2004 Gerdau Annual Report

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2004 Gerdau Annual Report

Steel to shape the world

2004 Annual Report


Steel to

shape the world

The Gerdau Group manufactures steel to turn dreams into

reality. Like the dream born in 1901, through the entrepreneurial

spirit of German immigrant João Gerdau, who founded what is

now the 13th largest steel company in the world.

A dream currently shared by 24,000 people powered by the

conviction that it is possible to overcome limits, generate

sustainable development and improve the quality of life. This

transformation capacity is in the people, in the steelmaking

process and in the use of steel.

Steel that is found in houses, buildings, bridges, vehicles, roads,

airports, telephone and electricity towers, dams and countless

other applications, making the world a better place.


Steel Mills – 26

Downstream Operations – 21

Fabricated Reinforcing Steel Facilities – 44

Flat Steel Service Facilities – 6

Comercial Gerdau Retail Stores – 69

Scrap Collection and Processing Units – 24

Solid Pig Iron Production Units – 2

Iron Ore Extraction Areas – 3

Private Port Terminals – 2

Equity Investments – 2


Profile

Brazil

The Gerdau mills in Brazil produced 54.2% of the total steel

output of the Gerdau Group in 2004 , the equivalent to

7.3 million metric tons. The Brazilian facilities include six market

mills (which buy raw materials, mainly iron scrap, in the same

region where they sell their products), four integrated mills,

eight downstream operations and 11 fabricated reinforcing

steel facilities. For raw material procurement/purchasing,

the Group has eight scrap collection and processing units,

two industrial facilities for the production of solid pig iron

and iron ore reserves. It also owns two port terminals, in the

states of Espírito Santo and Bahia. One advantage to Gerdau

customers is Comercial Gerdau, a distributor of long and flat

steel, with 69 retail stores in the main economic hubs and six

facilities that provide thermal cutting services for flat steel.

United States

The U.S. facilities accounted for 33% of Gerdau steel

production in 2004. Gerdau Ameristeel operates 11 steel

mills in the U.S. and a joint venture that produces long steel,

Gallatin Steel. Gerdau Ameristeel also encompasses the

operations in Canada and features 29 fabricated reinforcing

steel facilities, 10 downstream operations and nine scrap

collection and processing units. These figures include

important assets acquired in 2004, such as North Star Steel

units and the Gate City, RJ Rebar and Potter Form & Tie

fabricated reinforcing steel facilities pro-rated to the date

when they were acquired.

Canada

A leader in the long steel market, Gerdau Ameristeel produced

1.3 million metric tons of steel in 2004. It owns three mills in

the provinces of Ontario and Manitoba, which are focused

on the civil construction and industrial sectors. Furthermore,

it holds a 50% stake in two elevator guide units and in one

industrial facility that manufactures superlight I beams.

Gerdau Ameristeel also operates seven units specializing in

the collection and processing of scrap, its main raw material.

Chile

Gerdau AZA produced 371,000 metric tons of steel in 2004.

It operates two mills, in Colina and Renca, each catering to a

specific economic segment, civil construction and industry,

respectively. To add value to its products, the Gerdau Group

relies on Armacero to supply welded mesh and fabricated

rebar for civil construction. In addition, fabricated reinforcing

steel facilities are operated by Matco. Also part of the Group

are Aceros Cox, a distributor specializing in the industrial

segment, and Sack, another major distribution channel.

Uruguay

Located in the capital city Montevideo, Gerdau Laisa

produced 58,000 metric tons of steel in 2004. The facility

supplements its product line with items manufactured in

the Group’s Brazilian mills to fully meet customer demand.

Laisa focuses on the civil construction segment and its main

product is fabricated rebar.

Gross Revenues - R$ 23.4 billion

BRAZIL

CANADA AND

THE UNITED STATES

ARGENTINA, CHILE

AND URUGUAY

4.4%

40.4% 55.2%

Consolidated Sales - 12.6 million metric tons

Look up the location of Gerdau facilities in the Americas.

Argentina

The Gerdau Group leads the management of the Sipar

rolling mill, located in the province of Santa Fé. The Group

has a 38.2% equity investment in Sipar. The unit’s output

reached 214,000 metric tons of rolled products in 2004. As

a result, the company has become one of the main suppliers

in the long steel segment. Sipar provides superior quality

services to customers through Siderco, a distributor of

steel products and supplier of fabricated rebar for the civil

construction sector.

BRAZIL

CANADA AND

THE UNITED STATES

ARGENTINA, CHILE

AND URUGUAY

4.1%

43.1%

52.8%


2004 Annual Report

Highlights

The most important events of 2004

Consolidated numbers

Economic, environmental and social performance

Message from the chairman

Impressive performance in 2004 and positive perspectives for 2005

Strategic vision

Conviction that growth will continue in the Americas

Corporate governance

Management model aligned with the world’s best market practices

04

04

06

08

10

Business

Increased demand for steel drives results

Finance

Capital Markets

Production

Sales and Markets

Investments

Social

Commitment to the development of employees and communities

People and Teams

Community

The environment

Ecoefficient practices to protect the air, water and soil

Environmental Management System

Environmental Performance

Education for the Environment

Steel production

Find out how steel is produced at Gerdau facilities

Timeline

More than 100 years of history

Glossary

Definitions for technical terms employed in the report

Financial statements

Detailed information on financial performance

18

20

24

30

34

40

44

46

51

56

58

59

62

64

66

68

70


Highlights

The most important events of 2004

Net income reaches R$ 3.3 billion, a growth of 165.8%, and gross revenues reach R$ 23.4 billion,

48.3% higher than in 2003.

In the United States, the acquisition of North Star Steel assets in late 2004 consolidates the

strategy of increasing the geographic reach of sales into the U.S. Midwest. The US$ 308 million

deal encompasses four long steel producing mills, two scrap collection and processing units,

three wire rod processing facilities and a producer of grinding balls for the mining industry.

The expansion in South America is also noteworthy, with the establishment of a strategic

alliance in Colombia in December, when the Group signed an agreement to acquire 59.8% of

the assets of Grupo Diaco, with an annual output capacity of 460,000 metric tons of steel.

The highlight in Brazil is the construction of two new mills and the expansion of the Ouro

Branco unit, in the state of Minas Gerais. The investment program in Brazil may reach

US$ 2.4 billion by 2007. The new industrial facility in the state of São Paulo and the new specialty

Consolidated Numbers

Economic, environmental and social performance

Metalúrgica Gerdau S.A.

Dividends (R$ per share)

Gerdau S.A.

Dividends (R$ per share)

Metalúrgica Gerdau S.A.

Dividend Yield (%)

2004

5.22

2004

2.91

2004

7.8

2003

2002

2.07

1.68

2003

2002

1.19

0.90

2003

2002

6.2

12.4

2001

1.48

2001

0.58

2001*

17.0

2000

0.68

2000

0.44

2000

7.9

0.00 1.00 2.00 3.00 4.00 5.00 6.00

Amounts are adjusted to payments and calculated based on

the current number of outstanding shares.

Dividends paid on preferred shares.

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

Amounts are adjusted to payments and calculated based on

the current number of outstanding shares.

Dividends paid on preferred shares.

0 2 4 6 8 10 12 14 16 18

* Supplementary, non-recurring dividend.

Dividend yield is the ratio between the dividend paid per

share and the share price on the last day of the year.

Metalúrgica Gerdau S.A.

Average Annual Market Value (million R$)

Gerdau S.A.

Average Annual Market Value (million R$)

Metalúrgica Gerdau S.A. Consolidated

Return on Equity (%)

2004

3,691

2004

10,876

2004

48.5

2003

2002

692

1,329

2003

2002

4,638

2,789

2003

2002

29.2

27.5

2001

413

2001

1,600

2001

19.1

2000

478

2000

1,835

2000

18.8

0 1,000 2,000 3,000 4,000 5,000

Market value is calculated as share price multiplied by the

number of shares outstanding in the period.

0

2,000 4,000 6,000 8,000 10,000 12,000 14,000

Market value is calculated as share price multiplied by the

number of shares outstanding in the period.

0 10 20 30 40 50 60

Return on equity (ROE) is the ratio between consolidated net income

and consolidated equity.


04 05 h i g h l i g h t s

steel facility in the state of Rio de Janeiro focus on the Brazilian market, whereas the Ouro

Branco unit supplies the international market.

The environmental management policy gains momentum with US$ 25 million invested in the

upgrade of air, water and soil protection technologies.

The two publicly traded companies in Brazil – Metalúrgica Gerdau S.A. and Gerdau S.A. –

distribute R$ 433.9 million (+152.1%) and R$ 858.8 million (+144.5%), respectively, to shareholders

in 2004. In addition, Gerdau Ameristeel, responsible for North American operations, begins

paying dividends in the beginning of 2005, for an initial distribution of R$ 16.2 million.

Social projects in the fields of formal education, scientific research, the arts, entrepreneurship,

volunteer work, total quality, health, sports and community services receive investments of

R$ 36.5 million.

2004

2003

2002

2001

2000

Gerdau S.A.

Dividend Yield (%)

3.9

6.1

6.1

Dividend yield is the ratio between the dividend paid per share

and the share price on the last day of the year.

7.1

6.8

0 1 2 3 4 5 6 7 8

Social Responsibility (million R$) 2004 2003

Total investment in social projects 36.5 22.5

Formal education 4.4 2.8

Education for entrepreneurship 3.8 1.9

Education for scientific research 1.5 1.4

Education for total quality 2.3 2.6

Education for volunteer work 0.4 0.2

The arts 18.7 10.9

Health 3.0 1.1

Sports 1.0 0.8

Community action 0.6 0.1

Other 0.8 0.7

2004

2003

2002

2001

2000

Gerdau S.A. Consolidated

Return on Equity (%)

17.3

16.6

24.3

27.5

46.6

0 10 20 30 40 50

Return on equity (ROE) is the ratio between consolidated net income

and consolidated equity.

Environmental Management 2004 2003

Reuse of industrial water 96.7 96.0

(% of total consumption)

Emission of greenhouse gasses 550 n.a.*

(kg of co 2 per metric ton of

steel produced)

Use of by-products internally or in other 66.0 n.a.*

sectors of the economy

(% of total volume generated)

*Not available.

Exchange Rate

Year R$ =US$

2004 2.6544 1.00

2003 2.8892 1.00

2002 3.5333 1.00


Message from

the Chairman

An excellent year for steelmaking

World steel consumption reached its highest peak ever in 2004. Global production

topped the billion metric ton mark, boosted mainly by the growth in demand in China

and the United States. As a result, the average dollar price of steel exported by Gerdau

from Brazil rose 62.4%. Prices increased primarily due to rising raw material costs – in

many cases by over 50% – and maritime freight charges. In this context, the Gerdau

Group’s net income totaled R$ 3.3 billion, up 165.8% from the previous fiscal year, with

gross revenues up 48.3% to R$ 23.4 billion.

Meeting the growing demands of the market

Throughout the year, the Gerdau Group increased production to ensure that it could

fully meet its customers’ needs and expanded its presence in major markets in the

Americas.

Four mills were acquired from North Star Steel in the United States for US$ 308 million,

of which US$ 181 million consisted of working capital. The investment expanded the

company’s geographical coverage toward the Midwestern U.S. and added 1.6 million

metric tons to the Group’s annual installed capacity.

A strategic alliance was established in Colombia to gradually take over control of the

Diaco Group, which has a production capacity of 460,000 metric tons of steel per year.

This initiative will allow the Gerdau Group to reach a position of leadership in that

national market. The initial investment in this project was US$ 68.5 million.

Low indebtedness allows for new investments

The Gerdau Group’s production capacity has doubled in five years to 16.4 million metric

tons per year, and should reach 21 million metric tons by 2007, with the investment of

US$ 3.2 billion in the construction, expansion and modernization of the Group’s industrial

facilities. Of this total, US$ 2.4 billion will be invested in Brazil, where annual production

capacity will grow over 50%, from 7.6 to 11.7 million metric tons. Units in other countries

in the Americas will receive US$ 800 million during the same period.

The investment program will be based on cash generation and on the leverage allowed

by the Group’s current financial position. Operating cash generation (EBITDA) of

R$ 5.5 billion has allowed a significant reduction of debt levels. At the end of 2004,

net debt was just 0.7 times EBITDA, well below the limit of 2.5 times determined by

the Group’s policy. In addition, the net interest paid-per-metric- ton-sold was R$ 22.36,

approximately half that of the previous fiscal year.

Strategic investment decisions are based on the principle of balancing growth and

profitability. For this reason, annual dollar returns of at least 15% on capital invested are

always required of the Group’s acquisition and expansion projects. This goal has been

consistently achieved for both acquisitions and industrial plant expansions after the

investments mature.


06 07 MESsage

Commitment to economic, social and environmental sustainability

Balancing economic, social and environmental demands is part of the Group’s values. With

this vision, the Group works to continue offering growing dividends each year. The Gerdau

companies in Brazil have a policy of distributing 30% of adjusted net income each year. The

absolute value of dividends has yielded shareholders an average of 6% per year for Gerdau S.A.

and 10.3% for Metalúrgica Gerdau S.A. since 2000.

In the social area, community development is supported through a range of projects aimed

mainly at sharing knowledge, optimizing the ability of people to transform their own world and

creating a culture of personal development and learning in and around all the units. In total,

the Group takes part in more than one hundred initiatives to help improve the quality of life in

our communities.

The environmental aim is to reach increasingly demanding levels of ecoefficiency. All the steel

mills are undergoing international ISO 14001 certification. A total of US$ 25 million was invested

in 2004 to upgrade air, water and soil protection equipment and to promote programs that

encourage environmental awareness among our employees and communities.

A positive perspective for 2005

The current international conditions indicate a continued high level of steel consumption in

2005, with prices tending to stabilize. The price of steel in international markets is directly linked

to raw material volumes, with iron ore and coal as the defining factors. These components are

also strongly influenced by international freight costs. We believe that there is no possibility of

a significant increase in the supply of these raw materials in the next two years.

Another important consideration is “inefficient steel,” or steel produced at non-competitive

costs or with government subsidies. This has been a recurring theme in the debates at the

International Iron and Steel Institute (IISI) since before the global steel boom of the last few

years, and is under negotiation in the Organization for Economic Co-operation and Development

(OECD). The belief is that, as new, more competitive production capacity comes on line, the

inefficient mills will leave the market. In this context, the Gerdau Group strives to be a worldclass

company with a long-term vision.

Thank you

The results presented in this report were only possible because of the commitment and

responsibility of each of our employees, the work of our teams and their daily attitude of

servicing the needs of the market. The Gerdau Group also thanks its investors, shareholders,

suppliers, communities and especially its customers.

Jorge Gerdau Johannpeter

Chairman


Strategic Vision

Conviction that growth will continue in

the Americas

From the extreme south of the Americas to the plains of

Canada: this is where the Gerdau Group intends to build its

growth, focused on the long steel sector.

The Gerdau Group has the strategic vision of being a worldclass

international steel company. Guided by this goal, the

Group strives to consolidate its place as a major player

in this field of steelmaking. As a result of the logistical

requirements of its products, Gerdau understands that it

is more important to have a significant market share in

the Americas than to have production capacity scattered

around the world.

Since the 1980s, the Group has invested in internationalization,

expanding its operations in South and North America to

become the largest producer of long steel in the region. Its

growth policy is guided by investment in assets that add

value and significant returns for shareholders and that

allow the Group to continue its growth, always committed

to its characteristic levels of financial security.

In comparison with the markets where it operates, the

Gerdau Group has achieved outstanding performance for

its mills, through their logistical criteria, proximity to raw

materials and management in line with international best

practices.

This performance is based on the efficiency of our teams,

which have contributed decisively to the expansion of the

business, so that the Gerdau Group can continue to achieve

improved positions in regional markets over the coming

years.


08 09 S T R AT e G I C v i s i o n

The Gerdau Group is a world-class company

Throughout its history, the Gerdau Group has

developed the skill of boosting productivity in the

companies of which it takes control, especially

through the sharing of best management practices

and investment in the technological upgrade of

industrial installations. This can be seen in the

turnaround of results at the units that became

Gerdau Ameristeel Cambridge (Canada), Gerdau

AZA (Chile), Gerdau Aços Especiais Piratini (Brazil),

Gerdau Usiba (Brazil) and Gerdau Açominas – Ouro

Branco (Brazil).

Gerdau is now among the world-class companies of

the international steel sector, according to a study

by World Steel Dynamics, a major steel consultancy

group. Gerdau stands out for its profitability in the

fiscal periods from 2000 to 2004, its environmental

and safety record, its success in alliances, mergers,

acquisitions and joint ventures, and its performance

in the capital market over the last three years.

GERDAU AMERISTEEL CAMBRIDGE, CANADA (ABOVE), AND GERDAU AÇOMINAS – OURO BRANCO,

STATE OF MINAS GERAIS, BRAZIL (BELOW): POSITIVE RESULTS


Corporate

Governance

Management model aligned with the world’s best market practices

Governance structure

The Gerdau Group’s corporate governance structure is based on a Board of Directors, an

Executive Committee – which is assisted by a Strategy Committee and Excellence Committees

and coordinates the work of the Officers – and a Board of Auditors.

The Board of Directors is comprised of eight members whose primary responsibility is to

develop the Gerdau Group corporate strategy. This includes defining the direction of the

business, acceptable levels of risk and growth policies. The Board has three independent

members who, through their external insights and experience, help lead the decision-making

process.

Board meetings are held at least four times a year. The Group’s Executive Officers are invited

to present and discuss strategic issues relevant to their areas of operation to provide the

independent Board members with a better understanding of the Group’s operations and

market conditions.

Business management is the responsibility of the Officers, through an Executive Committee

that coordinates the daily business operations and acts as a liaison between operations and

the Board of Directors. There are five business operations, defined according to product line

and/or geographical location of the units: Gerdau Long Steel (Brazil), Gerdau Specialty Steel

(Brazil), Gerdau Açominas – Ouro Branco (Brazil), Gerdau Ameristeel (Canada and the United

States) and Gerdau South America (Argentina, Chile and Uruguay).

Each of the nine Executive Committee members – a president and eight vice presidents – is

responsible for specific processes and/or business operations. The processes are: sales and

marketing, industrial, logistics and transportation, raw materials, procurement, operational

planning, human resources and organizational development, finance and investor relations,

accounting and audit, legal, management technology, planning and strategic management,

business development, information technology, and corporate communications.

To assist the Board of Directors in the planning of the Group’s strategy, the Strategy Committee

includes Executive Committee members and the officers in charge of the main operations. The

Excellence Committees provide support to the business operations and functional processes

by encouraging debate and exchanging best practices.

The Board of Auditors was created five years ago at the two publicly traded companies in Brazil

and includes representatives elected by minority shareholders. Among other responsibilities,


10 11 corporate GOVernance

they are in charge of monitoring the actions of the Board of Directors and controlling the

accounting operations of both companies.

The corporate governance structure at the Gerdau Group follows the model below:

Strategy Committee

Excellence Committees

Board of Directors

Officers

Executive Committee

Business Operations

Board of Auditors

Functional Processes

Gerdau Long

Steel Brazil

Gerdau

Specialty Steel

Gerdau Açominas

– Ouro Branco

Gerdau

Ameristeel

Gerdau

South America

Gerdau companies

Gerdau Group” refers to all the companies that form the Gerdau economic group and that

are controlled by the same shareholders.

The two publicly traded companies controlled by the Group in Brazil – Gerdau S.A. and

Metalúrgica Gerdau S.A. – are part of the level 1 corporate governance program of the São

Paulo Stock Exchange (Bovespa). This program establishes a set of standards for trading in

capital markets, such as the level of transparency in the disclosure of information and the

number of shares in the hands of minority shareholders.

Gerdau Açominas S.A. is a non-public company that is responsible for the Group’s steelmaking

operations in Brazil. However, it is committed to upholding the same reporting standards

as those of the publicly traded companies. Gerdau Açominas S.A. has a six-member Board

of Directors. One of these members is appointed by the Açominas employee stockholding

association (Clube de Participação Acionária dos Empregados da Açominas – CEA). The Board

members hold quarterly meetings. The management of Gerdau Açominas is carried out

through an Executive Committee that coordinates three business operations: Gerdau Long

Steel, Gerdau Specialty Steel and Gerdau Açominas – Ouro Branco.

In North America, the Gerdau Ameristeel Corporation was created in October 2002 through a

merger between the Gerdau Group’s operations in the region and those of Co-Steel. The Gerdau

Ameristeel Board of Directors is comprised of nine members, five of them independent. The

Board holds quarterly meetings. Gerdau Ameristeel created committees focused on specific

areas: audit, human resources, corporate governance, safety, health and the environment.


Board of Directors. From left to right: Oscar de Paula Bernardes Neto, Board Member; Germano H. Gerdau Johannpeter, Vice Chairman;

Jorge Gerdau Johannpeter, Chairman; Klaus Gerdau Johannpeter, Vice Chairman; André de Lara Resende, Board Member;

Carlos J. Petry, Vice Chairman; Frederico C. Gerdau Johannpeter, Vice Chairman; Affonso Celso Pastore, Board Member


12 13 corporate GOVernance

Business management is under the responsibility of an Executive Committee that operates

based on industrial process and/or geographic region.

In Argentina, Chile and Uruguay, governance is the responsibility of Operating Committees,

which report to the Gerdau Executive Committee.

Shareholders’ meetings

Once a year, the general shareholders’ meeting brings together the shareholders of the

Group’s companies to analyze and approve financial statements and management reports,

decide on the allocation of net income, confirm or supplement the distribution of dividends

or interest on capital stock, and elect Board of Directors and Board of Auditors members.

Additional shareholders’ meetings may be scheduled to deal with specific topics not covered

in the general meetings and which require approval by shareholders.

At Gerdau Ameristeel, the structure is similar to that described above with an annual

shareholder meeting and special shareholder meetings. However, these meetings have

specific agendas and are adapted to the business and legal systems of North America.

Relationship with independent auditors

The policy ruling the hiring of independent auditors for services not related to external audits

is based on the following: auditors should not audit their own work, carry out management

functions on behalf of the client, or promote the client’s interests. These guidelines are

followed by Gerdau’s publicly traded companies for the hiring of independent auditors and

services not related to external audits, in accordance with security and exchange commission

regulations.

Risk management

The Gerdau Group is developing actions to improve risk management practices in its

operations. Integrated risk management is an initiative that fosters best corporate governance

practices, formalizes risk planning and defines the responsibilities of areas such as process

management, internal audit and other relevant areas. The implementation of an integrated

system translates into safer monitoring of potential risks and existing controls in each

business process.

The integrated Risk Management project, which is overseen by the Board of Auditors, is

based on internationally recognized methodologies that comply with the United States


Sarbanes-Oxley Act. This law improves the disclosure of information and the commitment

of management to internal controls and must be followed by foreign companies listed on

United States stock exchanges. Both Gerdau S.A. and Gerdau Ameristeel must comply with

the legal requirements, including those issued by the United States Securities and Exchange

Commission (SEC), the regulating government body for the capital markets in the United

States. For foreign companies with stocks traded in the North American market, the deadline

for compliance with the provisions of the Sarbanes-Oxley Act is July 15, 2006. At the Gerdau

Group, the process will be completed in 2005.

These initiatives will ensure the development of the Group’s corporate governance and

risk management processes, improve safety for the operations and increase the quality of

information disclosure and financial reports to the capital markets. They will also ensure that

international requirements are met.

Operational and administrative restructuring

Since December 2004, the Gerdau Group has been working to restructure its companies in

Brazil and other South American countries. The importance of this work is underscored by the

plan to increase the Group’s presence in South America (see Investments section). Through

restructuring, we hope to obtain greater strategic advantages and improve the operating and

management efficiency in South America. For that, efforts will be focused on the specialization

of different units and business operations. This will be a decisive step in the development of

alternatives for the future growth of the Gerdau Group.

On December 3, 2004, the Board of Directors at Gerdau S.A. authorized the implementation

of corporate restructuring measures for the Group’s companies in Brazil and other Latin

American countries in continuation of a process that began two years earlier with the merger

between Gerdau S.A. and Aço Minas Gerais S.A. – Açominas. This restructuring resulted in the

creation of Gerdau Açominas S.A. in Brazil.

On December 29, the first step in the restructuring process was taken when the dormant

holding of Gerdau Participações S.A. was capitalized with the shares of Gerdau Açominas S.A.

and a portion of the shares of Gerdau Internacional Empreendimentos Ltda. held by Gerdau

S.A., representing 91.5% and 22.8%, respectively of the capital stock for those companies.

The shares transferred to Gerdau Participações S.A. correspond to the direct or indirect

participating interest of Gerdau Internacional Empreendimentos Ltda. in the capital stock of

Gerdau Chile Inversiones Ltda., Gerdau Laisa S.A. and Sipar Aceros S.A.

With the support of independent consultants, management is currently finalizing studies

to establish the definitive shareholding structure. The restructuring involves the creation of

distinct companies, one for each business operation, involving the operations in Brazil and

other South American countries. The new companies will have different operational focuses,

such as: long steel, specialty steel, slabs, blooms and billets and distribution services. The

new companies will be created after the conclusion of studies and approval by the Board of

Directors and shareholders of the companies involved.


14 15 corporate GOVernance

The shareholders of publicly traded companies in Brazil and abroad will not be affected by

the restructuring. Shareholders will keep their current position and their rights and values

will be preserved.

Currently, the structure of the companies that are part of the Gerdau Group 1 is as follows 2 :

Metalúrgica Gerdau S.A.

99.0%

Banco Gerdau S.A.

Gerdau S.A.

44.8% (75.8% of voting shares)

100.0%

97.1%

72.1%

22.8%

Gerdau

Participações S.A.

91.5%

Seiva S.A.

Florestas e Indústrias

Gerdau Internacional

Empreendimentos Ltda.

Gerdau Açominas S.A.

66.5%

Gerdau Ameristeel

Corporation

100.0%

Gerdau Chile

Inversiones Ltda.

Gerdau Ameristeel US Inc.

100.0%

100.0%

Gerdau Laisa S.A.

Gerdau Ameristeel

MRM Special Sections Inc.

100.0%

38.2%

Sipar Aceros S.A.

Gerdau Ameristeel

Perth Amboy Inc.

100.0%

Gerdau Ameristeel

Sayreville Inc.

Gallatin Steel Company

100.0%

50.0%

1. Metalúrgica Gerdau stands for all the

operations included in its consolidated financial

statements.

2. Minus minority interests.


Board of Directors

Chairman

Jorge Gerdau Johannpeter

Vice Chairmen

Germano H. Gerdau Johannpeter

Klaus Gerdau Johannpeter

Frederico C. Gerdau Johannpeter

Carlos J. Petry

Board Members

Affonso Celso Pastore

André de Lara Resende

Oscar de Paula Bernardes Neto

Secretary General

Expedito Luz

Gerdau Executive Committee

President

Jorge Gerdau Johannpeter

Vice Presidents

Frederico C. Gerdau Johannpeter

Senior Vice President

Carlos J. Petry

Senior Vice President

André B. Gerdau Johannpeter

Claudio Gerdau Johannpeter

Domingos Somma

Filipe Affonso Ferreira

Osvaldo B. Schirmer

Ricardo Gehrke

Secretary General

Expedito Luz

Board of Auditors

Metalúrgica Gerdau S.A.

Carlos Roberto Schroder

Domingos Matias Urroz Lopes

Mário Magalhães de Sousa

Substitutes

Pedro Floriano Hoerde

Ruben Rohde

Valmir Pedro Rossi

Gerdau S.A.

José Antônio Cruz de Módena

Peter Wilm Rosenfeld

José Bernardo de Medeiros Neto

Substitutes

Rudolfo Teodoro Tanscheit

Tranquilo Paravizi

Brazil

Gerdau Açominas S.A.

Board of Directors

Chairman

Jorge Gerdau Johannpeter

Vice Chairmen

Germano H. Gerdau Johannpeter

Klaus Gerdau Johannpeter

Frederico C. Gerdau Johannpeter

Carlos J. Petry

Board Member

Marco Antônio Pepino

Substitutes

Claudio Gerdau Johannpeter

Expedito Luz

Osvaldo B. Schirmer

Ruy Lopes Filho

Guilherme Rocha Murgel de Rezende

Secretary General

Expedito Luz

Officers

President

Jorge Gerdau Johannpeter

Vice Presidents

Frederico C. Gerdau Johannpeter

Senior Vice President

André B. Gerdau Johannpeter

Claudio Gerdau Johannpeter

Osvaldo B. Schirmer

Business Operations

Gerdau Long Steel Brazil

Ricardo Gehrke

Executive Vice President

Business Operations

Gerdau Açominas – Ouro Branco

Luiz André Rico Vicente

Executive Vice President

Business Operations

Gerdau Specialty Steel

Cláudio Mattos Zambrano

Executive Director


16 17 corporate GOVernance

Executive Officers

Alfredo Huallem

André Felipe G. Reinaux

André Pires de Oliveira Dias

Cláudio Mattos Zambrano

Dirceu Tarcisio Togni

Érico Teodoro Sommer

Expedito Luz

Fladimir B. Lopes Gauto

Francesco S. Merlini

Francisco Deppermann Fortes

Geraldo Toffanello

Gerson Marcos Venzon

Guilherme C. Gerdau Johannpeter

Heitor L. B. Bergamini

João A. de Lima

João Carlos Salin Gonçalves

Joaquim de Souza Gomes

Joaquim G. Bauer

José Maurício Werneck Guimarães da Silva

Julio Carlos Lhamby Prato

Luiz Alberto Morsoletto (in memoriam)

Luiz Augusto Polacchini

Manoel Vitor Mendonça Filho

Moacir Curi Meneguzzi

Nestor Mundstock

Omar de Oliveira Fantoni

Paulo Ricardo Tomazelli

Paulo Roberto Perlott Ramos

Ruy Lopes Filho

Sirleu José Protti

Tadeu Petterle

Canada and the United States

Gerdau Ameristeel Corp.

Board of Directors

Chairman

Jorge Gerdau Johannpeter

Board Members

Arthur Scace

André B. Gerdau Johannpeter

Frederico C. Gerdau Johannpeter

Joseph J. Heffernan

J. Spencer Lanthier

Kenneth W. Harrigan

Michael D. Sopko

Phillip E. Casey

Officers

President and CEO

Phillip E. Casey

Vice President and COO

André B. Gerdau Johannpeter

Vice Presidents

Andre Beaudry

Anthony S. Read

Arlan Piepho

Carl Czarnik

Donald R. Shumake

Edward C. Woodrow

Glen A. Beeby

Gregory Bott

James S. Rogers

Jerry Goodwald

J. Neal McCullohs

Mark Quiring

Matthew C. Yeatman

Michael Christy

Michael Mueller

Paulo Fernando Bins de Vasconcellos

Robert L. Bullard

Robert Thompson

Roger Paiva

Tom J. Landa - CFO

Wilburn G. Manuel

William E. Rider

Yuan Wang

Chile

Gerdau Aza S.A.

Hermann Von Mühlenbrock S.

General Manager

Uruguay

Gerdau Laisa S.A.

José Pedro Sintas García

Executive Director

Equity Investment

Argentina

Sipar Aceros S.A.

Amaury Cordeiro de Oliveira

Executive Director


Business

Increased demand for steel drives results

Finance

Results

Indebtedness

Financial operations

Capital Markets

Publicly traded companies in Brazil

Publicly traded company in Canada

Relationship with shareholders, investors and analysts

Production

Brazil

Argentina, Chile and Uruguay

Canada and the United States

Sales and Markets

Brazil

Argentina, Chile and Uruguay

Canada and the United States

Investments

Main initiatives in 2004

Investment program for the coming years

20

24

30

34

40


Finance

Impressive performance in 2004

Results

In 2004, the Gerdau Group’s gross revenues grew 48.3% from R$ 15.8 billion in 2003,

reaching R$ 23.4 billion. Increased international steel consumption was boosted

mainly by the economic growth of China and the United States. This scenario elevated

international steel prices. For the Gerdau Group, the average dollar value per metric

ton exported from Brazil increased 62.4%. In addition, the improved performance of

South American operations, the consolidation of the new industrial units in North

America and the recovery of economic growth in Brazil contributed significantly to

the positive consolidated performance. As a result of this favorable scenario, net sales

increased 46.6% to R$ 19.6 billion. Consolidated net income was R$ 3.3 billion, up from

R$ 1.3 billion in the previous year – an increase of 165.8%.

Net margins (ratio between net income and net sales revenue) grew to 17.1% in 2004

from 9.4% in 2003, and gross margins increased 7.3 percentage points to 31.9%.

Operating expenses (sales, general and administrative) represented 7.7% of net sales

revenue in 2004 against 9.4% in 2003, and totaled R$ 1.5 billion.

EBITDA (earnings before interest, taxes, depreciation and amortization) increased

108.4%, reaching R$ 5.5 billion.

Net financial expenses (financial expenses minus financial revenues), excluding

foreign exchange effects and monetary variations, totaled R$ 253.1 million. Considering

foreign exchange revenues of R$ 119.2 million and monetary variation expenses of

R$ 14.5 million, the interest paid in the year was R$ 148.4 million.

In 2004, the Group’s investments outside Brazil, converted into Brazilian currency,

reflected the 8.1% devaluation of the U.S. dollar in relation to the real. The foreign

exchange effect is accounted for in the equity pick-up line of the balance sheet, which

also includes, among others, amortization of goodwill in the period. As a result, a

negative balance of R$ 344.6 million was recorded for equity pick-up in 2004.

Indebtedness

Net debt (gross debt minus cash and cash equivalents and short-term investments)

was reduced by 22.4% from R$ 5.3 billion to R$ 4.1 billion. The average life of debt

increased from 2.6 to 4.2 years in 2004.

Gross debt in 2004 was R$ 6.1 billion compared to R$ 6.3 billion in 2003 (a reduction

of 3%). Short-term debt also decreased by 17.6% to R$ 2 billion. Long-term debt was

R$ 4.1 billion (+6.4%), which reflects the lengthening of debt maturity and translates

into higher flexibility for business management. From the total debt, 18.6% is in

Brazilian currency, 38.7% is pegged to the U.S. dollar, and the remaining 42.7% comes

from the Group’s operations outside Brazil.


20 21 f i n a n c e

Even with the acquisition of new assets in 2004, the net interest (financial

expenses minus financial revenue, excluding currency exchange variation)

per metric ton sold was R$ 22.36, almost half the amount recorded in the

previous year. This indicates that the Gerdau Group’s expansion did not

compromise profitability or operating performance during the year.

In December, the balance of cash, cash equivalents and financial

investments was R$ 2 billion, of which 69.5% (R$ 1.4 billion) was indexed

to the U.S. dollar. The financial resources invested in 2004 almost doubled

in relation to 2003, reflecting a growth in cash generation.

The strong generation of operating cash (EBITDA) resulted in improved

debt payment capacity and availability to undertake new commitments to

expand the business. In 2004, the ratio between net debt and EBITDA was

0.7, well below the limit of 2.5 established in the Group’s indebtedness

policy.

Net Sales Revenue in 2004

(million R$)

13,367

7,307

5,570

19,597

9,976

8,857

+46.6%

+36.5%

+59.0%

Financial operations

In June, Gerdau Açominas S.A., the company responsible for the Group’s

steel operations in Brazil placed the second tranche of its Export Receivable

Notes program. This was important to lengthen the company’s debt

profile. The operation yielded US$ 128 million with maturity in eight years

and an annual interest rate of 7.321%. The transaction was completed in

parallel with a derivative instrument (US Treasury Lock), which reduced

the effective cost to 6.798% per year.

In October, a US$ 110 million operation in euro commercial papers, with

maturity on October 12, 2005 and annual interest of 3%, was concluded.

In December, Gerdau Açominas S.A. obtained a US$ 240 million loan to

upgrade the Ouro Branco mill (state of Minas Gerais) as part of the plant’s

expansion project. The guarantee for the operation was given by Nippon

Export and Investment Insurance (NEXI), a credit agency associated

with the Japanese government. The NEXI guarantee covers 97.5% of the

political risk and 95% of the commercial risk. That means that both the

risks related to the Brazilian policy for payments sent to foreign countries

(political risk) and the risks related to compliance with commitments

undertaken by the company (commercial risk) are covered. The total term

for this loan is seven years, including two years of grace and five years for

amortization. The operation, called an untied loan, is unique in that it is

not linked to the origin of the equipment supplied. In addition, the loan

does not require any additional guarantee from the company and there is

no link with imports or receivables from exports.

