reinforcing bars: Since 1995, imports of reinforcing bars from Brazil are subject to an antidumping duty of 57.69%. In June 2006, the second sunset review resolution determined the continuation of antidumping duties. On August 9, 2010, a third sunset review was initiated, and on January 12, 2012, the Mexican authority determined the continuation of the antidumping duty for an additional five-year period. Currently, there is an ongoing fourth sunset review, which was initiated on July 31, 2015.

 

Wire rod: Since September 2000, imports of wire rod from Ukraine are subject to an antidumping duty. The initial antidumping margin was 30.52%. In June 2006, the first sunset review resolution determined the continuation of the antidumping duty for five more years. On September 7, 2010, a second sunset review was initiated, and on March 7, 2012, the Mexican government increased the antidumping duty to 41% until September 2015. The Mexican government initiated the third sunset review on September 4, 2015. In addition, on September 2, 2015, the Mexican government initiated an antidumping investigation on wire rod from China. A preliminary determination was published on December 22, 2015, by which the Mexican government imposed a preliminary and specific antidumping duty of USD0.49 per kilogram.

 

On February 9, 2010, the Mexican Government issued a decree reducing the import tariffs on several steel product groups. The tariff for finished products was set at 0% starting in 2012. The tariff for semi-finished products was set at 0% starting in 2012 and the tariff for welded pipe products was set in a range from 0% to 5% starting in 2012. Three companies (including Ternium) and an industry-related labor union sought an injunction against these government decisions in early 2012 when the tariffs went to 0%. The legal action taken by the companies was rejected by the courts, but the legal action taken by the labor union had a positive preliminary outcome. As a result, the government reestablished on August 1, 2012, a 3% tariff on some semi-finished, flat, long and pipe and tube steel products. At the beginning of May 2015, the tariffs were again removed. However, on October 8, 2015, the Mexican Government issued a decree imposing a temporary 15% import tariff on several steel product groups for a period of six months. Steel product groups included slabs, hot-rolled, cold-rolled and wire rod. In April 2016, the measure was extended for another 6 months.

 

Exports of steel products from Mexico:

 

U.S. authorities have imposed a number of measures on steel import products from Mexico, thereby restricting Ternium’s exports to that country. Below is a description of measures currently in effect:

 

Carbon and alloy steel wire rod: Mexican wire rod exports are subject to an antidumping duty of 20.11% pursuant to an antidumping duty order on carbon and certain alloy steel wire rod. On May 30, 2014, as a result of the most recent sunset review, such duty was extended for five more years, until June 2019.

 

Pipe and tube: During 2007, U.S. authorities initiated an antidumping investigation of light-walled rectangular pipe and tube, or LWRPT, from, among other countries, Mexico. On June 13, 2008, the authorities made a final determination of sales at less than fair value in the investigation of LWRPT from Mexico and, consequently, imposed antidumping duties. On February 18, 2011, the authorities published the final results of the first administrative review by which Mexican LWRPT exports were subject to an antidumping duty of 6.13% until May 23, 2014, when U.S. authorities made a final affirmative sunset review of 2.40% for Maquilacero S.A. de C.V. and 3.76% for certain other companies subject to the review, including Ternium Mexico. On August 10, 2015, U.S. authorities initiated an antidumping investigation of heavy walled rectangular welded carbon steel pipes and tubes from Korea, Mexico, and Turkey. On February 23, 2016, the Department of Commerce announced its affirmative preliminary determinations in the antidumping duty investigations of imports of heavy walled rectangular welded carbon steel pipes and tubes from Korea (2.53%-3.81%); Mexico (Maquilacero: 3.99%; Productos y Laminados de Monterrey: 16.31%, Ternium Mexico: 13.65%, and others), and Turkey (0%-14.48%).

 

Welded pipes: Since 1992, pursuant to an antidumping duty order on circular welded non-alloy steel pipe or standard pipe from various countries, including Mexico, standard pipes manufactured by Hylsamex and Grupo Imsa were subject to antidumping duties. In 2007, such measures were extended for five more years. In August 2009, U.S. authorities published the final results of a changed circumstances review, concluding that Ternium Mexico is the successor-in-interest to Hylsamex for purposes of determining antidumping duty liability. In accordance with the latest administrative review, the applicable duty for Ternium Mexico is 48.33%. In 2012, the antidumping order was renewed as a result of the latest sunset review.

 

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Reinforced bars: On November 6, 2014, U.S. authorities made a final determination on reinforced bar imports from Mexico, imposing antidumping duties between 20.58% and 66.70%. The antidumping duty applicable to Ternium’s products is 20.58%.

 

Trade agreements:

 

Mexico has signed trade agreements with several countries or trade blocs aimed at liberalizing trade between them:

 

NAFTA was signed among Canada, Mexico and the United States and came into effect on January 1, 1994. NAFTA provided for the progressive elimination over a ten-year period of duties on, among other things, steel products traded between or among Mexico, the United States and Canada. As a result, zero tariffs currently apply to steel products traded within NAFTA countries. Accordingly, Ternium has greater access to the U.S. and Canadian markets through Ternium Mexico, but also faces increased competition in Mexico from U.S. and Canadian steel imports. NAFTA provides that NAFTA member companies (including Mexican steel producers such as Ternium Mexico) can challenge trade restrictions imposed by other NAFTA countries before a binational dispute resolution panel.

 

The Mexican-European Free Trade Agreement, or MEFTA, became effective on July 1, 2000. MEFTA provides for the phase-out and eventual elimination of Mexican and European duties on all industrial goods, including finished steel products. The European Union, or EU, eliminated all import duties on Mexican industrial goods, including finished steel products, as of January 1, 2003, while Mexico eliminated all import duties on European industrial goods, including finished steel products, as of January 1, 2007.

 

The Economic Partnership Agreement between Japan and Mexico came into force on April 1, 2015. The new agreement provides for a phase-out and eventual elimination of Mexican and Japanese duties on all industrial goods within a ten-year period. Beginning in April 1, 2015, all duties on steel products were eliminated. Until March 31, 2015, an import duty of 3% was applicable to Japanese steel imports.

 

In November 2003, Mexico and Argentina signed an Economic Complementation Agreement, or ACE 6, whereby reciprocal tariff preferences were granted. In 2006, Mexico and Argentina modified the ACE 6 Agreement, reducing to zero import duties on imports of certain steel products from the other country. Zero import duties included exports from Mexico to Argentina and from Argentina to Mexico for up to 90,000 tons per year of slabs, 60,000 tons per year of cold-rolled coils and 30,000 tons per year of corrosion-resistant coils, including hot dip galvanized and pre-painted sheets.

 

The Mexican government is also a party to trade agreements with Colombia, the European Free Trade Association—an intergovernmental organization set up by Liechtenstein, Norway, Iceland and Switzerland—Japan, Chile, Bolivia, Nicaragua, Costa Rica and Uruguay, among others. In addition, in 2012, Mexico joined the Trans-Pacific Partnership (“TPP”) negotiations, an initiative that includes Australia, Brunei Darussalam, Canada, Chile, United States, Malaysia, New Zealand, Peru, Singapore, Japan, and Vietnam. On February 4, 2016, trade ministers from twelve countries signed the Pacific trade agreement in Auckland, New Zealand. Each country will have to submit the agreement to an internal legal process in order to be approved. In the case of Mexico, such agreement will be submitted for approval to the Republic’s Senate.

 

Argentina.

 

Imports of steel products to Argentina:

 

In the past, the Argentine government imposed various antidumping measures on imports of certain steel products that compete directly with Ternium’s sales in Argentina. After several subsequent revisions of such cases, there are currently no measures in place.

 

Trade agreements:

 

Argentina has signed free trade agreements with several countries or trade blocs aimed at liberalizing trade between them, including the following:

 

In early 1991, Argentina entered, together with Brazil, Uruguay and Paraguay, into the Treaty of Asunción, creating the Mercado Común del Sur (Common Market of the South), or Mercosur, a common market organization that aimed to bring about the free movement of goods, capital, services and people among its member states. In 2004, the Mercosur members entered into the Treaty of Ouro Preto, creating a customs union among them. On January 1, 2013, Venezuela became a full member of Mercosur. Over time, Mercosur has eliminated or significantly reduced import duties, tariffs and other trade barriers among member states. Since January 1, 2000, zero tariffs apply to steel products traded among them; however, in the case of Venezuela, steel import tariffs currently range from 0% to 3.8%, and are expected to be zero by 2018.

 

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Applicable steel import tariffs to Mercosur member countries from non-member countries currently range between 2% and 16%. However, every six months, Mercosur members may exempt from tariffs a limited number of products imported from non-member countries. Uruguay has elected to exempt certain steel products, including cold-rolled sheets and galvanized flat steel products. This exemption regime is expected to be in force until December 31, 2017, but has been extended in the past and, if agreed by Mercosur member countries, could again be extended in the future.

 

In 2004, Mercosur and the Comunidad Andina de Naciones (Andean Community), or CAN, currently including Bolivia, Colombia, Ecuador and Peru, signed a free trade agreement aimed at reducing and eventually eliminating tariffs on steel products traded among member countries. While all tariffs on steel products traded between Argentina and Bolivia and between Argentina and Peru have been eliminated, the elimination of tariffs on steel products traded between Argentina and Ecuador and Argentina and Colombia are subject to a pending agreement on local content specifications. Mercosur entered into a trade agreement with Chile in 2005. As a result, all tariffs on steel products traded between Mercosur and Chile have been eliminated. In addition, Mercosur is negotiating a free trade agreement with the European Union.

 

In November 2003, Argentina and Mexico signed the ACE 6. See “—Regulations—Trade Regulations— Mexico.”

 

Colombia.

 

Imports of steel products to Colombia:

 

The Colombian government has imposed certain antidumping measures on imports of steel products. The following antidumping measures are currently in effect:

 

Low-carbon wire rods: On October 8, 2013, Colombia imposed provisional safeguard duties of 21.29% on imports of low-carbon wire rods from countries belonging to the World Trade Organization (WTO), with the exception of Cuba, Ecuador, the United States and Venezuela. On April 30, 2014, Colombia imposed final safeguard duties of 21.29% on imports of low-carbon wire rod from WTO members with the exception of Argentina, Chile, Ecuador, Costa Rica, the United States and Canada, to remain in force for a period of one year that ended on March 31, 2015. On October 2015, Colombia imposed provisional antidumping duties on imports of low-carbon wire rod from China, consisting of a duty calculated based on a price of USD541.06 per ton less the actual FOB import price for such product, in force until the end of March 2016. Definitive measures are expected to be announced shortly.

 

Galvanized flat steel products: On March 5, 2014, Colombia imposed final antidumping measures on imports of galvanized flat steel products from China, to remain in force for a period of three years, consisting of a duty calculated based on a price of USD824.57 per ton less the actual FOB import price for such product. In addition, in July 2015 Colombia imposed safeguard duties of 21% on imports of galvanized flat steel products from countries with whom Colombia does not have a free trade agreement in place, to remain in force for a period of one year.

 

Trade agreements:

 

Colombia has signed free trade agreements with several countries or trade blocs aimed at liberalizing trade between them.

 

CAN is a trading bloc, currently including Bolivia, Colombia, Ecuador and Peru, established during 1993 and approved during 1994 for the purpose of promoting trade relations among its members and between CAN and the rest of the world. The treaty formalized a customs union among CAN’s member states. Over time, CAN has eliminated or significantly reduced import duties, tariffs and other trade barriers among member states. In particular, zero tariffs have applied to steel products imported from other member states since January 1, 2000. The current tariff applicable to steel products imported from outside CAN is between 5% and 10% and, if such products are not produced in Colombia, the tariff was reduced to 0% until August 15, 2017. CAN and Mercosur have signed a free trade agreement. See “—Regulations—Trade Regulations—Argentina.”

 

During June 1994, Colombia and Mexico signed a free trade agreement. See “—Regulations—Trade Regulations—Colombia.”

 

On August 9, 2007, Colombia, El Salvador, Guatemala and Honduras established the Triángulo Norte (North Triangle), or TN, free trade agreement. Members of the TN signed multilateral agreements related to funds transfers and local and most favored nation statuses, and signed bilateral agreements aimed at reducing trade duties. Colombia’s free trade agreement with Guatemala started on November 12, 2009; with El Salvador on February 1, 2010; and with Honduras on March 27, 2010. Under TN, zero tariffs apply to several steel products imported from other member states.

 

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Colombia’s free trade agreement with the United States became effective in October 2011. Under this agreement, steel import tariffs from Colombia to the United States will remain at 0% and steel import tariffs from the United States to Colombia will decrease from a range of 5-10% in 2011 to 0% in one, five or ten years according to the product category. In particular, wire rods import tariffs became zero beginning in 2012 and rebar import tariffs will decrease gradually, reaching zero in 2021.

 

In addition, Colombia has also signed free trade agreements with Chile, Canada and the European Union, in effect since May 2009, August 2011 and August 2013, respectively, and has signed free trade agreements with Costa Rica, Israel, Panama and South Korea, which are not yet effective. Colombia is currently negotiating free trade agreements with Japan and Turkey.

 

United States.

 

U.S. authorities have imposed a number of measures on steel import products. Below is a description of measures currently in effect:

 

Imports of steel products to the United States:

 

Hot-rolled products: During February 2014, the U.S. government imposed antidumping and countervailing duties on certain hot-rolled carbon steel flat products from China, India, Taiwan, Thailand, Russia, Indonesia and Ukraine. Current antidumping duties range between 12.34% and 90.83% for China, 36.53% and 44.40% for India, 20.28% and 29.14% for Taiwan, 4.41% and 20.30% for Thailand and 73.59% and 184.56% for Russia, with rates depending on the exporting company; antidumping and countervailing duties are set at 47.86% for Indonesia and 90.33% for Ukraine. Current countervailing duties range between 540.78% and 563.50% for India and are set at 10.21% for Indonesia and 2.38% for Thailand. These measures are set to remain in force until March 2018. In addition, on September 24, 2015, the U.S. government initiated antidumping and countervailing investigations on hot-rolled products from Australia, Brazil, Japan, Korea, Netherlands, Turkey and the United Kingdom. On January 11, 2016, the Department of Commerce announced its affirmative preliminary determinations in the countervailing duty (CVD) investigation of imports of certain hot-rolled steel flat products from Brazil (7.42%), and its negative preliminary determinations in the CVD investigations of imports of certain hot-rolled steel flat products from the Republic of Korea and the Republic of Turkey. A final determination on the countervailing investigation is expected by July 2016. On March 15, 2016, the U.S. government imposed preliminary antidumping duties of 23.25% for Australia, between 33.91% and 34.28% for Brazil, between 6.79% and 11.29% for Japan, between 3.97% and 7.33% for Korea, 5.07% for Netherlands, between 5.24% and 7.07% for Turkey and 49.05% for the United Kingdom. Final determinations are scheduled to be announced on or about August 3, 2016. A final determination on the antidumping investigation is expected by September 2016.

 

Cold-rolled products: On December 15, 2015, the U.S. government imposed preliminary countervailing duties on cold-rolled products from Brazil (7.42%), China (227.29%), India (4.45%), Korea (negative) and the Russian Federation (with a “de minimis” exclusion of two companies and 6.33%). In addition, on March 1, 2016, the U.S. government imposed preliminary antidumping duties on cold-rolled products from Brazil (38.93%), China (265.79%), India (6.78%), Japan (71.35%), Korea (from 2.17% to 6.85%) and the Russian Federation (from 12.62% to 16.89%) and the United Kingdom (from 5.79% to 31.39%), with rates depending on the exporting company.

 

Corrosion-resistant flat products: On November 2, 2015, the U.S. government imposed preliminary countervailing duties on corrosion-resistant flat products from China (from 26.26% to 235.66%), India (from 2.85% to 7.71%), Italy (from 13.06% to 38.41%, with a “de minimis” exclusion of one company) and Korea (1.37%, with a “de minimis” exclusion of two companies), with rates depending on the exporting company. In addition, on December 21, 2015, the U.S. government imposed preliminary antidumping duties on corrosion-resistant flat products from China (255.8%), India (from 6.64% to 6.92%), Italy (3.11% with a “de minimis” exclusion of one company) and Korea (from 2.99% to 3.51%), with rates depending on the exporting company.

 

Wire rod: On January 8, 2015, the U.S. government imposed antidumping duties (from 106.19% to 110.25%) and countervailing duties (from 178.46% to 193.31%) on wire rod from China, with rates depending on the exporting company.

 

Reinforced bars: On November 6, 2014, U.S. authorities made a final determination on reinforced bar imports from Mexico, imposing antidumping duties between 20.58% and 66.70%. The antidumping duty applicable to Ternium’s products is 20.58%. See “—Trade Regulations— Mexico.”

 

Insurance

 

Our subsidiaries carry insurance policies covering property damage (including machinery breakdown and business interruption), general liability and other insurance such as, among others, automobile, marine cargo and life and workers’ compensation insurance. These insurance policies include coverage and contract amounts which are customary in the steel products industry and in line with legal and domestic market requirements. General liability coverage typically includes third party, employer, sudden and accidental seepage and pollution and product liabilities within limits up to USD100 million per occurrence.

 

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Disclosure Pursuant to Section 13(r) of the Exchange Act

 

The Iran Threat Reduction and Syria Human Rights Act of 2012, or ITRA, created a new subsection (r) in Section 13 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), which requires a reporting issuer to provide disclosure if the issuer or any of its affiliates engaged in certain enumerated activities relating to Iran, including activities involving the Government of Iran. Ternium is providing the following disclosure pursuant to Section 13(r).

 

Tenaris

 

Tenaris is indirectly controlled by San Faustin and, accordingly, is deemed an “affiliate” of Ternium, as that term is defined in Exchange Act Rule 12b-2. In response to our inquiry, Tenaris provided the disclosure included below.

 

In January 2010, Tenaris Global Services S.A., or TGS, a Tenaris subsidiary, entered into an agreement with the National Iranian Drilling Company, or NIDC, a company controlled by the Government of Iran, for a total value of EUR9.4 million (approximately USD10.1 million). TGS made all deliveries and collected most of its account receivables under the NIDC agreement prior to 2012. In 2012, TGS collected an amount of EUR750 thousand (approximately USD810 thousand) for products delivered to NIDC in prior years. As of December 31, 2015, an outstanding balance of EUR172 thousand (approximately USD187 thousand) is still due to TGS. During 2015, five NIDC experts visited one of our facilities, consistent with a pre-existing contractual obligation. As of December 31, 2015, TGS has not yet fully performed its obligation to allow six remaining NIDC experts to visit Tenaris’ mills at TGS’s cost. Tenaris expects to complete these pending obligations and collect outstanding payments during 2016.

 

TGS is also a party to an April 2011 agreement with Global Procurement General Trading FZE, or Global FZE, a company incorporated in United Arab Emirates, for the provision of OCTG for an amount of AED16.5 million (approximately USD4.5 million). TGS has been informed by Global FZE that the end users of the products delivered under this agreement are Oil Industries Engineering and Construction Group and Pars Oil and Gas Company, which are controlled by the Government of Iran. In 2012, TGS delivered products under the Global FZE agreement for a total value of AED16.3 million (approximately USD4.4 million), and collected a total amount of AED15.4 million (approximately USD4.2 million). All sales of goods and services to Iran under the agreement with Global FZE have ceased. As of December 31, 2015, a balance of AED862 thousand (approximately USD200 thousand) was owed to Tenaris, and Tenaris is currently working to collect the balance within 2016.

 

During 2015, Tenaris’s employees attended an exhibition of the oil & gas industry in Iran named Iran Oil Show, for which no fee was paid to the National Iranian Oil Company.

 

Tenaris did not record any profit in 2015 in connection with the agreements described above.

 

Except as otherwise stated above, there are no pending obligations of Tenaris or its subsidiaries under the agreements described above. While the Tenaris subsidiaries identified above intend to perform their pending obligations under such pre-existing agreements, Tenaris and its subsidiaries ceased prior to the end of 2012 all sales and deliveries of goods and services to Iran. Tenaris’s policy in 2015, based on the sanctions against Iran, was not to engage in future sales or deliveries. In January 2016, many of the international sanctions restrictions were lifted or suspended, thus enabling certain oil- and gas-related business with Iran under specified circumstances. Tenaris may consider opportunities in Iran and engage in transactions to the extent any such transactions are not prohibited under applicable remaining sanctions restrictions.

 

Tenaris believes that its activities concerning Iran do not violate any U.S. or foreign law, and has procedures in place to ensure that such activities comply with all applicable U.S. and foreign laws.

 

Tenova

 

Tenova S.p.A., or Tenova, an Italian supplier of equipment for the mining and the steel-making industry, is indirectly controlled by San Faustin and, accordingly, is deemed an “affiliate” of Ternium, as that term is defined in Exchange Act Rule 12b-2. In response to our inquiry, Tenova informed us that:

 

During 2015, Tenova or its subsidiaries supplied equipment and performed engineering services for the steel-making and raw material industries to companies believed by Tenova to be subsidiaries of development agencies of the Government of Iran.

 

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None of the activities performed is connected to the activities described in Sections 5(a) or (b) of the Iran Sanctions Act of 1996, Section 105A(b)(2) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 or was performed in favor of persons whose property and interests in property are blocked pursuant to Executive Order 13224 (terrorists and terrorist supporters) or 13382 (weapons of mass destruction proliferators and supporters).

 

All of these sales and activities, when required by applicable E.U. regulations, were authorized by the Comitato di Sicurezza Finanziaria – CSF, an Italian governmental committee established pursuant to Italian Decree n. 369 of October 12, 2001 (as amended by Italian Law n. 431 of December 14, 2001) under the supervision of the Italian Ministry of Economy.

 

Tenova’s Iran-related contracts, which were signed before 2015, are still currently being performed; any future contract between Tenova or its subsidiaries and customers controlled by the Government of Iran will continue to be made in compliance with all laws applicable to Tenova or its relevant subsidiaries.

 

Tenova informed us that its total sales revenue for 2015 with regard to the foregoing transactions amounted to USD25 million, which represents 2.2% of its total sales revenue for 2015.

 

Tenova also estimated that its net profits from such transactions, after internal cost allocation and taxes, were in the range of USD3.8 million.

 

C.Organizational Structure

 

Below is a simplified diagram of Ternium’s corporate structure as of March 31, 2016

 

 

 

Subsidiaries

 

Ternium operates entirely through subsidiaries. For a complete list of its subsidiaries and a description of its investments in other companies, see note 2 to our consolidated financial statements included elsewhere in this annual report.