BRAZIL

490 764 +55.9%

2003

2004

CANADA AND

THE UNITED STATES

ARGENTINA, CHILE

AND URUGUAY

Net Income in 2004 - R$ 3.3 Billion

BRAZIL

CANADA AND

THE UNITED STATES

ARGENTINA, CHILE

AND URUGUAY

5.2%

26.8%

68.0%


Financial Indicators 2004 1 2003

Firm value 2 /EBITDA 3 3.3x 5.4x

Net debt/EBITDA 0.7x 2.0x

Net debt/Total capitalization 34.2% 52.1%

EBITDA/Net financial expenses 4 21.8x 5.2x

Net income/Net equity 42.5% 26.0%

1. The improvement of indicators is due to the positive performance in 2004 which is reflected, for example, in the increase in EBITDA and net income as well as in the reduction

of net debt and net financial expenses.

2. Firm value: market value less net debt (Gerdau S.A. Consolidated).

3. EBITDA: earnings before interest, taxes, depreciation and amortization.

4. Net financial expenses: financial expenses minus financial revenue, excluded foreign exchange effects and monetary variation.

Distribution of Value-added

Metalúrgica Gerdau S.A. Consolidated

Total: R$ 10 billion

Distribution of Value-added

Metalúrgica Gerdau S.A. Consolidated

Governments: R$ 4.1 billion

GOVERNMENTS

EMPLOYEES

FUNDING

INSTITUTIONS

SHAREHOLDERS

REINVESTMENT

OF PROFIT

9.6%

4.0%

23.7%

21.8%

40.9%

FEDERAL TAXES AND

CONTRIBUTIONS

FEDERAL SOCIAL

OBLIGATIONS

STATE TAXES AND

CONTRIBUTIONS

MUNICIPAL TAXES

AND CONTRIBUTIONS

7.1%

0.9%

27.0%

65.0%

Distribution of Value-added

Metalúrgica Gerdau S.A. Consolidated

Employees: R$ 2.2 billion

SALARIES

BENEFITS

TRAINING

PROFIT SHARING

1.3%

17.6%

12.9%

68.2%

One century of profits

For more than 100 years the Gerdau Group has believed that growth and profitability must be balanced. Our

results are the ultimate proof that we follow this policy. Throughout its history, the Gerdau Group has always

recorded positive results, even in adverse economic scenarios. Ethical values, well trained employees, professional

management, financial seriousness, industrial and commercial competitiveness – all have been at the foundation of

a solid and safe expansion. Today, the Gerdau Group works to retain its position as one of the most profitable and

efficient steelmakers in the world.


22 23 f i n a n c e

Consolidated Cash Flow

Metalúrgica Gerdau S.A.

(in thousand R$)

Company

Consolidated

2004 2003 2004 2003

NET INCOME FOR YEAR 1,437,075 575,179 3,341,097 1,256,874

EQUITY PICKUP (1,342,842) (610,001) 344,628 281,240

PROVISION FOR CREDIT RISK - - 7,647 20,618

GAIN IN FIXED ASSET DISPOSAL - - 9,058 10,056

GAIN/LOSS IN LIQUIDATION OF INVESTMENTS (170,953) (1,445) (164,058) (1,556)

MONETARY AND EXCHANGE VARIATION 5,198 5,563 (94,087) 136,349

DEPRECIATION AND AMORTIZATION 145 149 766,819 605,045

INCOME TAX AND SOCIAL SECURITY CONTRIBUTION 47,393 8,420 505,551 (441,456)

INTEREST ON DEBT 778 14 412,152 593,308

CONTINGENCIES/LEGAL ESCROW (940) 18 4,351 562

CHANGES IN TRADE ACCOUNTS RECEIVABLE - - (720,363) (167,134)

CHANGES IN INVENTORIES - - (1,402,408) (207,267)

CHANGES IN CONTRACTORS 58 (27) 477,292 187,227

OTHER ACCOUNTS IN OPERATING ACTIVITIES (33,737) 8,656 (100,288) 74,557

Net cash provided by operating activities (57,825) (13,474) 3,387,391 2,348,423

FIXED ASSETS ACQUISITION/DISPOSAL - - (1,173,491) (873,039)

DEFERRED CHARGES - - (18,006) (7,246)

INVESTMENTS ACQUISITION/DISPOSAL 155,144 5,097 362,905 (67,005)

ACQUISITION OF ASSETS - - (924,457) -

PROCEEDS FROM DIVIDENDS/INTEREST ON CAPITAL STOCK 351,884 185,108 - -

Cash applied to investments 507,028 190,205 (1,753,049) (947,290)

FIXED ASSETS SUPPLIERS - - 144,573 2,196

WORKING CAPITAL FINANCING (7,778) (7,015) (133,006) (334,804)

DEBENTURES (586) (423) 85,305 (347,456)

PROCEEDS FROM FIXED ASSETS FINANCING - - 762,766 454,989

PAYMENTS OF FIXED ASSETS FINANCING - - (677,357) (541,308)

PAYMENT OF INTEREST ON FINANCING - - (379,801) (414,409)

INTER-COMPANY LOANS 2,839 (2,506) 35,944 (16,937)

CAPITAL INCREASE/TREASURY STOCK (14,441) (7,049) 451,704 (24,151)

PAYMENT OF DIVIDENDS/INTEREST ON CAPITAL STOCK AND STATUTORY PARTICIPATIONS (358,623) (198,413) (853,710) (423,399)

Net cash provided by financial activities (378,589) (215,406) (563,582) (1,645,279)

Change in cash balance 70,614 (38,675) 1,070,760 (244,146)

Cash Balance

AT THE BEGINNING OF THE PERIOD 25,186 63,861 1,015,726 1,420,236

UPDATE OF INITIAL CASH BALANCE - - (82,541) (173,736)

INITIAL BALANCE OF COMPANIES CONSOLIDATED IN THE YEAR - - - 13,372

AT THE END OF THE PERIOD 95,800 25,186 2,003,945 1,015,726


Capital Markets

Outstanding return for shareholders

The Gerdau Group is committed to cost-effective growth that does not compromise future

profitability for shareholders. The company works to guarantee the continuity of its business.

In the past five years, the absolute annual yield of dividends has been on average 6% for

Gerdau S.A. shareholders and 10.3% for Metalúrgica Gerdau S.A. shareholders. Additionally,

the Group seeks to enhance the liquidity of its shares by adopting new corporate governance

practices and by joining important stock exchanges around the world. In 2004, for example,

Gerdau Ameristeel, the company responsible for the Group’s operations in North America, was

listed on the New York Stock Exchange (NYSE). Through these actions, we have established a

strong relationship with our 89.2 thousand shareholders, partners in the construction of the

company’s future.

Publicly traded companies in Brazil

Metalúrgica Gerdau S.A. and Gerdau S.A. distributed a stock bonus to shareholders in 2004.

This initiative translated into an increase in the number of shares available and therefore

created more opportunities for access to the stock. The operation resulted from the issuing of

new shares to incorporate R$ 1.7 billion in reserves to the capital stock of Gerdau S.A. and

R$ 384.0 million to the capital stock of Metalúrgica Gerdau S.A.

The number of Gerdau S.A. shares was doubled to 296.7 million. The number of Metalúrgica

Gerdau S.A. shares was also doubled to 83.2 million (30% distributed as bonus and 70% by

stock split). At the end, each investor had more shares, reflecting the percent increase of each

company.

In December, Gerdau placed a public offering to sell common shares from its two publicly

traded companies in Brazil. The aim was to increase liquidity and appreciation of these

shares in the capital market. The auction offered 10.1% of the common shares of Metalúrgica

Gerdau S.A. and 10% of the common shares of Gerdau S.A., the equivalent of 2.8 million and

10.3 million shares, respectively. The Metalúrgica Gerdau S.A. shares belonged to Gersul

GERDAU AMERISTEEL RINGS THE

OPENING BELL AT THE NEW YORK STOCK

EXCHANGE (NYSE). FROM LEFT TO RIGHT:

NOREEN CULHANE, NYSE EXECUTIVE

VICE PRESIDENT; ANDRÉ JOHANNPETER,

GERDAU AMERISTEEL VICE PRESIDENT

AND COO; ROBERT BRITZ, NYSE PRESIDENT

AND CO-COO; PHILLIP CASEY, GERDAU

AMERISTEEL PRESIDENT AND CEO; TOM

LANDA, GERDAU AMERISTEEL VICE

PRESIDENT AND CFO; AND OSVALDO

SCHIRMER, GERDAU GROUP FINANCIAL

EXECUTIVE VICE PRESIDENT AND INVESTOR

RELATIONS DIRECTOR

SOURCE: nyse


24 25 capital markets

Empreendimentos Imobiliários Ltda., the Group’s controlling block holding

company. The Gerdau S.A. shares belonged to Metalúrgica Gerdau S.A. and Santa

Felicidade Comércio, Importação e Exportação de Produtos Siderúrgicos Ltda., a

fully owned subsidiary of Metalúrgica Gerdau S.A. The operation resulted in the

sale of 1.4 million Metalúrgica Gerdau S.A. shares (equivalent to R$ 75.1 million)

and 10.3 million Gerdau S.A. shares (R$ 412.1 million).

During 2004, payments made to the shareholders of Metalúrgica Gerdau S.A.

totaled R$ 433.9 million (+ 152.1%), and R$ 858.8 million (+ 144.5%) to the

shareholders of Gerdau S.A. This represents a dividend yield (on December

31) of 7.8% for Metalúrgica Gerdau S.A. and 6.1% for Gerdau S.A. In 2004, the

appreciation of shares corresponded to 122.7% and 66.2%, respectively.

Payment of dividends and interest on capital stock is based on the net income

for the year. At Metalúrgica Gerdau S.A., net income reached R$ 1.4 billion

(R$ 17.42 per share) and at Gerdau S.A., R$ 2.8 billion (R$ 9.59 per share).

The volume of Metalúrgica Gerdau S.A. shares traded increased 260.4% at the

São Paulo Stock Exchange, reaching R$ 2.1 billion. There were 63,200 trades, up

195.1% over the previous year. The average daily trading increased from

R$ 2.2 million in 2003 to R$ 7.2 million.

In 2004, the trading volume for Gerdau S.A. shares at the São Paulo Stock

Exchange was R$ 7.2 billion, the equivalent of 224,000 trades. This was an

increase of 185.2% and 116.2%, respectively. Consequently, the average daily

trading reached R$ 25.9 million, against R$ 9.8 million in the previous year.

The trading of Gerdau S.A. American Depository Receipts (ADRs) on the New

York Stock Exchange totaled US$ 1.3 billion, equivalent to a daily average of

US$ 5.1 million. At the Madrid Stock Exchange (Latibex), the company’s shares

were traded daily for a volume of € 6.2 million.

Performance of Metalúrgica Gerdau S.A. Shares in Brazil (GOUA4)

800

700

600

500

400

300

200

100

JAN-00

JAN-01 JAN-02 JAN-03 JAN-04

METALÚRGICA GERDAU S.A.

IBOVESPA

Dollar-deflated data / Basis 100 / Source: Economática


Performance of Gerdau S.A. Shares in Brazil (GGBR4)

800

700

600

500

400

300

200

100

JAN-00

JAN-01 JAN-02 JAN-03 JAN-04

GERDAU S.A.

IBOVESPA

Dollar-deflated data / Basis 100 / Source: Economática

Performance of Gerdau S.A. ADRs in the U.S.A. (GGB)

800

700

600

500

400

300

200

100

JAN-00

JAN-01 JAN-02 JAN-03 JAN-04

GERDAU S.A. ADRS

DOW JONES

Dollar-deflated data / Basis 100 / Source: Economática

Performance of Gerdau Ameristeel Corp. Shares in Canada (GNA)

300

250

200

150

100

50

OCT-02 OCT-03 OCT-04

GERDAU AMERISTEEL CORP.

TS300 INDEX

Quotes start October 28 2002 / Data in Cdn$ / Basis 100 / Source: Bloomberg


26 27 capital markets

Publicly traded company in Canada

The debut of Gerdau Ameristeel on the New York Stock Exchange (NYSE) in 2004 translated into a new level

of liquidity for its shares. Starting in October, when trading of Ameristeel stock at the NYSE began, until

the end of December, trading volume reached US$ 107.5 million, representing an average daily volume of

US$ 2.6 million. In addition, the listing in the U.S. increased the trading volume on the Toronto Stock Exchange,

where Gerdau Ameristeel has been listed since 2002. In the first nine months of 2004, the average daily

trading volume on the Toronto Stock Exchange was US$ 871,000. Taking into consideration the trades at the

NYSE, this volume reached US$ 5.9 million in the last quarter.

Gerdau Ameristeel is the second Gerdau Group company listed on the main world financial center. Gerdau

S.A., one of the Group’s publicly traded companies in Brazil, was listed in 1999.

Gerdau Ameristeel carried out two capital increase operations in 2004. In April, 26.8 million common shares

were purchased by Gerdau Ameristeel’s parent company, Gerdau S.A., for Cdn$ 4.90 per share, for a total of

US$ 100 million, generating resources for equipment financing, working capital, and debt payment.

In November, Gerdau Ameristeel issued a public offering of 78.8 million common shares to raise

US$ 370 million. This was the Company’s first international fund raising effort through the issuance of new

shares. The aim of the operation was to secure funds for the acquisition of North Star Steel assets, increase

the shareholder base in the United States and increase the liquidity of shares.

After these operations, Gerdau S.A. had increased its stake in Gerdau Ameristeel to 66.5%.

The company’s net revenues, adjusted to Brazilian accounting practices, reached R$ 8.9 billion in 2004,

with a profit of R$ 896.3 million. As a result, the Board of Directors decided for the quarterly payment

of dividends to shareholders starting in 2005. In March, individuals holding shares on February 16, 2005,

received US$ 0.02 per share in dividends. This amount refers to the first quarter of 2005, and totals

US$ 6.1 million.

Relationship with shareholders, investors and analysts

The Gerdau Group’s relationship with shareholders, investors and analysts is guided by disclosure and

fast response to market demands. In 2004, six meetings were held with Apimec, the Association of

Market Analysts and Investment Brokers. The meetings, broadcast in real time through the Internet and

available for replay until the end of the quarter, attracted 870 people. Gerdau’s investor relations team

held 280 individual meetings with market professionals in Brazil, North America and Europe. It organized

eight conference calls to discuss quarterly results in both Portuguese and English, attracting over 800

participants.

Total Shareholder Return (Steel Companies) - 1997 to 2004 (%)

METALÚRGICA GERDAU

GERDAU

BELGO

1,016.0

CSN

782.0

USIMINAS

236.0

COMMERCIAL METALS

170.0

NUCOR

105.0

STEEL DYNAMICS

98.0

1,513.0

1,605.0

Total shareholder return reflects the

dollar increase in the value of shares for

the period indicated, assuming that the

dividends distributed were reinvested in

shares of the same company.

Source: Bloomberg and Economática

Period from December 31 1996 to

December 31 2004


Shareholder Base

The geographic distribution of the Gerdau Group shareholder base in 2004 was as follows:

%

Metalúrgica Gerdau S.A. Gerdau S.A. Gerdau Ameristeel Corp.

BRAZIL 89.2 77.2 66.5

NORTH AMERICA 8.7 18.5 33.5

EUROPE 1.3 3.4 -

OTHER 0.8 0.9 -

100.0 100.0 100.0

*Source: Shareholder records from the custodian bank and São Paulo Stock Exchange. All holders of ADRs are considered to be North-American.

The Brazilian Securities and Exchange Commission was duly informed of equity investments representing more than 5% of the voting stock.

Number of Shares

The total number of Metalúrgica Gerdau S.A. shares on December 31, 2004 was 82,486,790 (27,722,930 common shares and 54,763,860 preferred

shares). At Gerdau S.A., the total number of shares on the same date was 295,134,822 (102,936,448 common shares and 192,198,374 preferred

shares). Gerdau Ameristeel Corp. had 304,028,122 common shares on December 31, 2004.

Stock Quotes

São Paulo Stock Exchange (Bovespa)

Metalúrgica Gerdau S.A.

Gerdau S.A.

R$ 2004 2003 2002 2001 2000 2004 2003 2002 2001 2000

HIGH 67.40 30.41 11.58 6.18 6.97 51.34 29.02 12.01 7.28 8.14

LOW 29.54 10.48 5.93 3.86 4.29 24.29 10.09 6.87 3.88 4.01

YEAR-END 67.40 30.27 11.58 5.70 5.19 47.50 28.57 11.35 6.53 5.09

In million R$

Market cap 5,559.6 2,684.1 1,131.1 664.5 679.6 14,018.9 8,887.6 3,751.1 2,308.9 1,939.8

Dividend-adjusted. Source: Economática

New York Stock Exchange (Nyse)

Gerdau S.A. - ADR

In US$ 2004 2003 2002 2001 2000

HIGH 18.20 10.23 5.39 4.50 5.96

LOW 7.96 3.11 2.65 1.80 3.03

YEAR-END 18.00 10.11 3.42 3.74 3.27

In million US$

Market cap 5,340.7 2,755.3 1,013.8 1,102.0 964.7

Source: Bloomberg

Madrid Stock Exchange (Latibex)

Gerdau S.A. - DR

In € 2004 2003 2002* 2001 2000

HIGH 19.95 16.77 7.32 - -

LOW 7.21 5.73 6.42 - -

YEAR-END 13.06 16.77 6.90 - -

In million €

Market cap 2,530.7 1,624.8 - - -

*Starting December 2nd 2002. Source: Bloomberg


28 29 capital markets

Toronto Stock Exchange

Gerdau Ameristeel Corp.

In Cdn$ 2004 2003 2002* 2001 2000

HIGH 8.35 4.76 3.30 - -

LOW 4.15 1.39 1.87 - -

YEAR-END 8.08 4.69 2.31 - -

In million Cdn$

Market cap 2,384.9 929.0 457.6 - -

*Starting October 28 2002. Source: Bloomberg

Indicators per Share

Metalúrgica Gerdau S.A.

Gerdau S.A.

In million R$ 2004 2003 2002 2001 2000 2004 2003 2002 2001 2000

DIVIDEND PAID 434 172 140 123 57 859 351 266 164 125

NET INCOME 1,437 575 434 253 218 2,831 1,137 799 464 393

ADJUSTED NET

INCOME 1,365 546 412 234 174 2,690 1,080 763 461 382

%

PAY-OUT 31.8 31.5 34.0 52.6 32.8 31.9 32.5 34.9 35.6 32.5

YIELD 7.8 6.2 12.4 17.0 7.9 6.1 3.9 7.1 6.8 6.1

In R$

EARNINGS PER SHARE 17.42 13.88 20.87 12.18 10.48 9.59 7.68 7.00 4.09 3.46

Equity value

per share 35.90 47.58 75.80 63.90 55.71 20.58 27.89 28.86 23.66 20.84

*Includes the payment of a supplementary non-recurring dividend.

Gerdau shares have been traded in units since 2003. Previous data refer to lots of one thousand shares.

Pay-out: Dividend divided by annual adjusted net income.

Yield: Per share dividend divided by non-dividend adjusted price of share on the last day of the year.

Long-term relationship with shareholders

Generate value for shareholders. This has been our philosophy for decades. Since 1977, the Gerdau Group’s publicly traded

companies in Brazil have been distributing at least 30% of the yearly adjusted net income as dividends or interest on

capital stock.

In 2002, the Group extended the tag-along right to minority common and preferred shareholders, that is, the right to

receive 100% of the amount paid to the shares of the control group in case the control on the company is sold.


Steel Output

(thousand metric tons)

12,343

6,976

5,020

13,448

7,284

5,736

+9.0%

+4.4%

+14.3%

Production

Growing efficiency levels

Achieve world-class operating levels and strive for maximum

industrial process efficiency. Following this principle, the

Gerdau Group is constantly allocating resources toward the

technological upgrading of its steel mills, employee training,

cost reduction and increased workplace safety.

BRAZIL

428

347 +23.5%

2003

2004

CANADA AND

THE UNITED STATES

Output of Rolled Product

(thousand metric tons)

BRAZIL

9,045

3,890

4,776

379

2003

10,274

4,339

5,451

484

2004

CANADA AND

THE UNITED STATES

CHILE AND

URUGUAY

+13.6%

+11.5%

+14.2%

+27.9%

ARGENTINA, CHILE

AND URUGUAY

Brazil

Long steel

Gerdau mills produced 10.2% more steel than in the previous

year. Melt shops and rolling mills also increased their

operational efficiency. In 2004, there was an improvement

of more than 20% in the number of billets that are rolled

between rolling errors. The Group is also currently performing

the technological upgrading of its drawing mills, which will

allow for a productivity gain of 27% when the units reach

their planned operational performance.

Specialty steel

The specialty steel segment, directed primarily at the

automotive industry, also reported a positive performance

for the year. Productivity increased 15.5%; the output of rolled

products grew 19.4%, and of forged products, 16.5%. The new

electric furnace at Gerdau Aços Especiais Piratini (state of

Rio Grande do Sul) began operating at the beginning of the

year, increasing the unit’s melt shop capacity.


30 31 p r o d u c t i o n

From scrap to steel

GERDAU DIVINÓPOLIS (STATE OF

MINAS GERAIS) SCRAP YARD

Each year, the Gerdau Group recycles nearly 11 million metric tons of scrap to produce steel. As a result,

it is one of the largest recyclers in the world. For society, the use of scrap in the steelmaking process

represents an important contribution to improve quality of life. It reduces the volume of material disposed

of in landfills and generates jobs through an extensive chain of small and medium-sized entrepreneurs

dedicated to this activity.

For the Gerdau Group, the use of iron scrap means an optimized production process, increased productivity

and reduced energy consumption and operating costs.


Improved efficiency

EMPLOYEES GATHERED IN EMBU DAS ARTES

(STATE OF SÃO PAULO) FOR THE 1 ST QUALITY

IMPROVEMENT STORY CONTEST

More than 200 employees from Gerdau units in Brazil participated in the 1 st National Meeting

of Quality Improvement Story Teams in July 2004. The purpose of the event was to recognize the

projects that improved production, safety, and quality.

The 15 teams that took part in the meeting were chosen among 767 Quality Improvement Story

Teams from all over the country. At the event, a judging commission formed by employees from

different areas of the Gerdau Group elected the three groups that most stood out among the

participants.

Gerdau Cearense (state of Ceará), for example, was able to increase the daily operating hours of its

rolling mill equipment by 4.4%, a figure that represents an additional production day per month.

A project at Gerdau Aços Especiais Piratini (Rio Grande do Sul) resulted in a 65% reduction in the

amount of material wasted during the rolling process. Gerdau Açonorte (Pernambuco) increased

the daily operating hours of the equipment used for nail production by 5%.

The goal for 2005 is to hold an international meeting with representatives from all the Gerdau

Group units in North and South America.


32 33 p r o d u c t i o n

Gerdau Açominas – Ouro Branco

In 2004, the Ouro Branco mill produced 3.0 million metric tons of

liquid steel, maintaining its 2003 performance by continuously

striving for operational regularity in the various production stages.

This work philosophy allowed the steel mill to make important

advances which resulted in higher productivity and product quality

as well as the enhanced safety of people and equipment.

The mill also recorded a 22.5% growth in the output of structural

shapes to meet increased demand. In 2004, it began to produce

wire rod – 186,000 metric tons destined for the industrial sector.

Argentina, Chile and Uruguay

In Uruguay, Gerdau Laisa reached record figures in 2004. The mill

increased its output of billets to 58,000 metric tons (+ 24%) and of

rolled products to 48,000 metric tons (+17%). It also surpassed its

goal to reduce losses at the rolling mill.

The output at Gerdau AZA in Chile grew 23.4% compared to the

previous year, reaching a total of 371,000 metric tons. The rolling

mills at Renca and Colina also reported increased productivity.

In Argentina, the output of rolled products at Sipar grew 17.7%

compared to 2003. The overall industrial productivity grew 40%

(ton/man/year).

Canada and the United States

The 14 steel mills belonging to Gerdau Ameristeel, the company

responsible for operations in Canada and the United States,

established goals to improve efficiency and reduce costs in 2004.

Electricity consumption in the furnaces dropped 4.3% in relation

to 2003, a significant achievement that helped counterbalance the

increased cost of the input during the year.


Sales and Markets

Capacity to meet growing market demands

Physical Sales by Geographic Region

(thousand metric tons)

BRAZIL

12,144

6,587

5,141

416

2003

12,561

2004

CANADA AND

THE UNITED STATES

Physical Sales by Product Line

12.6 million metric tons

SLABS, BLOOMS AND BILLETS

COMMON LONG ROLLED

PRODUCTS

SPECIAL ROLLED PRODUCTS

DRAWN PRODUCTS

FLAT STEEL

6,630

520

+3.4%

+0.6%

5,411 +5.3%

6.3% 7.9%

3.0%

18.2%

64.6%

+25.0%

ARGENTINA, CHILE

AND URUGUAY

The Gerdau Group participates in the life of millions of people. Rebar, bars,

profiles, wire rod, wires and a range of other steel products are transformed

into houses, buildings, bridges, roads, airports, automobiles, transmission

towers and household appliances. The Group also participates in rural

life, producing steel for fences and farming machinery and equipment,

among other applications.

In 2004, the recovery of the international market and an increase in

demand in the countries where the Gerdau units are located led to an

increase in sales performance. The Gerdau Group sold 12.6 million metric

tons during the year, representing a 3.4% increase compared to the

previous year.

Brazil

The steelmaking industry benefited from a strong demand in the Brazilian

economy. The Gross Domestic Product (GDP) increased 5.2%, leveraged by

the growth of civil construction, industry and agriculture.

As a result, the national market absorbed 18.3 million metric tons of

steel. From this total, 3.9 million were sold by the Gerdau Group – an

increase of 15% in relation to 2003. To meet domestic market needs, the

Group redirected a portion of the volume normally exported from Brazil.

International sales dropped 14.4% in relation to 2003 to a total of

2.7 million metric tons. Despite this result, shipments to 72 countries

during the year represented 41.5% of the overall sales of the facilities in

Brazil, generating a revenue of US$ 1.1 billion, a figure 39% higher than

that of the previous year. This performance in the international market is

also related to Gerdau’s strategy of serving distinct markets, safeguarding

its units from the protectionist measures currently effective in certain

countries.

In the civil construction sector, the domestic demand for products such as

Gerdau rebar, reinforcing mesh and truss frames increased 12.7% during

the year. Gerdau products were used in major construction projects:

the Recife airport (state of Pernambuco), the Congonhas airport (São

Paulo), the Irapé hydroelectric power station (Minas Gerais) and the Iberê

Camargo museum (Rio Grande do Sul), among others. The Gerdau Group’s

top seller in Brazil – the GG 50 rebar – is destined for civil construction.

Since 1992, the Gerdau brand has been imprinted onto the rebar, which

is certified by the National Institute of Metrology, Standardization and

Industrial Quality (Inmetro). The certification, based on best international


34 35 sales an d mar kets

practices, guarantees the quality of the steel.

The Group also provides special services to go along with its products, delivering fabricated

rebar based on each customer’s specific needs. In this way, the steel arrives at the construction

site ready for use. The deliveries are made in identified lots that streamline the verification of

receipt, storage and use. The service increases the productivity and quality of the structures

while also eliminating steel losses in structural frames, which can be as high as 15% in

conventional practices (see box “Suited to the customer’s taste”).

In the industrial sector, the demand for Gerdau products – wire rod, wires, bars, profiles,

angles and welded products – grew 11.6%. In 2004, angle bars and profiles of certain gauges

were also imprinted with the Gerdau brand for the first time, allowing the customer to verify

the quality of the product at sales outlets. This practice will be extended to other types of

profiles during 2005.

The Group was able to fully meet the demands of its specialty steel customers, despite the

significant growth of the automotive industry and the rise in auto parts exports. It increased

Suited to the customer’s taste

The Gerdau Group develops custom-made solutions

for its civil construction customers in the Americas.

The fabricated reinforcing steel facilities, for

example, use automated technology that increases

productivity by approximately 30% in the assembly

of readymade reinforcing structures, eliminates

losses from surplus and reduces final construction

costs. With this solution, rebar is delivered at

the construction site ready for use based on the

customer’s specific structural plan. Deliveries can be

based on a timetable established by the construction

company, allowing for a higher level of organization

at the construction sites and enhancing the safety

of users. The Gerdau Group already has 44 units

specializing in this service in Brazil, Argentina, Chile,

the United States and Uruguay.

FABRICATED REINFORCING STEEL FACILITY IN THE

UNITED STATES (ABOVE) AND THE INAUGURATION OF

THE SANTA CATARINA UNIT (TO THE RIGHT)


its delivery volume by 22.6% and destined 98% of all production to the domestic market.

Through these and other actions, the Gerdau Group has increasingly reinforced its participation

in international production chains – Gerdau steel is currently used in vehicles manufactured

by the major assemblers worldwide (see box “Cars drive innovation”).

In Brazil, there was a 4.7% increase in the sale of products for the agricultural sector compared

to 2003, including wire, wire rope, posts and other items.

Based on the current scenario, GDP growth in 2005 should surpass that of 2004 by 3.7%,

which will have a positive impact on domestic steel consumption.

Cars drive innovation

The Gerdau Group keeps up to speed with the innovations in the automotive

industry. Gerdau Aços Especiais Piratini (state of Rio Grande do Sul), for example,

has one of the most modern laboratories in Latin America for the development of

steel products, with equipment that allows technicians to simulate production and

forming processes and analyze the degree of steel purity in detail.

With these resources, it is possible to develop the improvements to better serve

our customers. In fact, it is through the very partnership with consumers that

Gerdau is able to create innovations in products and processes. Sales, marketing

and technical support teams verify customer needs by maintaining constant

contact with auto parts manufacturers and assemblers. The suggestions are then

forwarded to the engineers in the research and development area, who work with

customers to create and test new solutions. The Group also establishes partnerships

with universities and research centers, as well as technology transfer agreements

with consultants and other specialty steel producers in Europe and Asia who are

internationally recognized in the sector. Over 40 innovations have been placed on

the market during the past four years as a result of this work.

It is for this reason that the Gerdau Group is increasingly present in international

production chains. Today, its steel is found in vehicles made by Mercedes-Benz,

Caterpillar, Toyota, General Motors, Ford, Fiat, Volvo, Scania, Honda and Volkswagen,

among others, both in Brazil and abroad.

THE GERDAU AÇOS ESPECIAIS PIRATINI (STATE

OF RIO GRANDE DO SUL) LABORATORY: ONE

OF THE MOST MODERN IN LATIN AMERICA, IT

FEATURES ULTRASOUND EQUIPMENT (ABOVE) AND

THERMOMECHANICAL SIMULATORS (TO THE RIGHT)


36 37 sales an d mar kets

Support operations for steelmaking in brazil

COMERCIAL GERDAU

The largest steel distributor in Brazil, Comercial Gerdau sells the most complete line of Gerdau

long steel products along with flat steel products manufactured by other steel companies in

the country. In 2004, it serviced over 155,000 customers for a gross revenue of R$ 2.1 billion,

representing a growth of more than 30% compared to the previous year.

Comercial Gerdau currently operates 69 retail stores that cover the entire market. More

than products, it provides the market with solutions such as the fabricated reinforcing steel

facilities located outside construction sites that rigorously follow the structural design

specifications of each project.

The company offers an entire line of products through its six flat steel distribution facilities,

including roofs, sheets, strips and structural shapes, among others, in addition to plasma, laser

and oxy-cutting systems – state-of-the-art thermal cutting technologies designed primarily

for industry and metallic construction.

Banco Gerdau

Banco Gerdau (Gerdau Bank) is a financial institution that operates with the Group’s business

in Brazil. The institution began operations in 1994 as a multiple bank with the mission of

developing financial products and services that increase the business success and satisfaction

of customers and suppliers. The bank has granted over R$ 4 billion in loans during its 10 years

of operations.

In 2004 , it assisted 1,240 customers. The volume of financing granted grew from

R$ 514.7 million in 2003 to R$ 735.0 million, representing a 42.8% increase. The bank’s assets

portfolio increased from R$ 79.5 million to R$ 135 million. The sum managed by the bank in

the form of fixed income investment funds reached a total of R$ 1.6 billion, 44.6% higher than

in 2003.

Gerdau Florestal

Gerdau Florestal owns 144 thousand hectares of pine and eucalyptus forests.

With 24,000 hectares of pine plantations in the states of Santa Catarina and Mato Grosso do

Sul, Gerdau Florestal sold 1.6 million cubic meters of timber in 2004, maintaining the same

volume as that of the previous year.

It also dedicates 120,000 hectares to eucalyptus forests. In 2004 , Gerdau Florestal planted

15 million seedlings on 13,600 hectares, the main highlight of the US$ 11.5 million investment

plan implemented during the year. The unit also completed the expansion of the seedling

nursery, increasing its production capacity from 15 million seedlings per year to 20 million and

guaranteeing Gerdau Florestal self-sufficiency in highly productive genetic material.

Gerdau Florestal also develops the Forest Farmer Program. Since 1998, small rural landowners

have been encouraged to grow eucalyptus trees, receiving seedlings, raw materials and

technical support. Currently, 777 farmers participate in the project, caring for a planted area


THE CONSTRUCTION OF THE

LEE ROY SELMON EXPRESSWAY

IN TAMPA, FLORIDA EMPLOYS

GERDAU STEEL

of over 12,200 hectares. In 2004 alone, they planted more than 1,500 hectares. It

is estimated that another 7,000 hectares will be incorporated into the program

by 2007.

Argentina, Chile and Uruguay

The units in Argentina, Chile and Uruguay recorded a growth in sales, thanks to

the expansion of their domestic markets. They were responsible for the sale of

520,400 metric tons of steel products during the year, 25% more than in 2003.

The increase is due to the economic growth currently taking place in the three

countries, which drove sales up in various sectors such as civil construction and

industry.

The 9% increase in GDP in Argentina in 2004 reflected the country’s economic

recovery, which was also observed during the previous year. This good phase

had positive repercussions on the steelmaking market, increasing the demand

for steel in civil construction and industry. The Sipar rolling mill, in which the

Gerdau Group has a 38.2% equity investment, increased its sales volume by 16.6%

to 218,800 metric tons. The prospects for the upcoming year are also optimistic,

with an estimated 6% increase in GDP and a gradual recovery of infrastructure

projects and industrial activity.

The Chilean economy grew 6% in 2004 and maintained a sustainable pace of

growth. In the steelmaking market, the highlight was the rebar, with a 36.9%

increase in sales due to investments in infrastructure – especially in the country’s

urban road network – and housing constructions. In 2005, it is expected that the


38 39 sales an d mar kets

GDP growth rate will remain the same as that of 2004, reflecting a positive

prospect for the Chilean industry. This may increase the sales of the wire rod and

shapes produced by Gerdau AZA.

In 2004, Uruguay achieved important economic growth with a 12% increase in

its GDP. This recovery had a positive impact on the purchasing power of the

population, which enjoyed an average salary increase of 10.7%. Consequently,

there was a significant increase in the sale of products by Gerdau Laisa, the

Group’s unit in the country. The main highlight was the 21% increase in the sale

of rebar – a product used in civil construction – in relation to 2003. For 2005, the

Group expects to increase its sales in the national and international markets

based on the country’s economic growth, estimated at 5% of the GDP, and its

solid export performance.

Canada and the United States

The year 2004 was a positive one for the North American economy. The United

States and Canada registered economic growth of 4.4% and 2.8%, respectively,

in relation to the previous year. Gerdau Ameristeel, the Group’s company in the

region, felt the effects of this growth. The high demand for steel, combined with

low import volumes, led to an increase in both the pressure to meet domestic

market needs and margins during most of the year. The fourth quarter marked

a return to a more typical pattern of demand, with a rise in imports and larger

inventories. Nevertheless, all of the North American operations together

recorded a 5.3% growth in the volume of physical sales in comparison to 2003,

with a total of 5.4 million metric tons of steel.

Although the demand was strong in all economic segments in 2004, wire rod

and civil construction products benefited most from this trend. The year was

marked by new ventures in the shopping center and commercial building sector.

The housing sector also reported growth. For example, in the fourth quarter of

2004 alone, investments in housing grew 6% in the United States and 1.7% in

Canada.

Industry in the United States is also experiencing a positive phase. In 2004

companies invested more to keep up with economic growth, leading to the

acquisition of capital goods from North American and foreign suppliers. This

industrial growth meant a higher demand for Gerdau products.

It is projected that the U.S. economy will continue to grow in 2005, although at

a slower pace. The market projection is that the GDP will grow at an annual rate


Investments

Growing profitability and productivity

Increase the competitiveness of our operations and reduce

risks in the different markets where we operate. This is the goal

of our investments: generating value. Each year, the company

invests in increasing the installed capacity of its units and

supplying customers with products that follow rigorous technical

specifications and present superior quality. Because it operates in a

capital-intensive sector, the Group invests heavily in the expansion

of its units and in the acquisition of new assets with medium to

long-term maturity. For this reason, the Group’s decisions are

guided by the conviction that the investments it makes should not

only generate profitability in line with the Group’s historical levels,

but should also result in growing productivity.