 

Ternium Mexico. Ternium Mexico is a leading flat and long steel manufacturer in Mexico, with total annual finished steel production capacity of approximately 7.2 million tons. Ternium Mexico’s subsidiaries operate all of Ternium’s mining and steel production facilities in Mexico, except for Tenigal’s facilities. Ternium Mexico and its subsidiaries produce steel products mainly for the construction and industrial sectors.

 

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Siderar. Siderar is the main integrated manufacturer of flat steel products in Argentina with total annual finished steel production capacity of approximately 2.9 million tons. The shareholders of Siderar as of March 31, 2016 are set out in the following table, together with the share percentage owned by each such shareholder as of that date:

 

Siderar Shareholders  Number   Percent 
Ternium   2,752,808,188    60.94%
ANSeS   1,175,806,541    26.03%
Public   588,479,294    13.03%
Total shares issued and outstanding   4,517,094,023    100.00%

 

Ferrasa. Ferrasa is a leading long and flat steel products processor and distributor in Colombia and a scrap-based long steel manufacturer, with total annual finished steel production capacity of approximately 540,000 tons and annual sales of close to 600,000 tons, of which approximately 70% are long products and 30% are flat and tubular products, used mainly in the construction sector.

 

Tenigal. Tenigal is a hot-dip galvanized and galvannealed steel sheets manufacturer serving the Mexican automobile market with total annual finished steel production capacity of approximately 400,000 tons. Ternium and NSSMC hold 51% and 49% participations in Tenigal, respectively.

 

Ternium Guatemala. Ternium Guatemala and its subsidiaries operate all of Ternium’s steel processing facilities in Guatemala, El Salvador, Nicaragua and Costa Rica. Ternium Guatemala and its subsidiaries produce hot-dip galvanized steel sheets and other value-added finished steel products mainly for the construction and industrial sectors. Ternium Guatemala has total annual finished steel production capacity of 180,000 tons.

 

Ternium Internacional. Ternium Internacional comprises a network of companies in Uruguay, Colombia, the Netherlands and the United States that, together with our offices in Panama and Spain, market and provide services in relation to the sales of Ternium’s products to several markets other than Mexico and Argentina. The headquarters of the network are located in Uruguay. Office staff is dedicated to export sales and trading, technical assistance, commercial back office and credit analysis.

 

Ternium USA. Ternium USA operates Ternium’s steel processing activities in the United States and produces galvanized and color-coated sheets in its Shreveport unit in Louisiana, United States. Ternium USA has total annual finished steel production capacity of 200,000 tons.

 

Exiros. Exiros, which we own 50%/50% with Tenaris, has offices located in various countries and is in charge of the procurement of a majority of our purchases of raw materials and other products or services. Exiros’s objectives are to procure better purchase conditions and prices by exercising the improved bargaining power that results from combining the demand of products and services by both Ternium and Tenaris.

 

Other Investments

 

Usiminas. Usiminas is the largest flat steel producer in Brazil, with total annual crude steel production capacity of 9.5 million tons. Usiminas produces steel products mainly for the automobile, line pipe, civil construction, and electrical equipment manufacturing industries. Usiminas has iron ore mines in the Serra Azul region and industrial facilities in Ipatinga, Minas Gerais and in Cubatão, São Paulo, strategically located near the main consumers of steel in Brazil. In 2015, Usiminas shipped 4.9 million tons of steel products and 3.8 million tons of iron ore, and had net sales of BRL10.2 billion. Usiminas is a publicly traded company listed on the São Paulo stock exchange, BM&FBOVESPA S.A – Bolsa de Valores, Mercadorias e Futuros.

 

On January 16, 2012, the Company’s wholly-owned Luxembourg subsidiary Ternium Investments, together with Siderar (and Siderar’s wholly-owned Uruguayan subsidiary Prosid), and TenarisConfab, joined Usiminas’ existing control group through the acquisition of a total of 139.7 million ordinary shares of Usiminas, representing 27.7% of Usiminas’ voting capital (22.7% corresponding to Ternium and the other 5% corresponding to TenarisConfab). As a result, Usiminas’ control group, which holds, in the aggregate, 322.7 million ordinary shares representing approximately 63.9% of Usiminas’ voting capital, is now formed as follows: Nippon Group, which holds approximately 46.1% of the total shares held by the control group; T/T Group, which holds approximately 43.3% of the total shares held by the control group (35.6% corresponding to Ternium and the other 7.7% corresponding to TenarisConfab); and CEU, which holds the remaining 10.6% of the total shares held by the control group. As described below, after the completion of a share acquisition in October 2014, Ternium now owns shares of Usiminas in addition to those described in the preceding sentence.

 

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The rights and obligations of the members of Usiminas’ control group are governed by a shareholders’ agreement. Under such agreement, so long as the Nippon Group and the T/T Group each hold at least 25% of the total shares held by the control group, the Nippon Group and the T/T Group shall, in the aggregate, nominate a majority of the members of Usiminas’ board of directors, with each such group nominating an equal number of directors. Usiminas’ shareholders agreement further provides that the Nippon Group and the T/T Group shall nominate, by consensus, the chairman of Usiminas’ board of directors and Usiminas’ chief executive officer. In addition, the Nippon Group and the T/T Group have the right to nominate one member of Usiminas’ executive board (diretoria executiva) each. Any remaining Usiminas executive board seats are filled with candidates nominated by Usiminas’ chief executive officer, which nominations require the approval of both the Nippon Group and the T/T Group. Under the Usiminas’ shareholders agreement, the Nippon Group, the T/T Group and CEU are required to vote, and cause the Usiminas directors nominated by them to vote, as a single, unified block. Any and all decisions to be adopted by the members of the control group at Usiminas’ shareholders’ meetings, or by the directors nominated by them at any Usiminas’ board or directors’ meetings, require the consensus of both the Nippon Group and the T/T Group, with decisions on certain extraordinary matters requiring the unanimous consent of the Nippon Group, the T/T Group and CEU. The rights and obligations of Ternium Investments, Siderar (and Prosid) and TenarisConfab within the T/T Group are governed under a separate shareholders agreement.

 

On October 30, 2014, Ternium acquired from PREVI 51.4 million additional ordinary shares of Usiminas for a total purchase price of BRL616.7 million. Following this transaction, Ternium, through its subsidiaries Ternium Investments, Siderar and Prosid, owns 166.1 million ordinary shares of Usiminas, representing 32.9% of Usiminas’ ordinary shares. Of these, 114.7 million ordinary shares are subject to the Usiminas shareholders agreement; the remaining 51.4 million shares (acquired in October 2014 as described above) are not subject to the shareholders agreement, although during the term of the shareholders agreement, Ternium is required to vote such shares in accordance with the control group’s decisions.

 

In 2014, a conflict arose within the Usiminas’ control group with respect to the governance of Usiminas and the rules applicable to the appointment of senior managers and generally Usiminas’ business strategy. As part of that conflict, on September 25, 2014, the board of directors of Usiminas passed a resolution dismissing the company’s chief executive officer and two other executives from their respective positions on the Usiminas board of officers. The board resolution dismissing the officers was passed with a 5 to 5 vote, including the positive vote of the Nippon Group-appointed members and the negative vote of the T/T Group and CEU-appointed members, and the tie was resolved by the chairman of the board through his casting vote. Ternium believes that the votes cast by the Nippon Group-appointed members were computed in violation of the Usiminas shareholders agreement. Following the dismissal of the officers, a temporary CEO was elected with the same votes that decided the dismissal, until a new executive board is agreed between the T/T Group and the Nippon Group. As a result of these circumstances, Ternium took several actions to protect its rights and investment in Usiminas, which include requesting an injunction before the Belo Horizonte courts (ultimately denied on May 5, 2015) and making several complaints to the Brazilian securities regulator. Similarly, Usiminas’ Supervisory Board challenged the chairman’s actions. As of the date of this annual report, the proceedings before the Brazilian securities regulator are ongoing (as is the conflict within the control group). On April 6, 2015, Usiminas’ shareholders’ meeting elected a new board of directors and its chairman; due to disagreements between the Nippon and T/T Groups, the new chairman was elected by the minority shareholders. However, at the annual shareholder’s meeting held on April 28, 2016, Nippon and T/T Groups agreed to appoint a board member indicated by T/T Group as chairman.

 

For a discussion of other legal proceedings associated with Ternium’s investment in Usiminas, see Item 8. “Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

 

Techgen. Techgen is a joint venture company owned 48% by Ternium, 30% by Tecpetrol and 22% by Tenaris. Techgen is building a natural gas-fired combined-cycle electric power plant in the Pesquería area of the State of Nuevo León, Mexico. The plant is expected to be operational in the fourth quarter of 2016 with an estimated total investment of USD1.1 billion. Ternium and Tenaris agreed to enter into power supply and transportation agreements with Techgen, pursuant to which Ternium and Tenaris will contract 78% and 22%, respectively, of Techgen’s power capacity of approximately 900 megawatts. As a result, Ternium will secure the supply of electricity to its facilities in Mexico at competitive costs. For more information on the Company’s commitments under the Techgen project, see Item 5. “Operating and Financial Review and Prospects—E. Off-Balance Sheet Arrangements” and note 24 (ii) (h), (i) and (j) to our consolidated financial statements included elsewhere in this annual report.

 

D.Property, Plants and Equipment

 

See “—B. Business Overview—Production Facilities and Processes” and “—B. Business Overview—Capital Expenditure Program”.

 

Item 4A. Unresolved Staff Comments

 

None

 

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Item 5. Operating and Financial Review and Prospects

 

The following discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with, our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion and analysis presents our financial condition and results of operations on a consolidated basis.

 

Certain information contained in this discussion and analysis is presented elsewhere in this annual report, including information with respect to our plans and strategies for our business, and includes forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Concerning Forward-Looking Statements.” In evaluating this discussion and analysis, you should specifically consider the various risk factors identified in this annual report and others that could cause results to differ materially from those expressed in such forward-looking statements.

 

Overview

 

Ternium is a leading steel producer in Latin America. We manufacture and process a broad range of value-added steel products, including galvanized and electro-galvanized sheets, pre-painted sheets, tinplate, welded pipes, hot-rolled products, cold-rolled products, bars and wire rods as well as slitted and cut-to-length offerings through our service centers. Our customers range from large global companies to small businesses operating in the construction, automotive, home appliances, capital goods, container, food and energy industries. Ternium has production facilities located in Mexico, Argentina, Colombia, the southern United States and Guatemala, as well as a network of service and distribution centers throughout Latin America that provide it with a strong position from which to serve its core markets. In addition, Ternium participates in the control group of Usiminas, a leading steel company in the Brazilian steel market.

 

Ternium primarily sells its steel products in the regional markets of the Americas. Ternium provides specialized products and delivery services through its network of manufacturing facilities and service centers. We believe that Ternium is a leading supplier of flat steel products in Mexico and Argentina, a significant supplier of steel products in Colombia and in various other countries in South and Central America, and a competitive player in the international market for steel products. Through its network of commercial offices in several countries in Latin America, the United States and Spain, Ternium maintains an international presence that allows it to reach customers outside its local markets, achieve improved effectiveness in the supply of its products and in the procurement of semi-finished steel, and maintain a fluid commercial relationship with its customers by providing continuous services and assistance.

 

Ternium’s revenues are affected by general global trends in the steel industry and more specifically by the economic conditions in the countries in which it has manufacturing operations and where its customers are located. Ternium’s revenues are also impacted by events that affect the price and availability of raw materials, slabs, energy and other inputs needed for its operations. Furthermore, due to the highly cyclical nature of the steel industry, recent results may not be indicative of future performance, and historical results may not be comparable to future results. Investors should not rely on the results of a single period, particularly a period of peak prices, as an indication of Ternium’s annual results or future performance. The variables and trends mentioned below could also affect the results of its investments in steel related companies. See Item 4. “Information on the Company—B. Business Overview—Our Business Strategy.”

 

Ternium’s primary source of revenue is the sale of steel products. Management expects sales of steel products to continue to be Ternium’s primary source of revenue. The global market for such steel products is highly competitive, with the primary competitive factors being price, cost, product quality and customer service. The majority of Ternium’s sales are concentrated in the Americas. Specifically, Ternium’s largest markets are Mexico, Argentina and Colombia, where most of its manufacturing facilities are located.

 

Ternium’s results are sensitive to economic activity and steel consumption. Ternium’s results of operations, which primarily depend on economic conditions in Mexico and Argentina, are also influenced by economic conditions in international and regional markets such as NAFTA, Mercosur and the Andean Community. Historically, annual steel consumption in the countries where Ternium operates has varied at a rate that is linked to the annual change in each country’s gross domestic product and per capita disposable income. The 2008 – 2009 global economic downturn resulted in an overall decreased demand for Ternium’s products. For example, apparent consumption of finished steel products decreased in 2009 by 15% in Mexico and 33% in Argentina. This economic downturn had a pronounced negative effect on Ternium’s business and results of operations in 2009. Subsequently, apparent steel consumption recovered in these countries in sync with the recovery of economic activity. A protracted global recession or a depression would have a material adverse effect on the steel industry and Ternium.

 

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Ternium’s results are also sensitive to prices in the international steel markets. Steel prices are volatile and are sensitive to supply conditions and to trends in cyclical industries, such as the construction, automotive, appliance and machinery industries, which are significant markets for Ternium’s products. For example, steel prices in the international markets, which had been rising quickly during the first half of 2008, fell sharply beginning in the second half of 2008 as a result of collapsing apparent demand and the resulting excess capacity in the industry. The fall in prices during this period adversely affected the results of steel producers generally, including Ternium, as a result of lower revenues and write-downs of finished steel products and raw material inventories. In this regard, in the second half of 2008 Ternium recorded a valuation allowance in an amount of USD200.0 million and in the first half of 2009 it recorded an additional valuation allowance in an amount of USD127.6 million. Beginning in the second half of 2009, steel prices in the international markets rebounded mainly as a result of the increase in the demand for steel in China and other emerging markets, and the subsidence of the worldwide de-stocking process. Starting in the fourth quarter of 2014 and during most of 2015, steel prices in the international markets fell consistently to new multi-year lows as the steel industry continued to be characterized by significant overcapacity that, together with a deceleration of China’s economic growth rate, led to an unprecedented level of low-priced steel exports. In this context, Ternium’s average realized prices and operating income fell 12% and 40% year-over-year in 2015, respectively. A protracted fall in steel prices would have a material adverse effect on Ternium’s results, as could price volatility.

 

Trends in the steel industry may also have an impact on Ternium’s results. In addition to economic conditions and prices, the steel industry is affected by other factors such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. Historically, the steel industry has suffered, especially in downturn cycles, from substantial overcapacity. Currently, as a result of the 2008 – 2009 global downturn, the adverse economic conditions in Europe, a slowdown in China’s economic growth and the increase in steel production capacity in recent years, there is excess capacity in the global steel market that negatively affects the industry’s margins. Furthermore, there has been a trend in recent years toward steel industry consolidation among Ternium’s competitors, and current smaller competitors in the steel market could become larger competitors in the future. Intense competition could impact on Ternium’s share in certain markets and adversely affect its sales and revenue.

 

Ternium’s production costs are sensitive to prices of raw materials, slabs and energy, which reflect supply and demand factors in the global steel industry. Ternium purchases substantial quantities of raw materials (including iron ore, coal, ferroalloys and scrap) and slabs for use in the production of its steel products. The availability and price of these and other inputs vary, sometimes significantly, according to general market and economic conditions. In addition to raw materials and slabs, natural gas and electricity are both important components of Ternium’s cost structure. Ternium generally purchases these inputs at market or market based prices; accordingly, price fluctuations in these inputs, which may also vary according to general market and economic conditions, necessarily impact Ternium’s production costs.

 

Ternium’s export revenues could be affected by trade restrictions and its domestic revenues could be affected by unfair competition from imports. During the second half of the 1990s, a period of strong oversupply, several antidumping measures were imposed in several countries in which Ternium operates (including Mexico, Argentina and the United States) to prevent foreign steel producers from dumping certain steel products in local markets. The recovery in global economic conditions during the 2003 – 2008 period helped normalize international steel trade conditions and, eventually, several countries reduced or eliminated protective measures established in prior years including Argentina, Ternium’s second-largest steel market. However, in the face of a protracted period of oversupply since 2009, some countries have been reestablishing antidumping duties and/or other safeguards to protect their domestic markets, including Mexico, Ternium’s largest steel market, adding to measures that remained in place from before. Ternium’s ability to profitably access the export markets may be adversely affected by trade restrictions, including antidumping duties and countervailing measures, in those markets. In addition, Ternium’s ability to sell some steel products in its principal markets could be affected by unfair competition from imports of those steel products from certain countries, if applicable trade regulations were not in force.

 

Changes in prevailing exchange rates could impact results from subsidiaries with net short or long positions in currencies other than their functional currencies. The functional currency of our Mexican and Colombian subsidiaries is the U.S. dollar, and the functional currency of our Argentine subsidiary Siderar is the Argentine peso. Ternium subsidiaries record foreign exchange results on their net non-functional currency positions when the functional currencies appreciate or depreciate with respect to other currencies. For example, Ternium’s net foreign exchange result was a loss of USD5.2 million in 2015, a gain of USD26.7 million in 2014 and a gain of USD0.3 million in 2013. The 2015 net foreign exchange loss was primarily associated with the negative impact of the Argentine Peso’s 34% depreciation against the U.S. dollar on Ternium’s Argentine subsidiary Siderar’s net short U.S. dollar position, partially offset by the effect of the Mexican Peso’s 14% depreciation against the U.S. dollar on a net short local currency position in Ternium Mexican subsidiaries. In addition, Ternium’s Mexican and Colombian subsidiaries record deferred tax results when the U.S. dollar (their functional currency) appreciates or depreciates in relation to the Mexican peso or the Colombian peso, respectively, as such fluctuations change, in U.S. dollar terms, the tax base used to calculate deferred tax at such subsidiaries. Fluctuations in the value of such functional currencies against other currencies have had, and may also have in the future, an impact on Ternium’s results.

 

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Changes in prevailing exchange rates have had an impact on Ternium’s comprehensive results in the past and could impact comprehensive results from subsidiaries and investments with a functional currency other than the U.S. dollar in the future. In accordance with IFRS, Ternium records currency translation adjustments in its consolidated statements of comprehensive income. These adjustments do not affect results but, instead, have an impact on net worth. Fluctuations in the Brazilian real (as our participation in Usiminas is denominated in Brazilian reais) and the Argentine peso (as it is the functional currency of Siderar) against the U.S. dollar have had, and may also have in the future, an impact on Ternium’s comprehensive results. Ternium’s currency translation adjustments resulted in losses of USD640.5 million in 2015, USD390.6 million in 2014 and USD503.3 million in 2013. These adjustments were mainly related to the effect of the devaluation of the Brazilian real on the value of Ternium’s investment in Usiminas as measured in U.S. dollars, amounting to USD229.2 million in 2015, USD118.9 million in 2014 and USD200.2 million in 2013, and the effect of the devaluation of the Argentine peso on the value of Siderar’s net assets as measured in U.S. dollars.

 

Critical accounting estimates. This discussion of our operating and financial review and prospects is based on our consolidated financial statements included elsewhere in this annual report, which have been prepared in accordance with IFRS. The use of IFRS has an impact on our critical accounting policies and estimates.

 

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management makes estimates and assumptions concerning the future. Actual results may differ significantly from these estimates under different assumptions or conditions.

 

The principal estimates and assumptions made by management that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

 

Income taxes. The current income tax charge is calculated on the basis of the tax laws in force in the countries in which Ternium and its subsidiaries operate. Management evaluates positions taken in tax returns with respect to situations in which applicable tax regulation could be subject to interpretation. A liability is recorded for tax benefits that were taken in the applicable tax return but have not been recognized for financial reporting.

 

Deferred income taxes are calculated using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss. The principal temporary differences arise on fixed assets, intangible assets, inventories valuation and provisions for pensions. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantially enacted at year end. Under IFRS, deferred income tax assets (liabilities) are classified as non-current assets (liabilities).

 

Deferred tax assets are recognized to the extent it is probable that future taxable income will be available to offset temporary differences.

 

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associated companies, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

 

Deferred tax assets and liabilities are re-estimated if tax rates change. These amounts are charged or credited to the consolidated income statement or to the item “Other comprehensive income for the year” in the consolidated statement of comprehensive income, depending on the account to which the original amount was charged or credited.

 

Loss contingencies. Ternium is subject to various claims, lawsuits and other legal proceedings that arise in the ordinary course of business, including customer claims in which a third party is seeking reimbursement or indemnity. The Company’s liability with respect to such claims, lawsuits and other legal proceedings cannot be estimated with certainty. Periodically, management reviews the status of each significant matter and assesses potential financial exposure. If the potential loss from the claim or proceeding is considered probable and the amount can be reasonably estimated, a liability is recorded. Management estimates the amount of such liability based on the information available and the assumptions and methods it has concluded are appropriate, in accordance with the provisions of IFRS. Accruals for such contingencies reflect a reasonable estimate of the losses to be incurred based on information available, including the relevant litigation or settlement strategy, as of the date of preparation of these financial statements. As additional information becomes available, management will reassess its evaluation of the pending claims, lawsuits and other proceedings and revise its estimates. The loss contingencies provision amounts to USD8.1 million and USD9.1 million as of December 31, 2015 and 2014, respectively.

 

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Allowance for obsolescence of supplies and spare parts and slow-moving inventory. Management assesses the recoverability of its inventories considering their selling prices or whether they are damaged or have become wholly or partly obsolete.

 

Net realizable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.

 

The Company establishes an allowance for obsolete or slow-moving inventory in connection with finished goods and goods in process. The allowance for slow-moving inventory is recognized for finished goods and goods in process based on management’s analysis of their aging. In connection with supplies and spare parts, the calculation is based on management’s analysis of their aging, the capacity of such materials to be used based on their levels of preservation and maintenance, and their potential obsolescence due to technological change.

 

As of December 31, 2015 and 2014, the Company recorded no allowance for net realizable value and USD32.4 million and USD48.0 million, respectively, as allowance for obsolescence.

 

Historically, losses due to obsolescence and scrapping of inventory have been within expectations and the provisions established. If, however, circumstances were to materially change (e.g., significant changes in market conditions or in the technology used in the mills), management’s estimates of the recoverability of these inventories could be materially reduced and our results of operations, financial condition and net worth could be materially and adversely affected.