Main initiatives in 2004

Gerdau invested a total of US$ 771.7 million in 2004, 161.9% more

than in the previous year. One of the main strategic advances made

by the Group was the purchase of the steelmaking assets of North

Star Steel from Cargill Incorporated for US$ 308 million. With this

investment, the geographic coverage of Gerdau Ameristeel – the

company responsible for the Group’s operations in North America

– expanded into the Midwestern United States. Gerdau’s annual

installed capacity in the region increased by 26.2% for a total of

8.3 million metric tons, and by 23.3% for rolled products for a total

of 7.6 million metric tons.

Investments by Region in 2004 - US$ 771.7 million

BRAZIL

CANADA AND

THE UNITED STATES 42.2%

56.5%

ARGENTINA, CHILE

AND URUGUAY

1.3%


40 41 i n v e s tm e n t s

The purchase included four long steel mills in the states

of Minnesota, Iowa, Kentucky and Texas. It also included

three wire rod processing plants in Texas and Tennessee,

in addition to a unit that produces grinding balls for the

mining industry in Minnesota and two scrap collection and

processing units located in Iowa and Minnesota.

Throughout the year, Gerdau Ameristeel also increased the

supply of products with higher value added by acquiring 12

fabricated reinforcing steel facilities in the United States. Of

these, six were owned by Potter Form & Tie Co. and another

six by Gate City Steel and RJ Rebar. The investment created

synergy with the North Star Steel industrial plants due to

the proximity of the units.

In South America, the Gerdau Group entered into yet another

country: Colombia. It formed a strategic alliance to become

the controlling shareholder of the Diaco Group in a process

of staggered acquisition of the shares held by the Mayagüez

Group and The Latinamerican Enterprise Steel Holding. The

transaction involved two steel mills – a profile and rebar

producer and a specialty steel producer – three rolling

units and a fabricated reinforcing steel facility. The initial

investment for this project was US$ 68.5 million. In 2005,

the Gerdau Group will become the owner of 59.8% of the

Diaco Group’s capital stock, making it the largest long steel

producer in Colombia. In addition, the Gerdau units in Chile,

Uruguay and Argentina received US$ 10.3 million to upgrade

their facilities.

The Group invested US$ 325.6 million in Brazil in 2004.

Nearly a third of this value, US$ 100.2 million, was used to

expand the Ouro Branco mill (state of Minas Gerais). The

Group also invested US$ 77.9 million in the construction

of the Gerdau São Paulo (state of São Paulo) mill. Another

highlight was the modernization of Gerdau Cosigua (Rio de

Janeiro), involving investments of US$ 21.0 million.

THE NORTH STAR STEEL MILL IN CALVERT CITY, KENTUCKY, U.S.A.,

JOINED THE GERDAU GROUP AT THE END OF 2004

THE TUTA UNIT, A SHAPE AND REBAR PRODUCER IN COLOMBIA,

IS ONE OF THE INDUSTRIAL PLANTS IN THE ALLIANCE WITH THE

DIACO GROUP


Investment program for the coming years

The Gerdau Group will invest US$ 3.2 billion in the Americas through 2007.

The largest part, equal to US$ 2.4 billion, is planned for operations in Brazil.

The Group’s installed steel production capacity in Brazil will grow by 4.1 million

metric tons (+55%) over a three-year period, from 7.6 million metric tons to

11.7 million metric tons per year.

The units in North America will receive US$ 740 million and the facilities located

in Argentina, Chile and Uruguay, US$ 60 million.

Key projects in Brazil

Gerdau São Paulo (state of São Paulo): The construction of the new rebar

production unit for civil construction is in its final phase (see box “Countdown

in São Paulo”).

Gerdau Aços Especiais Rio (state of Rio de Janeiro): A new specialty steel mill will

be constructed and is scheduled to start operations in 2007. Designed to serve

the automotive industry, it will have an annual installed capacity of 800,000

metric tons of steel and 500,000 metric tons of rolled products.

Gerdau Açominas – Ouro Branco (state of Minas Gerais): The annual capacity

of the mill will increase from 3 million metric tons to 4.5 million metric tons in

2007. The Ouro Branco investment program also includes an additional phase

for expansion of this facility. The studies relating to this second phase will begin

after the conclusion of the current investment.

Gerdau Usiba (state of Bahia): By 2007, the investment program will expand

the mill’s annual capacity to approximately 640,000 metric tons per year. The

program also involves an increase in the rolling mill capacity during the period.

Gerdau Aços Especiais Piratini (Rio Grande do Sul): The production capacity of

rolled products for the automotive industry will increase from 390,000 metric

tons per year to 500,000 metric tons per year before the end of 2005.

Gerdau Cearense (state of Ceará): A 50% increase in the annual production

of rolled products, from 100,000 metric tons to 150,000 metric tons, will be

achieved ahead of schedule in 2005. Increasing productivity in the industrial

area and the quality of products destined for civil construction and industry is

part of the investment program.

Gerdau Riograndense (Rio Grande do Sul): In 2006, improvements in the melt

shop processes will create an additional production capacity of 60,000 metric

tons of steel per year, reaching approximately 560,000 metric tons.


42 43 i n v e s tm e n t s

Countdown in São Paulo

CONSTRUCTION WORK AT THE

STEEL MILL IN ARAÇARIGUAMA

(STATE OF SÃO PAULO)

The Gerdau Group steel mill in São Paulo is set to start operations in July 2005. The rolling

phase, when steel is transformed into the final product, is scheduled to begin in 2006. The

R$ 750 million investment will be applied in two stages. The first, which is scheduled for

completion in two years, involves an investment of R$ 500 million. In the second stage,

R$ 250 million will be invested.

Located in Araçariguama – 50 kilometers away from the capital of São Paulo – the unit

will have a total annual installed capacity of 1.3 million metric tons of steel and 1.2 million

metric tons of rebar for the civil construction sector. In the first phase, the melt shop will

have an annual installed capacity of 900,000 metric tons of steel, while the rolling mill

will have an annual installed capacity of 600,000 metric tons of rebar. The concept of

ecoefficiency was a highlight of the project with the installation of the most modern

technologies to protect the water, air and soil.


Social

Commitment to the development of

employees and communities

People and Teams

People management

Attracting talent

Training and development

Total workplace safety

Benefits

Career management and succession

Organizational climate

Community

Social highlights

46

51


People and Teams

Teams that add value to the business

More than 24,000 people work for the Gerdau Group. Regardless

of nationality, they work together toward the same objective and

strategy: consolidate the Gerdau Group as an international, worldclass

company.

They share values and knowledge by combining technical, industrial

and commercial expertise and integrating the best aspects of each

business operation.

They also search the market for the most efficient examples of

management, performing global benchmarking research, even in

other sectors of the economy. All of these actions are designed

to add value to the business through teams and leaders who are

committed to outstanding performance. We know, however, that

this is not a short term job. We therefore continuously invest in the

development of our professionals, in attracting talent and in the

quality of life of employees and their families.

People management

To keep people motivated, the Gerdau Group challenges its

employees to surpass limits and become the leaders of change. The

goals are established by teams and managers together, reinforcing

the spirit of team work and the feeling that each individual is

responsible for results (see box “Participative management”).

Outstanding performance is recognized and rewarded through

various compensation programs based on results.

Another important tool used to increase motivation is internal

communication, which encourages the involvement of people

in the Group’s challenges and the feeling of belonging to the

organization. These practices favor the construction of a long-term

bond based on mutual respect.

Attracting talent

The Gerdau Group works continuously to develop future leaders

and attract talents from the market. The emphasis on developing

leaders is reflected in its program for interns and trainees. Over

1,200 youth work side-by-side with experienced professionals

absorbing new knowledge and quickly becoming prepared to take

on new responsibilities.


46 47 People and teams

The Group also searches for developed professionals that can contribute

immediately to the business. Another important program is strategic

recruiting, which Gerdau uses to seek senior level professionals to fill

strategic positions.

Distribution by Region - 24,148 Employees

BRAZIL

Training and development

The Gerdau Group has a specific leadership program that is designed

to improve the efficiency of team management and achieve world-class

performance. One of the subjects addressed is coaching, which develops

each team’s potential to achieve superior results.

CANADA AND

THE UNITED STATES

ARGENTINA, CHILE

AND URUGUAY

3.7%

29.8%

66.5%

The Group also offers full scholarships for MBA and MS programs at the

world’s top educational institutions. Another way of expanding the global

vision of its employees is through intellectual and cultural exchange

within Group operations. This program fosters the Gerdau culture and

Participative management

The Gerdau Group has developed programs to encourage self-management

among employees for nearly 10 years. Through the Operator-Focused

Management Program, the professionals themselves are responsible for

the performance of their cells (teams organized by process in the industrial

operation). The program gives operators greater autonomy and also reduces

hierarchical levels, while increasing the transparency of communication.

Cell management is shared with operators. As part of an annual rotation

process, they take on the control of processes such as safety, maintenance,

environment and costs in addition to the continued exercise of their normal

daily activities. In Brazil, approximately 30% of the industrial unit employees

perform this type of role. In this way, the leaders can more effectively

perform their important function of managing and developing teams.

By receiving more information and participating in the management of

their cell, operators are encouraged to suggest improvements. This process

is happening in all Gerdau units. These are simple proposals that reduce

costs. Take the example of Gerdau Riograndense (state of Rio Grande do

Sul). Based on the suggestion of an employee, the unit was able to reduce

the use of a raw material and achieve an annual saving of R$ 100,000.

With participative management, the teams become more autonomous,

responsible, proactive and knowledgeable of the processes. The results

are reflected in the Gerdau Group performance and in the satisfaction of

employees, who are able to manage their own professional success.

GERDAU CEARENSE (STATE OF CEARÁ) EMPLOYEES

PARTICIPATE IN THE SELF-MANAGEMENT PROGRAM


7

5

3

1

Workplace Safety

(total frequency rate*)

4.4 4.1

2003 2004

* Accident frequency rates with time loss per

million man hours worked (includes employees

and service providers).

the best practices adopted at the different units (see box “A bridge between

the Americas”). Each year, Gerdau Group employees undertake missions to learn

management practices by visiting different units. In addition, more than 40

professionals work outside their country of origin.

Total workplace safety

For the Gerdau Group, no emergency situation, production requirement or result

can justify safety risks for our employees or service providers. It is for this reason

that the Total Safety System exists. It involves a strict set of practices that are

currently shared by all units and it operates on three major fronts:

1. Development of the Zero Accident culture by engaging the leadership and

involving all professionals. This work is performed through continuous awareness

raising, training and team involvement.

2. Use of safety management methodologies to benchmark against international

standards: The methodology is based on the structuring of a system that

guarantees the safety of people through preventive actions. Dozens of practices

are evaluated using this system, ranging from leadership and administration

to critical task analysis and procedures, preparation for emergencies, individual

protection equipment, health control, industrial hygiene and even off job safety.

A bridge between the Americas

The Gerdau Group constructed bridges of knowledge connecting

the employees of its units in the Americas. Each year, different

groups of professionals exchange experiences with colleagues

from other countries, seeking to learn about new cultures, improve

management practices and achieve increased operational results.

It is an opportunity to learn about the Gerdau Management

System and its practical application. It also works as an internal

benchmarking method, since the group visits help facilitate dialogue

between employees, who learn to speak the same management

language and adopt similar practices.

These employees, in turn, share information within their own

units (the multiplier effect). The exchange is an opportunity to

internationalize professionals, who are able to have contact with

the different cultures and practices adopted by their colleagues in

other countries.

U.S. EMPLOYEES VISIT A UNIT IN BRAZIL


48 49 People and teams

3. Investment in new protection materials and industrial equipment in addition

to the modernization of existing equipment.

All of this work is audited periodically by an external consulting firm and

internal teams. Both evaluate the strong points and areas for improvement

in the system, and each unit elaborates action plans, thereby promoting the

continuous improvement of safety practices.

Benefits

The Gerdau Group benefits program is designed to contribute to the quality of

life of employees and their families. It is adjusted based on the local markets,

laws and business operations.

Career management and succession

The Gerdau Group encourages the professional growth of employees in the

organization, preparing them to occupy strategic positions by means of

development programs. Individual development plans are designed together

with the professionals, with goals and the evaluation of results to help employees

achieve their professional aspirations and meet operational demands.

We take pride

Pride to work for the Gerdau Group. This is the feeling that

inspires the majority of employees from all units. The 370

professionals that work in Chile for Gerdau AZA are among

the most satisfied to work for the Group. The perception

was confirmed by an opinion poll performed in 2004. Over

92% of all employees said they were happy to be working at

the unit. The favorability index, which counts the number

of positive results in relation to the total number of poll

questions, was also impressive: 79.7%. The rate is the highest

among all operations in the Americas. In the poll, employees

emphasized factors such as safety, work stability and good

relations with the leadership and other colleagues, in

addition to the availability of training.

AN EMPLOYEE’S CHILD VISITS GERDAU AZA IN CHILE


Organizational climate

Each year, the Gerdau Group performs an opinion poll with employees to evaluate whether

people management practices are meeting the expectations of professionals and generating

the desired results. In 2004, over 85.5% of the professionals in the Americas participated in

the poll, and 79.9% stated that they were happy to be working for the Gerdau Group (see box

Staff 2004 2003

EMPLOYEES 24,148 20,160

OUTSOURCING 9,468 8,852

TRAINEES AND INTERNS 1,241 908

DEPENDENTS 41,259 36,517

NUMBER OF WOMEN WHO WORK AT THE COMPANY 1,657 N.A. 1

% OF LEADERSHIP POSITIONS OCCUPIED BY WOMEN 10.9 N.A. 1

% OF EMPLOYEES OVER 45 YEARS OLD 29.0 32.1

AVERAGE TIME WITH THE COMPANY (IN YEARS) 12.0 10.2

Training and development 2004 2003

INVESTMENTS (MILLION R$) 28.0 22.7

TOTAL NUMBER OF TRAINING HOURS (MILLION) 2 1.5 N.A. 1

NUMBER OF TRAINING HOURS PER EMPLOYEE 2 89 N.A. 1

Workplace safety 2004 2003

INVESTMENTS (MILLION R$) 16.2 11.2

Benefits 2004 2003

MEALS (MILLION R$) 33.4 24.3

TRANSPORTATION (MILLION R$) 33.7 24.6

PROFIT SHARING (MILLION R$) 283.6 249.4

HEALTH (MILLION R$) 161.7 100.8

PRIVATE PENSIONS (MILLION R$) 96.1 46.6

1. Not available

2. Does not include Gerdau Ameristeel data


50 51 c o m m u n i t y

JUNIOR ACHIEVEMENT

PARTICIPANTS: AN

INTERNATIONAL PROJECT

SUPPORTED BY THE GERDAU

GROUP THAT TEACHES

ENTREPRENEURIAL PRACTICES

TO MORE THAN 4 MILLION

YOUTH AROUND THE WORLD

Community

Building a more just world

The sustainability of the Gerdau Group is not only found in its

business management, the efficiency of its employees and in the

protection of the environment but it also extends beyond the

walls of its facilities, because business success is directly linked

to the development of communities. It is for this reason that

the Gerdau Group supports social initiatives in all the countries

where it operates. They are projects that primarily encourage the

dissemination of knowledge, maximizing the ability of people to

transform and generating an environment of growth near the

Gerdau Group facilities.

This focus on social action translates into more than 100 programs

supported by the Gerdau Group. In 2004, these programs involved

R$ 36.5 million in resources and benefited more than 6.5 million

people in the Americas. Since 2005, the management of these

initiatives was handed over to a dedicated structure: the Gerdau

Institute. The Gerdau Institute was created to consolidate the

Group’s policies and guidelines in the area of social responsibility

and coordinate projects that contribute even further to improving

quality of life. It also seeks to engage and encourage partnerships

with other public and private organizations in an effort to optimize

resources and multiply the results of social actions. The institute

promotes volunteer work among its employees, encouraging their

commitment to solving society’s challenges.

The Gerdau Group also makes investments to ensure that the

projects become self-sustainable, both from a financial point of

view and in terms of management capacity. This requires satisfied

people with a good quality of life both inside and outside the

company.


Social highlights

Some activities developed in 2004

A fund for social action

In Brazil, an initiative of the Gerdau Group has served as a

model for other companies, entities and governments: the

Gerdau Professionals Pro-Childhood Fund, a project that

raises the awareness of employees about donating resources

to charitable entities, focused on assisting underprivileged

youth. Created five years ago, the fund raises resources

through tax-deductible donations. Employees use an

Intranet system to select how much they want to contribute

and to which project. Last year alone, the fund received over

R$ 4.6 million in donations, with contributions from both

the Group and its employees. The funds were used to directly

assist approximately 19,000 children and adolescents from

101 Brazilian entities located in 34 cities. The Pro-Childhood

Movement was one of them. It is a non-profit organization

that uses art and education to promote the inclusion of 810

needy boys and girls from the Metropolitan Region of Recife

(state of Pernambuco).

THE GERDAU PROFESSIONALS PRO-CHILDHOOD FUND

CONTRIBUTES TO THE SOCIAL INCLUSION OF BOYS

AND GIRLS IN RECIFE (STATE OF PERNAMBUCO)

The recipe that works

The Prato Popular program brings meals and social

engagement to needy communities in Brazil. At the end

of 2003, the Gerdau Group started its first low-income

restaurant in the State of Rio Grande do Sul near the Gerdau

Riograndense mill. Since then, two other restaurants have

been opened to the public, one in the city of Charqueadas

(state of Rio Grande do Sul) and another in Maracanaú

(Ceará). Some 3,500 people have access to the meals

subsidized by the Group with the initiative. Besides a

balanced meal, the communities assisted began to use the

space as a community center that offers courses and lectures

with themes of social interest (such as alcoholism and drugs)

as well as hairdressing and dental hygiene sessions.

THE PRATO POPULAR RESTAURANT ASSISTS SOME

3,500 PEOPLE IN BRAZIL


52 53 c o m m u n i t y

Champions of the future

Gerdau AZA is committed to the future of sports in Chile.

To encourage the development of champions, the Group

grants one scholarship each year to a talented athlete with

low income. The candidates are chosen by a team comprised

of athletes, specialized technicians and sports journalists.

The selection criteria are technical skill, the level of the

tournaments competed in, results obtained in competitions

during the year, family income and school performance.

Last year, 42 athletes competed for a scholarship of over

R$ 20,000 to fund their training during the year. The resources

are used to improve the quality of the athlete’s training,

meals, transportation and study. The award can be extended

for one more year if the athlete is successful in his or her

competitions. This was the case of the Judo fighter Erwin

Guzmán Pino, who won the 2004 scholarship and will have

it extended through 2005.

JUDO FIGHTER ERWIN GUZMÁN PINO RECEIVES THE

GERDAU AZA SCHOLARSHIP IN CHILE

Holding hands with the community

The social priority of Sipar, the rolling mill located in

Argentina, is to work together with the institutions and

population of Pérez, a city of 22,000 people. The Gerdau Group

currently has a 38.2% equity investment in Sipar. Among the

unit’s community actions, we highlight its support for public

service providers, such as the police and firefighters, and City

Hall, in addition to the maintenance of a public square and

cycle lane. The company also contributes to the development

of local schools and charitable entities, such as the Red Cross,

Liga de Ayuda contra el Cáncer (League in the Fight Against

Cancer - Lalcec), Ilar, an institution created to rehabilitate

people with special needs and Asociación Rosarina de Lucha

contra la Poliomelitis (Association in the Fight Against

Poliomyelitis - ARLPI).

SIPAR, IN ARGENTINA, INTEGRATES

EMPLOYEES, FAMILY MEMBERS AND THE

COMMUNITY OF PÉREZ


From work to school

Gerdau Laisa brings the philosophy of total quality to the

schools of Uruguay. The 5S at School project promotes

environmental management improvements at the six

teaching institutions located near the mill. The efforts are

focused on the fifth and sixth grade classes, with children

between the ages of 10 and 11. In 2004, 540 boys and girls

attended lectures on industry, quality and 5S. They received

the booklets “5S at School” and “5S in the Backpack” and

learned to put the organizational rules of this management

tool to practice. Gerdau Laisa also contributes to improving

the infrastructure of the schools involved, an activity that

benefits 4,200 students.

URUGUAYAN STUDENTS RECEIVE BACKPACKS FROM THE

5S AT SCHOOL PROGRAM PROMOTED BY GERDAU LAISA

Children with wings

NIÑOS CON ALAS BRINGS NEEDY CHILDREN FROM

URUGUAY A NEW PERSPECTIVE ON LIFE

Niños con Alas (Children with Wings) is a program that

transforms the lives of low income children in Uruguay. The

project is organized by a non-governmental organization

with the same name that since 2001 has received the

support of Gerdau Laisa, a mill located in the capital city

of Montevideo. With the program, individuals and private

companies sponsor children for a period of six years, offering

them a brighter future. The sponsored children receive

balanced meals and high quality education in a private

teaching institution and participate in extracurricular

activities such as foreign language classes and sports. In

addition to receiving school materials and a uniform, they

also receive a yearly tuition from Gerdau Laisa, which appoints

an employee to follow the child’s progress. This professional

delivers the donations and also takes the sponsored child

to see movies, plays, and have fun in amusement parks. The

program helps rescue the citizenship of school-aged boys

and girls, giving them the best development opportunities.


54 55 c o m m u n i t y

House of hope

The home of Maria Andrews and her five children is made

of Gerdau Ameristeel material and the effort of Cartersville

unit employees in the United States. The U.S. citizen is one

of the individuals who received aid through the Habitat

for Humanity program, which provides job opportunities

and housing to families experiencing financial difficulties.

Gerdau Ameristeel, in addition to construction tools and

materials, provides volunteer work of nearly 50 employees

who dedicated more than 1,000 hours of their free time

to the project. Many of these individuals spent less time

with their own families so that Maria Andrews and her

children would have a home by Christmas, 2004. They

were able to deliver a four-bedroom house at half the

cost of a conventional project. The savings were possible

through the use of materials donated by sponsors, such as

Gerdau Ameristeel, and through the volunteer labor of the

Cartersville steel mill employees. The North American units

stand out for their community work. Last year alone, more

than 2,000 Gerdau employees became involved in social

initiatives in Canada and the United States.

VOLUNTEER WORK ENGAGES GERDAU AMERISTEEL

CARTERSVILLE EMPLOYEES IN THE UNITED STATES

Running for life

Gerdau Ameristeel employees in Cambridge, Canada, made

running a doubly healthy habit. In addition to their own personal

development, the employees are also fostering the health of the

community. In Canada, various campaigns promote physical

activities as fundraising events for hospitals and cancer prevention

foundations. Roxane Beyette, quality control coordinator at the

Gerdau Ameristeel Cambridge mill, participated in the Weekend to

End Breast Cancer in September 2004. Besides walking 60 kilometers

(about 37 miles), Beyette and her mother Kathy cultivated seasonings

and made candies, which were sold before the walk at locally-held

parties. Beyette earned Cdn$ 2,000 with the initiative. Bruno Manella,

another Gerdau employee, was even more creative: he had his hair

cut off in order to raise money for the campaign. He auctioned off

the opportunity to cut his hair to his colleagues. With initiatives such

as this one, more than 4,500 participants raised Cdn$ 14.7 million for

the prevention and treatment of breast cancer. A team from the unit

also participated in “Run for the Cure,” a different campaign. The

event occurs at the same time in 40 different Canadian cities and

benefits the Canadian Breast Cancer Foundation.

ROXANE BEYETTE (TO THE RIGHT),

QUALITY CONTROL COORDINATOR AT

GERDAU AMERISTEEL CAMBRIDGE IN

CANADA AND HER MOTHER KATHY

WORKED HARD IN THE CAMPAIGN TO

FIGHT BREAST CANCER


The

Environment

Ecoefficient practices to protect

the air, water and soil

Environmental Management System

Environmental Performance

Raw materials

Water

Air

Soil

Energy

Biodiversity

Education for the Environment

58

59

62


Environmental

Management System

Gerdau units follow world-recognized

standards

Protect the environment with future generations in mind. This is

a daily concern for the Gerdau Group, which produces thousands

of metric tons of steel per year with a commitment to reducing

the environmental impact of its operations. It is also expressed

in its environmental policy, elaborated based on the international

ISO 14001 standard and enforced by its 24,000 employees.

The environmental management system involves the analysis of

over 13,000 industrial processes along the entire production line,

from raw material collection to steel distribution. It translates

the principles of the Gerdau Group into well-defined rules and

objectives that enable the analysis of air, water and soil protection

Distribution of Investment in the Environment by

Geographic Region - US$ 25 million in 2004

BRAZIL

10.3%

CANADA AND

THE UNITED STATES

CHILE AND URUGUAY

31.8%

57.9%

Distribution of Investment in the Environment by

Subject - US$ 25 million in 2004

AIR

WATER

SOIL

ISO 14001

VARIOUS

2.5%

3.6%

20.2%

14.0% 59.7%


58 59 environmental management

measures – fundamental for the continued achievement of increased

ecoefficiency rates. This monitoring gives the Group a detailed view of

the impacts that each activity has on nature – no matter how small – and

allows it to develop projects to improve the performance of the units.

The environmental management system also directly engages employees

by encouraging them to send suggestions via the Intranet, thereby

increasing their commitment to the results obtained.

Environmental

Performance

Technologies ensure outstanding performance

Raw materials

Reuse is currently one of the best ways of guaranteeing the sustainability

of our planet. For the Gerdau Group, this is more than a principle because

recycling is actually part of the business: approximately 65% of the

production in the Americas requires iron scrap. The recycling effort is also

present at the end of the industrial process – 66.2% of the by-products

generated are reused by other economic segments, reducing the use of

natural resources.

Water

The Gerdau Group does its part to preserve water resources. Currently,

96.7% of processed water from its units is reused, drastically reducing

the need for collection. This rate results from a set of important practices,

especially recirculation. This process collects the industrial water and

recycles it in the production process. This means that only 3.3% of the

water used in steel production is collected from the rivers. This collection

is necessary because approximately 1.8% of the water used evaporates

and 1.5% returns to the rivers after being treated inside the mills.

Another initiative involves the capture of rain water through rainwater

collection systems that are currently being modernized or expanded.

SYSTEMS FOR PROCESS WATER TREATMENT AND RECIRCULATION

ARE PRESENT IN ALL GERDAU STEEL MILLS

By-product Disposal

3.8 million metric tons

REUSED

BY-PRODUCTS 1

2.5 MILLION

NON RE-USED

BY-PRODUCTS 2

1.3 MILLION

33.8%

66.2%

1. Secondary products of the industrial process reused or recycled either

internally or externally.

2. Secondary products of the industrial process stored in deposits specifically

designed for this purpose.


In 2004, the Gerdau Group invested US$ 3.5 million in actions

designed to preserve water resources.

Water Consumption - 1.5 billion m 3

CAPTURED WATER

3.3%

RECIRCULATED

WATER

96.7%

Air

Maintaining air quality is a Gerdau Group priority. In 2004, it

was the area that most received investments (US$ 14.9 million),

ranging from the technological upgrading of dust filtration

systems to improvements in the melt shop furnaces, also designed

to improve air quality. The dust removal systems are technologies

developed to efficiently capture the solid particles emitted during

the steel production process and are based on world-recognized

best practices. Another measure is the use of natural gas as a

substitute for oil in heating processes. This effort is in line with the

Kyoto Protocol as it reduces greenhouse gas emissions. The Group’s

carbonic gas emission rate per metric ton of steel produced was

550 kilograms, as determined by the IPCC Guidelines for National

Greenhouse Gas Inventories, a world reference for the indicator.

The number represents the average consolidated emission rate of

the Gerdau Group – including market and integrated mills. That

means that the Group’s average is much lower than the worldwide

average of 1.6 tons for the sector, according to 2003 data supplied

by the International Iron and Steel Institute (IISI).

Soil

Care for the soil is also a concern for the Gerdau Group, involving

continuous investments in improving storage conditions that

translate into increasingly safer practices for raw material, product

and by-product stocking.


60 61 environmental performance

Energy

The steelmaking sector is known for its intensive use of energy. For this reason,

the management of this resource is a permanent concern. Although the Group’s

total energy consumption has grown, the specific consumption necessary for the

production of steel fell, showing increased efficiency in the use of this input.

Energy Consumption 2004

7

5

3

Electricity Consumption

(million MWh)

6.4

7.0

OXYGEN (in Nm 3 ) 794,654,254

NATURAL GAS (in Nm 3 ) 662,312,728

DIESEL FUEL (in l) 6,246,022

LUBRICANTS AND GREASES (kg) 1 2,656,484

1. Does not include data from Gerdau Ameristeel and Gerdau AZA.

1

2003 2004

Biodiversity

The maintenance of green belts around the steel mills represents a commitment

to nature and to the quality of life of the community. The Gerdau Group dedicates

8,000 hectares of its total area of 16,900 hectares for the preservation of green

areas. Of this total, 5,500 hectares are set apart for the preservation of native

forest to protect the local ecosystems.

700

500

300

Specific Consumption of Electricity

(KWh per metric ton of steel produced)

541.7 522.5

100

2003 2004

Chilean students receive the recycling scrap! guide

The first school guide on scrap recycling was published

in Chile in 2004 by Gerdau AZA together with the nongovernmental

organization Casa de la Paz (House for

Peace). The material is directed at elementary and high

school teachers and is designed to promote the inclusion

of the topic into different curriculum subjects. In addition

to information about the steelmaking sector, in which

scrap is a major raw material, the guide proposes a series

of activities to be developed in the classroom: teachers

and students can have a hands-on experience about the

importance of scrap recycling for the preservation of the

environment. What’s more, Gerdau AZA sets an example by

producing 100% of its steel from scrap.

The 1,500 copies of the guide’s first edition were given out

in less than three months. The material was distributed at

various schools in the Metropolitan Region of Santiago and

forwarded to the National Environmental Commission and

environmental organizations. The next edition is currently

being prepared for distribution in 2005.

BOOKLET TEACHES ELEMENTARY AND HIGH SCHOOL STUDENTS IN CHILE ABOUT RECYCLING


Education for

the Environment

Encouraging ecological awareness

Care with the water, air, soil and green areas depends on

the awareness of employees and the community. This is

why environmental education actions are fundamental

for preserving natural resources and have been receiving

increasing attention. In 2004, more than 50,000 people,

including employees, service providers and community

members participated in events such as lectures and courses

designed to encourage the preservation of nature.

The Group increased the number of employee training hours

in the environment more than eight fold in relation to the

previous year. For the external public, the Group increased

the number of training hours by 26.1%. In all, Gerdau Group

professionals and the community had over 300,000 hours of

training in ways to preserve the environment.

Promoting awareness on environmental issues is also a

way of encouraging the sustainable development of the

regions where the Gerdau Group has units and establishing

a commitment with customers, shareholders, suppliers and

the community.

100

70

40

10

Hours of Environmental

Training - Employees

(thousand hours)

9

80

2003 2004

250

200

150

100

50

Hours of Environmental

Training - Community

(thousand hours)

177

224

2003 2004


62 63 education FOR THE environment

ISO 14001 mobilizes employees

The Gerdau Group has a priority goal in environmental management: to

obtain the ISO 14001 certification for its 26 steel mills. The mission involves

employees from various units in the Americas. Gerdau AZA in Chile and

Gerdau Ameristeel Cambridge in Canada already have been awarded this

recognition of good environmental practices. In Brazil, Gerdau Açominas

– Ouro Branco (state of Minas Gerais), Gerdau Cosigua (Rio de Janeiro)

and Gerdau Aços Especiais Piratini (Rio Grande do Sul) have obtained the

certification. These three units account for more than 60% of the Group’s

capacity in the country.

The ISO 14001 standard was created to help companies identify, prioritize

and manage environmental risks as part of their daily practices. To obtain

this recognition, the Gerdau Group implemented the Campaign for ISO

14001 Certification in Brazil to encourage employees, service providers

and partner companies from the units to improve their environmental

management practices.

COUNTER-CLOCKWISE: OBTAINING THE CERTIFICATION IS A

SOURCE OF PRIDE FOR EMPLOYEES FROM GERDAU COSIGUA

(STATE OF RIO DE JANEIRO), GERDAU AÇOMINAS – OURO

BRANCO (MINAS GERAIS) AND GERDAU AÇOS ESPECIAIS

PIRATINI (RIO GRANDE DO SUL)


Steel Production

Find out how steel is produced at Gerdau facilities

Integrated

Mills

Iron Ore Blast Furnace Converter

Ladle

Market

Mills

Steel

Scrap

Electric Arc

Furnace

Ladle Furnace

Pig Iron

Nail

Machine

Drawn

Wire

Drawing

Unit

Welding

Manufacturing

Process

Galvanizing

Unit

Nails

Welding Wires

and Wires for Electrodes

Barbed

Wire

Oval-Shaped

Wire

Galvanized

Wire

CA-60

Rebar

Annealed

Wire


64 65 steel production

Raw Material

Melt Shop

Rolling

Drawing

Nail Factory

Gerdau Products

Ladle

Billets

Reheating

Furnace

Continuous

Caster

Wire Rod

Laying

Head

Finishing

Unit

Rolling

Mill

Cooling

Bed

Ribbed Reinforcing

Mesh

Structural

Profiles

Bars and GG 50

Profiles

Rebar


Timeline

More than 100 years of history

German immigrant João

Gerdau and his son Hugo

found the first Gerdau

Group unit, the Pontas de

Paris Nail Factory in the

city of Porto Alegre in the

state of Rio Grande do Sul.

Curt Johannpeter, Hugo’s

son-in-law, leads Gerdau

through a decisive stage

in the expansion of the

company’s business. In

1947, Gerdau becomes a

limited liability company

listed on the Porto Alegre

Stock Exchange.

The Group develops

its culture of social

responsibility, creating

the Gerdau Foundation

with programs in

the areas of health,

education, housing and

social assistance for

employees and their

family members.

Gerdau heads toward

the northeastern region

of Brazil, initiating steel

production in the state

of Pernambuco with the

Açonorte mill.

1901

1946

1963

1969

1907

1948

1967

1971

The business started by João

Gerdau is divided into two

independent companies:

Hugo directs the Pontas

de Paris Nail Factory and

his brother, Walter, takes

charge of the furniture

manufacturing business,

Móveis Gerdau, also located

in Porto Alegre. Later on, in

1930, the two brothers take

part in the creation of the

Manufacturing Industry

Center of Rio Grande do

Sul (CINFA), which later

becomes the Federation of

Industries of Rio Grande do

Sul (FIERGS).

The Gerdau Group

enters the steelmaking

business with the

Group’s Riograndense

steel mill in Porto Alegre.

The Riograndense

mill pioneers the

technological concept

of the market mill,

employing scrap metal

as raw material and

focusing operations

on regional marketing

and sales, and more

competitive operating

costs.

The company’s

expansion route

reaches the

southeastern region

of Brazil with the

acquisition of the

São Judas Tadeu wire

factory, a nail and wire

manufacturer in the

state of São Paulo.

Construction of the

Cosigua mill begins

in the city of Rio de

Janeiro as part of a

joint venture with

the German group

August Thyssen

Huette. This is

also the year in

which the Gerdau

Group enters the

steel distribution

business with the

first Comercial

Gerdau store in São

Paulo.


66 67 t i m e l i n e

The Gerdau

Group’s process of

internationalization

begins with the

acquisition of the

Laisa steel mill in

Uruguay.

The Group acquires

control of the AZA steel

mill in Chile, currently

Gerdau AZA. The Group

launches the GG 50 rebar,

the first in the country to

bear a brand name and a

guarantee of quality.

Gerdau starts to produce

steel in the United States

with the acquisition

of Ameristeel. In the

same year, the shares of

Gerdau S.A., one of the

Group’s public companies

in Brazil, are listed on the

New York Stock Exchange

(NYSE).

The Group merges

its North American

operations with Co-Steel.

The move results in

the creation of Gerdau

Ameristeel, with 11 steel

mills and 29 steel service

facilities.

1980 1992

1999

2002

1989

1998

2001

2004

International growth

advances into North

America with the

acquisition of Courtice

Steel, currently Gerdau

Ameristeel Cambridge,

located in the province

of Ontario (Canada). In

1995, Gerdau strengthens

its position in Canada

by acquiring a second

industrial plant, MRM

Steel, in the province of

Manitoba.

In Argentina, Gerdau

becomes a shareholder

of the Sipar Aceros S.A.

rolling mill.

The Gerdau Group

completes 100 years of

activity, reaching the

8.4 million metric ton

mark for steel production

capacity and R$ 551 million

in net income.