 

Useful lives and impairment of property, plant and equipment and other long-lived assets. In determining useful lives, management considered, among others, the following factors: age, operating condition and level of usage and maintenance. Management conducted visual inspections for the purpose of (i) determining whether the current conditions of such assets are consistent with normal conditions of assets of similar age; (ii) confirming that the operating conditions and levels of usage of such assets are adequate and consistent with their design; (iii) establishing obsolescence levels and (iv) estimating life expectancy, all of which were used in determining useful lives. Management believes, however, that it is possible that the periods of economic utilization of property, plant and equipment may be different than the useful lives so determined. Furthermore, management believes that this accounting policy involves a critical accounting estimate because it is subject to change from period to period as a result of variations in economic conditions and business performance.

 

Assets that are subject to amortization and investments in affiliates are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

 

When assessing whether an impairment indicator may exist, the Company evaluates both internal and external sources of information, such as the following:

 

whether significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated;

 

whether market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially;

 

whether the carrying amount of the net assets of the entity is more than its market capitalization;

 

whether evidence is available of obsolescence or physical damage of an asset;

 

whether significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite;

 

whether evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected;

 

whether it is becoming probable that the investee will enter bankruptcy or other financial reorganization, or is experiencing other financial difficulty;

 

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whether observable data indicates that there is a measurable decrease in the estimated future cash flows of the investee since the initial recognition; and

 

whether the lender of the investee, for economic or legal reasons relating to the investee’s financial difficulty, has granted a concession that the lender would not otherwise consider.

 

Considering that some of the impairment indicators were identified as of December 31, 2015, the Company tested all its cash generating units (CGUs) for impairment, resulting in no impairment charges to be recognized. Except as described below with respect to the impairments of our investment in Usiminas on December 31, 2012, September 30, 2014, and December 31, 2015, none of the Company’s cash generating units (CGUs) were tested for impairment in 2014 or 2013 (other than on goodwill as described below), as no impairment indicators were identified. Based on the information currently available to us, as of the date of this annual report, the Company is not aware of any factors that would lead to the recognition of future impairment charges. Any such impairment charges could have a material adverse effect on Ternium’s results of operations, financial condition and net worth.

 

In connection with its investment in Usiminas, the Company performed an impairment test over such investment as of December 31, 2012, and subsequently wrote down the investment by USD275.3 million, to USD1.6 billion as of year-end 2012. The impairment was mainly due to expectations of a weaker industrial environment in Brazil, where industrial production and consequently steel demand had been suffering downward adjustments. In addition, a higher degree of uncertainty regarding future prices of iron ore led to a reduction in Ternium’s forecast of long-term iron ore prices that affected cash flow expectations. Following discussions with the Staff of the U.S. Securities and Exchange Commission, the Company re-evaluated and revised the assumptions used to calculate the carrying value of the Usiminas investment at September 30, 2014, and recorded an impairment of USD739.8 million as of September 30, 2014, resulting in a carrying value for the Usiminas investment of BRL12 per share. Furthermore, Usiminas’ financial statements as of December 31, 2015, described a downgraded economic scenario for the company that caused a significant impact on its financial leverage and cash generation. In addition, KPMG, Usiminas’ external auditors included in their report on these financial statements an emphasis of matter paragraph which, without qualifying their opinion, indicated the existence of “a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern” as a result of the risk of not achieving an action plan defined by Usiminas’ management to equalize its financial obligations with cash generation. Consequently, Ternium assessed the recoverable value of its investment in Usiminas based on Usiminas ordinary shares’ average market price for December 2015, and impaired its investment by USD191.9 million. The resulting book value of Ternium’s investment in Usiminas as of December 31, 2015, was USD240.0 million. Any further write-down to Ternium’s investment in Usiminas could have a material adverse effect on Ternium’s net worth and results. For further information on the Usiminas investment, see note 3 to our consolidated financial statements included elsewhere in this annual report.

 

Goodwill impairment test. Assessment of the recoverability of the carrying value of goodwill requires significant judgment. Management evaluates goodwill allocated to the operating units for impairment on an annual basis or whenever there is an impairment indicator. Goodwill is tested at the level of the CGUs. Impairment testing of the CGUs is carried out and the value in use determined in accordance with the following accounting policy:

 

Assets that have an indefinite useful life (including goodwill) are not subject to amortization and are tested annually for impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and the value in use.

 

To carry out these tests, assets are grouped at the lowest levels for which there are separately identifiable cash flows (each, a CGU). When evaluating long-lived assets for potential impairment, the Company estimates the recoverable amount based on the value in use of the corresponding CGU. The value in use of each CGU is determined on the basis of the present value of net future cash flows which will be generated by the assets tested.

 

Determining the present value of future cash flows involves highly sensitive estimates and assumptions specific to the nature of each CGU’s activities, including estimates and assumptions relating to amount and timing of projected future cash flows, expected changes in market prices, expected changes in the demand of Ternium products and services, selected discount rate and selected tax rate.

 

Ternium uses cash flow projections for the next five years based on past performance and expectations of market development; thereafter, it uses a perpetuity rate. Application of the discounted cash flow (DCF) method to determine the value in use of a CGU begins with a forecast of all expected future net cash flows. Variables considered in forecasts include the gross domestic product (GDP) growth rates of the country under study and their correlation with steel demand, level of steel prices and estimated raw material costs as observed in industry reports.

 

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Cash flows are discounted at rates that reflect specific country and currency risks associated with the cash flow projections.

 

As a result of the above factors, actual cash flows and values could vary significantly from the forecasted future cash flows and related values derived using discounting techniques. Based on the information currently available, however, Ternium believes that it is not reasonably possible that the variation would cause the carrying amount to exceed the recoverable amount of the CGUs.

 

The discount rates used are based on Ternium’s weighted average cost of capital (WACC), which is considered to be a good indicator of cost of capital. As of December 31, 2015, the discount rate used to test goodwill allocated to the Mexico CGUs (of Steel and Mining) for impairment was 9.59% and no impairment charge resulted from the impairment test performed.

 

At December 31, 2015, 2014 and 2013, no impairment charges to CGUs with allocated goodwill resulted from the impairment tests performed. Any future impairment charge could have a material adverse effect on Ternium’s results of operations, financial condition and net worth. For a discussion of the impairments of our investment in Usiminas, see “—A. Results of Operations—Fiscal Year Ended December 31, 2015 compared to Fiscal Year Ended December 31, 2014—Overview” and “—A. Results of Operations—Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013—Overview.”

 

Allowances for doubtful accounts. Management makes estimates of the uncollectibility of our accounts receivable. Management analyzes the trade accounts receivable on a regular basis and, when aware of a third party’s inability to meet its financial commitments to Ternium, management impairs the amount due by means of a charge to the allowance for doubtful accounts. Management specifically analyses accounts receivable and historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

 

Allowances for doubtful accounts are adjusted periodically in accordance with the aging of overdue accounts. For this purpose, trade accounts receivable overdue by more than 90 days, and which are not covered by a credit collateral, guarantee or similar surety, are fully provisioned. As of December 31, 2015 and 2014, allowance for doubtful accounts totaled USD7.6 million and USD11.4 million, respectively.

 

Historically, losses due to credit failures, aging of overdue accounts and customer claims have been within expectations and in line with the provisions established. If, however, circumstances were to materially change (e.g., higher than expected defaults), management’s estimates of the recoverability of amounts due to us could be materially reduced and our results of operations, financial condition and net worth could be materially and adversely affected.

 

Mining reserve estimates. Reserves are estimates of the amount of product that can be economically and legally extracted from Ternium’s mining concessions. In order to estimate reserves, a range of geological, technical and economic factors is required to be considered. Estimating the quantity and/or grade of reserves requires complex and difficult geological judgments to interpret the data. Because the economic assumptions used to estimate reserves change from period to period, and because additional geological data is generated during the course of operations, estimates of reserves may change from period to period.

 

Changes in reported reserves may affect Ternium’s financial results and financial position. For example:

 

Asset carrying amounts may be affected due to changes in estimated future cash flows.

 

Depreciation and amortization charges may change where such charges are determined by the units of production basis, or where the useful economic lives of assets change.

 

Stripping costs recognized in Mining assets or charged to results may change due to changes in stripping ratios or the units of production basis of depreciation.

 

Asset retirement obligations may change where changes in estimated reserves affect expectations about the timing or cost of these activities.

 

Post-employment obligation estimates. Ternium estimates at each year-end the provision necessary to meet its post-employment obligations in accordance with the advice from independent actuaries. The calculation of post-employment and other employee obligations requires the application of various assumptions. The main assumptions for post-employment and other employee obligations include discount rates, compensation growth rates, pension growth rates and life expectancy.  Changes in the assumptions could give rise to adjustments in the results and liabilities recorded and might have an impact on the post-employment and other employee obligations recognized in the future.

 

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A.Results of Operations

 

The following discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements included elsewhere in this annual report. Accordingly, this discussion and analysis present our financial condition and results of operations on a consolidated basis. See “Presentation of Certain Financial and Other Information—Accounting Principles” and notes 2 and 4 to our consolidated financial statements included elsewhere in this annual report. The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report.

 

In thousands of U.S. dollars  For the year ended December 31, 
(except number of shares and per share data)  2015   2014   2013   2012(1)   2011(1)(2) 
Selected consolidated income statement data                    
                     
Net sales   7,877,449    8,726,057    8,530,012    8,608,054    9,122,832 
Cost of sales   (6,477,272)   (6,925,169)   (6,600,292)   (6,866,379)   (7,016,322)
                          
Gross profit   1,400,177    1,800,888    1,929,720    1,741,675    2,106,510 
Selling, general and administrative expenses   (770,292)   (816,478)   (843,311)   (809,181)   (839,362)
Other operating income (expenses), net   9,454    71,751    23,014    (11,881)   (11,495)
                          
Operating income   639,339    1,056,161    1,109,423    920,613    1,255,653 
                          
Finance expense   (89,489)   (117,866)   (132,113)   (150,302)   (105,570)
                          
Finance income   7,981    7,685    9,517    17,047    25,563 
                          
Other financial income (expenses), net   (17,922)   40,731    (12,879)   11,623    (220,414)
Equity in (losses) earnings of non-consolidated companies (3)   (272,810)   (751,787)   (31,609)   (346,833)   10,137 
                          
Income before income tax expense   267,099    234,924    942,339    452,148    965,368 
Income tax expense   (207,320)   (339,105)   (349,426)   (261,227)   (312,555)
                          
Profit (Loss) for the year   59,779    (104,181)   592,913    190,921    652,813 
                          
Attributable to:                         
Owners of the parent   8,127    (198,751)   455,425    142,043    517,668 
Non-controlling interest   51,652    94,570    137,488    48,878    135,145 
                          
Profit (Loss) for the year   59,779    (104,181)   592,913    190,921    652,813 
                          
Depreciation and amortization   433,788    414,797    377,133    370,855    395,988 
Weighted average number of shares outstanding (4)   1,963,076,776    1,963,076,776    1,963,076,776    1,963,076,776    1,968,327,917 
                          
Basic earnings (losses) per share (in USD per share) (5) (6)   0.00    (0.10)   0.23    0.07    0.26 
Dividends per share (in USD per share)   0.090    0.090    0.075    0.065    0.075 

 

(1)Starting on January 1, 2013, Consorcio Peña Colorada and Exiros have been proportionally consolidated. Comparative amounts for the years ended December 31, 2012 and 2011 show them as investments in non-consolidated companies and their results are included within “Equity in (losses) earnings of non-consolidated companies” in the consolidated income statement.
(2)Ternium changed prospectively the functional currency of its Mexican subsidiaries to the U.S. dollar, effective as of January 1, 2012. For the period ended December 31, 2011 the functional currency for the Company’s Mexican subsidiaries was the Mexican peso.
(3)Equity in losses of non-consolidated companies include write-downs of our investment in Usiminas, as a result of the performance of impairment tests, of USD275.3 million in 2012, USD739.8 million in 2014, and USD191.9 million in 2015.
(4)Of the 2,004,743,442 shares issued as of December 31, 2015, the Company held 41,666,666 that were repurchased from Usiminas on February 15, 2011. Such shares were not considered outstanding for purposes of the calculation of the weighted average number of shares.
(5)International Accounting Standard N° 1 (IAS 1) (Revised) requires that income for the year as shown in the income statement includes the portion attributable to non-controlling interest. Basic earnings per share, however, continue to be calculated on the basis of income attributable solely to the owners of the parent.
(6)Diluted earnings per share (expressed in USD per share), equals basic earnings per share.