Year of expansion

in the Americas. The

highlight in Brazil is the

construction of two new

mills and the expansion

of the Ouro Branco unit,

in the state of Minas

Gerais. In Colombia, it

becomes a shareholder

of the Diaco and Del

Pacífico mills. In North

America, Gerdau acquires

the assets of North Star

Steel. Gerdau Ameristeel

shares are listed on the

NYSE.


Glossary

Definitions for technical terms employed

in the report

A

ADRs

ADRs, or American Depositary

Receipts, are securities issued in

the U.S. capital market to represent

shares of non-U.S. companies. These

securities were created to give

foreign companies access to the

North American capital market.

Amortization

Accounting procedure by which

the original cost value of an

asset with limited life or of an

intangible asset is gradually

written off as expense, reducing

the value of the asset. In the case

of fixed assets, the term used is

“depreciation” and for goods such

as natural resources, “exhaustion.”

Assets

Any goods with commercial or

exchange value belonging to a

society, institution or individual.

B

Bars and profiles

Product category encompassing

shapes used to manufacture diverse

products such as agricultural

machinery and equipment,

furniture, steel grating, etc.

Benchmark

Standard of excellence.

Billet

Steel section (usually square)

resulting from continuous casting

or rolling of larger sections. Used

as material for the production

of long steel products.

Blast furnace

A large steel stack lined with

refractory brick used in integrated

steel mills to produce pig iron.

By-product

Desirable or undesirable secondary

product of the industrial process.

C

Coke

A raw material used in the blast

furnace to produce pig iron.

Coke is produced from charcoal

through a process known as

coking. Coking removes the

volatile components of charcoal.

Common share

Security representing the smallest

portion of capital stock in a

corporation, providing voting rights.

Continuous casting

Process during which liquid steel

is solidified. Steel may be cast

into various shapes and gauges to

produce billets, slabs or blooms.

Controlling block

Ownership by a shareholder or

group of shareholders of the largest

portion of shares with voting

rights in a company, which entails

the power of decision-making.

Corporate governance

System by which corporations

are managed and supervised,

involving the relationship between

shareholders/quota holders, board

of directors, executive board,

independent auditors and fiscal

council. Good corporate governance

practices are aimed at increasing

the value of a company’s shares,

facilitating the access of companies

to capital resources and contributing

to their continuity (Brazilian Institute

for Corporate Governance definition).

D

Dividend

Amount distributed to shareholders

in cash for each share.

Drawing

Cold process by which wire rod

is transformed into wire.

Dust removal

A highly efficient system for

filtering the tiny solid particles

resulting from steelmaking.

E

EBITDA

Earnings Before Interest, Taxes,

Depreciation and Amortization.

It is calculated as gross profit

minus sales, general and

administrative expenses,

depreciation and amortization.

Ecoefficiency

Capacity to carry out processes

with the least negative impact

on the environment.

Electric arc furnace

Furnace used to manufacture

steel primarily from steel scrap.

Employs electricity through an

electric arc to melt raw materials.

Equity pickup

Realization of equity changes in a

controlled or subsidiary company in

the results of the parent company.

Euro commercial paper

Short or medium term securities

that are issued by companies in

international financial markets.

F

Flat rolled steel

Product category including

products such as plates and strips.

Flat steel is used in the exterior

of cars, home appliances, etc.

G

Galvanized steel

Steel coated with a thin layer of zinc

that provides resistance against

corrosion for use in applications

exposed to the environment, such as

automotive parts, cans and fencing.

GGB

Ticker symbol for Gerdau S.A. ADRs

on the New York Stock Exchange.

GGBR4

Ticker symbol for Gerdau S.A.

preferred shares on the São

Paulo Stock Exchange.

GNA

Ticker symbol for Gerdau

Ameristeel shares on the

New York Stock Exchange.

GOAU4

Symbol for Metalúrgica Gerdau

S.A. preferred shares on the

São Paulo Stock Exchange.

Gross debt

Amount referring to bank loans

plus issued debentures.

Gross margin

Equivalent to gross income

divided by net sales revenues.

Gross margin is expressed as

a percentage representing the

amounts of net sales revenues

that produced gross income.

Gross revenues

Total sales before cost of

materials and services.

I

Indebtedness

Composition of long and short

term debt resulting from

loans and debentures.

Integrated mill

A mill employing iron ore to

manufacture steel. It is usually

comprised of a pellet mill and

coking unit, a blast furnace,

melt shop and rolling mill.

L

Ladle furnace

Furnace that receives the liquid

steel produced at the electric arc

furnace for chemical refining.

Level 1 Corporate Governance,

Bovespa

Set of conduct rules for companies,

managers and controlling

shareholders, which contribute

to the appreciation of shares and

other assets issued by a company.

Level 1 Companies are committed to

improving disclosure to the market

and shareholding dispersion.


68 69 G L O S S a r y

Liquidity

Ability of an asset to be

converted into cash quickly.

Long steel

Steel product in which one

dimension (length) is predominant.

Includes bars, profiles, wire rod,

rebar, structural shapes and wires.

The line of long steel products

is Gerdau’s main product line.

M

Majority shareholder

Individual or group holding a

sufficient number of voting

shares to control a company.

Market mills

Steel mills focused on purchasing

raw material and selling their

production in the same region

in which they are installed.

Melt shop

In a steel mill, the location where

steel is actually produced.

Minority shareholder

Individual or group holding a

number of shares that is not

sufficient to control the company.

N

Net debt

Gross debt minus cash and

financial applications.

Net income

Profit after taxes and

minority participations.

Net margin

Equivalent to net income

divided by net sales revenues.

Net margin is expressed as a

percentage representing the

amounts of net sales revenues

that produced net income.

Net sales revenue

Gross revenues minus sales

taxes, freight and discounts.

O

Oxy-cutting

Cutting method for metallic

parts. It is used to cut scrap

and billets or slabs in the

continuous casting process.

P

Pellet

Small iron ore body, usually spherical,

used as input in the blast furnace.

Pig iron

Produced in the blast furnace,

pig iron results from the

chemical reduction of iron

ore with charcoal or coke.

Preferred share

Security representing the

smallest portion of capital

stock in a corporation, providing

privileges in terms of dividend

distribution and reimbursement

of capital in case of dissolution.

In general, preferred stock holders

do not have voting rights.

Productivity

Ratio between what is produced

and the necessary resources for

production. In the steel industry, one

of the most widely used productivity

indicators is ton/man/year (t/m/y).

Publicly traded company

Company whose shares are

registered with the Securities

and Exchange Commission,

distributed among a certain

number of shareholders and

negotiable in stock exchanges

or over-the-counter market.

R

Rebar

A steel rod with ridges for use

in reinforced concrete.

Receivables

Accounts receivable less bad debts.

Recycling

Process through which iron scrap

is re-used to produce steel.

Ribbed reinforcing mesh

Grid frame made of ribbed rebar used

in the construction of concrete slabs.

ROE

Return on Equity. ROE is the ratio

between net income and net

equity. It reflects shareholder

return on investment.

Rolled product

Product resulting from the rolling

process, in which raw material

is successively compressed

until acquiring the desired

shape and dimensions.

Rolling

Cold or hot mechanical process

that changes the cross-sectional

dimensions or shape of steel

produced in the melt shop.

Rolling block

Rolling equipment, including a set

of cages assembled as a single

structure, used in the high-speed

production of high quality wire rod.

S

Sarbanes-Oxley

A law enacted by the U.S.

Congress to protect investors from

accounting fraud in corporations.

The rules and regulations of the

Sarbanes-Oxley Act amend and

supplement the preexisting laws

ruling publicly traded companies.

Scrap

Iron material that is reprocessed

for steel production.

Shareholders’ equity

Shareholders’ net worth capital

invested in a company.

Slab

A steel product that serves as

the basis for the production

of plates and strips.

Specialty long steel

Long steel produced with specific

physical characteristics required

for special applications, such

as in the automotive, oil, tools

and machinery industries.

Steel

An iron alloy with carbon content

not more than 1.5%, which may

also contain other elements that

alter the physical properties.

Stock bonus

Shares of stock given to current

shareholders in addition to

dividends. May also be a security

that entitles to the subscription of

new shares issued by a company

within the limit of capital increase

authorized in the by-laws.

Structural shapes

Category of steel product

including I and H beams and

wide flange beams. Used in

buildings, industrial installations,

bridge reinforcements, etc.

Sustainability

Sustainability (or sustainable

development) is the balance between

economic, environmental and social

aspects to avoid compromising

the future growth of a company.

T

Total quality

Management methodology

in which quality is viewed as

synonymous with the satisfaction

of a company’s stakeholders:

customers, employees, shareholders,

suppliers and the community.

W

Wire rod

Round steel product obtained

from the rolling process. Wire rod

is usually drawn and used in the

production of wire, screws and nails.


2004

Financial

Statements

Detailed information on financial performance

Metalúrgica Gerdau S.A.

Gerdau S.A.

Gerdau Açominas S.A.

72

108

144


Metalúrgica Gerdau S.A.

Balance Sheet at December 31

(In thousands of reais)

Assets Company Consolidated

2004 2003 2004 2003

Current Assets

Cash and cash equivalents ........................................................... note 5 95,800 25,186 2,003,945 1,015,726

Trade accounts receivable ............................................................. note 6 - - 2,564,192 1,561,083

Inventories................................................................................... note 7 - - 4,236,642 2,336,598

Tax credits................................................................................... note 8 11,247 16,113 251,858 137,810

Deferred income tax and social contribution on net income.............. note 9 - - 329,797 117,106

Dividends receivable..................................................................... 120,508 62,086 - -

Other accounts receivable ............................................................. 3,801 4,095 267,058 264,504

Total current assets......................................................................... 231,356 107,480 9,653,492 5,432,827

Long-term Receivables

Related parties............................................................................. note 21 - 3,390 1,231 30,509

Eletrobrás loans............................................................................ 372 372 10,584 10,584

Deposit for future investment in subsidiaries................................... note 4 - - 182,158 -

Deferred income tax and social contribution on net income.............. note 9 9,702 10,830 623,722 812,105

Compulsory deposits and other...................................................... note 10 2,817 3,553 245,391 228,287

Total long-term receivables............................................................ 12,891 18,145 1,063,086 1,081,485

Permanent Assets

Investments ................................................................................. note 11 3,018,021 2,029,479 112,547 463,224

Fixed assets.................................................................................. note 12 1,593 1,738 7,928,973 7,380,838

Deferred charges.......................................................................... note 13 - - 33,858 20,467

Total permanent assets.................................................................... 3,019,614 2,031,217 8,075,378 7,864,529

Total assets......................................................................................... 3,263,861 2,156,842 18,791,956 14,378,841

The accompanying notes are an integral part of these financial statements.


72 73

METALÚRGICA GERDAU S.A.

Liabilities and Shareholder’s Equity Company Consolidated

2004 2003 2004 2003

Current Liabilities

Trade accounts payable.................................................................. 63 4 1,921,424 1,191,065

Financing..................................................................................... note 14 - - 2,027,865 2,461,299

Debentures................................................................................... note 15 - 624 2,986 3,651

Taxes and contributions payable.................................................... note 18 2,247 3,537 391,185 178,442

Related parties............................................................................. note 21 266 - - -

Deferred income tax and social contribution on net income.............. note 9 - - 180,166 35,721

Salaries payable............................................................................ 4,218 7,364 259,919 156,289

Dividends payable......................................................................... note 23 158,374 73,524 338,972 165,722

Other accounts payable................................................................. 10,630 9,037 222,741 231,854

Total current liabilities.................................................................... 175,798 94,090 5,345,258 4,424,043

Long-term Liabilities

Financing..................................................................................... note 14 - - 3,490,374 3,396,085

Debentures................................................................................... note 15 - - 573,504 423,956

Provision for contingencies............................................................ note 20 664 1,800 240,964 223,015

Deferred income tax and social contribution on net income.............. note 9 85,540 44,315 699,119 532,263

Post-employment benefits.............................................................. note 22 - - 294,478 278,870

Other accounts payable................................................................. 40,825 44,541 292,664 263,689

Total long-term liabilities............................................................... 127,029 90,656 5,591,103 5,117,878

Minority Interest.................................................................... - - 4,894,561 2,864,824

Shareholders’ Equity

Capital......................................................................................... note 23 1,664,000 1,280,000 1,664,000 1,280,000

Capital reserves............................................................................ 10,842 10,659 10,842 10,659

Revenue reserves.......................................................................... 1,285,632 680,877 1,285,632 680,877

Retained earnings......................................................................... 560 560 560 560

Total shareholders’ equity.............................................................. 2,961,034 1,972,096 2,961,034 1,972,096

Shareholders’ Equity Including Minority Interest.................................. - - 7,855,595 4,836,920

Total liabilities and shareholders’ equity.................................... 3,263,861 2,156,842 18,791,956 14,378,841

The accompanying notes are an integral part of these financial statements.


Statement of Income

Years Ended December 31

(In thousands of reais)

Company

Consolidated

2004 2003 2004 2003

GROSS SALES REVENUES................................................................... note 26 - - 23,407,573 15,782,967

Taxes on sales............................................................................... - - (2,456,568) (1,427,585)

Freight and discounts..................................................................... - - (1,353,743) (988,421)

___________ ___________ ___________ ___________

Net Sales Revenues........................................................ - - 19,597,262 13,366,961

COST OF SALES AND/OR SERVICES RENDERED.................................... - - (13,352,238) (10,076,740)

___________ ___________ ___________ ___________

GROSS PROFIT...................................................................... - - 6,245,024 3,290,221

SELLING EXPENSES........................................................................... - - (455,175) (448,131)

FINANCIAL INCOME.......................................................................... note 17 10,239 11,900 249,261 86,754

FINANCIAL EXPENSES....................................................................... note 17 (6,852) (5,616) (397,642) (708,130)

GENERAL AND ADMINISTRATIVE EXPENSES

Management fees.......................................................................... (3,168) (2,957) (50,654) (35,256)

General expenses........................................................................... (28,891) (27,036) (1,000,299) (769,245)

EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES

AND ASSOCIATED COMPANIES...................................................... note 11 1,342,842 610,001 (344,628) (281,240)

OTHER OPERATING INCOME (EXPENSES), NET.................................... 96 367 191,043 17,208

___________ ___________ ___________ ___________

Operating Profit........................................................... 1,314,266 586,659 4,436,930 1,152,181

NON-OPERATING INCOME (EXPENSES), NET....................................... 170,953 1,445 144,102 (6,162)

___________ ___________ ___________ ___________

Profit Before Taxes and Profit Sharing......................... 1,485,219 588,104 4,581,032 1,146,019

PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION

ON NET INCOME.......................................................................... note 9

Current......................................................................................... (2,624) (3,305) (957,000) (314,614)

Deferred........................................................................................ (42,352) (6,663) (238,405) 454,470

MANAGEMENT PROFIT SHARING....................................................... note 24a (3,168) (2,957) (44,530) (29,001)

___________ ___________ ___________ ___________

Net Income Before Minority Interest........................ 1,437,075 575,179 3,341,097 1,256,874

___________ ___________ ___________ ___________

___________ ___________ ___________ ___________

MINORITY INTEREST......................................................................... ___________ (1,904,022) ___________ (681,695)

NET INCOME FOR THE YEAR................................................. ___________ 1,437,075 ___________ 575,179

Net income per share - R$......................................................... ___________

17.42 ___________

13.88

Net equity per share - R$.......................................................... ___________

35.90 ___________

47.58

The accompanying notes are an integral part of these financial statements.


74 75

METALÚRGICA GERDAU S.A.

Statement of Changes in Financial Position

Years Ended December 31

(In thousands of reais)

Company

Consolidated

Financial Resources Were Provided By

Operations:

2004 2003 2004 2003

Net income for the year............................................................ 1,437,075 575,179 3,341,097 1,256,874

Expenses (income) not affecting working capital

Depreciation and amortization.............................................. 145 149 766,819 605,045

Cost of permanent asset disposals........................................ 79,158 8,771 360,815 42,201

Equity in the (earnings) losses of subsidiaries and associated

companies...................................................................... note 11 (1,342,842) (610,001) 344,628 281,240

Gain on sale of shares by subsidiary...................................... note 11 (125,969) - - -

Foreign exchange effects on working capital of

foreign companies........................................................... - - (86,946) (120,202)

Monetary variations on long-term debt.................................. 3,707 4,653 (131,822) (11,085)

Third parties:

Monetary variations on long-term receivables....................... - - (526) (5,107)

___________ ___________ ___________ ___________

From operations.............................................................. 51,274 (21,249) 4,594,065 2,048,966

___________ ___________ ___________ ___________

Capital increase........................................................................ - - 493,181 -

Treasury shares........................................................................ note 23 (14,441) (7,049) (41,477) (24,152)

Increase (decrease) in long-term liabilities.................................. 32,666 (2,334) 768,045 675,463

Contributions to capital reserves ............................................... 183 - 16,246 66,302

Working capital of consolidated companies................................ - - - 53,198

Working capital - purchase of assets......................................... - - 669,446 -

Dividends not included in income for the year............................. 404,325 173,643 - 459

Total funds provided..................................................... 474,007 143,011 6,499,506 2,820,236

Financial Resources Were Used for

Investments ................................................................................. 3,214 5,119 41,619 80,402

Purchase of assets........................................................................ - - 924,457 -

Fixed assets.................................................................................. - - 1,262,707 843,462

Deferred charges.......................................................................... - - 18,654 7,246

Increase (decrease) in long-term receivables................................... (5,254) 576 (13,500) 518,612

Dividends/interest on equity ......................................................... note 23 433,879 172,100 966,119 354,015

Total funds used............................................................. 431,839 177,795 3,200,056 1,803,737

Changes in Working Capital ..................................... 42,168 (34,784) 3,299,450 1,016,499

___________ ___________ ___________ ___________

___________ ___________ ___________ ___________

Working capital............................................................................

At the beginning of the year...................................................... 13,390 48,174 1,008,784 (7,715)

At the end of the year............................................................... 55,558 13,390 4,308,234 1,008,784

___________ ___________ ___________ ___________

Changes in Working Capital ............................ 42,168 (34,784) 3,299,450 1,016,499

___________ ___________ ___________ ___________

___________ ___________ ___________ ___________

The accompanying notes are an integral part of these financial statements.


Statement of Changes

in Shareholders’ Equity

(In thousands of reais)

Capital reserves Revenue reserves

Premium Investments Total

on issue and working Retained shareholders’

Capital of shares Other Total Legal capital Total earnings equity

At December 31, 2002 640,000 8,686 1,973 10,659 79,181 845,666 924,847 560 1,576,066

Net income for the year - - - - - - - 575,179 575,179

Capital increase through

capitalization of reserve note 23 640,000 - - - - (640,000) (640,000) - -

Treasury shares note 23 - - - - - (7,049) (7,049) - (7,049)

Distribution proposed for

the Annual General Meeting

Legal reserve note 23 - - - - 28,759 - 28,759 (28,759) -

Reserve for investments

and working capital - - - - - 374,320 374,320 (374,320) -

Dividends/interest on equity note 23 - - - - - - - (172,100) (172,100)

At December 31, 2003 1,280,000 8,686 1,973 10,659 107,940 572,937 680,877 560 1,972,096

Net income for the year - - - - - - - 1,437,075 1,437,075

Capital increase note 23 384,000 - - - - (384,000) (384,000) - -

Investment incentives - - 183 183 - - - - 183

Treasury shares note 23 - - - - - (14,441) (14,441) - (14,441)

Distribution proposed for

the Annual General Meeting

Legal reserve note 23 - - - - 71,855 - 71,855 (71,855) -

Reserve for investments

and working capital - - - - - 931,341 931,341 (931,341) -

Dividends/interest

on equity note 23 - - - - - - - (433,879) (433,879)

At December 31, 2004 1,664,000 8,686 2,156 10,842 179,795 1,105,837 1,285,632 560 2,961,034

The accompanying notes are an integral part of these financial statements.


76 77

METALÚRGICA GERDAU S.A.

Statement of Cash Flows

Years Ended December 31

(In thousands of reais)

Company

Consolidated

2004 2003 2004 2003

Net income for the year..................................................................... 1,437,075 575,179 3,341,097 1,256,874

Equity in the (earnings) losses of subsidiaries and associated companies.. note 11 (1,342,842) (610,001) 344,628 281,240

Provision for credit risks.................................................................... - - 7,647 20,618

Gain on disposal of fixed assets......................................................... - - 9,058 10,056

Gain (loss) on disposal of investments................................................ (170,953) (1,445) (164,058) (1,556)

Monetary and exchange variations..................................................... 5,198 5,563 (94,087) 136,349

Depreciation and amortization........................................................... 145 149 766,819 605,045

Income tax and social contribution on net income............................... 47,393 8,420 505,551 (441,456)

Interest on debt................................................................................ 778 14 412,152 593,308

Contingencies/judicial deposits ......................................................... (940) 18 4,351 562

Changes in trade accounts receivable................................................. - - (720,363) (167,134)

Changes in inventories...................................................................... - - (1,402,408) (207,267)

Changes in trade accounts payable..................................................... 58 (27) 477,292 187,227

Other operating activity accounts....................................................... (33,737) 8,656 (100,288) 74,557

___________ ___________ ___________ ___________

Net cash provided by (used in) operating activities.......................... (57,825) (13,474) 3,387,391 2,348,423

___________ ___________ ___________ ___________

Acquisition/disposal of fixed assets.................................................... - - (1,173,491) (873,039)

Increase in deferred charges.............................................................. - - (18,006) (7,246)

Acquisition/disposal of investments.................................................... 155,144 5,097 362,905 (67,005)

Purchase of assets............................................................................ - - (924,457) -

Receipt of dividends/interest on equity .............................................. 351,884 185,108 - -

___________ ___________ ___________ ___________

Net cash provided by (used in) investing activities........................... 507,028 190,205 (1,753,049) (947,290)

___________ ___________ ___________ ___________

Suppliers of fixed assets.................................................................... - - 144,573 2,196

Working capital financing.................................................................. (7,778) (7,015) (133,006) (334,804)

Debentures ..................................................................................... (586) (423) 85,305 (347,456)

Permanent asset financing................................................................. - - 762,766 454,989

Payment of permanent asset financing................................................ - - (677,357) (541,308)

Payment of financing interest............................................................. - - (379,801) (414,409)

Loans with related parties ................................................................. 2,839 (2,506) 35,944 (16,937)

Capital increase/treasury shares......................................................... note 23 (14,441) (7,049) 451,704 (24,151)

Payment of dividends/interest on equity and profit sharing............... (358,623) (198,413) (853,710) (423,399)

___________ ___________ ___________ ___________

Net cash used in financing activities............................................... (378,589) (215,406) (563,582) (1,645,279)

___________ ___________ ___________ ___________

Changes in cash and cash equivalents............................................ 70,614 (38,675) 1,070,760 (244,146)

___________ ___________ ___________ ___________

___________ ___________ ___________ ___________

Cash and cash equivalents

At the beginning of the year.......................................................... note 5 25,186 63,861 1,015,726 1,420,236

Restatement of opening balance.................................................... - - (82,541) (173,736)

Opening balance of consolidated companies for the year................. - - - 13,372

At the end of the year................................................................... note 5 95,800 25,186 2,003,945 1,015,726


Notes to the Financial Statements

at December 31, 2004 and 2003

(All amounts in thousands of reais unless otherwise indicated)

1 - Operations

Metalúrgica Gerdau S.A. is a holding company in the Gerdau Group, which is principally dedicated to the production of common and special

steel and to the sale of general steel products (flat and long), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the United

States of America.

The Gerdau Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from

scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). Gerdau also operates plants which are

capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special

steels. It is the largest scrap recycling group in Latin America and is among the largest in the world.

The industrial sector is the most important market, including manufacturers of consumer goods such as vehicles and household and

commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil

construction sector, which demands a high volume of rebars and wires for concrete. There are also numerous customers for nails, staples

and wires, commonly used in the agribusiness sector.

2 - Presentation of the Financial Statements

The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based

on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM).

A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information

in order to provide additional information.

3 - Significant Accounting Practices

a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the

interest rates agreed with the financial institutions, and do not exceed market value;

b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the

exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes

the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees

and the legal advisors’ opinion, and is considered sufficient to cover eventual losses on realization;

c) Inventories - are stated at the lower of market value and average production or purchase cost;

d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss

is recorded in an income statement account;

e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note

12, which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress

is added to the cost of the constructions;

f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented

projects in relation to their installed capacities;

g) Financing - are stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations.

Swap contracts, which are linked to the loan agreements, are classified together with the related loans;

h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated

in conformity with current legislation;

i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated

amounts plus accrued charges and indexation adjustments (liabilities), when applicable;

j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding.

The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases

of inputs and products are made under terms and conditions similar to those of unrelated third parties;

k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting;

l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions.

The Company’s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for

contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated;

m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or

capitalized when incurred; and

n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency

(R$) at the foreign exchange rate in effect at the balance sheet date (2004 - US$ 1.00 = R$ 2.6544 and 2003 - US$ 1.00 = R$ 2.8892).


78 79

METALÚRGICA GERDAU S.A.

4 - Consolidated Financial Statements

a) The consolidated financial statements at December 31, 2004 include the accounts of Metalúrgica Gerdau S.A. and the directly or indirectly

controlled subsidiaries listed below:

Percentage Shareholders’

Consolidated company ownership equity

Gerdau S.A...................................................................................................................................................................... 100 6,073,856

Gerdau Participações S.A.................................................................................................................................................. 100 4,887,726

Gerdau Açominas S.A....................................................................................................................................................... 100 4,766,046

Gerdau Ameristeel Corporation and subsidiaries*............................................................................................................... 100 3,622,636

Gerdau Internacional Empreendimentos Ltda. - Grupo Gerdau............................................................................................. 100 2,785,282

Gerdau GTL Spain S.L....................................................................................................................................................... 100 2,761,750

Gerdau Steel Inc. ............................................................................................................................................................ 100 2,351,341

Axol S.A.......................................................................................................................................................................... 100 476,156

Gerdau Chile Inversiones Ltda........................................................................................................................................... 100 476,126

Indústria Del Acero S.A. - Indac......................................................................................................................................... 100 476,063

Gerdau Aza S.A. ............................................................................................................................................................. 100 421,401

Santa Felicidade Com. Imp. e Exp. de Produtos Siderúrgicos Ltda......................................................................................... 100 388,298

Seiva S.A. - Florestas e Indústrias...................................................................................................................................... 100 202,143

Itaguaí Com. Imp. e Exp. Ltda. ......................................................................................................................................... 100 193,964

Sipar Aceros S.A. ............................................................................................................................................................ 38 78,037

Margusa - Maranhão Gusa S.A. ........................................................................................................................................ 100 73,714

Gerdau Laisa S.A. ............................................................................................................................................................ 100 51,897

Aramac S.A. ................................................................................................................................................................... 100 49,355

GTL Equity Investments Corp. ........................................................................................................................................... 100 49,286

Banco Gerdau S.A............................................................................................................................................................ 100 33,618

Açominas Com. Imp. Exp. S.A. - Açotrading........................................................................................................................ 100 22,583

Florestal Rio Largo Ltda.................................................................................................................................................... 100 18,174

Aceros Cox Comercial S.A................................................................................................................................................. 100 10,110

Gerdau Açominas Overseas Ltda. ..................................................................................................................................... 100 7,914

Florestal Itacambira S.A.................................................................................................................................................... 100 7,650

Siderco S.A...................................................................................................................................................................... 38 6,958

GTL Financial Corp........................................................................................................................................................... 100 4,931

GTL Trade Finance Inc. .................................................................................................................................................... 100 27

Dona Francisca Energética S.A. ........................................................................................................................................ 52 (16,350)

*Subsidiaries:

Gerdau Ameristeel MRM Special Sections Inc. (100%), Gerdau USA Inc. (100%), Ameristeel Bright Bar Inc. (100%), Gerdau Ameristeel US Inc. (100%), Gerdau Ameristeel Perth Amboy

Inc. (100%), Gallatin Steel Company (50%) e Gerdau Ameristeel Sayreville Inc. (100%).

b) The more significant accounting practices used in preparing the consolidated financial statements are as follows:

I) Metalúrgica Gerdau S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The

financial statements of foreign subsidiaries were translated using the exchange rate in effect at the balance sheet date and were adjusted

to conform with accounting practices adopted in Brazil;

II) Asset, liability and income statement balances arising from transactions between consolidated companies have been eliminated; and

III) Holdings of minority shareholders in subsidiaries are shown separately.

c) During the year, the following transactions occurred:

I) On February 16, 2004, the subsidiary Gerdau Ameristeel Corporation signed a sale and purchase agreement for the acquisition of all assets

of Potter Form & Tie Co., headquartered in Belvidere, Illinois, in the United States of America. The acquisition price was US$ 11 million,

equivalent to R$ 31,995 on that date;

II) On April 16, 2004, the subsidiary Gerdau S.A., through its indirect subsidiary Gerdau Steel Inc., acquired 26,800,000 shares of Gerdau

Ameristeel Corporation through a capital increase of Cdn$ 131 million, equivalent to R$ 283,937 on that date. After this transaction, Gerdau

S.A. held, indirectly, 72% of Gerdau Ameristeel Corporation;


III) The Extraordinary General Meeting of shareholders of the subsidiary Gerdau S.A. held on June 30, 2004 approved the merger of the

subsidiary GTL Brasil Ltda., without the issue of new shares. The net assets transferred to Gerdau S.A. as a result of the merger, are as

follows:

Assets

Current assets.................................................................................................................................................................................................................... 534

____________

Long-term receivables......................................................................................................................................................................................................... 8

____________

Permanent assets

Investments

Seiva S.A. - Florestas e Indústrias................................................................................................................................................................................... 17,883

Gerdau Açominas S.A.................................................................................................................................................................................................... 333,257

(-) Negative goodwill - Gerdau Açominas S.A.................................................................................................................................................................. ____________ (280,882)

Total permanent assets................................................................................................................................................................................................................ ____________

70,258

Total assets................................................................................................................................................................................................................................... ____________

70,800

Liabilities

Current liabilities................................................................................................................................................................................................................ 1,495

Long-term liabilities............................................................................................................................................................................................................ ____________ 4,591

Total liabilities..................................................................................................................................................................................................... ____________

6,086

Total net assets.................................................................................................................................................................................................... ____________

64,714

IV) On October 15, 2004, the subsidiary Gerdau S.A. announced to the market that the indirect subsidiary Gerdau Ameristeel Corporation

obtained the confirmation of its registration with the Canadian securities regulatory authorities for the public offer of 70 million common

shares. Gerdau S.A., through its subsidiary Gerdau Steel Inc., acquired 35,000,000 and 4,381,000 common shares on October 20, 2004 and

November 18, 2004, respectively, in the total amount of US$ 185 million, equivalent to R$ 528,787 on those dates. The transaction initially was

a capital increase in Gerdau Steel Inc., through the issue of 817,969 common shares. Subsequently, on December 28, 2004, Gerdau S.A. paid

up capital in Gerdau Internacional Empreendimentos Ltda. (the company that holds the investments abroad) through the transfer of 817,969

common shares of Gerdau Steel Inc. in the amount of R$ 499,430. Following this transaction, Metalúrgica Gerdau S.A. held, indirectly, 66.5%

of Gerdau Ameristeel Corporation.

V) On October 28, 2004, the subsidiary Gerdau S.A., through its indirect subsidiary Gerdau Ameristeel Corporation, announced the signature

of a sale and purchase agreement for the acquisition of the assets of Gate City Steel Inc. and RJ Rebar Inc. (cutting and folding of rebars,

with and without epoxy covering), headquartered in Indianapolis, Indiana, in the United States of America. The acquisition price was US$ 16

million (R$ 42,470 at December 31, 2004);

VI) On October 29, 2004, the subsidiary Armafer Serviços de Construção Ltda. was merged by the subsidiary Gerdau Açominas S.A., and the

net assets of R$ 44,744 were recorded, replacing the investment account, without capital increase. The objectives of the transaction were to

reduce administrative expenses and improve operating synergy;

VII) On November 1, 2004, the subsidiary Gerdau S.A., through its indirect subsidiary Gerdau Ameristeel Corporation, purchased the fixed

assets and working capital of four mills producing long steel, three processing units of wire rods and one producer of steel grinding balls for

the mining industry owned by North Star Steel, announced on September 9, 2004. The price paid for these assets was US$ 266 million (R$

706,070 at December 31, 2004), in cash. Gerdau Ameristeel Corporation also paid an additional US$ 52 million (R$ 138,029 at December 31,

2004) as an adjustment in the purchase price due to fluctuations in working capital up to the transaction date;

VIII) On December 23, 2004, the Gerdau Group reached an agreement with the Mayaguez Group and The Latinamerican Enterprise Steel

Holding, majority shareholders of Diaco S.A., the largest Colombian producer of steel and rebars, and Siderúrgica del Pacífico S.A. - Sidelpa,

the only producer of special steel in that country, for the scheduled acquisition of their holdings in these companies. Initially, US$ 69 million

(R$ 182,158 at December 31, 2004) were invested, recorded as “deposit for future investment in subsidiaries” in long-term receivables. The

Mayagüez Group, which will remain as a Diaco shareholder for a maximum eight-year period, formed a strategic partnership with the

Gerdau Group for the development of the Colombian steel industry; and

IX) On December 3, 2004, the Board of Directors of the subsidiary Gerdau S.A. authorized the company’s management to implement corporate

restructuring measures to obtain greater strategic advantages, as well as greater operating and management efficiency, arising from the

specialization and location of the different business units and areas of the Gerdau Group. The efforts will be concentrated in the main

activities, focused operations and gain of critical mass within each of the activity areas. Also, this restructuring will consider solutions for the

Group’s future growth. On December 29, 2004, the first act of this process was completed, with the capital increase of the holding company

Gerdau Participações S.A. through the shares held in Gerdau Açominas S.A. and part of the quotas in Gerdau Internacional Empreendimentos

Ltda.. held by Gerdau S.A., representing, respectively, 91.5% and 22.8% of those companies’ capital. The capital of Gerdau Participações S.A.

was also increased by the direct and indirect investments held by Gerdau Internacional Empreendimentos Ltda. in Gerdau Chile Inversiones

Ltda., Gerdau Laisa S.A. and Sipar Aceros S.A. The final corporate restructuring model has not yet been finished and will be implemented as

the management proposals are approved by the Board of Directors. Accordingly, additional measures should be implemented during this

year and they will be advised, as soon as they occur.


80 81

METALÚRGICA GERDAU S.A.

d) The financial statements of the jointly-owned subsidiary Dona Francisca Energética S.A., and the jointly-owned indirect subsidiaries

Gallatin Steel Company and Sipar Aceros S.A., were consolidated proportionally based on the direct or indirect interest of the parent company

in the capital of these subsidiaries.

The amounts of the financial statements of these companies are shown as follows:

Dona Francisca Gallatin Sipar Aceros S.A.

Energética S.A.

______________________

Steel Company

______________________

Consolidado *

_____________________

2004 2003 2004 2003 2004 2003

Assets

Current assets........................................................................ 116,627 111,782 586,106 290,036 144,251 85,185

Long-term receivables............................................................. 128,427 129,889 - - - 2,863

Permanent assets.................................................................... __________ 180,984 __________ 191,728 __________ 612,762 __________ 736,223 __________ 18,929 __________ 19,109

Total assets...................................................................... __________

426,038 __________

433,399 __________

1,198,868 __________

1,026,259 __________

163,180 __________

107,157

Liabilities

Current liabilities.................................................................... 29,381 28,522 131,580 152,134 80,787 40,252

Long-term liabilities................................................................ 413,006 423,722 54,190 230,651 4,356 4,212

Shareholders’ equity................................................................ (16,349) (18,845) 1,013,098 643,474 78,037 62,693

__________ __________ __________ __________ __________ __________

Total liabilities........................................................................ 426,038 433,399 1,198,868 1,026,259 163,180 107,157

__________ __________ __________ __________ __________ __________

__________ __________ __________ __________ __________ __________

Statement of operations

Gross sales revenues............................................................... 44,987 37,189 2,384,065 1,260,130 437,864 296,651

Sales deductions..................................................................... (2,207) (3,952) (11,215) (14,157) (87,259) (62,398)

__________ __________ __________ __________ __________ __________

Net sales revenues.................................................................. 42,780 33,237 2,372,850 1,245,973 350,605 234,253

Cost of sales........................................................................... (19,424) (19,520) (1,626,650) (1,194,150) (285,566) (188,139)

__________ __________ __________ __________ __________ __________

Gross profit............................................................................ 23,356 13,717 746,200 51,823 65,039 46,114

Selling expenses..................................................................... - - (6,224) (5,336) (4,987) (2,259)

General and administrative expenses........................................ (2,110) (2,251) (45,010) (33,376) (19,876) (12,762)

Other financial income (expenses)............................................ (17,882) (20,743) (14,030) (22,620) (8,101) 2,681

Other operating income (expenses)........................................... - - - - (76) (3,346)

__________ __________ __________ __________ __________ __________

Operating profit (loss)............................................................. 3,364 (9,277) 680,936 (9,509) 31,999 30,428

Non-operating income (expenses), net...................................... 380 3,790 10,225 (1,367) 759 (2,889)

Provision for income tax and social contribution........................ (1,249) 1,871 (797) - (10,188) (7,425)

__________ __________ __________ __________ __________ __________

Net income (loss) for the year............................................................ 2,495 (3,616) 690,364 (10,876) 22,570 20,114

__________ __________ __________ __________ __________ __________

__________ __________ __________ __________ __________ __________

* includes the subsidiary Siderco

e) The Company and its direct and indirect subsidiaries have goodwill and negative goodwill balances, which are being amortized as the

assets that generated them are realized or based on the realization of the projected future income, limited to ten years, as follows:

Amortization

period Company Consolidated

Goodwill included in the investments accounts

Balance at December 31, 2003............................................................................................. - 432,077

(+) Goodwill recorded in the period...................................................................................... 1,502 308,899

(-) Reversal of goodwill based on the adjustment in purchase price (Margusa - Maranhão Gusa S.A.) - (5,258)

(-) Write-off of goodwill as a result of the merger of the subsidiary GTL Brasil........................... - (280,882)

(-) Foreign exchange adjustment .......................................................................................... - (36,361)

(-) Amortization for the year................................................................................................ up to 10 years ______________ (1,502) __________________ (365,621)

Balance at December 31, 2004 (based on expectation of future profitability)............................ - 52,854

Analysis of the goodwill by

Margusa - Maranhão Gusa S.A........................................................................................ - 24,728

Dona Francisca Energética S.A......................................................................................... - 19,512

Armacero Industrial y Comercial Ltda............................................................................... - 457

Distribuidora Matco S.A.................................................................................................. - 6,066

Salomon Sack S.A.......................................................................................................... ______________- __________________ 2,091

- 52,854


Amortization

period Company Consolidated

Goodwill included in the fixed asset accounts

Balance at December 31, 2003...................................................................................................... - 239,740

(-) Foreign exchange adjustment.................................................................................................... - (14,860)

(-) Amortization for the year.......................................................................................................... up to 10 years ______________- __________________ (79,921)

Balance at December 31, 2004 (based on undervaluation of assets)................................................. - 144,959

The goodwill mainly resulted from the assets of the subsidiary Gerdau Ameristeel US Inc.

Negative goodwill included in the fixed asset accounts

Balance at December 31, 2003...................................................................................................... - (272,130)

(-) Amortization for the year.......................................................................................................... ______________- __________________ 28,853

Balance at December 31, 2004 (based on overvaluation of assets)................................................... up to 10 years - (243,277)

The negative goodwill arises from the assets of the subsidiary Gerdau Açominas S.A.

The goodwill recorded in the investment accounts, calculated on the subsidiary Gerdau Ameristeel US Inc., were reviewed in respect of their

amortization period and projected profitability. The remaining balance was amortized in accordance with accounting practices adopted in

Brazil, and based on the current scenario and performance of the subsidiary Gerdau Ameristeel Corporation.

The equity accounting loss in the consolidated statement of income refers, basically, to the effect of the devaluation of the U.S. dollar on the

foreign investments, to goodwill amortization for the year and to the tax incentive reserves arising from the reduction of income tax on the

exploitation profit of the subsidiaries Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A., both located in the Northeastern region of

Brazil, as well as to benefits arising from state tax financing.

5 - Cash and Cash Equivalents

Company

Consolidated

_______________________________ ______________________________

2004 2003 2004 2003

Cash and banks................................................................................................ 98 23 337,767 125,596

Financial investment fund.................................................................................. - - 527,102 326,551

Fixed income securities...................................................................................... 95,702 25,163 1,101,388 364,116

Equities............................................................................................................ - - 37,688 199,463

_____________ _____________ _____________ _____________

95,800 25,186 2,003,945 1,015,726

_____________ _____________ _____________ _____________

_____________ _____________ _____________ _____________

Of the existing balance, R$ 1,004,550 - consolidated (R$ 518,315 - consolidated in 2003) refers to investments in U.S. dollars.

6 - Trade Accounts Receivable

Consolidated

_____________________________

2004 2003

Customers in Brazil...................................................................................................................................................................... 880,557 568,968

Brazilian exports receivable.......................................................................................................................................................... 543,954 235,442

Receivables from customers of overseas companies........................................................................................................................ 1,232,095 835,212

Provision for credit risks............................................................................................................................................................... ____________ (92,414) ____________ (78,539)

____________

2,564,192 ____________

1,561,083


82 83

METALÚRGICA GERDAU S.A.

7 - Inventories

Consolidated

_________________________________

2004 2003

Finished products......................................................................................................................................................................... 1,728,652 868,147

Work in process........................................................................................................................................................................... 679,167 323,373

Raw materials.............................................................................................................................................................................. 1,112,467 586,311

Storeroom materials..................................................................................................................................................................... 649,892 517,010

Advances to suppliers................................................................................................................................................................... ____________ 66,464 ____________ 41,757

____________

4,236,642 ____________

2,336,598

The inventories are covered against fire and overflow. Coverage is determined based on the amounts and the risks involved.

8 - Tax Credits

Company

Consolidated

______________________________ ________________________________

2004 2003 2004 2003

Value-Added Tax on Sales and Services (ICMS).................................................... 9 9 99,819 90,820

Social Contribution on Revenues (COFINS) to offset............................................. - - 56,302 -

Social Integration Program (PIS) to offset............................................................ - - 36,730 4,759

Excise Tax (IPI) ................................................................................................. - - 3,310 6,358

Income tax and social contribution on net income............................................... 11,232 16,076 46,396 30,435

Tax on Added Value (IVA).................................................................................. - - 1,861 487

Other............................................................................................................... 6 28 7,440 4,951

_____________ _____________ _____________ _____________

11,247 16,113 251,858 137,810

_____________ _____________ _____________ _____________

_____________ _____________ _____________ _____________

9 - Income Tax and Social Contribution on Net Income

a) Analysis of the income tax and social contribution expense:

Profit before income tax and social contribution, after statutory

Company

__________________________________________________________________________________________

2004 2003

__________________________________________ _________________________________________

IR CS Total IR CS Total

profit sharing..................................................................... 1,482,051 1,482,051 1,482,051 585,147 585,147 585,147

Statutory rates ...................................................................... 25% 9% 34% 25% 9% 34%

Income tax and social contribution expense at statutory rates... (370,513) (133,385) (503,898) (146,287) (52,663) (198,950)

Tax effects on:

- equity in earnings (losses) ................................................ 335,711 120,856 456,567 152,500 54,900 207,400

- interest on equity............................................................. (685) (247) (932) 46 17 63

- permanent differences (net) ............................................. 2,297 990 3,287 (13,801) (4,680) (18,481)

___________ ___________ ___________ ___________ ___________ ___________

Income tax and social contribution expense............................. (33,190) (11,786) (44,976) (7,542) (2,426) (9,968)

___________ ___________ ___________ ___________ ___________ ___________

___________ ___________ ___________ ___________ ___________ ___________

Current.............................................................................. (2,070) (554) (2,624) (2,575) (730) (3,305)

Deferred............................................................................ (31,120) (11,232) (42,352) (4,967) (1,696) (6,663)

IR - Corporate income tax.

CS - Social contribution on net income.


Profit before income tax and social contribution, after statutory

Consolidated

__________________________________________________________________________________________

2004 2003

__________________________________________ _________________________________________

IR CS Total IR CS Total

profit sharing..................................................................... 4,536,502 4,536,502 4,536,502 1,117,018 1,117,018 1,117,018

Statutory rates....................................................................... 25% 9% 34% 25% 9% 34%

Income tax and social contribution expenses at statutory rates.. (1,134,126) (408,285) (1,542,411) (279,255) (100,532) (379,787)

Tax effects on:

- tax rate difference for foreign companies........................... (96,019) 91,649 (4,370) 38,906 (14,169) 24,737

- equity in earnings (losses)................................................. (86,157) (31,017) (117,174) (70,310) (25,312) (95,622)

- interest on equity............................................................. 90,350 32,526 122,876 88,569 31,885 120,454

- foreign exchange effect.................................................... 29,731 2,676 32,407 72,863 26,231 99,094

- recovery of deferred tax assets.......................................... 270,770 48,109 318,879 305,724 117,027 422,751

- permanent differences (net).............................................. (34,333) 28,721 (5,612) (38,028) (13,743) (51,771)

___________ ___________ ___________ ___________ ___________ ___________

Income tax and social contribution expense............................. (959,784) (235,621) (1,195,405) 118,469 21,387 139,856

___________ ___________ ___________ ___________ ___________ ___________

___________ ___________ ___________ ___________ ___________ ___________

Current.............................................................................. (789,638) (167,362) (957,000) (240,313) (74,301) (314,614)

Deferred............................................................................ (170,146) (68,259) (238,405) 358,782 95,688 454,470

IR - Corporate income tax.

CS - Social contribution on net income.

b) Analysis of the deferred income tax and social contribution assets and liabilities, at statutory rates:

Assets

_________________________________________________________________________________________________________________________

Company

Consolidated

___________________________________________________________ ____________________________________________________________

2004 2003 2004 2003

____________________________ _____________________________ _____________________________ _____________________________

IR CS TOTAL IR CS TOTAL IR CS TOTAL IR CS TOTAL

Income tax losses.................... 3,572 - 3,572 4,499 - 4,499 431,440 - 431,440 462,096 - 462,096

Social contribution losses........ - 5,023 5,023 - 5,260 5,260 - 69,255 69,255 - 94,826 94,826

Provision for contingencies...... 117 42 159 345 124 469 48,846 17,465 66,311 41,133 14,680 55,813

Benefits to employees............. - - - - - - 101,474 - 101,474 95,839 - 95,839

Commissions/other.................. - - - - - - 156,345 2,343 158,688 80,178 1,492 81,670

Amortized goodwill................. 948 - 948 602 - 602 7,391 2,319 9,710 9,696 3,274 12,970

Provision for losses................. ________- ________- ________- ________- ________- ________- ________ 87,595 ________ 29,046 ________ 116,641 ________ 94,462 ________ 31,535 ________ 125,997

________ 4,637 ________ 5,065 ________ 9,702 ________ 5,446 ________ 5,384 ________ 10,830 ________ 833,091 ________ 120,428 ________ 953,519 ________ 783,404 ________ 145,807 ________ 929,211

Current.................................. - - - - - - 271,204 58,593 329,797 90,981 26,125 117,106

Long-term.............................. 4,637 5,065 9,702 5,446 5,384 10,830 561,887 61,835 623,722 692,423 119,682 812,105

Liabilities

_________________________________________________________________________________________________________________________

Company

Consolidated

___________________________________________________________ ____________________________________________________________

2004 2003 2004 2003

____________________________ _____________________________ _____________________________ _____________________________

IR CS TOTAL IR CS TOTAL IR CS TOTAL IR CS TOTAL

Accelerated depreciation......... - - - - - - 576,176 823 576,999 426,751 854 427,605

Amortized negative goodwill/

deferred capital gain.......... 68,903 16,637 85,540 38,590 5,725 44,315 121,116 31,265 152,381 98,263 22,326 120,589

Inflationary/exchange effect..... ________- ________- ________- ________- ________- ________- ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790

________ 68,903 ________ 16,637 ________ 85,540 ________ 38,590 ________ 5,725 ________ 44,315 ________ 813,226 ________ 66,059 ________ 879,285 ________ 544,804 ________ 23,180 ________ 567,984

Current.................................. - - - - - - 146,195 33,971 180,166 35,721 - 35,721

Long-term.............................. 68,903 16,637 85,540 38,590 5,725 44,315 667,031 32,088 699,119 509,083 23,180 532,263


84 85

METALÚRGICA GERDAU S.A.

The tax benefits recognized on income tax and social contribution loss carryforwards, as well as on the provision for losses, both in the

Company and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical feasibility

studies, approved by management. These studies, which consider the history of the Company’s and its subsidiaries’ profitability and the

maintenance of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 318,879

(R$ 422,751 - 2003) in subsidiaries, whose estimated recovery is shown in item “c” below. Other credits, based on temporary differences,

mainly tax contingencies, were maintained according to their estimate of realization.

c) Estimated recovery of deferred income tax and social contribution assets:

Company

__________________________________

Consolidated

__________________________________

2004 2003 2004 2003

Up to 2004....................................................................................................... - - 329,797 117,106

2005................................................................................................................ - 4,967 65,829 134,554

2006................................................................................................................ - 2,161 65,120 126,773

2007................................................................................................................ - 1,784 86,693 128,414

2008................................................................................................................ 4,297 1,918 132,680 151,321

2009................................................................................................................ 5,405 - 173,548 91,669

2010 to 2012................................................................................................... - - 99,852 145,083

2013 to 2014................................................................................................... - - - 34,291

_____________ _____________ _____________ _____________

9,702 10,830 953,519 929,211

_____________ _____________ _____________ _____________

_____________ _____________ _____________ _____________

10 - Compulsory Deposits and Other

Company

__________________________________

Consolidated

__________________________________

2004 2003 2004 2003

Compulsory deposits......................................................................................... 318 - 30,767 16,421

Receivables under contract................................................................................ 2,397 2,895 49,893 43,223

ICMS credits on purchases of fixed assets........................................................... - - 72,581 56,270

Income tax incentives........................................................................................ 102 145 10,230 10,314

Prepaid expenses.............................................................................................. - - - 3,036

Assets not for use............................................................................................. - - 45,779 52,614

Prepaid financial expenses and others................................................................ - 513 36,141 46,409

_____________ _____________ _____________ _____________

2,817 3,553 245,391 228,287

_____________ _____________ _____________ _____________

_____________ _____________ _____________ _____________


11 - Investments

Company

__________________________________________________________________________________________________________________________________________________________

2004 2003

____________________________________________________________________________________________________________________________________________ ____________

Subsidiaries Other Total Total

_______________________________________________________________________________________________________________ ____________ ___________ ____________

Santa Felicidade

Banco GLAM Com. Imp. Exp.

Gerdau S.A. Gerdau S.A. Participações S.A. Prod. Sid. Ltda. Other

_______________________________ ______________ ____________________ __________________ ________________

Investment Goodwill Investment Investment Investment Investment

Opening balance............................................... 1,820,152 - 28,216 106 179,356 134 1,515 2,029,479 1,596,773

Merger/capitalization..................................... - - - (23,396) 23,396 - - - -

Acquisition.................................................... 745 - - - - - 967 1,712 5,119

Goodwill on acquisition of investment............. - 1,502 - - - - - 1,502 -

Sale.............................................................. (76,837) - - - - (116) (2,205) (79,158) (8,771)

Equity in earnings (losses) 1 ............................. 1,228,992 (1,502) 8,625 23,290 83,383 54 - 1,342,842 610,001

Gain on sale of shares by 2 .............................. - - - - 125,969 - - 125,969 -

Dividends/interest on equity........................... _______________ (376,947) _______________ - ______________ (3,564) ____________________ - __________________ (23,806) ________________ (8) _____________ - ____________ (404,325) ____________ (173,643)

Closing balance................................................ _______________

2,596,105 _______________

- ______________

33,277 ____________________

- __________________

388,298 ________________

64 _____________

277 ____________

3,018,021 ____________

2,029,479

Capital............................................................. 3,471,312 - 21,700 - 550,893

Adjusted shareholders’ equity............................ 6,073,856 - 33,618 - 388,298

Net income for the year..................................... 2,831,339 - 8,695 23,291 106,665

Percentage of Interest (%)................................. 42,75% - 99,00% - 100,00%

Common shares/quotas held.............................. 77,975,404 - 1,352,676 - 550,892,935

Preferred shares held ........................................ 48,875,508 - 1,352,676 - -

1 Includes amortization of goodwill.

2 Gain arising from the sale of shares by the subsidiary Santa Felicidade Com. Imp. Exp. Prod. Sid. Ltda. due to the Public Offer of Shares of Gerdau S.A.


86 87

METALÚRGICA GERDAU S.A.

Consolidated

__________________________________________________________________________________

2004 2003

____________________________________________________________ ______________

Investment Goodwill Total Total

Gerdau Ameristeel US Inc......................................................................... - - - 281,870

Gerdau Ameristeel Corporation.................................................................. - - - 80,470

Margusa - Maranhão Gusa S.A.................................................................. - 24,728 24,728 43,564

Dona Francisca Energética S.A................................................................... - 19,512 19,512 21,951

Armacero Industrial y Comercial Ltda.......................................................... 9,871 457 10,328 10,321

Distribuidora Matco S.A. 1 ......................................................................... 12,400 6,066 18,466 -

Salomon Sack S.A. 1 .................................................................................. 17,873 2,091 19,964 -

Corporate joint ventures............................................................................ 10,036 - 10,036 9,984

Other....................................................................................................... 9,513 - 9,513 15,064

____________________ ____________ ___________ ______________

1

Companies purchased by the indirect subsidiary Industria del Aceros S.A. - Indac.

59,693 52,854 112,547 463,224

____________________ ____________ ___________ ______________

____________________ ____________ ___________ ______________

12 - Fixed Assets

Company

___________________________________________________________________________________________

2004 2003

________________________________________________ ____________

Anual

Accumulated

depreciation

depreciation

rate % Cost and depletion Net Net

Land, buildings and structures................................................... 0 to 4 4,918 (3,325) 1,593 1,738

____________ _________________ ____________ ____________

4,918 (3,325) 1,593 1,738

____________ _________________ ____________ ____________

____________ _________________ ____________ ____________

Consolidated

___________________________________________________________________________________________

2004 2003

________________________________________________ ____________

Anual

Accumulated

depreciation

depreciation

rate % Cost and depletion Net Net

Land, buildings and structures................................................... 0 to 10 3,315,650 (1,083,206) 2,232,444 2,303,169

Machinery, equipment and installations...................................... 5 to 10 7,965,817 (3,639,334) 4,326,483 4,085,090

Furniture and fixtures................................................................ 5 to 10 110,487 (69,690) 40,797 38,005

Vehicles................................................................................... 20 to 33 41,678 (31,112) 10,566 12,369

Electronic data equipment/rights/licenses.................................... 20 to 33 284,837 (188,113) 96,724 94,112

Construction in progress............................................................ - 1,065,583 - 1,065,583 718,810

Forestation/reforestation........................................................... Plano de corte 207,431 (51,055) 156,376 129,283

____________ _________________ ____________ ____________

12,991,483 (5,062,510) 7,928,973 7,380,838

____________ _________________ ____________ ____________

____________ _________________ ____________ ____________

a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks

involved. The plants of the North American subsidiaries and the Ouro Branco plant of the subsidiary Gerdau Açominas S.A. have coverage for

loss of profits.

b) Capitalization of interest and financial charges - R$ 2,021 was capitalized during the year - consolidated, (R$ (14,711) consolidated

in 2003).

c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 688,034 - consolidated (R$ 539,724

consolidated in 2003).


d) Summary of changes in fixed assets:

Company

__________________________________

Consolidated

__________________________________

2004 2003 2004 2003

Balance at the beginning of the year.................................................................. 1,738 1,888 7,380,838 7,581,144

(+) Purchases/sales in the year........................................................................... - - 1,167,022 830,871

(-) Depreciation and depletion in cost of sales..................................................... - - (692,609) (538,286)

(-) Depreciation and depletion in administrative expenses.................................... (145) (150) (69,594) (61,806)

(+) Companies consolidated in the year.............................................................. - - - 289,055

(-) Revaluation reversal..................................................................................... - - - (365,347)

(+) Purchase of North Star and others................................................................ - - 267,948 -

(-) Foreign exchange effect on foreign fixed assets.............................................. _____________- _____________- _____________ (124,632) _____________ (354,793)

Balance at the end of the year........................................................................... _____________

1,593 _____________

1,738 _____________

7,928,973 _____________

7,380,838

13 - Deferred Charges

Consolidated deferred charges comprise pre-operating expenses in the construction of a power plant, as well as reforestation, research,

development and restructuring projects.

14 - Financing

Financing are represented as follows:

Anual

Consolidated

___________________________________

charges 2004 2003

CURRENT

Working capital financing (R$)............................................................................................................ 8.00% to 14.00% 60,642 95,388

Fixed asset financing (R$)................................................................................................................... 12.00% - 3,054

Investment financing (R$)................................................................................................................... CDI 4,500 4,500

Investment financing (US$)................................................................................................................. US$ 133,955 45,649

Working capital financing (US$).......................................................................................................... 1.36% to 10.50% 1,085,418 1,341,746

Fixed asset financing and others (US$)................................................................................................ US$ - 8,692

Working capital financing (Clp$)......................................................................................................... 0.23% to 0.32% 31,905 30,025

Working capital financing (PA$).......................................................................................................... 4.25% to 10.00% 19,956 -

Current portion of long-term financing................................................................................................ ______________ 691,489 ______________ 932,245

LONG-TERM

2,027,865 2,461,299

Working capital financing (R$)............................................................................................................ 10.02% 28,215 3,812

Fixed asset financing and others (R$).................................................................................................. 4.00% to 9.90% 657,720 627,727

Investment financing (R$)................................................................................................................... IGPM + 8.5% 29,045 35,019

Fixed asset financing and others (US$)................................................................................................ 1.74% to 9.97% 762,338 761,288

Working capital financing (US$).......................................................................................................... 2.95% to 10.75% 2,473,200 2,643,325

Investment financing (US$)................................................................................................................. 4.04% 182,943 -

Working capital financing (Cdn$)........................................................................................................ 2.00% to 3.25% - 164,974

Fixed assets financing (Cdn$).............................................................................................................. 2.00% to 3.25% 3,485 3,837

Working capital financing (Clp$)......................................................................................................... 0.29% to 0.43% 16,254 29,952

Fixed assets financing (Clp$)............................................................................................................... 0.26% to 0.43% 27,000 58,396

Fixed assets financing (PA$)............................................................................................................... 4.25% to 10.00% 1,663 -

(-) Current portion............................................................................................................................. ______________ (691,489) ______________ (932,245)

______________ 3,490,374 ______________ 3,396,085

Total financing................................................................................................................................... ______________

5,518,239 ______________

5,857,384

CDI - Certificate of Interbank Deposit interest rate.

IGPM - General Market Price Index.

Summarized by currency:

Consolidated

___________________________________

2004 2003

Brazilian real (R$)............................................................................................................................................................. 780,122 769,500

U.S. dollar (US$)............................................................................................................................................................... 4,637,854 4,800,700

Canadian dollar (Cdn$)..................................................................................................................................................... 3,485 168,811

Argentine peso (PA$)........................................................................................................................................................ 21,619 -

Chilean peso (Clp$)........................................................................................................................................................... ______________ 75,159 ______________ 118,373

______________

5,518,239 ______________

5,857,384


88 89

METALÚRGICA GERDAU S.A.

The schedule for payment of the long-term portion of financing is as follows:

Consolidated

In 2006........................................................................................................................................................................................................ 527,860

In 2007........................................................................................................................................................................................................ 563,896

In 2008........................................................................................................................................................................................................ 565,035

In 2009........................................................................................................................................................................................................ 323,109

In 2010........................................................................................................................................................................................................ 210,048

After 2010.................................................................................................................................................................................................... __________________ 1,300,426

__________________

3,490,374

a) Events during the year

On June 3, 2004, the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December 31, 2004) of a US$ 400 million

Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, 2004) was concluded. This joint program between Gerdau S.A.

and Gerdau Açominas S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization

as from July 2006.

b) Guarantees

The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans

are guaranteed by sureties from the controlling shareholders, on which the subsidiary pays a fee of 1% p.a. on the amount guaranteed.

c) Covenants

In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows:

I) Consolidated interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes,

Depreciation and Amortization);

II) Consolidated leverage ratio - measures the debt coverage capacity in relation to EBITDA;

III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and

IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations.

All the covenants mentioned above are calculated on a consolidated basis, except for item IV which refers to the Company itself, and have

been observed. The penalty for non-compliance is the prepayment of the contracts.

d) Credit lines

The North American subsidiaries have a credit line in the amount of US$ 350 million, equivalent to R$ 929,040 at the balance sheet date,

falling due in June 2008, which can be drawn in U.S. dollars (at the LIBOR rate plus interest between 2.25% and 2.75% p.a. or US Prime/FED

Funds plus interest of 0.5% p.a.) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus interest between 2.35% and 2.85% p.a. or

Canadian Prime plus interest of 1.00% p.a.). The distribution of this credit line among the companies is made in proportion to the working

capital of each North American subsidiary.

The subsidiary Gerdau Aza S.A. has a credit line for working capital amounting to Clp$ 28 billion, equivalent to R$ 133,582 at the balance sheet

date, bearing interest of 3.90% p.a., and a credit line for fixed assets in the amount of Clp$ 6 billion, equivalent to R$ 28,625 at the balance

sheet date, bearing interest of 4.50% p.a.

15- Debentures

General Number Anual

_________________________________

Issue meeting Issue In portifolio Maturity rate 2004 2003

3 rd .............................................. 09.21.1999 9,170 - 07.01.2004 TJLP + 4% _________- _________ 624

Company................................... _________

- _________

624

Current portion - consolidated.... - 624

Gerdau S.A.

3 rd - A e B................................... 05.27.1982 144,000 52,946 06.01.2011 CDI 156,387 73,508

7 th .............................................. 07.14.1982 68,400 6,500 07.01.2012 CDI 121,068 21,628

8 th .............................................. 11.11.1982 179,964 65,811 05.02.2013 CDI 145,878 83,566

9 th .............................................. 06.10.1983 125,640 38,234 09.01.2014 CDI 170,954 29,927

11 th - A and B.............................. 06.29.1990 150,000 97,044 06.01.2020 CDI 98,189 19,249

13 th ............................................ 11.23.2001 30,000 30,000 11.01.2008 CDI less 2% - -

Gerdau Ameristeel Corp................ 04.23.1997 125,000 - 04.30.2007 6.50% 232,618 226,021

Debentures held by consolidated

subsidiaries............................... (252,982) (26,916)

Debentures held by the Company.. _________ (95,622) _________-

Total Consolidated................... _________

576,490 _________

427,607

Current portion - consolidated.... 2,986 3,651

Long-term portion- consolidated. 573,504 423,956


The Extraordinary General Meeting of shareholders held on April 30, 2004 approved the cancellation of the 1st issue (7,100 debentures),

which were held in treasury.

The Extraordinary General Meeting (EGM) of the subsidiary Gerdau S.A. held on April 29, 2004 approved the cancellation of the 4th issue

(42,000 debentures) and 10th issue debentures (6,450 debentures), which were held in treasury.

The same EGM approved the split of the following debenture issues: 3rd (classes A and B), 7th, 8th, 9th and 11th issues (classes A and B). On

July 1, 2004, three new debentures were issued for each existing debenture, thus changing their nominal value.

The Extraordinary General Meeting of the subsidiary Seiva S.A. - Florestas e Indústrias held on April 30, 2004 approved the cancellation of the

1st issue debentures, series A and B (12,000 debentures), which were held in treasury.

The Board of Directors’ Meeting of the subsidiary Gerdau S.A. held on October 14, 2004 approved the fixed remuneration of the 13th issue

debentures at the CDI interest rate less 2% p.a., during the period from November 1, 2004 to October 31, 2005.

The debentures of Gerdau Ameristeel Corporation are convertible into common shares of that subsidiary, up to their maturity date.

The controlling shareholders hold, directly or indirectly, R$ 181,965 at December 31, 2004 (R$ 63,216 in 2003) of the outstanding debentures.

16 - Financial Instruments

a) General comments - Metalúrgica Gerdau S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of

which are managed through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and

mainly relate to the instruments listed below:

- financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5;

- investments - are explained and presented in Note 11;

- related parties - are explained and presented in Note 21;

- financing - are explained and presented in Note 14;

- debentures - are explained and presented in Note 15; and

- financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on their liabilities, the subsidiaries Gerdau

Açominas S.A. and Dona Francisca Energética S.A. entered into swap contracts that were converted into Brazilian reais on the contract date

and linked to changes in the CDI rate and the IGPM, plus additional interest. The subsidiary Gerdau Ameristeel Corporation also entered into

swap contracts linked to the London Interbank Offered Rate (LIBOR) plus interest between 6.05% and 6.45% p.a.

The swap contracts are listed below:

Consolidated

___________________________________________________________________________________________

Contract date Purpose Amount (US$ thousand) Rate Maturity

07/16/2001 to 07/05/2002 Prepayment 32,823 85.55% to 100.00% of the CDI 01/13/2005 to 03/01/2006

02/20/2002 Resolution 2770 54,000 106.00% of the CDI 06/20/2005

02/19/2003 Resolution 4131 3,300 85.70% of the CDI 02/04/2005

04/17/2003 Fixed assets 6,316 IGPM + 12.95% 05/16/2005 to 11/16/2010

04/17/2003 Fixed assets 13,095 97.00% to 100.90% of the CDI 05/16/2005 to 11/16/2013

10/30 a 11/03/2003 Bank notes 200,000 LIBOR + interest between

6.09% to 6.13% 07/15/2011

06/26/2003 Investment 55,000 4.86% to 5.40% 09/02/2005 to 10/02/2006

b) Market value - the market values of the financial instruments are as follows:

Company

_____________________________________________________________________________

2004 2003

____________________________________ ____________________________________

Book Market Book Market

value value value value

Financial investments........................................................................................ 95,702 95,702 25,163 25,163

Debentures....................................................................................................... - - 624 624

Investments...................................................................................................... 3,018,021 5,979,482 2,029,479 4,199,166

Related parties (assets)..................................................................................... - - 3,390 3,390

Related parties (liabilities) ................................................................................ 266 266 - -

Treasury shares - Note 23.................................................................................. 21,490 45,967 7,049 9,153


90 91

METALÚRGICA GERDAU S.A.

Consolidated

_____________________________________________________________________________

2004 2003

____________________________________ ____________________________________

Book Market Book Market

value value value value

Financial investments ....................................................................................... 1,666,178 1,666,178 890,130 890,130

Swap contracts - investments (liabilities)............................................................. 4,500 4,500 12,303 12,303

Securitization financing..................................................................................... 627,908 627,908 303,282 303,282

Import financing............................................................................................... 619,883 619,883 377,534 383,941

Prepayment financing........................................................................................ 808,983 804,724 807,385 818,786

Financing - Resolution 2770.............................................................................. 263,060 256,585 365,573 390,235

ACC (Advances on Export Contracts) financing.................................................... 43,891 43,891 500,118 524,935

Financing - Resolution 4131.............................................................................. 20,893 20,755 24,243 24,468

Bank notes financing......................................................................................... 1,050,835 1,260,376 1,144,601 1,292,733

Fixed asset financing ........................................................................................ 45,837 45,686 93,172 96,069

Other financing................................................................................................. 2,036,949 2,036,949 2,158,241 2,177,487

Debentures....................................................................................................... 576,490 576,490 427,607 427,607

Investments...................................................................................................... 112,547 112,547 463,224 463,224

Related parties (assets)..................................................................................... 1,231 1,231 30,509 30,509

Stock options (liabilities) - note 25..................................................................... - 13,663 - 8,298

The market values of the swap contracts of subsidiaries in Brazil were obtained based on future income projections for each contract,

calculated based on the present value of the forward U.S. dollar + coupon rates (assets) and CDI/IGPM future rates (liabilities) and adjusted

to present value on the balance sheet date, using the projected future CDI/IGPM rate for each maturity. The same methodology is applied for

the calculation of the market values of the swap contracts of the subsidiary Gerdau Ameristeel Corporation, using the LIBOR rate.

Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the “Financial expenses/

income, net” account, and are stated at cost plus accrued charges up to the balance sheet date. Contracts not linked to such financing have

been recorded at their market value under the heading “Other accounts payable”, in long-term liabilities.

The Company believes that the balances of the other financial instruments, which are recognized in the books at net contracted values,

are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these

instruments are not active, differences could exist if they were settled in advance.

c) Risk factors that could affect the Company’s and its subsidiaries’ business

Price risk: this risk is related to the possibility of price variations of the products that the subsidiaries sell or in the raw material prices and

other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may

be affected by the changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly

monitor the price variations in the local and international markets.

Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to assets

(investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company and its subsidiaries

have adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically

renegotiate contracts to adjust them to market.

Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income)

and the liability (or asset) balance of contracts denominated in a foreign currency. In addition to the foreign investments which are a natural

hedge, the Company and its subsidiaries use “hedge” instruments, usually swaps contracts, as described in item “a” above, to manage the

effects of these fluctuations.

Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or investments at financial

institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial and equity position of

their customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company and


its subsidiaries invest solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum

limit for investment, determined by the Credit Committee.

17 - Financial Expenses/Income, Net

Company

Consolidated

__________________________________ __________________________________

2004 2003 2004 2003

Financial income

Financial investments........................................................................................ 1,227 8,574 136,413 142,746

Interest received............................................................................................... 15 1,674 29,934 69,913

Monetary variations - assets.............................................................................. 1 - 3,327 3,972

Foreign exchange variations - assets................................................................... - - (34,671) (79,356)

Foreign exchange swaps - assets........................................................................ - - 3,915 (62,884)

Other financial income...................................................................................... _____________ 8,996 _____________ 1,652 _____________ 110,343 _____________ 12,363

Total financial income.................................................................................. _____________

10,239 _____________

11,900 _____________

249,261 _____________

86,754

Financial expenses

Interest on debt................................................................................................ (844) (14) (417,041) (593,308)

Monetary variations - liabilities.......................................................................... (5,147) (5,602) (22,983) (29,115)

Foreign exchange variations - liabilities.............................................................. - - 197,607 716,672

Foreign exchange swaps - liabilities.................................................................... - - (44,127) (741,389)

Other financial expenses.................................................................................... _____________ (861) _____________- _____________ (111,098) _____________ (60,990)

Total financial expenses............................................................................... (6,852) (5,616) (397,642) (708,130)

_____________ _____________ _____________ _____________

_____________ _____________ _____________ _____________

18 - Taxes and Social Contributions Payable

Company

__________________________________

Consolidated

__________________________________

2004 2003 2004 2003

Income tax and social contribution on net income............................................... 843 710 202,962 39,600

Social charges on payroll................................................................................... 149 546 49,368 49,021

Value-added tax on sales and services (ICMS)..................................................... - - 32,131 12,865

Social contribution on revenues (COFINS)........................................................... 1,014 2,281 33,622 16,494

Excise tax (IPI).................................................................................................. - - 14,114 2,966

Social integration program (PIS)......................................................................... 220 - 6,903 3,923

Income tax and social contribution withheld at source......................................... - - 8,211 23,787

Taxes payable in installments............................................................................. - - 11,819 15,427

Other............................................................................................................... _____________ 21 _____________- _____________ 32,055 _____________ 14,359

2,247 3,537 391,185 178,442

_____________ _____________ _____________ _____________

_____________ _____________ _____________ _____________

19 - Tax Recovery Program (Refis) and Special Installment Payment Program (Paes)

a) REFIS

On December 6, 2000, the subsidiary Gerdau S.A. enrolled in the REFIS program to pay the Social Integration Program (PIS) and the Social

Contribution on Revenues (COFINS) contributions in installments. The balances of these tax liabilities are recorded in Taxes and contributions

payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were

originally divided into 60 installments of which 5 installments are not yet due, are restated by the Long-Term Interest Rate (TJLP) rate, and

are as follows at the year end:

Company and consolidated

__________________________________________________________________________________________________

2004 2003

______________________________________________ ______________________________________________

Principal Interest Total Principal Interest Total

PIS....................................................................... 2,608 2,551 5,159 9,895 6,494 16,389

COFINS................................................................ ______________ 620 ____________ 605 ____________ 1,225 ______________ 2,351 ____________ 1,540 ____________ 3,891

Total.................................................................... ______________

3,228 ____________

3,156 ____________

6,384 ______________

12,246 ____________

8,034 ____________

20,280

Current................................................................ 3,228 3,156 6,384 8,644 5,671 14,315

Long-term............................................................ - - - 3,602 2,363 5,965

Taxes, contributions and other liabilities are paid by the subsidiary Gerdau S.A. on their due dates, which is a basic requirement to remain

eligible for the REFIS program.


92 93

METALÚRGICA GERDAU S.A.

As guarantee for this installment payment program, the subsidiary Gerdau Açominas S.A. pledged the land and buildings of the Piratini

plant, located in the municipality of Charqueadas, in the state of Rio Grande do Sul, amounting to R$ 78,494.