 

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In thousands U.S. dollars  At December 31, 
(except number of shares and per share data)  2015   2014   2013   2012   2011 
Selected consolidated balance sheet data                    
                     
Non-current assets   5,480,389    6,341,290    7,153,162    7,211,371    5,195,688 
Property, plant and equipment, net   4,207,566    4,481,027    4,708,895    4,438,117    3,969,187 
Other non-current assets (1)   1,272,823    1,860,263    2,444,267    2,773,254    1,226,501 
Current assets   2,582,204    3,348,869    3,219,462    3,655,628    5,547,374 
Cash and cash equivalents   151,491    213,303    307,218    560,307    2,158,044 
Other current assets (2)   2,419,046    3,120,810    2,894,474    3,083,303    3,378,956 
Non-current assets classified as held for sale   11,667    14,756    17,770    12,018    10,374 
                          
Total assets   8,062,593    9,690,159    10,372,624    10,866,999    10,743,062 
                          
Capital and reserves attributable to the owners of the parent (3)   4,033,148    4,697,201    5,340,035    5,369,183    5,711,495 
Non-controlling interest   769,849    937,502    998,009    1,065,730    1,077,055 
                          
Non-current liabilities   1,558,979    1,964,070    2,185,421    2,306,640    1,975,129 
                          
Borrowings   607,237    900,611    1,204,880    1,302,753    948,495 
Deferred tax liabilities   609,514    670,523    605,883    657,211    719,061 
Other non-current liabilities   342,228    392,936    374,658    346,676    307,573 
                          
Current liabilities   1,700,617    2,091,386    1,849,159    2,125,446    1,979,383 
                          
Borrowings   913,786    1,264,208    797,944    1,121,610    1,047,641 
Other current liabilities   786,831    827,178    1,051,215    1,003,836    931,742 
                          
Total liabilities   3,259,596    4,055,456    4,034,580    4,432,086    3,954,512 
Total equity and liabilities   8,062,593    9,690,159    10,372,624    10,866,999    10,743,062 
                          
Number of shares (3)   1,963,076,776    1,963,076,776    1,963,076,776    1,963,076,776    1,963,076,776 

 

(1)Includes goodwill mainly related to the acquisition of our Mexican subsidiaries for a total amount of USD662.3 million as of December 31, 2015, 2014 and 2013, and USD663.8 million as of December 31, 2012 and 2011.
(2)As of December 31, 2015, 2014, 2013, 2012 and 2011, includes financial assets with maturity of more than three months for a total amount of USD237.2 million, USD150.0 million, USD169.5 million, USD160.8 million and USD281.7 million, respectively.
(3)The Company’s share capital as of December 31, 2015, 2014, 2013, 2012 and 2011 was represented by 2,004,743,442 shares, par value USD1.00 per share, for a total amount of USD2,004.7 million. Of the 2,004,743,442 shares, as of December 31, 2015, the Company held 41,666,666, repurchased from Usiminas on February 15, 2011.

 

Fiscal Year Ended December 31, 2015 compared to Fiscal Year Ended December 31, 2014

 

Overview

 

Apparent steel use in Mexico increased 5.8% year-over-year to approximately 24.2 million tons in 2015, supported by a broad expansion of the Mexican industrial sector and continued improvement of the construction sector during the year. Mexico’s GDP increased 2.5% year-over-year, evidencing a moderate acceleration in economic activity versus the prior year. In Argentina, apparent steel use increased 4.8% year-over-year to approximately 5.2 million tons, supported by an improved construction sector, partially offset by continued weakness in the industrial sector. In Colombia, apparent steel use decreased 4.0% year-over-year to approximately 3.8 million tons in 2015. GDP in this country continued growing in 2015, although at a lower pace, with relatively good performance in the construction and manufacturing sectors, and lower activity in the oil & gas sector.

 

Ternium’s operating income in 2015 was USD639.3 million, USD416.8 million lower than operating income in 2014. Steel shipments increased by 219,000 tons year-over-year, mainly as a result of a 301,000-ton increase in Mexico and a 41,000-ton increase in the Southern Region, partially offset by a 124,000-ton decrease in Other Markets. Operating margin decreased, mainly reflecting USD108 lower steel revenue per ton, partially offset by USD70 lower operating cost per ton. Steel revenue per ton decreased as a result of lower steel prices in Ternium’s main steel markets, partially offset by a higher value-added product mix. The decrease in operating cost per ton was mainly due to lower costs of purchased slabs, raw materials and energy.

 

Net income in 2015 was USD59.8 million, compared to a USD104.2 million net loss in 2014. Both years were affected by impairments to the recoverable value of Ternium’s investment in Usiminas, of USD191.9 million and USD739.8 million in 2015 and 2014, respectively. The USD164.0 million higher result in the year-over-year comparison was mainly due to the above-mentioned lower impairment of Ternium’s investment in Usiminas and to lower income tax expenses, partially offset by lower operating income and higher net financial expenses.

 

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Net Sales

 

Net sales in 2015 were USD7.9 billion, 10% lower than net sales in 2014. The following table shows Ternium’s total consolidated net sales for 2015 and 2014:

 

   Net sales (million USD) 
   2015   2014   Dif. 
Mexico   4,354.8    4,863.9    -10%
Southern Region   2,567.2    2,641.5    -3%
Other Markets   905.4    1,159.3    -22%
Total steel products consolidated net sales   7,827.4    8,664.8    -10%
Other products (1)   47.7    35.8    33%
Total steel segment net sales   7,875.2    8,700.5    -9%
                
Total mining segment net sales   203.1    313.2    -35%
                
Intersegment eliminations   (200.8)   (287.6)     
                
Total consolidated net sales   7,877.4    8,726.1    -10%

 

(1)The item “Other products” primarily includes pig iron.

 

Cost of sales

 

Cost of sales was USD6.5 billion in 2015, a decrease of USD447.9 million compared to 2014. This was principally due to a USD477.2 million, or 9%, decrease in the cost of raw material and consumables used, mainly reflecting lower iron ore, coking coal, scrap, energy and purchased slabs costs, partially offset by a 2% increase in shipments; and to a USD29.3 million increase in other costs, including a USD23.0 million increase in maintenance expenses and a USD17.9 million increase in depreciation of property, plant and equipment and amortization of intangible assets, partially offset by a USD9.1 million decrease in services and fees and a USD2.9 million decrease in insurance expenses.

 

Selling, general and administrative expenses

 

Selling, General & Administrative (SG&A) expenses in 2015 were USD770.3 million, or 9.8% of net sales, a decrease of USD46.2 million compared to 2014, mainly as a result of lower labor cost, freight and transportation expenses, and services and other expenses.

 

Other net operating income

 

Other net operating income in 2015 was a USD9.5 million gain, lower than the USD71.8 million gain in 2014. Other net operating income in 2014 included a USD57.5 million income recognition on insurance recovery related to Ternium’s subsidiary Siderar.

 

Operating income

 

Operating income in 2015 was USD639.3 million, or 8.1% of net sales, compared to operating income of USD1.1 billion, or 12.1% of net sales, in 2014.

 

The following table shows Ternium’s operating income by segment for 2015 and 2014:

 

In millions of U.S. dollars  Steel segment   Mining segment   Intersegment
eliminations
   Total 
   2015   2014   2015   2014   2015   2014   2015   2014 
Net Sales   7,875.2    8,700.5    203.1    313.2    (200.8)   (287.6)   7,877.4    8,726.1 
Cost of sales   (6,465.6)   (6,960.0)   (214.7)   (255.2)   194.0    290.1    (6,477.3)   (6,925.2)
SG&A expenses   (757.1)   (799.8)   (13.2)   (16.6)   -    -    (770.3)   (816.5)
Other operating income (expenses), net   9.2    70.7    0.3    1.0    -    -    9.5    71.8 
Operating income (loss)   670.7    1,011.4    (24.5)   42.3    (6.9)   2.4    639.3    1,056.2 

 

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Steel reporting segment

 

The steel segment’s operating income was USD670.7 million in 2015, a decrease of USD340.7 million compared to 2014, reflecting lower net sales and the above mentioned lower other net operating income, partially offset by lower operating cost.

 

Net sales of steel products in 2015 decreased 9% compared to 2014, reflecting a USD108 decrease in steel revenue per ton shipped, partially offset by a 219,000-ton increase in shipments. Revenue per ton decreased, reflecting lower steel prices in Ternium’s main steel markets, partially offset by a better product mix in Mexico. The increase in shipments in 2015 was mainly due to higher shipments in Mexico and the Southern Region, partially offset by lower shipments in Other Markets.

 

   Net Sales (million USD)   Shipments (thousand tons)   Revenue / ton (USD/ton) 
   2015   2014   Dif.   2015   2014   Dif.   2015   2014   Dif. 
Mexico   4,354.8    4,863.9    -10%   5,933.4    5,632.2    5%   734    864    -15%
Southern Region   2,567.2    2,641.5    -3%   2,552.2    2,510.9    2%   1,006    1,052    -4%
Other Markets   905.4    1,159.3    -22%   1,114.6    1,238.5    -10%   812    936    -13%
Total steel products   7,827.4    8,664.8    -10%   9,600.3    9,381.5    2%   815    924    -12%
Other products  (1)   47.7    35.8    33%                              
Total steel segment   7,875.2    8,700.5    -9%                              

  

(1) The item “Other products” primarily includes pig iron.

 

Operating cost decreased 7% due to a 9% decrease in operating cost per ton, partially offset by a 2% increase in shipments. The decrease in operating cost per ton was mainly due to lower raw material, purchased slabs and energy costs.

 

Mining reporting segment

 

The mining segment’s operating result was a loss of USD24.5 million in 2015, compared to a USD42.3 million gain in 2014, mainly reflecting lower iron ore sales, partially offset by a lower operating cost. Net sales of mining products in 2015 were 35% lower than in 2014, reflecting a 31% lower revenue per ton and 6% lower shipments.

 

   Mining segment 
   2015   2014   Dif. 
Net Sales (million USD)   203.1    313.2    -35%
Shipments (thousand tons)   3,635.6    3,857.3    -6%
Revenue per ton (USD/ton)   56    81    -31%

 

Operating cost decreased 16% year-over-year, mainly due to the above mentioned 6% decrease in shipment volumes and an 11% decrease in operating cost per ton. The decrease in operating cost per ton was mainly the result of lower energy costs and freight and transportation expenses.