The total income tax and social contribution credits from third parties offset against fines and interest on the consolidation of the REFIS

debts on December 6, 2000 totaled R$ 57,040 and were purchased for R$ 4,351. The subsidiary’s own tax credits were not used.

The constitutionality of the use of credits of R$ 40,118 of the total purchased is being challenged in court. This is because the Federal Revenue

authorities understand that tax credits must first be used to offset the assignor’s own debts, only transferring the excess to the assignee.

This understanding, based solely on a REFIS Management Committee Resolution, edited subsequently to the subsidiary’s enrollment in the

program, does not comply with the legal order. In fact, the law which established the Program authorized, with no conditions, the purchase

of third party tax credits for offset against own liabilities.

b) PAES

The proportionally consolidated (52%) subsidiary Dona Francisca Energética S.A. enrolled in the PAES, established by Law 10684/03, at the

Federal Revenue Secretariat, to settle Corporate Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program

(PIS) and Social Contribution on Revenues (COFINS) liabilities. The balances of these tax liabilities are recorded in Taxes and contributions

payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were

divided into 180 installments of which 161 are not yet due, are restated by the TJLP and are as follows at the year end:

Consolidated

__________________________________________________________________________________________________

2004 2003

______________________________________________ ______________________________________________

Principal Interest Total Principal Interest Total

IRPJ..................................................................... 20,303 3,160 23,463 21,816 1,255 23,071

CSLL.................................................................... 7,360 1,145 8,505 7,908 455 8,363

PIS....................................................................... 720 112 832 774 45 819

COFINS................................................................ ______________ 3,326 ____________ 518 ____________ 3,844 ______________ 3,574 ____________ 206 ____________ 3,780

Total.................................................................... ______________

31,709 ____________

4,935 ____________

36,644 ______________

34,072 ____________

1,961 ____________

36,033

Current................................................................ 2,364 368 2,732 2,363 136 2,499

Long-term............................................................ 29,345 4,567 33,912 31,709 1,825 33,534

Dona Francisca Energética S.A. pays its taxes, contributions and other liabilities on their due dates, which is a basic requirement to remain

eligible for the PAES program.

20 - Provision for Contingencies

The Company and its subsidiaries are parties in labor, civil, and tax processes. Based on the opinion of its legal advisors, management believes

that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and

that the final decisions will not have significant effects on the financial position of the Company at December 31, 2004.

The balances of the contingencies are as follows:

I) Contingent liabilities provided

Company

Consolidated

_________________________________ _________________________________

a) Tax contingencies 2004 2003 2004 2003

Eletrobrás............................................................................ (a.1) - - 50,456 50,456

Finsocial.............................................................................. (a.2) - - 6,898 6,948

ICMS................................................................................... (a.3) - - 17,300 14,346

Social contribution on net income......................................... (a.4) - 198 7,333 40,954

Corporate income tax........................................................... (a.5) - 25 19,993 101,159

INSS.................................................................................... (a.6) - - 24,900 17,375

PIS...................................................................................... (a.7) 469 1,382 2,372 3,739

COFINS............................................................................... (a.7) - - 6,935 6,935

Emergency Capacity Charge.................................................. (a.8) - - 25,563 10,074

Extraordinary Tariff Recomposition ....................................... (a.8) - - 13,037 5,847

FGTS and other tax contingencies.......................................... (a.9) - - 1,503 2,330

(-) Judicial deposits.............................................................. (a.10) _____________- _____________- _____________ (73,938) _____________ (155,138)

469 1,605 102,352 105,025

b) Labor contingencies......................................................... (b.1) - - 49,798 29,609

(-) Judicial deposits.............................................................. (b.2) _____________- _____________- _____________ (10,538) _____________ (10,244)

- - 39,260 19,365

c) Civil contingencies............................................................ (c.1) 195 195 100,559 99,688

(-) Judicial deposits......................................................... (c.2) _____________- _____________- _____________ (1,207) _____________ (1,063)

_____________ 195 _____________ 195 _____________ 99,352 _____________ 98,625

Total liabilities provided........................................ _____________

664 _____________

1,800 _____________

240,964 _____________

223,015

INSS - National Institute of Social Security

FGTS - Government Severance Indemnity Fund for employees


a) Tax contingencies

a.1) Of the total provision, R$ 50,456 (consolidated) refers to the contingency of compulsory loans to Eletrobrás, the constitutionality of

which is being questioned by the subsidiary Gerdau S.A. In March 1995, the Federal Supreme Court judged the proceedings against other

taxpayers. Certain of the Company’s proceedings are pending decision, but the outcomes are already foreseeable, in view of the prior

decisions. The subsidiary Gerdau S.A. established a provision related to “compulsory loans”, taking into consideration that, although the

payment to Eletrobrás was made as a loan: (i) the reimbursement to the company would probably be in the form of shares of Eletrobrás; (ii)

the conversion will be made based on the net asset book value of the shares; and (iii) based on the current available information, the shares

of Eletrobrás are valued at substantially less than the net asset book value.

a.2) R$ 6,898 (consolidated) relating to the unconstitutionality of the Social Investment Fund (FINSOCIAL). Although the Supreme Court has

confirmed the constitutionality of the tax at the rate of 0.5%, some of the Company’s subsidiaries claims are still pending judgment, most

of them in the Superior Courts.

a.3) R$ 17,300 (consolidated) relating to amounts for Value-Added Tax on Sales and Services (ICMS), the majority of which relates to credit

rights involving the Finance Secretariat and the State Courts of the First Instance in the state of Minas Gerais.

a.4) R$ 7,333 (consolidated) relating to social contribution on net income. The amounts refer to challenges of the constitutionality of the

contribution in 1989, 1990 and 1992. Some proceedings are pending decision, most of them in the Superior Courts.

a.5) R$ 19,993 (consolidated), relating to Corporate Income Tax, challenged at the administrative sphere. Considering the many legal decisions

unfavorable to the unconstitutionality of the limitation of the offset of income tax and social contribution losses to 30% of net income,

the subsidiary Gerdau Açominas S.A. decided to no longer deposit in court the amounts related to the matter and requested, in the court

injunction records in which it is the petitioner, the conversion of the amounts deposited in court (R$ 338,992) into tax payments, and started

observing the legal limitation. The legal challenge has been maintained; however, in the event the STF reviews its current guidance and the

subsidiary is successful, it will plead the offset of the amounts overpaid.

a.6) R$ 24,900 (consolidated) on contributions due to the INSS which correspond to suits for annulment by the subsidiary Gerdau S.A. with

judicial deposits of practically the whole amount involved, in progress in the Federal Court of the First Instance in the state of Rio de Janeiro.

The provision also includes lawsuits questioning the position of the INSS in terms of charging INSS contributions on profit sharing payments

made by the subsidiary Gerdau Açominas S.A., as well as on payments for services rendered by third parties, in which the Institute calculated

charges for the last ten years and assessed the subsidiary because it understands that the company is jointly liable. The assessments were

maintained at the administrative level, and Gerdau Açominas S.A. filled annulment actions with the judicial deposit of the corresponding

amount, based on the understanding that the right to assess part of the charge had prescribed and that there is no such liability.

a.7) R$ 469 (Company) and R$ 2,372 (consolidated), relating to contributions for the Social Integration Program (PIS), and R$ 6,935

(consolidated) to the Social Contribution on Revenues (COFINS), in connection with lawsuits questioning the constitutionality of Law 9718,

which changed the calculation basis of these contributions. These suits are in progress in the Federal Regional Court of the 2nd Region and

the Federal Supreme Court.

a.8) R$ 25,563 (consolidated) relating to the Emergency Capacity Charge (ECE), as well as R$ 13,037 (consolidated) relating to the Extraordinary

Tariff Recomposition (RTE), included in the electric energy bills of the subsidiaries’ plants. According to the Company, these charges are

of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal Constitution. For this reason, the

constitutionality of this charge is being challenged in court. The lawsuits are in progress in the Federal Justice of the First Instance of the

states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the Federal Regional Courts

of the 1st and 2nd Regions. The subsidiaries have fully deposited in court the amount of the disputed charges.

a.9) R$ 1,503 (consolidated) relating to a lawsuit brought by the subsidiary Gerdau Açominas S.A. regarding the Government Severance

Indemnity Fund for Employees (FGTS) increased charges, which arose from the changes introduced by Complementary Law 110/01. Currently,

the corresponding court injunction is awaiting the judgment of the extraordinary appeal filed by the subsidiary. The amount provided is

fully deposited in court.

a.10) The judicial deposits, representing restricted assets of the subsidiary Gerdau S.A., relate to amounts deposited and maintained in

court until the resolution of the related legal matters. The balances of these credits, which at December 31, 2004 amounted to R$ 73,938

(consolidated), are classified as a reduction of the provision for tax contingencies recorded in the books.

b) Labor contingencies

b.1) The Company’s subsidiaries are also defending labor claims, for which there is a provision of R$ 49,573 (consolidated) at December 31,

2004. None of these claims refer to individually significant amounts, and the lawsuits mainly involve claims for overtime pay, health hazards

and risk premium, among others.

b.2) The balances of the deposits in court, which totaled R$ 10,313 at December 31, 2004 (consolidated), are classified as a reduction of the

provision for labor contingencies.

c) Civil contingencies

c.1) The Company and its subsidiaries are also defending in court civil claims arising in the normal course of its own and the subsidiaries’

operations, including claims arising from work accidents, in a total amount at December 31, 2004 of R$ 195 (Company) and R$ 100,559

(consolidated) as contingent liability for these claims.


94 95

METALÚRGICA GERDAU S.A.

The provision refers mainly to an issue involving the jointly-owned (52%) subsidiary Dona Francisca Energética S.A. According to a resolution

of the Brazilian Electricity Regulatory Agency (ANEEL), the operations of the subsidiary are restricted to the South of Brazil submarket. Since

some of its transactions were carried out in the remaining submarkets, Dona Francisca Energética S.A. may have to acquire the energy it

sells from third parties. The subsidiary challenges in court the validity of the ANEEL resolution and has obtained a favorable preliminary

injunction.

c.2) At December 31, 2004, the balances of deposits in court totaled R$ 1,207 (consolidated) and are classified as a reduction of the provision

for contingencies.

II) Contingent liabilities not provided

a) Tax contingencies

a.1) The subsidiary Gerdau S.A. is defendant in assessments filed by the state of Minas Gerais demanding ICMS tax payments arising mainly

from the sales of products to commercial exporters. The restated amount of the lawsuits totals R$ 32,848. The Company has not recorded

any provision for contingency in relation to these claims since it considers this tax is not payable, because products for export are exempted

from ICMS.

a.2) The subsidiaries Gerdau S.A. and Gerdau Açominas S.A. are defendants in assessments filed by the state of Minas Gerais, which demand

ICMS tax payments on the export of semi-finished manufactured products. The subsidiary Gerdau Açominas S.A. is also the petitioner of an

annulment action. The total amount demanded is R$ 249,742. The companies have not recorded any provision for contingency in relation to

these claims since they consider this tax is not payable because the products cannot be considered semi-finished manufactured products as

defined by the federal complementary law and, therefore, are not subject to ICMS.

a.3) Also, R$ 68,431 are being demanded due to the understanding of the Federal Revenue Secretariat that the transactions carried out by

the subsidiary Gerdau Açominas S.A., under the drawback concession granted by DECEX, were not in conformity with the legislation. Gerdau

Açominas filed a preliminary administrative defense of the legality of the arrangement, which is pending judgment. Since the tax liability

has not been definitely established, and considering that the arrangement which originated the demand conforms with the assumptions

required for the drawback concession, and also that the concession was granted after analysis by the legal administrative authority, Gerdau

Açominas S.A. considers an unfavorable outcome to be remote and, for this reason, has not recorded any provision for the contingency.

b) Civil contingencies

b.1) Two civil construction syndicates in the state of São Paulo alleged that the subsidiary Gerdau S.A. and other long steel producers in Brazil

divide customers among them, violating the antitrust legislation. After investigations carried out by the National Secretariat of Economic

Law (SDE) and based on public hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier

opinion by the Secretariat for Economic Monitoring (SEAE). The process has now been forwarded to the Administrative Council for Economic

Defense (CADE) for final decision.

The subsidiary Gerdau S.A. denies having engaged in any type of anti-competitive behavior and believes, based on information available,

including the opinion of its legal advisors, that the administrative process until now includes many irregularities, some of which are

impossible to resolve. For example, the investigations carried out by SDE did not follow the due legal course and the representatives of the

SDE influenced certain witnesses who testified in the process. In addition, the SDE report was issued before the subsidiary Gerdau S.A. had

the chance to reply to the closing arguments, which indicates that there was a bias in the judgment made by the SDE. The same applies to

the SEAE report, which does not analyze the economic issues and is based exclusively on the witnesses’ testimony.

These irregularities, which also reflect non-compliance with the related constitutional provisions, will no doubt affect the administrative

decision by CADE, based on the conclusions presented by the antitrust authorities until now. The subsidiary Gerdau S.A. has pointed out and

tried to combat all these irregularities and will continue doing so in relation to the allegations and the irregularities in the administrative

process, believing in a favorable outcome to this process, if not in the administrative sphere, possibly in the judicial sphere.

Because of the above, no provision has been recorded for this case. According to Brazilian legislation, fines of up to 30% of gross revenues in

the prior fiscal years may be applied to the subsidiary Gerdau S.A. and, if personal responsibility of an executive is proven, such executive may

be penalized by 10% to 50% of the fine applied to the company. There are no precedents for fines exceeding 4%. In a similar case involving

flat steel companies, the fine was 1%.

b.2) A civil lawsuit has been filed against the subsidiary Gerdau Açominas S.A. regarding the termination of a contract for the supply of slag

and indemnities for losses and damages. At December 31, 2004, the lawsuit amounts to approximately R$ 37,014.

Gerdau Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach

of contract.

The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion,

the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained by

the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation of the

contract. The process was in the High Court of Justice (STJ) and was returned to the TAMG for judgment of the appeal requesting clarification

of the decision.

Gerdau Açominas S.A. believes that any loss from the case is remote, since it understands that a change in the judgment is unlikely.

b.3) A civil lawsuit has been filed by Sul America Cia. Nacional de Seguros against the subsidiary Gerdau Açominas S.A. and Banco

Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has

been deposited in court. The insurance company pleads doubt in relation to whom payment should be made and alleges that the subsidiary


is resisting in receiving and settling it. The lawsuit was contested both by the Bank (which claims having no right over the amount deposited,

which resolves the doubt raised by Sul América) and by the subsidiary (which claims that there is no such doubt and that there is justification

to refuse payment since the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in

the Bank’s representation, and this matter is therefore already settled, which resulted in the withdrawal in December 2004 of the amount

deposited. The process should enter the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal

advisors, the subsidiary expects loss to be remote and that the sentence will declare the amount payable within the amount stated in the

pleading.

Also, Gerdau Açominas S.A. filed, prior to this lawsuit, a lawsuit for the payment of the amount recognized by the insurance companies. The

lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit.

The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel mill, which resulted

in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the

loss of profits arising from the accident, were covered by an insurance policy. The report on the event, as well as the loss claim, was filed with IRB - Brasil

Resseguros S.A., and an advance payment of R$ 62,000 was received in 2002.

In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total

amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of

the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the

advance amount received plus the amount proposed by the insurance company as a complement to settle the indemnity. Subsequently, new

amounts were added to the discussion, as stated in the subsidiary’s plea, although not yet recorded.

Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of

operations or the Company’s consolidated financial position are remote.

III) Contingent assets not recorded

a) Tax contingencies

a.1) The subsidiary Gerdau S.A. believes that the realization of certain contingent gains is probable. Among them is a court-order debt

security issued in 1999 in its favor by the state of Rio de Janeiro in the amount of R$ 26,580, arising from an ordinary lawsuit against the noncompliance

with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI).

Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00, which granted the government

a ten-year moratorium for payment of securities issued to cover court-order debts not related to food, the realization of this credit is not

expected in 2004 and, also, there is no expectation of realization in 2005 and following years. For this reason, this gain is not recognized in

the financial statements.

a.2) The Company’s subsidiaries have filed several ordinary proceedings relating to the correct basis of calculation of PIS under Complementary

Law 07/70, due to the declarations of unconstitutionality of Decree Laws 2445/88 and 2449/88. The companies expect to recover the taxes

incorrectly paid. The amounts under discussion total R$ 84,245.

a.3) Also, the subsidiaries Gerdau S.A., Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits.

Gerdau S.A. and the subsidiary Margusa Maranhão Gusa S.A. have filed administrative appeals for recovery, which are pending judgment.

With regards to the subsidiary Gerdau Açominas S.A., the proceedings were directed to the courts, with an unfavorable judgment. Currently,

the process awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 394,002 but no accounting

recognition has been made thereof because of uncertainty as to their realization.

21 - Related Parties

a) Analysis of loan balances

Company

Consolidated

__________________________________ __________________________________

2004 2003 2004 2003

Gerdau Açominas S.A........................................................................................ (381) 3,390 - -

Fundação Gerdau.............................................................................................. - - 1,305 16,762

Gerdau S.A....................................................................................................... 115 - - -

Sipar Aceros S.A. and other............................................................................... _____________- _____________- _____________ (74) _____________ 13,747

Total................................................................................................................ _____________

(266) _____________

3,390 _____________

1,231 _____________

30,509

b) Commercial transactions - the Company paid R$ 300 (R$ 300 in 2003) to the associated company Grupo Gerdau Empreendimentos Ltda.

for the use of the Gerdau trademark, as well as R$ 502 (R$ 524 in 2003) to the parent company Indac - Ind. Adm. e Comércio S.A. related to

guarantees.

c) Guarantees granted - the Company is the guarantor of the subsidiary GTL Financial Corp., in the amount of US$ 50,000, equivalent

to R$ 132,720 at the balance sheet date. The subsidiary Gerdau S.A. is the guarantor of the Euro Commercial Paper program of the subsidiary

GTL Trade Finance Inc., of US$ 110 million, equivalent to R$ 291,984 at the balance sheet date. The subsidiary is also the guarantor of financing

agreements of the subsidiary GTL Financial Corp., of US$ 5,000, equivalent to R$ 13,272, and securitization operations of the subsidiary

Gerdau Açominas Overseas Ltda., of US$ 233 million, equivalent to R$ 618,475 on the balance sheet date. The subsidiary Gerdau Açominas S.A.

is the guarantor of the vendor financing loan agreement of the associated company Banco Gerdau S.A., in the amount of R$ 68,138.


96 97

METALÚRGICA GERDAU S.A.

22 - Post-employment Benefits

Considering all types of benefits to employees granted by the Company, the asset and liability positions at December 31 are as follows:

Company

__________________________________

Consolidated

__________________________________

2004 2003 2004 2003

Pension plan actuarial liability - defined benefit.................................................. - - 154,199 162,719

Actuarial liability with post-employment health benefit........................................ - - 130,283 105,964

Retirement and discharge benefits payable......................................................... - - 9,996 10,187

_____________ _____________ _____________ _____________

Total liabilities.................................................................................................. - - 294,478 278,870

_____________ _____________ _____________ _____________

_____________ _____________ _____________ _____________

Unrecognized actuarial assets............................................................................ 1,964 1,892 165,510 125,107

_____________ _____________ _____________ _____________

_____________ _____________ _____________ _____________

a) Pension plan - defined benefit

The Company and other Group subsidiaries in Brazil are the co-sponsors of defined benefit pension plans that cover substantially all

employees in Brazil (“Açominas Plan” and “Gerdau Plan”).

The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement

the social security benefits of employees and retired employees of the Ouro Branco unit of Gerdau Açominas S.A. The assets of the Açominas

Plan mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties.

The Gerdau Plan is managed by Gerdau - Sociedade de Previdência Privada, a closed supplementary pension entity to complement the social

security benefits of employees and retired employees of the Company of the other units of Gerdau Açominas S.A. and other subsidiaries in

Brazil. The assets of the Gerdau Plan comprise investments in bank deposit certificates, federal public securities and marketable securities.

Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all

of their employees.

The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to complement the social security benefits of

employees of Gerdau Ameristeel Corporation and its subsidiaries, The assets of the Plans mainly comprise marketable securities.

The sponsors’ contributions to the pension plans were R$ 13 in 2004 and R$ 11 in 2003 for the Company and R$ 68,288 in 2004 and R$ 63,733

in 2003 for the consolidated.

The current expenses of the defined pension plan are as follows:

Company

Consolidated

__________________________________ __________________________________

2004 2003 2004 2003

Cost of current service....................................................................................... 39 60 49,884 41,261

Interest cost .................................................................................................... 124 700 125,054 110,212

Expected return of plan assets........................................................................... (204) (1,310) (162,001) (122,362)

Amortization of unrecognized liability................................................................. - - 462 467

Amortization of past service costs ..................................................................... - - 778 1,332

Amortization of (gain) loss ................................................................................ (18) - 2,550 2,764

Employees’ expected contribution ..................................................................... _____________- _____________- _____________ (4,383) _____________ (3,576)

Pension plan cost (benefit), net ......................................................................... _____________

(59) _____________

(550) _____________

12,344 _____________

30,098

The reconciliation of the assets and liabilities of the plans is presented below:

Company

Consolidated

__________________________________ __________________________________

2004 2003 2004 2003

Total liabilities ................................................................................................. (7,065) (6,223) (1,790,639) (1,623,000)

Fair value of plan assets.................................................................................... _____________ 14,993 _____________ 12,366 _____________ 1,867,506 _____________ 1,663,567

Net assets........................................................................................................ 7,928 6,143 76,867 40,567

Unrecognized (gains) losses............................................................................... (5,964) (4,251) (96,827) (91,405)

Past service costs ............................................................................................. - - 26,342 7,722

Other .............................................................................................................. _____________- _____________- _____________ 4,929 _____________ 5,504

Total assets (liabilities), net............................................................................... _____________

1,964 _____________

1,892 _____________

11,311 _____________

(37,612)

Actuarial asset ................................................................................................. 1,964 1,892 165,510 125,107

Pension plan liability recorded in balance sheet................................................... _____________- _____________- _____________ (154,199) _____________ (162,719)

Assets (liabilities), net....................................................................................... _____________

1,964 _____________

1,892 _____________

11,311 _____________

(37,612)


Changes in plan assets and actuarial liabilities were as follows:

Company

__________________________________

Consolidated

__________________________________

2004 2003 2004 2003

Changes in benefit

Benefit liabilities at the beginning of the year..................................................... 6,223 6,901 1,623,000 1,554,443

Cost of service.................................................................................................. 39 60 49,884 41,261

Interest cost..................................................................................................... 124 700 125,054 110,212

Actuarial loss (gain) ......................................................................................... 794 (1,336) 88,360 75,148

Payment of benefits......................................................................................... (115) (102) (69,534) (58,588)

Past service costs due to changes in the plan...................................................... - - 10,516 -

Foreign exchange effect on foreign companies.................................................... - - (45,000) (99,476)

Initial liability recognition adjustment................................................................. _____________- _____________- _____________ 8,359 _____________-

Benefit liabilities at the end of the year ........................................................ _____________

7,065 _____________

6,223 _____________

1,790,639 _____________

1,623,000

Company

Consolidated

__________________________________ __________________________________

2004 2003 2004 2003

Changes in plan assets

Fair value of plan assets at the beginning of the year........................................... 12,366 10,515 1,663,567 1,396,928

Return on plan assets........................................................................................ 2,729 1,942 232,043 314,371

Sponsor contributions........................................................................................ 13 11 68,288 63,733

Participant contributions.................................................................................... - - 5,202 4,232

Payment of benefits......................................................................................... (115) (102) (69,534) (58,588)

Foreign exchange effect on foreign companies.................................................... _____________- _____________- _____________ (32,060) _____________ (57,109)

Fair value of plan assets at the end of the year.................................................... _____________

14,993 _____________

12,366 _____________

1,867,506 _____________

1,663,567

The method for calculating the actuarial liability is the Projected Unit Credit Method, as determined by CVM Deliberation 371/2000.

The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period,

the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the

fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for

the employees that participate in the plan.

The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and

consolidated:

North american

Gerdau Plan Açominas Plan plan

Average discount rate................................................................. 11.30% 11.30% 5.75% - 6.00%

Increase in compensation............................................................ 9.20% 8.675% 2.50% - 4.25%

Expected rate of return on assets................................................. 12.35% 12.35% 7.25% - 8.40%

Mortality chart........................................................................... GAM 83 (-1 year) AT-83 GAM 83

Disabled mortality chart.............................................................. RRB 1944 AT-83 RRB 1977

Turnover rate............................................................................. Based on service Null Based on age

and salary level

and service

(plan experience)

b) Pension plan - defined contribution

The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan administered by Gerdau - Sociedade

de Previdência Privada. Contributions are based on a percentage of the compensation of employees.

The foreign subsidiary Gerdau AmeriSteel US Inc. has a defined contribution plan, the contributions to which are equivalent to 50% of the

amount paid by the participants, limited to 4% of salary. The other companies do not have this type of pension plan.

The total cost of this plan was R$ 55 in 2004 and R$ 62 in 2003 for the Company and R$ 12,005 in 2004 and R$ 9,827 in 2003 consolidated.

c) Other post-employment benefits

The Company estimates that the amount payable to executives on their retirement or discharge totals R$ 9,996 (consolidated) at December

31, 2004 (R$ 10,187 in 2003 - consolidated).


98 99

METALÚRGICA GERDAU S.A.

The American Plan includes, in addition to pension benefits, specific health benefits for employees who retire after a certain age and with

a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are

based on amounts actuarially calculated.

The composition of the net periodic cost for the post-employment health benefits is as follows:

Consolidated

___________________________________

2004 2003

Cost of service.................................................................................................................................................................. 3,007 2,542

Interest cost..................................................................................................................................................................... 5,715 6,492

Amortization of past service costs...................................................................................................................................... (563) -

Amortization of (gain) loss................................................................................................................................................. ______________ 80 ______________-

Expense for post retirement health benefits, net.................................................................................................................. ______________

8,239 ______________

9,034

The status of the fund for post-employment health benefits is as follows:

Consolidated

___________________________________

2004 2003

Plan assets at market value............................................................................................................................................... - -

Projected benefit liabilities................................................................................................................................................. ______________ (130,559) ______________ (111,390)

Fund status...................................................................................................................................................................... (130,559) (111,390)

Unrecognized gains and losses, net ................................................................................................................................... 8,101 5,426

Past service costs.............................................................................................................................................................. ______________ (7,825) ______________-

Post-retirement health benefit liabilities recorded in thebalance sheet................................................................................... ______________

(130,283) ______________

(105,964)

The changes in plan assets and actuarial liabilities was as follows:

Consolidated

___________________________________

2004 2003

Changes in projected benefit liabilities

Projected benefit liabilities at the beginning of the year....................................................................................................... 111,390 112,991

Purchase of North Star...................................................................................................................................................... 23,136 -

Cost of service.................................................................................................................................................................. 3,007 2,542

Interest cost..................................................................................................................................................................... 5,715 6,492

Participant contributions.................................................................................................................................................... 1,946 1,870

Actuarial loss.................................................................................................................................................................... 4,759 3,432

Administrative benefits and expenses paid.......................................................................................................................... (6,639) (6,528)

Foreign exchange effect ................................................................................................................................................... (4,364) (9,409)

Initial liability recognition adjustment................................................................................................................................. ______________ (8,391) ______________-

Projected benefit liabilities at the end of the year................................................................................................................ ______________

130,559 ______________

111,390

Consolidated

___________________________________

2004 2003

Changes in plan assets

Plan assets a the beginning of the year.............................................................................................................................. - -

Sponsor contributions........................................................................................................................................................ 4,693 4,658

Participant contributions.................................................................................................................................................... 1,946 1,870

Administrative benefits and expenses paid.......................................................................................................................... ______________ (6,639) ______________ (6,528)

Plan assets at the end of the year....................................................................................................................................... ______________

- ______________

-


The assumptions adopted in the accounting for post-employment health benefits were as follows:

North american plan

Average discount rate ...................................................................................................................................................... 5.75% - 6.00%

Health treatment - rate for the next year............................................................................................................................. 9.50% - 13.00%

Health treatment - rate for cost decrease to be reached from 2010 to 2013.......................................................................... 4.50% to 5.50%

23 - Shareholders’ Equity

a) Capital - authorized capital at December 31, 2004, comprises 50,000,000 common shares (50,000,000 at December 31, 2003) and

100,000,000 preferred shares (100,000,000 at December 31, 2003), with no par value.

The Extraordinary General Meeting of shareholders held on April 30, 2004 approved the capital increase of R$ 384,000 through the

capitalization of the reserve for investments and working capital, with a bonus of 30% on the shares on that date, representing 12,475,319

new shares (4,158,440 common and 8,316,879 preferred). Also, a split of 70% of these new shares was approved, with the issue of 29,109,076

shares (9,703,025 common and 19,406,051 preferred).

At December 31, 2004, 27,722,930 common shares (13,861,465 at December 31, 2003) and 55,445,860 preferred shares (27,722,930 at December

31, 2003) are subscribed and paid-up, totaling R$ 1,664,000 (R$ 1,280,000 at December 31, 2003). Preferred shares do not have voting rights

and cannot be redeemed, but have the same rights as common shares in terms of profit sharing.

b) Treasury stock - at December 31, 2004, the Company had 682,000 preferred shares (137,500 preferred shares in 2003), held in treasury for

subsequent sale in the market or cancellation, totaling R$ 21,490 (R$ 7,049 in 2003).

c) Interest on equity and dividends - the Company calculated interest on equity in accordance with the terms established by Law 9249/95.

The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was recorded as

dividends, not affecting net income. The related tax benefit through the reductions of the income tax and social contribution on net income

charges for the year was R$ 55,250 (R$ 58,514 in 2003). Shareholders are entitled to receive, each year, a minimum mandatory dividend of 30%

of adjusted net income.

The amount of interest on equity and dividends credited for the year was R$ 433,879, shown as follows:

2004 2003

Net income for the year..................................................................................................................................................... 1,437,075 575,179

Transfer to legal reserve.................................................................................................................................................... ______________ (71,855) ______________ (28,759)

Adjusted net income......................................................................................................................................................... ______________

1,365,220 ______________

546,420

Distributions during the year

_____________________________________________________________________________________________________

Period Nature R$/share Credit Payment 2004 2003

1 st quarter......................................................... Interest 1.10 3/30/2004 5/18/2004 45,368 34,307

2 nd quarter ........................................................ Interest 0.62 6/30/2004 8/17/2004 51,142 23,287

Dividends 0.46 6/30/2004 8/17/2004 37,944 -

3 rd quarter......................................................... Interest 0.80 8/13/2004 11/17/2004 65,990 34,099

Dividends 0.91 11/3/2004 11/17/2004 75,062 -

4 th quarter ........................................................ Interest - 80,407

Dividends 1.92 2/11/2005 2/22/2005 _________ 158,373 ___________-

Interest on equity and dividends.......................... _________

433,879 ___________

172,100

% interest/dividends paid or credited.................. 32% 31%

Credit per share (R$).......................................... 5,26 4,15

Outstanding shares (thousands).......................... 82,487 41,447

The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws.

24 - Statutory Profit Sharing

a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the

Company’s by-laws;

b) The employees’ profit sharing is linked to the attainment of operating goals and was charged to cost of production and general and

administrative expenses, as applicable.


100 101

METALÚRGICA GERDAU S.A.

25 - Long-term Incentive Plans

I) Gerdau S.A.

The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a previously agreed plan and within the limit

of the authorized capital, to grant options to purchase preferred shares to management, employees or persons who render services to the

subsidiary or the companies under its control, and approved the formation of the Long-Term Incentive Program that represents a new form

of compensation of the strategic executives of the subsidiary. The options should be exercised in a maximum of five years after the grace

period.

a) Summary of changes in the plan:

Stock options grants (Number of shares)

________________________________________________________________________________

2003 2003 2004 2004 Total

Opening balance at December 31, 2003............................................... 403,228 280,840 - - 684,068

Grants in 2004................................................................................... - - 2,430 171,125 173,555

Share bonus on April 29, 2004............................................................ __________ 403,229 __________ 280,840 __________ 2,429 __________ 171,125 __________ 857,623

Closing balance at December 31, 2004................................................. __________

806,457 __________

561,680 __________

4,859 __________

342,250 __________

1,715,246

Exercise price - R$ .............................................................................. 11.94 11.94 30.50 30.50

Grace period....................................................................................... 3 anos - 3 anos -

Grace period....................................................................................... - 5 anos - 5 anos

The subsidiary Gerdau S.A. has a total of 1,573,200 preferred shares in treasury at December 31, 2004, These shares can be used for this

plan.

b) Plan status at December 31

Stock options grants

___________________________________________

2004 2003 Average

Total stock options granted........................................................................................................................................... 347,109 1,368,137

Exercise price - R$ ........................................................................................................................................................ 30.50 11.94 15.70

Fair value of options date of grant - R$ per option (*)..................................................................................................... 8.65 3.72 4.72

Average term of option to be exercised (years)................................................................................................................ 3.68 1.82 2.26

(*) Calculated using the Black-Scholes model

The percentage of dilution in interest that the current shareholders may experience if all options are exercised is approximately 0.6%.

II) Gerdau Ameristeel Corporation - (“Gerdau Ameristeel”)

Gerdau Ameristeel Corporation and its subsidiaries have stock compensation plans for their employees, as follows:

a) Former Co-Steel Plan

According to the terms of the Co-Steel Plan, the Stock-Based Option Plan, the company was authorized to grant purchase options to employees

and directors up to the limit of 3,041,335 common shares. The exercise price was based on the closing price of the common shares in the

market on the day prior to the issue of the option. The options have a maximum term of ten years and are granted during various periods, as

determined by the administrator of the plan at the date of the grant, up to April 13, 2008.

b) Gerdau AmeriSteel US Inc. (“AmeriSteel”) Plans

According to the terms of the Transaction Agreement relating to the acquisition of Co-Steel, the minority shareholders of AmeriSteel

exchanged their shares and stock options for shares and stock options of Ameristeel at the ratio of 9,4617 shares and stock options for each

share or stock option of AmeriSteel. This exchange occurred on March 31, 2003.

b.1) Stakeholder Plan

In March 2000, the Board of Directors of AmeriSteel a approved long-term incentive plan available to the executive management (Stakeholder

Plan) to assure that the interests of the senior management of AmeriSteel are in line with those of the AmeriSteel shareholders. The awards

are determined by a formula based on the return on employed capital of AmeriSteel in a given year of the plan. The awards are granted and

paid over a period of four years. The participants may choose payment in cash or in shares of AmeriSteel and Gerdau, for which a premium

of 25% is given, if chosen. Expenses related to the benefits for the years ended December 31, 2004 and 2003 totaled US$ 1,300 thousand

(R$ 3,450) and US$ 150 thousand (R$ 433), respectively. A premium of approximately US$ 14,000 thousand (equivalent to R$ 37,161) was

recorded at December 31, 2004 and will be granted on March 1, 2005. This premium will be provided in accordance with the payment schedule

established by the plan.


.2) SAR Plan

In July 1999, the Board of Directors of AmeriSteel approved the SAR/Shares Purchase Plan (SAR Plan) available to basically all employees. The

SAR Plan authorizes the sale of 946,170 common shares to the employees during three offer periods, from July to September in 1999, 2002

and 2005. The employees who purchase the shares are rewarded with stock appreciation rights (SARs) equal to four times the number of

shares purchased. SARs at market value were granted at the date of grant, determined based on an independent appraisal at the end of the

prior year. SARs can be exercised at 25% annually as from the date of the grant, to be exercised over a period of ten years as from the date

of the grant.

In July 2002, the Board of Directors of AmeriSteel approved the issue of new purchase options under the SAR Plan, which were granted to the

executive directors, with the exercise price determined by the fair value at the date of grant. A total of 6,244,722 SARs were authorized and

issued. One-third of all awarded options and common shares are vested two years as from the date of concession, and one third after each

subsequent two-year period. The options may be exercised in up to ten years after the date of concession.