 

Net financial results

 

Net financial results were a USD99.4 million loss in 2015, compared with a USD69.5 million loss in 2014. Ternium’s net interest results totaled a loss of USD81.5 million in 2015, compared to a loss of USD110.2 million in 2014, reflecting lower average indebtedness and weighted-average interest rates. Net foreign exchange results were a loss of USD5.2 million in 2015 compared to a gain of USD26.7 million in 2014. The loss in 2015 was primarily associated with the negative impact of the Argentine Peso’s 34% depreciation against the U.S. dollar on Ternium’s Argentine subsidiary Siderar’s net short U.S. dollar position (Siderar’s functional currency is the Argentine Peso), partially offset by the effect of the Mexican Peso’s 14% depreciation against the U.S. dollar on a net short local currency position in Ternium Mexican subsidiaries (Ternium Mexican subsidiaries’ functional currency is the U.S. dollar). Change in fair value of financial instruments included in net financial results was a USD10.2 million loss in 2015 compared with a USD17.8 million gain in 2014.

 

Equity in results of non-consolidated companies

 

Equity in results of non-consolidated companies was a loss of USD272.8 million in 2015, compared to a loss of USD751.8 million in 2014. Both years were affected by impairments to the recoverable value of Ternium’s investment in Usiminas, of USD191.9 million and USD739.8 million in 2015 and 2014, respectively.

 

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Income tax expense

 

Income tax expense in 2015 was USD207.3 million, compared to an income tax expense of USD339.1 million in 2014. The relatively high effective tax rate on both periods was mainly due to non-taxable losses stemming from the investment in Usiminas and to the depreciation of the Mexican peso against the U.S. dollar, which reduces, in U.S. dollar terms, the tax base used to calculate deferred tax at our Mexican subsidiaries (which have the U.S. dollar as their functional currency), among other non-cash effects on deferred taxes.

 

Net income attributable to non-controlling interests

 

Net gain attributable to non-controlling interests in 2015 was USD51.7 million, compared to a net gain of USD94.6 million in 2014, mainly due to a lower result attributable to non-controlling interest in Siderar.

 

Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013

 

Overview

 

Apparent steel use in Mexico increased 11.7% year-over-year to approximately 22.5 million tons in 2014, reflecting a vibrant industrial sector in which exports of manufactured goods, particularly to the United States, continued to increase, and a slowly improving construction sector. Mexico’s GDP increased 2.1% year-over-year, evidencing a moderate acceleration in economic activity versus the prior year. In Argentina, apparent steel use decreased slightly to approximately 5.0 million tons, reflecting a broad decrease in activity, particularly in the automotive sector. In Colombia, apparent steel use increased 15.8% year-over-year to approximately 4.0 million tons in 2014. Colombian GDP continued expanding at a solid pace, with positive performance by each of the different steel-consuming sectors.

 

Ternium’s operating income in 2014 was USD1.1 billion, slightly lower than operating income in 2013. Steel shipments increased by 647,000 tons year-over-year in Mexico, and decreased by a combined 254,000 tons in the Southern Region and Other Markets. Operating margin decreased slightly, reflecting a decrease of USD14 in steel revenue per ton, partially offset by a decrease of USD3 in steel operating cost per ton. A decrease in steel prices in the Southern Region was mostly offset by higher steel prices in Mexico and better value-added product mix.

 

In October 2014 Ternium acquired 51.4 million additional ordinary shares of Usiminas from PREVI for a total purchase price of BRL616.7 million (or USD249.0 million). For further information on the Usiminas transactions, see note 3 to our consolidated financial statements included elsewhere in this annual report and for a discussion of the legal proceedings associated with Ternium’s investment in Usiminas, see Item 8. “Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

 

Following discussions with the Staff of the U.S. Securities and Exchange Commission, the Company re-evaluated and revised the assumptions used to calculate the carrying value of the Usiminas investment at September 30, 2014, and recorded an impairment of USD739.8 million as of September 30, 2014, resulting in a carrying value for the Usiminas investment of BRL12 per share. The aforementioned impairment charge negatively affected the net result for the year, which was a net loss of USD104.2 million in 2014 compared to a net income of USD592.9 million in 2013.

 

Net Sales

 

Net sales in 2014 were USD8.7 billion, 2% higher than net sales in 2013, mainly as a result of higher steel products sales in Mexico, partially offset by lower steel products sales in the Southern Region and Other Markets.

 

The following table shows Ternium’s total consolidated net sales for 2014 and 2013:

 

   Net sales (million USD) 
   2014   2013   Dif. 
Mexico   4,863.9    4,230.1    15%
Southern Region   2,641.5    2,944.7    -10%
Other Markets   1,159.3    1,251.2    -7%
Total steel products consolidated net sales   8,664.8    8,426.0    3%
Other products (1)   35.8    33.9    5%
Total steel segment net sales   8,700.5    8,459.9    3%
                
Total mining segment net sales   313.2    386.5    -19%
                
Intersegment eliminations   (287.6)   (316.4)     
                
Total consolidated net sales   8,726.1    8,530.0    2%

 

(1)The item “Other products” primarily includes pig iron and pre-engineered metal building systems.

 

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Cost of sales

 

Cost of sales was USD6.9 billion in 2014, an increase of USD324.9 million compared with 2013. This was principally due to a USD248.0 million, or 5%, increase in raw material and consumables used, mainly reflecting a 4% increase in steel shipment volumes, higher purchased slabs costs and higher energy costs, partially offset by lower iron ore and coking coal costs; and a USD76.9 million increase in other costs, including a USD44.6 million increase in maintenance expenses, a USD39.7 million increase in depreciation of property, plant and equipment and amortization of intangible assets and a USD2.6 million increase in services and fees, partially offset by a USD6.9 million decrease in labor costs and USD2.5 million decrease in insurance costs.

 

Selling, general and administrative expenses

 

Selling, General & Administrative (SG&A) expenses in 2014 were USD816.5 million, or 9.4% of net sales, a decrease of USD26.8 million compared with SG&A in 2013, mainly as a result of lower taxes and contributions (other than income tax) and lower freight and transportation expenses.

 

Other net operating income

 

Other net operating income in 2014 was USD71.8 million, higher than the USD23.0 million gain in 2013. Other net operating income in 2014 and 2013 included a USD57.5 million and a USD11.7 million income recognition on insurance recovery, respectively.

 

Operating income

 

Operating income in 2014 was USD1.1 billion, or 12.1% of net sales, compared with operating income of USD1.1 billion, or 13.0% of net sales, in 2013.

 

The following table shows Ternium’s operating income by segment for 2014 and 2013:

 

In millions of U.S. dollars  Steel segment   Mining segment   Intersegment
eliminations
   Total 
   2014   2013   2014   2013   2014   2013   2014   2013 
Net Sales   8,700.5    8,459.9    313.2    386.5    (287.6)   (316.4)   8,726.1    8,530.0 
Cost of sales   (6,960.0)   (6,645.2)   (255.2)   (268.3)   290.1    313.2    (6,925.2)   (6,600.3)
SG&A expenses   (799.8)   (820.3)   (16.6)   (23.0)   -    -    (816.5)   (843.3)
Other operating income (expenses), net   70.7    23.1    1.0    (0.1)   -    -    71.8    23.0 
Operating income (loss)   1,011.4    1,017.5    42.3    95.1    2.4    (3.2)   1,056.2    1,109.4 

 

Steel reporting segment

 

The steel segment’s operating income was USD1.0 billion in 2014, a decrease of USD6.1 million compared with 2013, reflecting higher operating cost, offset by higher sales.

 

Net sales of steel products in 2014 increased 3% compared with 2013, reflecting an increase in shipments partially offset by a decrease in revenue per ton. Shipments increased 393,000 tons, or 4%, compared with 2013, mainly due to higher sales volume in Mexico partially offset by lower sales volume in the Southern Region and Other Markets. Revenue per ton decreased by USD14, mainly due to lower steel prices in the Southern Region, mostly offset by higher steel prices and a higher value added product mix in Mexico.

 

   Net Sales (million USD)   Shipments (thousand tons)   Revenue / ton (USD/ton) 
   2014   2013   Dif.   2014   2013   Dif.   2014   2013   Dif. 
Mexico   4,863.9    4,230.1    15%   5,632.2    4,984.9    13%   864    849    2%
Southern Region   2,641.5    2,944.7    -10%   2,510.9    2,633.1    -5%   1,052    1,118    -6%
 Other Markets   1,159.3    1,251.2    -7%   1,238.5    1,370.3    -10%   936    913    3%
Total steel products   8,664.8    8,426.0    3%   9,381.5    8,988.4    4%   924    937    -1%
Other products (1)   35.8    33.9    5%                              
Total steel segment   8,700.5    8,459.9    3%                              

  

(1) The item “Other products” primarily includes pig iron and pre-engineered metal building systems.

 

Operating cost increased 4%, due to the above-mentioned 4% increase in shipment volumes and relatively stable operating cost per ton.

 

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Mining reporting segment

 

The mining segment’s operating income was USD42.3 million in 2014, a decrease of USD52.8 million compared with 2013 mainly reflecting lower iron ore sales, partially offset by lower operating cost. Net Sales of mining products in 2014 were 19% lower than in 2013, reflecting lower shipments and revenue per ton. Shipments were 3.9 million tons, 9% lower than in 2013, mainly as a result of lower iron ore production at Peña Colorada.

 

   Mining segment 
   2014   2013   Dif. 
Net Sales (million USD)   313.2    386.5    -19%
Shipments (thousand tons)   3,857.3    4,243.0    -9%
Revenue per ton (USD/ton)   81    91    -11%

 

Operating cost decreased 7% year-over-year, due to the above mentioned 9% decrease in shipment volumes, partially offset by a 3% increase in operating cost per ton. Operating cost per ton increased mainly due to higher depreciation of property, plant and equipment.

 

Net financial results

 

Net financial results were a USD69.5 million loss in 2014, compared with a USD135.5 million loss in 2013. During 2014, Ternium’s net financial interest results totaled a loss of USD110.2 million, compared with a loss of USD122.6 million in 2013. Net foreign exchange result was a gain of USD26.7 million in 2014 compared with a gain of USD0.3 million in 2013. The gain in 2014 was primarily associated with the effect of a depreciation of the Mexican peso against the U.S. dollar on a net short local currency position in Ternium’s Mexican subsidiaries. Change in fair value of financial instruments included in net financial results in 2014 was a USD17.8 million gain, mainly related to results from changes in the fair value of financial assets, compared with a USD12.3 million loss in 2013.

 

Equity in results of non-consolidated companies

 

Equity in results of non-consolidated companies was a loss of USD751.8 million in 2014, compared with a loss of USD31.6 million in 2013. Equity in results of non-consolidated companies in 2014 included the above mentioned USD739.8 million loss related to an impairment of Ternium’s investment in Usiminas.

 

Income tax expense

 

Income tax expense in 2014 was USD339.1 million, compared with an income tax expense of USD349.4 million in 2013. The effective tax rate in 2014 was unusually high, reaching 144% of profit before income tax expense, mainly as a result of the significant impact of non-taxable losses stemming from the investment in Usiminas, the non-cash effect on deferred taxes of the significant depreciation of the Mexican peso and the Colombian peso against the U.S. dollar during the year, which reduces, in U.S. dollar terms, the tax base used to calculate deferred tax at our Mexican and Colombian subsidiaries (which have the U.S. dollar as their functional currency) and an amendment of a previous period tax return in Mexico, partially offset by a net gain related to a non-cash reduction of deferred tax liabilities at one of Ternium’s subsidiaries.