At December 31, 2004, an expense related to this plan of US$ 20,700 thousand, equivalent to R$ 54,946, was recorded in the consolidated

financial statements (at December 31, 2003, an expense of US$ 9,400 thousand, equivalent to R$ 27,158 was recorded).

b.3) Equity Ownership

In September 1996, the Board of Directors of AmeriSteel approved the Equity Ownership Plan of AmeriSteel Corporation (the “Equity

Ownership” Plan), which grants common shares, purchase options for common shares and SARs. The maximum number of shares that may

be issued under this plan is 4,152,286, AmeriSteel granted 4,667,930 incentive stock options and 492,955 common shares under the Equity

Ownership Plan up to December 31, 2004. One-third of all options and common shares issued become vested two years from the date of the

grant, and one third after each subsequent two-year period. All grants were carried out at the market value of the common shares at the

date of grant, determined based on an independent appraisal at the end of the prior year. The options may be exercised for ten years as from

the date of the grant.

b.4) Purchase Plan

In May 1995, the Board of Directors of AmeriSteel approved an option/purchase plan (the “Purchase Plan”), available to essentially all

employees. The employees who purchased shares were rewarded with options for six times the number of shares purchased. A total of

356,602 shares were sold under the Purchase Plan at a purchase price of US$ 1.12 per share. The options were granted at market value at the

date of the grant, determined based on an independent appraisal at the end of the prior year. A total of 2,139,612 options were granted under

the Purchase Plan. No options are available for future grant. All shares granted can already be exercised, which may occur for ten years as

from the date of the grant.

A summary of the Gerdau Ameristeel plans is as follows:

2004 2003

___________________________________________ ____________________________________________

Number Weighted average Number Weighted average

of shares exercise price - R$ of shares exercise price - R$

Available at the beginning of the year............................. 3,606,570 17.01 1,367,400 26.87

Exchange of Ameristeel Planfor options of the

Gerdau Ameristeel Plan (*)........................................... - - 2,660,601 6.21

Exercised....................................................................... (374,609) 5.04 - -

Cancelled...................................................................... (76,973) 5.10 - -

Expire d ........................................................................ _________________ (321,700) ______________________ 51.65 _________________ (421,431) ______________________ 56.98

Available at the end of the year...................................... _________________

2,833,288 ______________________

15.77 _________________

3,606,570 ______________________

18.52

(*) Exchange mentioned in item “b” above.


102 103

METALÚRGICA GERDAU S.A.

The table below summarizes the information on the purchase options of Gerdau Ameristeel shares available at December 31, 2004:

Quantity exercisable

Available Average Weighted average at december 31,

Exercise price (R$) quantity grace period exercise price - R$ 2004

3.50 to 3.80 ................................................................. 752,829 4.40 3.66 597,086

4.78 to 5.04 ................................................................. 824,536 5.90 4.88 497,369

5.60 to 7.86 ................................................................. 563,923 4.50 11.89 563,923

41.01 to 49.61.............................................................. 342,500 2.10 44.59 342,500

53.25 to 53.49 ............................................................. __________________ 349,500 1.70 53.49 ________________________ 349,500

__________________

2,833,288 ________________________

2,350,378

The effect on net income for the year and shareholders’ equity would have been as follows, had the expenses for the option plans of Gerdau

S.A. and Gerdau Ameristeel Corporation been recorded:

Consolidated

______________________________________________

Net income

Shareholders equity

Balances based on financial statements............................................................................................ 3,341,097 2,961,034

Expenses for the period*................................................................................................................. ___________________ (2,649) ______________________ (8,383)

Proforma balances.......................................................................................................................... ___________________ 3,338,448 ______________________ 2,952,651

*using the fair value method (Black-Scholes model)

26 - Calculation of EBITDA

Consolidated

___________________________________

2004 2003

Gross profit...................................................................................................................................................................... 6,245,024 3,290,221

Selling expenses............................................................................................................................................................... (455,175) (448,131)

General and administrative expenses.................................................................................................................................. (1,050,953) (804,501)

Depreciation and amortization........................................................................................................................................... ______________ 766,819 ______________ 605,045

EBITDA............................................................................................................................................................................ ______________

5,505,715 ______________

2,642,634


27 - Information by Geographic Area and Business Segment

Information by geographic area:

Geográphic Área

_________________________________________________________________________________________________________________________________________________________

Brazil South america (*) North america Consolidated

_________________________________ _______________________________ ________________________________ ________________________________

2004 2003 2004 2003 2004 2003 2004 2003

Gross sales revenues............................... 12,914,377 9,024,250 1,039,986 652,829 9,453,210 6,105,888 23,407,573 15,782,967

Net sales revenues.................................. 9,975,760 7,306,927 763,865 490,122 8,857,637 5,569,912 19,597,262 13,366,961

Cost of sales........................................... (5,668,217) (4,444,848) (488,120) (325,333) (7,195,901) (5,306,559) (13,352,238) (10,076,740)

Gross profit ........................................... 4,307,543 2,862,079 275,745 164,789 1,661,736 263,353 6,245,024 3,290,221

Selling expenses..................................... (400,317) (407,717) (7,079) (5,140) (47,779) (35,274) (455,175) (448,131)

General and administrative expenses........ (751,200) (554,218) (45,934) (33,492) (253,819) (216,791) (1,050,953) (804,501)

Financial income (expenses), net.............. 33,673 (437,013) (4,491) (3,831) (177,563) (180,532) (148,381) (621,376)

Operating profit (loss)............................. 3,022,950 1,197,824 219,272 120,012 1,194,708 (165,655) 4,436,930 1,152,181

Net income (loss) for the year.................. 2,270,548 1,224,769 174,240 93,379 896,309 (61,274) 3,341,097 1,256,874

EBITDA (**)............................................ 3,657,500 2,256,415 250,983 151,524 1,597,232 234,695 5,505,715 2,642,634

(*) Does not include Brazilian operations,

(**) Income before financial expenses, income tax and social contribution on net income, and depreciation and amortization, as mentioned in Note 26,

The segments shown below correspond to the business units through which the Gerdau Executive Committee manages its operations: Long Steel Brazil, Açominas (corresponding to the

operations of the plant located in Ouro Branco, state of Minas Gerais), South America (excluding Brazilian operations) and North America (Gerdau Ameristeel):

Information by business segment:

Business sector

________________________________________________________________________________________________________________________________________________________________

Long Brazil Açominas Ouro Branco South America (*) Nort América Consolidated

___________________________ __________________________ ___________________________ ___________________________ ____________________________

2004 2003 2004 2003 2004 2003 2004 2003 2004 2003

Net sales revenues..................... 7,329,008 5,359,998 2,646,752 1,946,929 763,865 490,122 8,857,637 5,569,912 19,597,262 13,366,961

Identifiable assets (**)............... 4,447,413 3,183,362 3,482,517 3,241,331 668,351 580,385 6,131,526 4,273,441 14,729,807 11,278,519

Capital expenditure.................... 648,070 329,999 265,851 355,984 27,367 22,253 1,156,660 164,803 2,097,948 873,039

Depreciation/amortization........... 235,767 235,878 265,707 120,392 28,251 25,367 237,094 223,408 766,819 605,045

(*) Does not include Brazilian operations,

(**)Identifiable assets: accounts receivable, inventories and fixed assets


104 105

METALÚRGICA GERDAU S.A.

Board of Directors

Chairman

JORGE GERDAU JOHANNPETER

Vice Chairman

GERMANO H. GERDAU JOHANNPETER

KLAUS GERDAU JOHANNPETER

CARLOS JOÃO PETRY

Board members

AFFONSO CELSO PASTORE

ANDRÉ PINHEIRO DE LARA RESENDE

OSCAR DE PAULA BERNARDES NETO

Secretary General

EXPEDITO LUZ

Executive Committee

President

JORGE GERDAU JOHANNPETER

Vice Presidents

FREDERICO C. GERDAU JOHANNPETER, Senior Vice President

CARLOS JOÃO PETRY, Senior Vice President

ANDRÉ BIER JOHANNPETER

CLAUDIO JOHANNPETER

OSVALDO BURGOS SCHIRMER

DOMINGOS SOMMA

FILIPE AFFONSO FERREIRA

RICARDO GEHRKE

Secretary General

EXPEDITO LUZ

Corporate Officers

EXPEDITO LUZ

GERALDO TOFFANELLO

GERALDO TOFFANELLO

Accountant CRC RS No. 31.084

CPF N0. 078.257.060-72


Report of Independent Auditors

To the Board of Directors and Shareholders

Metalúrgica Gerdau S.A.

1. We have audited the accompanying balance sheets of Metalúrgica Gerdau S.A. and the consolidated balance sheets

of Metalúrgica Gerdau S.A. and its subsidiaries as of December 31, 2004 and 2003, and the related statements of

income, of changes in shareholders’ equity and of changes in financial position of Metalúrgica Gerdau S.A., as well as

the related consolidated statements of income and of changes in financial position, for the years then ended. These

financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion

on these financial statements.

2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform

the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material

respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration

the significance of balances, the volume of transactions and the accounting and internal control systems of the

companies, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial

statements, and (c) assessing the accounting practices used and significant estimates made by management, as well

as evaluating the overall financial statement presentation.

3. In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position

of Metalúrgica Gerdau S.A. and of Metalúrgica Gerdau S.A. and its subsidiaries at December 31, 2004 and 2003, and

the results of operations, the changes in shareholders’ equity and the changes in financial position of Metalúrgica

Gerdau S.A., as well as the consolidated results of operations and of changes in financial position, for the years then

ended, in accordance with accounting practices adopted in Brazil.

4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a

whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part of the

basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the

basic financial statements and, in our opinion, is fairly presented in all material respects in relation to the financial

statements taken as a whole.

Porto Alegre, March 4, 2005

Auditores Independentes

CRC 2SP000160/O-5 “F” RS

Carlos Alberto de Sousa

Accountant CRC 1RJ 056561/O-0”S”RS


106 107

METALÚRGICA GERDAU S.A.

Opinion of the Fiscal Council

The Fiscal Council of Metalúrgica Gerdau S.A., in performance of its legal and statutory duties, in compliance with

article 163 of Law 6404/76, having examined the Company’s Management Report, the individual (parent company)

and consolidated balance sheets and the related statements of income, of changes in shareholders’ equity and of

changes in financial position for the years ended December 31, 2004 and 2003, as well as the distribution of interest

on equity and dividends, and based on the report of PricewaterhouseCoopers Auditores Independentes, is of the

opinion that these accounting statements fairly reflect the Company’s individual and consolidated financial position,

in conformity with current accounting practices, and are in prefect condition to be approved at the Ordinary General

Meeting.

Porto Alegre, March 11, 2005

CARLOS ROBERTO SCHRÖDER

DOMINGOS MATIAS URROZ LOPES

MÁRIO MAGALHÃES DE SOUSA


Gerdau S.A.

Balance Sheet at December 31

(In thousands of reais)

Assets Company Consolidated

2004 2003 2004 2003

Current Assets

Cash and cash equivalents............................................................. note 5 15,709 177,684 2,041,967 1,017,006

Trade accounts receivable ............................................................. note 6 - - 2,496,808 1,526,176

Inventories .................................................................................. note 7 - - 4,236,642 2,336,598

Tax credits.................................................................................... note 8 32,038 1,844 240,462 120,815

Deferred income tax and social contribution on net income.............. note 9 - - 329,464 116,868

Dividends receivable...................................................................... 147,226 235,459 - -

Other accounts receivable.............................................................. 1,014 102 210,922 217,417

Total current assets......................................................................... 195,987 415,089 9,556,265 5,334,880

Long-Term Receivables

Related parties............................................................................. note 21 - - 1,448 26,979

Eletrobrás loans............................................................................ 8,908 8,908 10,212 10,212

Deposit for future investment in subsidiaries................................... note 4 - - 182,158 -

Deferred income tax and social contribution on net income.............. note 9 42,296 29,686 597,931 789,346

Compulsory deposits and other...................................................... note 10 25,495 25,503 242,570 224,720

Total long-term receivables............................................................. 76,699 64,097 1,034,319 1,051,257

Permanent Assets

Investments.................................................................................. note 11 7,100,464 4,248,312 112,017 461,412

Fixed assets.................................................................................. note 12 - - 7,927,363 7,378,725

Deferred charges........................................................................... note 13 - - 33,858 20,467

Total permanent assets.................................................................... 7,100,464 4,248,312 8,073,238 7,860,604

Total assets........................................................................................ 7,373,150 4,727,498 18,663,822 14,246,741

The accompanying notes are an integral part of these financial statements.


108 109

GERDAU S.A.

Liabilities and Shareholders’ Equity Company Consolidated

2004 2003 2004 2003

Current Liabilities

Trade accounts payable.................................................................. 72 - 1,935,953 1,192,428

Financing..................................................................................... note 14 - - 1,968,397 2,414,376

Debentures................................................................................... note 15 - - 2,986 3,027

Taxes and contributions payable..................................................... note 18 6,808 42,455 386,238 171,776

Related parties............................................................................. note 21 164,549 - - -

Deferred income tax and social contribution on net income.............. note 9 - - 180,166 35,721

Salaries payable............................................................................ 622 4,089 255,418 148,626

Dividends payable......................................................................... note 23 280,378 131,916 306,771 154,220

Other accounts payable................................................................. 4,838 11,801 211,739 222,725

Total current liabilities.................................................................... 457,267 190,261 5,247,668 4,342,899

Long-Term Liabilities

Financing..................................................................................... note 14 - - 3,490,374 3,396,085

Debentures................................................................................... note 15 692,476 227,878 915,086 449,039

Related parties............................................................................. note 21 - 20,961 - -

Provision for contingencies ........................................................... note 20 94,882 95,000 240,300 221,212

Deferred income tax and social contribution on net income.............. note 9 54,669 57,530 611,707 484,096

Post-employement benefits ........................................................... note 22 - - 294,478 278,870

Other accounts payable................................................................. - 7,472 251,162 219,393

Total long-term liabilities............................................................... 842,027 408,841 5,803,107 5,048,695

Minority Interest............................................................. - - 1,539,191 726,751

Shareholders’ Equity

Capital......................................................................................... note 23 3,471,312 1,735,656 3,471,312 1,735,656

Capital reserves ........................................................................... 376,672 376,672 376,672 376,672

Revenue reserves.......................................................................... 2,225,872 2,016,068 2,225,872 2,016,068

Total shareholders’ equity............................................................... 6,073,856 4,128,396 6,073,856 4,128,396

Shareholders’ Equity Including

Minority Interest.......................................................... - - 7,613,047 4,855,147

Total liabilities and shareholders’ equity..................................... 7,373,150 4,727,498 18,663,822 14,246,741

The accompanying notes are an integral part of these financial statements.


Statement of Income

Years ended December 31

(In thousands of reais)

Company Consolidated

2004 2003 2004 2003

GROSS SALES REVENUES................................................................... note 26 - 6,087,658 23,407,573 15,782,967

Taxes on sales................................................................................ - (1,068,692) (2,456,568) (1,427,585)

Freight and discounts..................................................................... ____________- ____________ (148,765) ____________ (1,353,743) ____________ (988,421)

Net Sales Revenues.................................................... - 4,870,201 19,597,262 13,366,961

COST OF SALES ............................................................................... ____________- ____________ (3,041,635) ____________ (13,352,238) ____________

(10,076,740)

Gross Profit............................................................... - 1,828,566 6,245,024 3,290,221

SELLING EXPENSES........................................................................... - (312,873) (455,175) (448,131)

FINANCIAL INCOME.......................................................................... note 17 42,326 3,210 209,846 52,029

FINANCIAL EXPENSES....................................................................... note 17 (49,329) (396,812) (385,952) (698,599)

GENERAL AND ADMINISTRATIVE EXPENSES........................................

Management fees.......................................................................... (1,261) (16,323) (43,562) (27,089)

General expenses........................................................................... (42,681) (305,054) (960,264) (736,351)

EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES

AND ASSOCIATED COMPANIES...................................................... note 11 2,836,486 503,064 (343,116) (299,357)

OTHER OPERATING INCOME (EXPENSES), NET.................................... ____________ 28,057 ____________ 11,123 ____________ 187,866 ____________ 14,489

Operating Profit........................................................ 2,813,598 1,314,901 4,454,667 1,147,212

NON-OPERATING INCOME (EXPENSES), NET....................................... ____________ (1,065) ____________ (26,664) ____________ (24,930) ____________ (7,608)

Profit before Taxes and Profit Sharing................ 2,812,533 1,288,237 4,429,737 1,139,604

PROVISION FOR INCOME TAX AND SOCIAL

CONTRIBUTION ON NET INCOME................................................... note 9

Current......................................................................................... 4 (93,129) (951,201) (308,681)

Deferred........................................................................................ 20,063 (41,569) (202,286) 449,605

MANAGEMENT PROFIT SHARING....................................................... note 24a ____________ (1,261) ____________ (16,323) ____________ (41,363) ____________ (26,043)

Net Income before Minority Interest..................... ____________

2,831,339 ____________

1,137,216 ____________

3,234,887 ____________

1,254,485

MINORITY INTEREST......................................................................... ____________ (403,548) ____________ (117,269)

Net Income for The Year........................................... ____________ 2,831,339 ____________ 1,137,216

Net income per share - R$......................................................... ____________

9.59 ____________

7.68

Net equity per share - R$.......................................................... ____________

20.58 ____________

27.89

The accompanying notes are an integral part of these financial statements.


110 111

GERDAU S.A.

Statement of Changes in Financial Position

Years ended December 31

(In thousands of reais)

Company

Consolidated

2004 2003 2004 2003

Financial Resources Were Provided by

Operations:

Net income for the year........................................................... 2,831,339 1,137,216 3,234,887 1,254,485

Expenses (income) not affecting working capital

Depreciation and amortization............................................. - 183,832 766,665 604,887

Cost of permanent asset disposals ................................... 76,796 147,999 125,585 33,434

Equity in the (earnings) losses of subsidiaries

and associated companies .......................................... note 11 (2,836,486) (503,064) 343,116 299,357

Foreign exchange effects on working capital

of foreign companies.................................................. - - (54,312) (120,202)

Monetary variations on long-term debt............................. 44,942 1,621 (138,490) (15,737)

Monetary variations on long-term receivables.................... ____________- ____________ (1,493) ____________ (526) ____________ (5,107)

From operations............................................................. ____________ 116,591 ____________ 966,111 ____________ 4,276,925 ____________ 2,051,117

Third parties:

Capital increase.................................................................. - - 493,181 -

Treasury shares................................................................... note 23 (27,036) (17,103) (27,036) (17,103)

Contributions to capital reserves ......................................... - 66,304 16,246 66,304

Increase (decrease) in long-term liabilities............................. 388,245 (422,659) 1,055,900 639,723

Working capital of consolidated companies........................... - - - 53,198

Working capital - operational integration.............................. - 256,530 - -

Working capital - purchase of assets..................................... - - 669,446

Dividends not included in income for the year........................ 748,271 273,781 - 459

Total funds provided................................................................. 1,226,071 1,122,964 6,484,662 2,793,698

Financial Resources Were Used for

Investments .......................................................................... 840,734 156,913 35,395 75,280

Purchase of assets.................................................................. - - 924,457 -

Fixed assets........................................................................... - 263,483 1,262,707 843,461

Deferred charges.................................................................... - 2,304 18,654 7,246

Increase (decrease) in long-term receivables.............................. 12,602 (30,465) (12,039) 506,376

Dividends/interest on equity..................................................... note 23 858,843 351,247 938,872 351,546

Total funds used......................................................................... 1,712,179 743,482 3,168,046 1,783,909

Changes in Working Capital .......................................... ____________ (486,108)

____________ 379,482

____________ 3,316,616 ____________

1,009,789

Working capital

At the beginning of the year................................................ 224,828 (154,654) 991,981 (17,808)

At the end of the year......................................................... ____________ (261,280) ____________ 224,828 ____________ 4,308,597 ____________ 991,981

Changes in Working Capital .......................................... (486,108) 379,482 3,316,616 1,009,789

The accompanying notes are an integral part of these financial statements.


Statement of Changes

in Shareholders’ Equity

(In thousands of reais)

Capital reserves Revenue reserves

Special Investments Total

Investment Law and working Retained shareholders’

Capital incentives 8200/91 Other Total Legal capital Total earnings equity

At December 31, 2002......... 1,335,120 276,606 21,487 12,275 310,368 127,569 1,520,169 1,647,738 - 3,293,226

Net income for the year.............. - - - - - - - - 1,137,216 1,137,216

Capital increase......................... 400,536 - - - - - (400,536) (400,536) - -

Investment incentives................. - 66,304 - - 66,304 - - - - 66,304

Treasury shares.......................... note 23 - - - - - - (17,103) (17,103) - (17,103)

Distribution proposed for the

Annual General Meeting

Legal reserve ........................ note 23 - - - - - 56,860 - 56,860 (56,860) -

Reserve for investments and

working capital................. - - - - - - 729,109 729,109 (729,109) -

Interest on equity.................. note 23 - - - - - - - - (351,247) (351,247)

At December 31, 2003....... 1,735,656 342,910 21,487 12,275 376,672 184,429 1,831,639 2,016,068 - 4,128,396

Net income for the year.............. - - - - - - - - 2,831,339 2,831,339

Capital increase......................... note 23 1,735,656 - - - - - (1,735,656) (1,735,656) - -

Treasury shares.......................... note 23 - - - - - - (27,036) (27,036) - (27,036)

Distribution proposed for the

Annual General Meeting

Legal reserve ........................ note 23 - - - - - 141,567 - 141,567 (141,567) -

Reserve for investments and

working capital................. - - - - - - 1,830,929 1,830,929 (1,830,929) -

Dividends/interest on equity... note 23 - - - - - - - - (858,843) (858,843)

At December 31, 2004....... 3,471,312 342,910 21,487 12,275 376,672 325,996 1,899,876 2,225,872 - 6,073,856

The accompanying notes are an integral part of these financial statements.


112 113

GERDAU S.A.

Statement of Cash Flows

Years Ended December 31

(In thousands of reais)

Company

Consolidated

2004 2003 2004 2003

Net income for the year..................................................................... 2,831,339 1,137,216 3,234,887 1,254,485

Equity in the (earnings) losses of subsidiaries and

associated companies................................................................... note 11 (2,836,486) (503,064) 343,116 299,357

Provision for credit risks.................................................................... - 11,594 7,323 20,705

Gain on disposal of fixed assets......................................................... - 15,928 9,058 10,056

Gain (loss) on disposal of investments ............................................... 1,065 (1,645) 4,382 (111)

Monetary and exchange variations..................................................... (9,556) 82,483 (99,284) 130,790

Depreciation and amortization........................................................... - 183,832 766,665 604,887

Income tax and social contribution on net income............................... (34,703) (12,204) 463,938 (438,731)

Interest on debt................................................................................ 53,277 291,462 406,534 587,143

Contingencies/judicial deposits ......................................................... (110) 4,997 5,295 624

Changes in trade accounts receivable ................................................ - (160,073) (687,562) (180,879)

Changes in inventories ..................................................................... - (106,405) (1,402,408) (207,267)

Changes in trade accounts payable..................................................... 72 11,157 490,458 187,378

Other operating activity accounts....................................................... ____________ (42,524) ____________ 135,319 ____________ (56,428) ____________ 84,468

Net cash provided by (used in) operating activities.......................... ____________ (37,626) ____________ 1,090,597 ____________ 3,485,974 ____________ 2,352,905

Acquisition/disposal of fixed assets.................................................... - (262,887) (1,173,491) (873,039)

Increase in deferred charges.............................................................. - (2,304) (18,006) (7,246)

Acquisition/disposal of investments.................................................... (802,735) (25,488) (37,686) (71,603)

Purchase of assets............................................................................ - - (924,457) -

Receipt of dividends/interest on own capital ...................................... ____________ 833,126 ____________ 38,251 ____________- ____________-

Net cash provided by (used in) investing activities........................... ____________ 30,391 ____________ (252,428) ____________ (2,153,640) ____________ (951,888)

Suppliers of fixed assets.................................................................... - 2,436 144,574 2,196

Working capital financing.................................................................. - 112,645 (136,784) (336,901)

Debentures....................................................................................... 411,560 (426,154) 399,120 (394,340)

Increase in permanent asset financing................................................ - 111,684 762,766 454,989

Payment of permanent asset financing................................................ - (272,111) (677,357) (541,308)

Payment of financing interest............................................................. - (142,343) (372,676) (402,611)

Loans with related parties ................................................................. 196,195 7,574 32,872 (11,316)

Capital increase/treasury shares......................................................... note 23 (27,036) (17,103) 466,146 (17,103)

Payment of dividends/interest on equity and profit sharing................... ____________ (735,459) ____________ (402,793) ____________ (843,493) ____________ (407,910)

Net cash used in financing activities............................................... ____________ (154,740) ____________ (1,026,165) ____________ (224,832) ____________ (1,654,304)

Changes in cash and cash equivalents............................................ ____________

(161,975) ____________

(187,996) ____________

1,107,502 ____________

(253,287)

Cash and cash equivalents

At the beginning of the year.......................................................... note 5 177,684 365,680 1,017,006 1,430,656

Restatement of opening balance.................................................... - - (82,541) (173,735)

Opening balance of consolidated companies for the year................. - - - 13,372

At the end of the year................................................................... note 5 15,709 177,684 2,041,967 1,017,006


Notes to the Financial Statements

at December 31, 2004 and 2003

(All amounts in thousands of reais unless otherwise indicated)

1 - Operations

Gerdau S.A. is a holding company in the Gerdau Group, which is principally dedicated to the production of common and special steel rods

and sale of general steel products (flat and long), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the United States of

America.

The Gerdau Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from

scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). Gerdau also operates plants which are

capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special

steels, It is the largest scrap recycling group in Latin America and among the largest in the world.

The industrial sector is the most important market, including manufacturers of consumer goods such as vehicles and household and

commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil

construction sector, which demands a high volume of rebar and wire for concrete. There are also numerous customers for nails, staples and

wires, commonly used in the agribusiness sector.

2 - Presentation of the Financial Statements

The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based

on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM).

A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information

in order to provide additional information.

3 - Significant Accounting Practices

a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the

interest rates agreed with the financial institutions, and do not exceed market value;

b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the

exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes

the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees

and the legal advisors’ opinion, and is considered sufficient to cover eventual losses on realization;

c) Inventories - are stated at the lower of market value and average production or purchase cost;

d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss

is recorded in an income statement account;

e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note 12,

which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress is

added to the cost of the constructions;

f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented

projects in relation to their installed capacities;

g) Financing - is stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations.

Swap contracts, which are linked to the loan agreements, are classified together with the related loans;

h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated

in conformity with current legislation;

i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated

amounts plus accrued charges and indexation adjustments (liabilities), when applicable;

j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding.

The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of

inputs and products are made under terms and conditions similar to those of unrelated third parties;

k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting;

l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions.

The Company’s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for

contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated;

m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or

capitalized when incurred; and

n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency

(R$) at the foreign exchange rate in effect at the balance sheet date (2004 - US$ 1.00 = R$ 2.6544 and 2003 - US$ 1.00 = R$ 2.8892),


114 115

GERDAU S.A.

4 - Consolidated Financial Statements

a) The consolidated financial statements at December 31, 2004 include the accounts of Gerdau S.A. and the directly or indirectly controlled

subsidiaries listed below:

Percentage

Shareholders’

Consolidated company ownership equity

Gerdau Participações S.A.................................................................................................................. 100 4,887,726

Gerdau Açominas S.A....................................................................................................................... 100 4,766,046

Gerdau Ameristeel Corporation and subsidiaries*............................................................................... 100 3,622,636

Gerdau Internacional Empreendimentos Ltda. - Grupo Gerdau ............................................................ 100 2,785,282

Gerdau GTL Spain S.L. ..................................................................................................................... 100 2,761,750

Gerdau Steel Inc. ............................................................................................................................ 100 2,351,341

Axol S.A.......................................................................................................................................... 100 476,156

Gerdau Chile Inversiones Ltda. ......................................................................................................... 100 476,126

Indústria Del Acero S.A. - Indac ........................................................................................................ 100 476,063

Gerdau Aza S.A. .............................................................................................................................. 100 421,401

Seiva S.A. - Florestas e Indústrias ..................................................................................................... 100 202,143

Itaguaí Com. Imp. e Exp. Ltda. .......................................................................................................... 100 193,964

Sipar Aceros S.A. ............................................................................................................................. 38 78,037

Margusa - Maranhão Gusa S.A.......................................................................................................... 100 73,714

Gerdau Laisa S.A. ............................................................................................................................ 100 51,897

Aramac S.A. .................................................................................................................................... 100 49,355

GTL Equity Investments Corp............................................................................................................. 100 49,286

Açominas Com. Imp. Exp. S.A. - Açotrading........................................................................................ 100 22,583

Florestal Rio Largo Ltda.................................................................................................................... 100 18,174

Aceros Cox Comercial S.A. ............................................................................................................... 100 10,110

Gerdau Açominas Overseas Ltd......................................................................................................... 100 7,914

Florestal Itacambira S.A.................................................................................................................... 100 7,650

Siderco S.A. .................................................................................................................................... 38 6,958

GTL Financial Corp. ......................................................................................................................... 100 4,931

GTL Trade Finance Inc. ..................................................................................................................... 100 27

Dona Francisca Energética S.A. ......................................................................................................... 52 (16,350)

* Subsidiaries:

Gerdau Ameristeel MRM Special Sections Inc. (100%), Gerdau USA Inc. (100%), Ameristeel Bright Bar Inc. (100%), Gerdau Ameristeel US Inc. (100%), Gerdau Ameristeel Perth Amboy Inc.

(100%), Gallatin Steel Company (50%) e Gerdau Ameristeel Sayreville Inc. (100%).

b) The more significant accounting practices used in preparing the consolidated financial statements are as follows:

I) Gerdau S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The financial

statements of foreign subsidiaries were translated using the exchange rate in effect at the balance sheet date and were adjusted to conform

with accounting practices adopted in Brazil;

II) Asset and liability, and income and expense, accounts arising from transactions between consolidated companies have been eliminated; and

III) Holdings of minority shareholders in subsidiaries are shown separately.

c) The following transactions occurred during the year:

I) On February 16, 2004, the subsidiary Gerdau Ameristeel Corporation signed a sale and purchase agreement for the acquisition of all

assets of Potter Form & Tie Co., headquartered in Belvidere, Illinois, in the United States of America. The acquisition price was US$ 11 million,

equivalent to R$ 31,995 on that date;


II) On April 16, 2004, Gerdau S.A., through its indirect subsidiary Gerdau Steel Inc., acquired 26,800,000 shares of Gerdau Ameristeel Corporation

through a capital increase of Cdn$ 131 million, equivalent to R$ 283,937 on that date. After this transaction, Gerdau S.A. held, indirectly, 72%

of Gerdau Ameristeel Corporation;

III) The Extraordinary General Meeting of shareholders held on June 30, 2004 approved the merger of the subsidiary GTL Brasil Ltda., without

the issue of new shares. The net assets transferred to Gerdau S.A. as a result of the merger, are as follows:

Assets

Current assets.......................................................................................................................................................................................................................... __________ 534

Long-term receivables............................................................................................................................................................................................................... __________ 8

Permanent assets

Investments

Seiva S.A. - Florestas e Indústrias........................................................................................................................................................................................... 17,883

Gerdau Açominas S.A............................................................................................................................................................................................................ 333,257

(-) Negative goodwill - Gerdau Açominas S.A.......................................................................................................................................................................... __________ (280,882)

Total permanent assets..................................................................................................................................................................................................... __________ 70,258

Total assets...................................................................................................................................................................................................................... __________

70,800

Liabilities

Current liabilities...................................................................................................................................................................................................................... __________ 1,495

Long-term liabilities.................................................................................................................................................................................................................. __________ 4,591

Total liabilities.................................................................................................................................................................................................................. __________

6,086

Total Net Assets............................................................................................................................................................................................................... __________

64,714

IV) On October 15, 2004, Gerdau S.A. announced to the market that the indirect subsidiary Gerdau Ameristeel Corporation obtained the

confirmation of its registration with the Canadian securities regulatory authorities for the public offer of 70 million common shares. Gerdau

S.A., through its subsidiary Gerdau Steel Inc., acquired 35,000,000 and 4,381,000 common shares on October 20, 2004 and November 18, 2004,

respectively, in the total amount of US$ 185 million, equivalent to R$ 528,787 on those dates. The transaction initially was a capital increase in

Gerdau Steel Inc., through the issue of 817,969 common shares. Subsequently, on December 28, 2004, Gerdau S.A. paid up capital in Gerdau

Internacional Empreendimentos Ltda. (the company that holds the investments abroad) through the transfer of 817,969 common shares of

Gerdau Steel Inc. in the amount of R$ 499,430. Following this transaction, Gerdau S.A. held, indirectly, 66.5% of Gerdau Ameristeel Corporation;

V) On October 28, 2004, Gerdau S.A., through its indirect subsidiary Gerdau Ameristeel Corporation, announced the signature of a sale and

purchase agreement for the acquisition of the assets of Gate City Steel Inc. and RJ Rebar Inc. (cutting and folding of rebar, with and without

epoxy covering), headquartered in Indianapolis, Indiana, in the United States of America. The acquisition price was US$ 16 million (R$ 42,470

at December 31, 2004);

VI) On October 29, 2004, the subsidiary Armafer Serviços de Construção Ltda. was merged by the subsidiary Gerdau Açominas S.A., and the

net assets of R$ 44,744 were recorded, replacing the investment account, without capital increase. The objectives of the transaction were to

reduce administrative expenses and improve operating synergy;

VII) On November 1, 2004, Gerdau S.A., through its indirect subsidiary Gerdau Ameristeel Corporation, purchased the fixed assets and working

capital of four mills producing long steel, three processing units of wire rods and one producer of steel grinding balls for the mining industry

owned by North Star Steel, announced on September 9, 2004. The price paid for these assets was US$ 266 million (R$ 706,070 at December

31, 2004), in cash. Gerdau Ameristeel Corporation also paid an additional US$ 52 million (R$ 138,029 at December 31, 2004) as an adjustment

in the purchase price due to fluctuations in working capital up to the transaction date;

VIII) On December 23, 2004, the Gerdau Group reached an agreement with the Mayaguez Group and The Latinamerican Enterprise Steel

Holding, majority shareholders of Diaco S.A., the largest Colombian producer of steel and rebar, and Siderúrgica del Pacífico S.A. - Sidelpa,

the only producer of special steel in that country, for the scheduled acquisition of their holdings in these companies. Initially, US$ 69 million

(R$ 182,158 at December 31, 2004) were invested, recorded as “deposit for future investment in subsidiaries” in long-term receivables. The

Mayagüez Group, which will remain as a Diaco shareholder for a maximum eight-year period, formed a strategic partnership with the Gerdau

Group for the development of the Colombian steel industry; and

IX) On December 3, 2004, the Board of Directors of Gerdau S.A. authorized the Company’s management to implement corporate restructuring

measures to obtain greater strategic advantages, as well as greater operating and management efficiency, arising from the specialization

and location of the different business units and areas of the Gerdau Group. The Company’s efforts will be concentrated in its main activities,

focused operations and gain of critical mass within each of the activity areas. Also, this restructuring will consider solutions for the Group’s

future growth. On December 29, 2004, the first act of this process was completed, with the capital increase of the holding company Gerdau

Participações S.A. through the shares held in Gerdau Açominas S.A. and part of the quotas held in Gerdau Internacional Empreendimentos

Ltda. by Gerdau S.A., representing, respectively, 91.5% and 22.8% of those companies’ capital. The capital of Gerdau Participações S.A. was

also increased by the direct and indirect investments held by Gerdau Internacional Empreendimentos Ltda. in Gerdau Chile Inversiones Ltda.,

Gerdau Laisa S.A. and Sipar Aceros S.A. The final corporate restructuring model has not yet been finished and will be implemented as the

management proposals are approved by the Board of Directors. Accordingly, additional measures should be implemented during this year and

they will be advised, as soon as they occur.


116 117

GERDAU S.A.

d) The financial statements of the jointly-owned subsidiary Dona Francisca Energética S.A., and the jointly-owned indirect subsidiaries

Gallatin Steel Company and Sipar Aceros S.A., have been consolidated proportionally based on the direct or indirect interest of the parent

company in the capital of these subsidiaries.

The amounts of the financial statements of these companies are shown as follows:

Dona Francisca Gallatin Sipar Aceros S.A.