 

Net income attributable to non-controlling interests

 

Net income attributable to non-controlling interests in 2014 was a gain of USD94.6 million, compared with a gain of USD137.5 million in 2013.

 

Foreign Currency Fluctuations

 

See Item 11. “Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange Exposure Risk.”

 

Governmental Economic, Fiscal, Monetary or Political Policies or Factors

 

See Item 3. “Key Information—D. Risk Factors—Risks Relating to the Countries in Which We Operate.”

 

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B.Liquidity and Capital Resources

 

We obtain funds from our operations, as well as from short-term and long-term borrowings from financial institutions. These funds are primarily used to finance our working capital and capital expenditures requirements, as well as our acquisitions (for further information on capital expenditures, see Item 4. “Information on the Company—B. Business Overview—Capital Expenditure Program”). We hold money market investments, time deposits and variable-rate or fixed-rate securities. Our gross financial indebtedness decreased in the 2014-2015 period, from USD2.0 billion at the end of 2013 to USD1.5 billion at the end of 2015. In December 2014, Consorcio Peña Colorada negotiated a USD200 million loan with Nacional Financiera S.A., a Mexican development bank, maturing in April 2025. Disbursements under this facility began in April 2015. In the fourth quarter of 2014, we invested USD249.0 million in the purchase of Usiminas ordinary shares, and in the second quarter of 2015, we invested USD74.0 million in the acquisition of the remaining minority stake in Ferrasa. For further information on the Usiminas and Ferrasa transactions, see notes 3 and 2 b) to our consolidated financial statements included elsewhere in this annual report, respectively.

 

Management believes that funds from operations will be sufficient to satisfy our current working capital needs and service our debt in the foreseeable future. Other than the above mentioned loan to Consorcio Peña Colorada, Ternium has not negotiated additional committed credit facilities. However, Ternium has negotiated non-committed credit facilities and management believes it has adequate access to the credit markets. Management also believes that our liquidity and capital resources give us adequate flexibility to manage our planned capital spending programs and to address short-term changes in business conditions.

 

The following table shows the changes in our cash and cash equivalents for each of the periods indicated below:

 

   For the year ended December 31, 
In thousands of U.S. dollars  2015   2014   2013 
             
Net cash provided by operating activities   1,323,491    505,844    1,092,174 
Net cash used in investing activities   (572,061)   (675,774)   (882,779)
Net cash provided by (used in) financing activities   (809,634)   84,561    (466,076)
                
Decrease in cash and cash equivalents   (58,204)   (85,369)   (256,681)
Effect of exchange rate changes   (3,608)   (8,546)   (8,635)
                
Initial cash of Consorcio Peña Colorada and Exiros (1)   -    -    12,227 
Cash and cash equivalents at the beginning of the year   213,303    307,218    560,307 
                
Cash and cash equivalents at the end of the year (2)   151,491    213,303    307,218 

 

(1)Starting on January 1, 2013, Consorcio Peña Colorada and Exiros have been proportionally consolidated. Comparative amounts for the year ended December 31, 2012 show them as investments in non-consolidated companies and their results are included within “Equity in earnings (losses) of non-consolidated companies” in the consolidated income statement.

(2)In addition, at December 31, 2013, 2014 and 2015, Ternium had USD169.5, USD150.0 and USD237.2 million of other current investments with maturities of more than three months, respectively, and USD0.9, USD0.1 and USD0.1 million in restricted cash, respectively.

 

Fiscal Year Ended December 31, 2015 compared to Fiscal Year Ended December 31, 2014

 

Overview

 

During 2015, Ternium’s primary source of funding was cash provided by operating activities and cash on hand. Cash and cash equivalents as of December 31, 2015, were USD151.5 million, a USD61.8 million decrease from USD213.3 million at the end of the previous year. The decrease is mainly attributable to net cash used in financing activities of USD809.6 million and net cash used in investing activities of USD572.1 million, partially offset by net cash provided by operating activities of USD1.3 billion.

 

In addition to cash and cash equivalents, as of December 31, 2015, we held other investments with maturity of more than three months for a total amount of USD237.2 million, increasing USD87.2 million compared with December 31, 2014.

 

Operating activities

 

Net cash provided by operating activities was USD1.3 billion in 2015, higher than the USD505.8 million recorded in 2014, including a decrease in working capital of USD509.1 million in 2015 and an increase in working capital of USD551.0 million in 2014. The decrease in working capital during 2015 was the result of a USD349.7 million decrease in inventories, an aggregate USD125.7 million net decrease in trade and other receivables and an aggregate USD33.8 million net increase in accounts payable and other liabilities.

 

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Inventories decreased as shown in the table below.

   Change in inventory Dec‘15 / Dec‘14 
   (in millions of USD) 
   Price   Volume   Total 
Finished goods   (73.4)   (21.7)   (95.1)
Goods in process   (131.3)   (14.6)   (145.9)
Raw materials, supplies and allowances   (200.2)   91.5    (108.7)
                
Total   (404.9)   55.2    (349.7)

 

Investing activities

 

Net cash used in investing activities in 2015 was USD572.1 million, compared with net cash used in investing activities of USD675.8 million in 2014 for a year-over-year decrease of USD103.7 million. This change was primarily attributable to the following:

 

a decrease in net cash used in acquisitions of businesses of USD249.0 million (net cash used in 2014 included the acquisition of additional ordinary shares of Usiminas); partially offset by

 

changes of USD104.2 million in other investments (from a decrease of USD18.3 million in 2014 to an increase of USD85.9 million in 2015); and

 

an increase of USD23.2 million in capital expenditures (from USD443.5 million in 2014 to USD466.6 million in 2015).

 

Financing activities

 

Net cash used in financing activities was USD809.6 million in 2015, compared with net cash provided by financing activities of USD84.6 million in 2014, for a net year-over-year change of USD894.2 million. This change was primarily attributable to the following:

 

net repayments of borrowings of USD557.1 million in 2015, compared with net proceeds from borrowings of USD265.4 million in 2014, for a net year-over-year change of USD822.5 million; and

 

a payment of USD74.0 million in 2015 for the acquisition of the remaining minority stake in Ferrasa.

 

Fiscal Year Ended December 31, 2014 compared to Fiscal Year Ended December 31, 2013

 

Overview

 

During 2014, Ternium’s primary source of funding was cash provided by operating activities, net proceeds from borrowings and cash on hand. Cash and cash equivalents as of December 31, 2014 were USD213.3 million, a USD93.9 million decrease from USD307.2 million at the end of the previous year. The decrease is mainly attributable to net cash used in investing activities of USD675.8 million, partially offset by net cash provided by operating activities of USD505.8 million and net cash provided by financing activities of USD84.6 million.

 

In addition to cash and cash equivalents, as of December 31, 2014, we held other investments with maturity of more than three months for a total amount of USD150.0 million, decreasing USD19.5 million compared with December 31, 2013.

 

Operating activities

 

Net cash provided by operating activities was USD505.8 million in 2014, lower than the USD1.1 billion recorded in 2013, including an increase in working capital of USD551.0 million in 2014 and a decrease in working capital of USD114.6 million in 2013. The increase in working capital during 2014 was the result of a USD357.0 million increase in inventories, an aggregate USD108.0 million net decrease in accounts payable and other liabilities and an aggregate USD86.0 million net increase in trade and other receivables.

 

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Inventories increased as shown in the table below.

   Change in inventory Dec‘14 / Dec‘13 
   (in millions of USD) 
   Price   Volume   Total 
Finished goods   (29.4)   (25.6)   (55.0)
Goods in process   (52.9)   (47.3)   (100.2)
Raw materials, supplies and allowances   (36.5)   (165.3)   (201.8)
                
Total   (118.8)   (238.2)   (357.0)

 

Investing activities

 

Net cash used in investing activities in 2014 was USD675.8 million, compared with net cash used in investing activities of USD882.8 million in 2013. This change was primarily attributable to the following:

 

a decrease of USD439.9 million in capital expenditures (from USD883.3 million in 2013 to USD443.5 million in 2014); partially offset by

 

an increase in net cash used in acquisitions of businesses of USD249.0 million (net cash used in 2014 consisted of cash paid for the acquisition of additional ordinary shares of Usiminas).

 

Financing activities

 

Net cash provided by financing activities was USD84.6 million in 2014, compared with net cash used in financing activities of USD466.1 million in 2013, for a net year-over-year change of USD550.6 million. This change was primarily attributable to the following:

 

net proceeds from borrowings of USD265.4 million in 2014, compared with net repayment of borrowings of USD270.8 million in 2013, for a net year-over-year change of USD536.3 million; and

 

a decrease of USD33.1 million in dividends paid in cash to non-controlling interests (from USD66.7 million in 2013 to USD33.6 million in 2014); partially offset by

 

an increase of USD19.6 million in dividends paid in cash to the Company’s shareholders (from USD127.6 million in 2013 to USD147.2 million in 2014).

 

Principal Sources of Funding

 

Funding Policies

 

Management’s policy is to maintain a high degree of flexibility in operating and investment activities by maintaining adequate liquidity levels and ensuring access to readily available sources of financing. Management believes that it could have access to external borrowing in case of any shortfalls or specific needs. We obtain financing primarily in U.S. dollars, Argentine pesos and Colombian pesos. Whenever feasible, management bases its financing decisions, including the election of currency, term and type of the facility, on the intended use of proceeds for the proposed financing and on costs. For further information on our financial risk management, see note 28 to our consolidated financial statements included elsewhere in this annual report.

 

Financial Liabilities

 

Our financial liabilities consist of loans with financial institutions and some pre-accorded overdraft transactions. As of December 31, 2015, these facilities were mainly denominated in U.S. dollars (89.0% of total financial liabilities) and Argentine pesos (7.3% of total financial liabilities). Total financial debt (inclusive of principal and interest accrued thereon) decreased by USD643.8 million in the year, from USD2.2 billion as of December 31, 2014, to USD1.5 billion as of December 31, 2015, mainly due to the repayment of principal and interest on borrowings related to prior acquisitions and on short-term borrowings. As of December 2015, current borrowings were 60.1% of total borrowings, none of which corresponded to borrowings with related parties. Ternium’s nominal weighted-average interest rate for 2015 was 3.37%. This rate was calculated using the rates set for each instrument in its corresponding currency and weighted using the U.S. dollar-equivalent outstanding principal amount of each instrument as of December 31, 2015.

 

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The following table shows Ternium’s financial liabilities as of December 31 of each of the last three years:

 

In thousands of U.S. dollars  2015   2014   2013 
Bank borrowings (1)   1,521,023    2,164,819    2,002,824 
                
Total borrowings   1,521,023    2,164,819    2,002,824 

 

(1)Net of debt issuance costs.

 

The weighted-average interest rates at December 31, 2015, 2014 and 2013 shown below were calculated using the rates set for each instrument in its corresponding currency and weighted using the U.S. dollar-equivalent outstanding principal amount of those instruments at December 31, 2015, 2014 and 2013, respectively. Such rates do not include the effect of derivative financial instruments, nor fluctuations in the exchange rate between the instrument’s currencies and the U.S. dollar.