Energética S.A. Steel Company Consolidated *

________________________________ ________________________________ ________________________________

2004 2003 2004 2003 2004 2003

Assets

Current assets............................................................. 116,627 111,782 586,106 290,036 144,251 85,185

Long-term receivables.................................................. 128,427 129,889 - - - 2,863

Permanent assets......................................................... ___________ 180,984 ___________ 191,728 ___________ 612,762 ___________ 736,223 ___________ 18,929 ___________ 19,109

Total assets................................................................. ___________

426,038 ___________

433,399 ___________

1,198,868 ___________

1,026,259 ___________

163,180 ___________

107,157

Liabilities

Current liabilities......................................................... 29,381 28,522 131,580 152,134 80,787 40,252

Long-term liabilities..................................................... 413,006 423,722 54,190 230,651 4,356 4,212

Shareholders’ equity..................................................... ___________ (16,349) ___________ (18,845) ___________ 1,013,098 ___________ 643,474 ___________ 78,037 ___________ 62,693

Total liabilities............................................................. ___________

426,038 ___________

433,399 ___________

1,198,868 ___________

1,026,259 ___________

163,180 ___________

107,157

Statement of operations

Gross sales revenues.................................................... 44,987 37,189 2,384,065 1,260,130 437,864 296,651

Sales deductions.......................................................... ___________ (2,207) ___________ (3,952) ___________ (11,215) ___________ (14,157) ___________ (87,259) ___________ (62,398)

Net sales revenues....................................................... 42,780 33,237 2,372,850 1,245,973 350,605 234,253

Cost of sales................................................................ ___________ (19,424) ___________ (19,520) ___________ (1,626,650) ___________ (1,194,150) ___________ (285,566) ___________ (188,139)

Gross profit................................................................. 23,356 13,717 746,200 51,823 65,039 46,114

Selling expenses.......................................................... - - (6,224) (5,336) (4,987) (2,259)

General and administrative expenses............................. (2,110) (2,251) (45,010) (33,376) (19,876) (12,762)

Other financial income (expenses)................................. (17,882) (20,743) (14,030) (22,620) (8,101) 2,681

Other operating income (expenses)................................ ___________- ___________- ___________- ___________- ___________ (76) ___________ (3,346)

Operating profit (loss).................................................. 3,364 (9,277) 680,936 (9,509) 31,999 30,428

Non-operating income (expenses), net........................... 380 3,790 10,225 (1,367) 759 (2,889)

Provision for income tax and social contribution............. ___________ (1,249) ___________ 1,871 ___________ (797) ___________- ___________ (10,188) ___________ (7,425)

Net income (loss) for the year....................................... ___________

2,495 ___________

(3,616) ___________

690,364 ___________

(10,876) ___________

22,570 ___________

20,114

* includes the subsidiary Siderco S.A.

e) The Company and its direct and indirect subsidiaries have goodwill and negative goodwill balances, which are being amortized as the

assets that generated them are realized or based on the realization of the projected future income, limited to ten years, as follows:

Amortization

period Company Consolidated

Goodwill included in the investment accounts

Balance at December 31, 2003...................................................................................................... 21,951 432,077

(+) Goodwill recorded in the period............................................................................................... 280,882 307,397

( - ) Reversal of goodwill based on the adjustment in purchase price (Margusa - Maranhão Gusa S.A.).. - (5,258)

( - ) Write-off of goodwill as a result of the merger of the subsidiary GTL Brasil Ltda. ........................ (280,882) (280,882)

( - ) Foreign exchange adjustment.................................................................................................. - (36,361)

( - ) Amortization during the year................................................................................................... up to 10 years ______________ (2,439) __________________ (364,119)

Balance at December 31, 2004 (based on expectation of future profitability)..................................... 19,512 52,854

Analysis of the goodwill by subsidiary:

Margusa - Maranhão Gusa S.A. ............................................................................................... - 24,728

Dona Francisca Energética S.A. ................................................................................................ 19,512 19,512

Armacero Industrial y Comercial Ltda. ...................................................................................... - 457

Distribuidora Matco S.A. ......................................................................................................... - 6,066

Salomon Sack S.A. .................................................................................................................. ______________- __________________ 2,091

19,512 52,854


Amortization

period Company Consolidated

Negative goodwill included in the investment accounts

Balance at December 31, 2003...................................................................................................... (270,949) -

( - ) Amortization during the year.................................................................................................. up to 10 years 28,877 -

( - ) Write-off of negative goodwill as a result of the capitalization of the subsidiary

Gerdau Participações S.A. ..................................................................................................... ______________ 242,072 __________________-

Balance at December 31, 2004...................................................................................................... - -

Goodwill included in the fixed asset accounts

Balance at December 31, 2003...................................................................................................... - 239,740

( - ) Foreign exchange adjustment.................................................................................................. - (14,860)

( - ) Amortization during the year................................................................................................... up to 10 years ______________- __________________ (79,921)

Balance at December 31, 2004 (based on undervaluation of assets)................................................. - 144,959

The goodwill mainly resulted from the assets of the subsidiary Gerdau Ameristeel US Inc.

Negative goodwill included in the fixed asset accounts

Balance at December 31, 2003...................................................................................................... - (272,130)

( - ) Amortization during the year................................................................................................... up to 10 years ______________- __________________ 28,853

Balance at December 31, 2004 (based on overvaluation of assets)................................................... - (243,277)

The negative goodwill mainly resulted from the assets of the subsidiary Gerdau Açominas S.A.

The goodwill recorded in the investment accounts, calculated on the subsidiary Gerdau Ameristeel US Inc., were reviewed in respect of their

amortization period and projected profitability. The remaining balance was amortized in accordance with accounting practices adopted in

Brazil, and based on the current scenario and performance of the subsidiary Gerdau Ameristeel Corporation.

The equity accounting loss in the consolidated statement of income refers, basically, to the effect of the devaluation of the U.S. dollar on the

foreign investments, to goodwill amortization for the year and to the tax incentive reserves arising from the reduction of income tax on the

exploitation profit of the subsidiaries Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A., both located in the Northeastern region of

Brazil, as well as to benefits arising from state tax financing.

5 - Cash and Cash Equivalents

Company

Consolidated

2004 2003 2004 2003

Cash and Banks................................................................................................. 1,347 10 333,720 121,615

Financial investment fund................................................................................... 12,373 174,842 571,745 326,551

Fixed income securities....................................................................................... 1,989 2,832 1,098,814 369,377

Equities............................................................................................................. - - 37,688 199,463

___________ ___________ ___________ ___________

15,709 177,684 2,041,967 1,017,006

___________ ___________ ___________ ___________

___________ ___________ ___________ ___________

Of the existing balance, R$ 1,004,550 - consolidated (R$ 518,315 - consolidated in 2003) refers to investments in U.S. dollars.

6 - Trade Accounts Receivable

Consolidated

2004 2003

Customers in Brazil.......................................................................................................................................................... 812,420 533,631

Brazilian export receivables .............................................................................................................................................. 543,954 235,442

Receivables from customers of overseas companies............................................................................................................. 1,232,095 835,212

Provision for credit risks................................................................................................................................................... ____________ (91,661) ____________ (78,109)

____________

2,496,808

____________

1,526,176


118 119

GERDAU S.A.

7 - Inventories

Consolidated

2004 2003

Finished products............................................................................................................................................................ 1,728,652 868,147

Work in progress............................................................................................................................................................. 679,167 323,373

Raw materials................................................................................................................................................................. 1,112,467 586,311

Storeroom materials......................................................................................................................................................... 649,892 517,010

Advances to suppliers...................................................................................................................................................... ____________ 66,464 ____________ 41,757

____________

4,236,642

____________

2,336,598

The inventories are covered against fire and overflow. Coverage is determined based on the amounts and the risks involved.

8 - Tax Credits

Company

Consolidated

2004 2003 2004 2003

Value-Added Tax on Sales and Services (ICMS)..................................................... - - 99,803 90,804

Social Contribution on Revenues (COFINS) to offset.............................................. - - 56,302 -

Social Integration Program (PIS) to offset............................................................. 24,621 1,786 36,730 4,759

Excise Tax (IPI)................................................................................................... - - 3,310 6,358

Income tax and social contribution on net income................................................ 7,386 58 35,023 13,485

Tax on Added Value (IVA).................................................................................... - - 1,861 487

Other ................................................................................................................ 31 - 7,433 4,922

___________ ___________ ___________ ___________

32,038 1,844 240,462 120,815

___________ ___________ ___________ ___________

___________ ___________ ___________ ___________

9 - Income Tax and Social Contribution on Net Income

a) Analysis of the income tax and social contribution expense:

Company

____________________________________________________________________________

2004 2003

_____________________________________ ____________________________________

IR CS Total IR CS Total

Profit before income tax and social contribution,

after statutory profit sharing............................................... 2,811,272 2,811,272 2,811,272 1,271,914 1,271,914 1,271,914

Statutory rates of tax.............................................................. 25% 9% 34% 25% 9% 34%

Income tax and social contribution expense at statutory rates.... (702,818) (253,014) (955,832) (317,979) (114,472) (432,451)

Tax effects on:

- equity in earnings (losses).................................................... 709,122 255,284 964,406 125,766 45,276 171,042

- interest on capital................................................................ 15,669 5,641 21,310 87,694 31,569 119,263

- permanent differences (net).................................................. ___________ (7,340) ___________ (2,477) ___________ (9,817) ___________ 4,790 ___________ 2,658 ___________ 7,448

Income tax and social contribution expense.............................

___________ 14,633

___________ 5,434

___________ 20,067

___________ (99,729)

___________ (34,969)

___________

(134,698)

Current................................................................................. 4 - 4 (74,640) (18,489) (93,129)

Deferred................................................................................ 14,629 5,434 20,063 (25,089) (16,480) (41,569)

IR - Corporate income tax.

CS - Social contribution on net income.


Consolidated

____________________________________________________________________________

2004 2003

_____________________________________ ____________________________________

IR CS Total IR CS Total

Profit before income tax and social contribution,

after statutory profit sharing............................................... 4,388,374 4,388,374 4,388,374 1,113,561 1,113,561 1,113,561

Statutory rates of tax.............................................................. 25% 9% 34% 25% 9% 34%

Income tax and social contribution expense at statutory rates.... (1,097,094) (394,954) (1,492,048) (278,390) (100,220) (378,610)

Tax effects on:

- tax rate difference for foreign companies............................... (96,019) 91,649 (4,370) 38,906 (14,169) 24,737

- equity in earnings (losses).................................................... (85,779) (30,880) (116,659) (74,839) (26,942) (101,781)

- interest on own capital......................................................... 90,100 32,436 122,536 87,887 31,639 119,526

- foreign exchange effect........................................................ 29,731 2,676 32,407 72,863 26,231 99,094

- recovery of deferred tax assets.............................................. 270,770 48,109 318,879 305,724 117,027 422,751

- permanent differences (net).................................................. ___________ (40,554) ___________ 26,322 ___________ (14,232) ___________ (32,015) ___________ (12,778) ___________ (44,793)

Income tax and social contribution expense.............................

___________ (928,845)

___________ (224,642)

___________ (1,153,487)

___________ 120,136

___________ 20,788

___________

140,924

Current................................................................................. (785,225) (165,976) (951,201) (235,130) (73,551) (308,681)

Deferred................................................................................ (143,620) (58,666) (202,286) 355,266 94,339 449,605

IR - Corporate income tax.

CS - Social contribution on net income.

b) Analysis of the deferred income tax and social contribution assets and liabilities, at the statutory rates of tax:

Assets

_________________________________________________________________________________________________________________________

Company

Consolidated

___________________________________________________________ ____________________________________________________________

2004 2003 2004 2003

____________________________ _____________________________ _____________________________ _____________________________

IR CS Total IR CS Total IR CS Total IR CS Total

Income tax losses.................... 8,655 - 8,655 119 - 119 420,986 - 420,986 457,597 - 457,597

Social contribution losses........ - 3,758 3,758 - 517 517 - 60,651 60,651 - 89,175 89,175

Provision for contingencies...... 12,918 4,651 17,569 12,916 4,650 17,566 48,673 17,403 66,076 40,732 14,536 55,268

Benefits to employees............. - - - - - - 101,474 - 101,474 95,839 - 95,839

Commissions/other.................. - - - - - - 156,148 2,272 158,420 80,071 1,453 81,524

Amortized goodwill................. 1,220 439 1,659 610 220 830 2,314 833 3,147 610 220 830

Provision for losses................. ________ 9,664 ________ 991 ________ 10,655 ________ 9,663 ________ 991 ________ 10,654 ________ 87,595 ________ 29,046 ________ 116,641 ________ 94,462 ________ 31,519 ________ 125,981

________ 32,457 ________ 9,839 ________ 42,296 ________ 23,308 ________ 6,378 ________ 29,686 ________ 817,190 ________ 110,205 ________ 927,395 ________ 769,311 ________ 136,903 ________

906,214

Current.................................. - - - - - - 270,959 58,505 329,464 90,818 26,050 116,868

Long-term.............................. 32,457 9,839 42,296 23,308 6,378 29,686 546,231 51,700 597,931 678,493 110,853 789,346

Liabilities

_________________________________________________________________________________________________________________________

Company

Consolidated

___________________________________________________________ ____________________________________________________________

2004 2003 2004 2003

____________________________ _____________________________ _____________________________ _____________________________

IR CS Total IR CS Total IR CS Total IR CS Total

Accelerated depreciation......... - - - - - - 576,176 823 576,999 426,751 854 427,605

Amortized negative goodwill.... 40,198 14,471 54,669 42,301 15,229 57,530 50,341 14,628 64,969 55,821 16,601 72,422

Inflationary/exchange effect..... ________- ________- ________- ________- ________- ________- ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790

________ 40,198 ________ 14,471 ________ 54,669 ________ 42,301 ________ 15,229 ________ 57,530 ________ 742,451 ________ 49,422 ________ 791,873 ________ 502,362 ________ 17,455 ________

519,817

Current.................................. - - - - - - 146,195 33,971 180,166 35,721 - 35,721

Long-term.............................. 40,198 14,471 54,669 42,301 15,229 57,530 596,256 15,451 611,707 466,641 17,455 484,096


120 121

GERDAU S.A.

The tax benefits recognized on income tax and social contribution losses, as well as on the provision for losses, both in the Company

and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical feasibility studies,

approved by management. These studies, which consider the history of the Company’s and its subsidiaries’ profitability and the maintenance

of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 318,879 (R$ 422,751 - 2003) in

subsidiaries, whose estimated recovery is shown in item “c” below. Other credits, based on temporary differences, mainly tax contingencies,

were maintained according to their estimate of realization.

c) Estimated recovery of deferred income tax and social contribution assets:

Company

Consolidated

2004 2003 2004 2003

Up to 2004........................................................................................................ - - - 116,868

2005 ............................................................................................................... - 1,843 329,464 129,587

2006 ................................................................................................................ - 3,201 65,829 124,612

2007 ................................................................................................................ 1,839 6,723 65,120 126,239

2008 ................................................................................................................ 2,298 9,371 71,933 137,865

2009 ................................................................................................................ 18,948 2,495 121,649 91,669

2010 to 2012.................................................................................................... 14,794 6,053 173,548 145,083

2013 to 2014.................................................................................................... 4,417 - 99,852 34,291

___________ ___________ ___________ ___________

42,296 29,686 927,395 906,214

___________ ___________ ___________ ___________

___________ ___________ ___________ ___________

10 - Compulsory Deposits and Other

Company

Consolidated

2004 2003 2004 2003

Compulsory deposits.......................................................................................... 15,550 15,558 28,052 16,566

Receivables under contract................................................................................. - - 47,496 40,328

ICMS credits on purchases of fixed assets............................................................ - - 74,978 55,612

Income tax incentives......................................................................................... 9,945 9,945 10,122 10,155

Prepaid expenses............................................................................................... - - - 3,036

Assets not for use.............................................................................................. - - 45,779 52,614

Prepaid financial expenses.................................................................................. - - 36,143 46,409

___________ ___________ ___________ ___________

25,495 25,503 242,570 224,720

___________ ___________ ___________ ___________

___________ ___________ ___________ ___________


11 - Investments

Company

________________________________________________________________________________________________________________________________________________________________________________________________________________________________

2004 2003

_________________________________________________________________________________________________________________________________________________________________________________________________________________ ___________

Subsidiaries Other Total Total

______________________________________________________________________________________________________________________________________________________________________________________ _________ ___________ ___________

Gerdau Itaguaí

Gerdau Internacional Com. Imp. Dona Seiva S.A. -

Participa- Gerdau Empreend. e Export Francisca Florestas e GTL

ções S.A. 1 Açominas S.A. Ltda. 2 Ltda. Energética S.A. Indústrias Brasil Ltda. 3 Other

_______________ ______________________________ _______________ _________ ______ ____________________________ _______________ ______________________________ _______________

Negative Provision

Investment Investment Goodwill Investment Investment for loss Goodwill Investment Investment Goodwill Investment

_______________ _______________ ____________ _______________ _________ ______ ____________ _____________ _______________ _______________ ____________ _______________

Opening balance.......... 639 2,512,502 (270,949) 1,820,606 98,777 (9,765) 21,951 74,478 - - 30 43 4,248,312 4,410,913

Merger/

capitalization....... 4,879,338 (4,146,662) 242,072 (684,769) 97,132 - - (80,316) (64,714) (280,882) - - (38,801) (805,785)

Acquisition............... 116 - - 528,787 - - - - 26,261 - - - 555,164 513,100

Goodwill on

aquisition of

investment........... - - - - - - - - - 280,882 - - 280,882 -

Sale......................... - - - (15,426) - - - (17,882) - - - - (33,308) (99,199)

Equity in earnings

(losses) 4 ............ 154,920 2,203,954 28,877 358,467 22,783 1,293 (2,439) 23,720 44,913 - (2) - 2,836,486 503,064

Dividends/

interest on

own capital....... _______________ (147,287) _______________ (569,794) ____________ - _______________ - _________ (24,728) ______ ____________ - _____________ - _______________ - _______________ (6,460) ____________ - _______________ (2) _________ - ___________ (748,271) ___________ (273,781)

Closing balance............ _______________

4,887,726 _______________

- ____________

- _______________

2,007,665 _________

193,964 ______ ____________

(8,472) _____________

19,512 _______________

- _______________

- ____________

- _______________

26 _________

43 ___________

7,100,464 ___________

4,248,312

Capital ....................... 15,227,079 - - 2,663,343 145,110 - 66,600 - - -

Adjusted shareholder’s

equity...................... 4,887,726 - - 2,785,282 193,964 - (16,350) - - -

Net income

for the year.............. 154,974 2,483,483 - 404,571 21,719 - 2,495 48,517 55,522 55,522

Holding in capital (%).. 100.00% - - 72.08% 100.00% - 51.82% - - -

Common shares/

quotas held.............. 9,249,199,209 - - 1,919,769,142 145,109,651 - 345,109,212 - - -

1 On December 29, 2004, the Company increased the capital in Gerdau Participações S.A. (previously Siderúrgica Riograndense S.A.) paid through the merger of its total shareholding in the subsidiary Gerdau Açominas S.A. (91.5%) and the

equivalent of a 22.8% holding in the subsidiary Gerdau Internacional Empreendimentos Ltda., relating to the indirect holding of this company in Gerdau Chile Inversiones Ltda., Gerdau Laisa S.A. and Sipar Aceros S.A. These investments were

valued at the economic values of their net assets by an expert company based on projections of cash flows, discounted to present values, in the total amount of R$ 15,226,656. The difference between the book value of these investments

and the amount appraised represents an unrealized capital gain of R$ 10,347,318, recorded as a reduction of the corresponding capitalization. The realization of the capital gain will be made in accordance with the realization of the goodwill

recorded by the subsidiary Gerdau Participações S.A.

2 Company holder of the investments in foreign subsidiaries.

3 Company merged on June 30, 2004.

4 Includes amortization of goodwill/negative goodwill.


122 123

GERDAU S.A.

Consolidated

________________________________________________________________________

2004 2003

_____________________________________________________ ______________

Investment Goodwill Total Total

Gerdau Ameristeel US Inc. ........................................................................ - - - 281,870

Gerdau Ameristeel Corporation.................................................................. - - - 80,470

Margusa - Maranhão Gusa S.A................................................................... - 24,728 24,728 43,564

Dona Francisca Energética S.A.................................................................... - 19,512 19,512 21,951

Armacero Industrial y Comercial Ltda.......................................................... 9,871 457 10,328 10,321

Distribuidora Matco S.A. 1 ......................................................................... 12,400 6,066 18,466 -

Salomon Sack S.A. 1 .................................................................................. 17,873 2,091 19,964 -

Corporate joint ventures............................................................................ 10,036 - 10,036 9,984

Other investments..................................................................................... 8,983 - 8,983 13,252

____________________ ____________ ___________ ______________

59,163 52,854 112,017 461,412

____________________ ____________ ___________ ______________

____________________ ____________ ___________ ______________

1

Companies purchased by the indirect subsidiary Industria del Aceros S.A. - Indac.

12 - Fixed Assets

Consolidated

___________________________________________________________________________________________________________

2004 2003

_________________________________________________________ ______________

Annual

Accumulated

depreciation

depreciation

rate - % Cost and depletion Net Net

Land, buildings and structures.................................................... 0 to 10 3,310,732 (1,079,881) 2,230,851 2,301,431

Machinery, equipment and installations...................................... 5 to 10 7,965,817 (3,639,334) 4,326,483 4,085,090

Furniture and fixtures................................................................ 5 to 10 110,424 (69,644) 40,780 37,979

Vehicles................................................................................... 20 to 33 41,678 (31,112) 10,566 12,369

Eletronics data equipment/rights/licenses.................................... 20 to 33 284,837 (188,113) 96,724 93,764

Construction in progress............................................................ - 1,065,583 - 1,065,583 718,810

Forestation/reforestation........................................................... Felling plan 207,431 (51,055) 156,376 129,282

____________ _________________ ____________ ______________

12,986,502 (5,059,139) 7,927,363 7,378,725

____________ _________________ ____________ ______________

____________ _________________ ____________ ______________

a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks

involved. The plants of the North American subsidiaries and the Ouro Branco plant of the subsidiary Gerdau Açominas S.A. have coverage for

loss of profits.

b) Capitalization of interest and financial charges - R$ 2,021 was capitalized during the year - consolidated (R$ 1,174 - Company and R$ (14,711)

consolidated in 2003).

c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 688,034 - consolidated (R$ 539,724

consolidated in 2003).

d) Summary of changes in fixed assets:

Consolidated

2004 2003

Balance at the beginning of the year ................................................................................................................................. 7,378,725 7,597,318

( + ) Purchases/sales for the year...................................................................................................................................... 1,167,372 812,583

( - ) Depreciation and depletion in cost of sales.................................................................................................................. (692,610) (538,286)

( - ) Depreciation and depletion in administrative expenses.................................................................................................. (69,440) (61,648)

( + ) Companies consolidated in the year........................................................................................................................... - 288,898

( - ) Revaluation reversal.................................................................................................................................................. - (365,347)

( + ) Purchase of North Star and others.............................................................................................................................. 267,948 -

( - ) Foreign exchange effect on foreign fixed assets............................................................................................................ __________ (124,632) __________ (354,793)

Balance at the end of the year..........................................................................................................................................

__________

7,927,363

__________

7,378,725


13 - Deferred Charges

Consolidated deferred charges comprise pre-operating expenses in the construction of a power plant, as well as reforestation, research,

development and restructuring projects.

14 - Financing

Financing are represented as follows:

Annual _______________________________

Consolidated

charges 2004 2003

CURRENT

Working capital financing (R$) ........................................................................................................... 8.00% to 14.00% 1,174 48,465

Fixed asset financing (R$)................................................................................................................... 12.00% - 3,054

Investment financing (R$) .................................................................................................................. CDI 4,500 4,500

Investment financing (US$) ................................................................................................................ US$ 133,955 45,649

Working capital financing (US$).......................................................................................................... 1.36% to 10.50% 1,085,418 1,341,746

Fixed asset financing and others (US$) ............................................................................................... US$ - 8,692

Working capital financing (Clp$)......................................................................................................... 0.23% to 0.32% 31,905 30,025

Working capital financing (PA$).......................................................................................................... 4.25% to 10.00% 19,956 -

Current portion of long-term financing................................................................................................ ______________ 691,489 ______________ 932,245

1,968,397 2,414,376

LONG-TERM

Working capital financing (R$)............................................................................................................ 10.02% 28,215 3,812

Fixed asset financing and others (R$).................................................................................................. 4.00% to 9.90% 657,720 627,727

Investment financing (R$)................................................................................................................... IGPM + 8.5% 29,045 35,019

Fixed asset financing and others (US$)................................................................................................ 1.74% to 9.97% 762,338 761,288

Working capital financing (US$).......................................................................................................... 2.95% to 10.75% 2,473,200 2,643,325

Investment financing (US$)................................................................................................................. 4.04% 182,943 -

Working capital financing (Cdn$)........................................................................................................ 2.00% to 3.25% - 164,974

Fixed asset financing (Cdn$)............................................................................................................... 2.00% to 3.25% 3,485 3,837

Working capital financing (Clp$)......................................................................................................... 0.29% to 0.43% 16,254 29,952

Fixed asset financing (Clp$)................................................................................................................ 0.26% to 0.43% 27,000 58,396

Fixed asset financing (PA$)................................................................................................................. 4.25% to 10.00% 1,663 -

(-) Current portion............................................................................................................................. ______________ (691,489) ______________ (932,245)

______________ 3,490,374 ______________ 3,396,085

Total financing................................................................................................................................... ______________

5,458,771 ______________

5,810,461

CDI - Certificate of Interbank Deposit interest rate.

IGPM - General Market Price Index.

Summarized by currency:

Consolidated

__________________________________

2004 2003

Brazilian real (R$)............................................................................................................................................................. 720,654 722,577

U.S. dollar (US$)............................................................................................................................................................... 4,637,854 4,800,700

Canadian Dollar (Cdn$)..................................................................................................................................................... 3,485 168,811

Argentine Peso (PA$)......................................................................................................................................................... 21,619 -

Chilean Peso (Clp$)........................................................................................................................................................... ____________ 75,159 ____________ 118,373

____________

5,458,771 ____________

5,810,461

The schedule for payment of the long-term portion of financing is as follows:

Consolidated

In 2006........................................................................................................................................................................................................ 527,860

In 2007........................................................................................................................................................................................................ 563,896

In 2008........................................................................................................................................................................................................ 565,035

In 2009........................................................................................................................................................................................................ 323,109

In 2010........................................................................................................................................................................................................ 210,048

After 2010.................................................................................................................................................................................................... ______________ 1,300,426

______________

3,490,374


124 125

GERDAU S.A.

a) Events during the year

On June 3, 2004, the Company concluded the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December

31, 2004) of a US$ 400 million Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, 2004). This joint program with

Gerdau Açominas S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization as

from July 2006.

b) Guarantees

The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans

are guaranteed by sureties from the controlling shareholders, on which the subsidiary pays a fee of 1% p.a. on the amount guaranteed.

c) Covenants

In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows:

I) Consolidated interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes,

Depreciation and Amortization);

II) Consolidated leverage ratio - measures the debt coverage capacity in relation to EBITDA;

III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and

IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations.

All the covenants mentioned above are calculated on a consolidated basis, except for item IV which refers to the parent company Metalúrgica

Gerdau S.A., and have been observed. The penalty for non-compliance is the prepayment of the contracts.

d) Credit lines

The North American subsidiaries have a credit line in the amount of US$ 350 million, equivalent to R$ 929,040 at the balance sheet date,

falling due in June 2008, which can be drawn in U.S. dollars (at the LIBOR rate plus interest between 2.25% and 2.75% p.a. or US Prime/FED

Funds plus interest of 0.5% p.a.) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus interest between 2.35% and 2.85% p.a. or

Canadian Prime plus interest of 1.00% p.a.). The distribution of this credit line among the companies is made in proportion to the working

capital of each North American subsidiary.

The subsidiary Gerdau Aza S.A. has a credit line for working capital amounting to Clp$ 28 billion, equivalent to R$ 133,582 at the balance sheet

date, bearing interest of 3.90% p.a., and a credit line for fixed assets in the amount of Clp$ 6 billion, equivalent to R$ 28,625 at the balance

sheet date, bearing interest of 4.50% p.a.

15- Debentures

General Number Annual

_________________________________

Issue meeting Issued In portfolio Maturity rate 2004 2003

3 rd - A and B.................................. 05.27.1982 144,000 52,946 06.01.2011 CDI 156,387 73,508

7 th ................................................. 07.14.1982 68,400 6,500 07.01.2012 CDI 121,068 21,628

8 th ................................................. 11.11.1982 179,964 65,811 05.02.2013 CDI 145,878 83,566

9 th ................................................. 06.10.1983 125,640 38,234 09.01.2014 CDI 170,954 29,927

11 th - A and B................................ 06.29.1990 150,000 97,044 06.01.2020 CDI 98,189 19,249

13 th ............................................... 11.23.2001 30,000 30,000 11.01.2008 CDI less 2% __________- __________-

Company 692,476 227,878

Gerdau Ameristeel Corp.................. 04.23.1997 125,000 - 04.30.2007 6.50% 232,618 226,021

Debentures held by

consolidated subsidiaries............. __________ (7,022) __________ (1,833)

Consolidated.............................. __________

918,072 __________

452,066

Current portion.............................. 2,986 3,027

Long-term portion.......................... 915,086 449,039

The Extraordinary General Meeting of shareholders held on April 29, 2004 approved the cancellation of the 4 th issue (42,000 debentures) and

10 th issue debentures (6,450 debentures), which were held in treasury.

The same EGM approved the split of the following debenture issues: 3 rd (classes A and B), 7 th , 8 th , 9 th and 11 th issues (classes A and B). On July

1, 2004, three new debentures were issued for each existing debenture, thus changing their nominal value.

The Extraordinary General Meeting of the subsidiary Seiva S.A. - Florestas e Indústrias held on April 30, 2004 approved the cancellation of the

1 st issue debentures, series A and B (12,000 debentures), which were held in treasury.

The Board of Directors’ Meeting held on October 14, 2004 approved the fixed remuneration of the 13 th issue debentures at the CDI interest

rate less 2% p.a., during the period from November 1, 2004 to October 31, 2005.

The debentures of Gerdau Ameristeel Corporation are convertible into common shares of that subsidiary, up to their maturity date.

The controlling shareholders hold, directly or indirectly, R$ 523,546 at December 31, 2004 (2003 - R$ 88,284) of the outstanding debentures.


16 - Financial Instruments

a) General comments - Gerdau S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of which are managed

through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly relate to the

instruments listed below:

- financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5;

- investments - are explained and presented in Note 11;

- related parties - are explained and presented in Note 21;

- financing - are explained and presented in Note 14;

- debentures - are explained and presented in Note 15; and

- financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on their liabilities, the subsidiaries Gerdau

Açominas S.A. and Dona Francisca Energética S.A. entered into swap contracts that were converted into Brazilian reais on the contract date

and linked to changes in the CDI rate and the General Market Price Index (IGP-M), plus additional interest. The subsidiary Gerdau Ameristeel

Corporation also entered into swap contracts, linked to the London Interbank Offered Rate (LIBOR) plus interest of between 6.05% and 6.45% p.a.

The swap contracts are listed below:

Consolidated

Contract date Purpose Amount (US$ thousand) Rate Maturity

07/16/2001 to 05/07/2002 Prepayment 32,823 85.55% to 100.00% of the CDI 01/13/2005 to 03/01/2006

02/20/2002 Resolution 2770 54,000 106.00% of the CDI 06/20/2005

02/19/2003 Resolution 4131 3,300 85.70% of the CDI 02/04/2005

04/17/2003 Fixed assets 6,316 IGPM + 12.95% 05/16/2005 to 11/16/2010

04/17/2003 Fixed assets 13,095 97.00% to 100.90% of the CDI 05/16/2005 to 11/16/2013

10/30 to 11/03/2003 Bank notes 200,000 LIBOR + interest between 6.09% to 6.13% 07/15/2011

06/26/2003 Investment 55,000 4.86% to 5.40% 09/02/2005 to 10/02/2006

b) Market value - the market values of the financial instruments are as follows:

Company

_____________________________________________________________________

2004

__________________________________

2003

_________________________________

Book Market Book Market

Value Value Value Value

Financial investments........................................................................................ 14,362 14,362 177,674 177,674

Debentures....................................................................................................... 692,476 692,476 227,878 227,878

Investments...................................................................................................... 7,100,464 7,100,464 4,248,312 4,248,312

Related parties (liabilities)................................................................................. 164,549 164,549 20,961 20,961

Stock options (liabilities) - note 25..................................................................... - 8,096 - 5,088

Treasury shares - note 23................................................................................... 44,139 74,727 17,103 21,045

Consolidated

_____________________________________________________________________

2004

__________________________________

2003

_________________________________

Book Market Book Market

Value Value Value Value

Financial investments ....................................................................................... 1,708,247 1,708,247 895,391 895,391

Swap contracts - investments (liabilities) ............................................................ 4,500 4,500 12,303 12,303

Eurobonds ....................................................................................................... - - 83,235 72,581

Securitization financing..................................................................................... 627,908 627,908 303,282 303,282

Import financing............................................................................................... 619,883 619,883 377,534 383,941

Prepayment financing........................................................................................ 808,983 804,724 807,385 818,786

Financing - Resolution 2770.............................................................................. 263,060 256,585 365,573 390,235

ACC (Advances on Export Contracts) financing.................................................... 43,891 43,891 500,118 524,935

Financing - Resolution 4131.............................................................................. 20,893 20,755 24,243 24,468

Bank notes financing......................................................................................... 1,050,835 1,260,376 1,144,601 1,292,733

Fixed asset financing ........................................................................................ 45,837 45,686 93,172 96,069

Other financing ................................................................................................ 1,977,481 1,977,481 2,111,318 2,130,564

Debentures....................................................................................................... 918,072 918,072 452,066 452,066

Investments...................................................................................................... 112,017 112,017 461,412 461,412

Related parties (assets)..................................................................................... 1,448 1,448 26,979 26,979

Stock options (liabilities) - note 25..................................................................... - 13,663 - 8,298


126 127

GERDAU S.A.

The market values of the swap contracts of subsidiaries in Brazil were obtained based on future income projections for each contract,

calculated based on the present value of the forward U.S. dollar + coupon rates (assets) and CDI/IGPM future rates (liabilities) and adjusted

to present value on the balance sheet date, using the projected future CDI/IGPM rate for each maturity. The same methodology is applied for

the calculation of the market values of the swap contracts of the subsidiary Gerdau Ameristeel Corporation, using the LIBOR rate.

Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the “Financial expenses/

income, net” account, and are stated at cost plus accrued charges up to the balance sheet date. Contracts not linked to such financing have

been recorded at their market value under the heading “Other accounts payable”, in long-term liabilities.

The Company believes that the balances of the other financial instruments, which are recognized in the books at net contracted values,

are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these

instruments are not active, differences could exist if they were settled in advance.

c) Risk factors that could affect the Company’s and its subsidiaries’ business

Price risk: this risk is related to the possibility of price variations of the products that the subsidiaries sell or in the raw material prices and

other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may

be affected by the changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly

monitor the price variations in the local and international markets.

Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to assets

(investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company and its subsidiaries

have adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically

renegotiate contracts to adjust them to market.

Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income)

and the liability (or asset) balance of contracts denominated in a foreign currency. In addition to the foreign investments which are a natural

hedge, the Company and its subsidiaries use “hedge” instruments, usually swaps contracts, as described in item “a” above, to manage the

effects of these fluctuations.

Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or investments at financial

institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial and equity position of

their customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company and

its subsidiaries invest solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum

limit for investment, determined by the Credit Committee.

17 - Financial Expenses/Income, Net

Company

Consolidated

2004 2003 2004 2003

Financial income

Financial investments......................................................................................... 18,674 25,392 141,394 139,860

Interest received................................................................................................ 301 26,072 29,928 30,318

Monetary variations - assets............................................................................... 62 1,486 3,325 4,438

Foreign exchange variations - assets.................................................................... 1 (18) (34,671) (79,356)

Foreign exchange swaps - assets ........................................................................ - (62,884) 3,915 (62,884)

Other financial income....................................................................................... 23,288 13,162 65,955 19,653

____________ ____________ ____________ ____________

Total financial income.................................................................................... 42,326 3,210 209,846 52,029

____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Financial expenses

Interest on debt................................................................................................. (53,662) (291,462) (411,365) (587,143)

Monetary variations - liabilities........................................................................... (743) (23,741) (17,836) (24,018)

Foreign exchange variations - liabilities................................................................ 10,336 393,600 197,607 716,672

Foreign exchange swaps - liabilities..................................................................... - (452,210) (44,127) (741,389)

Other financial expenses..................................................................................... (5,260) (22,999) (110,231) (62,721)

____________ ____________ ____________ ____________

Total financial expenses................................................................................. (49,329) (396,812) (385,952) (698,599)

____________ ____________ ____________ ____________

____________ ____________ ____________ ____________


18 - Taxes and Social Contributions Payable

Company

Consolidated

2004 2003 2004 2003

Income tax and social contribution on net income................................................ - 9,776 200,862 37,222

Social charges on payroll.................................................................................... 253 196 48,822 48,131

Value-added tax on sales and services (ICMS)...................................................... - - 32,131 12,865

Social contribution on revenues (COFINS)............................................................ 19 110 32,609 14,057

Excise tax (IPI)................................................................................................... - - 14,114 2,966

Social Integration Program (PIS).......................................................................... 1 - 6,683 3,607

Income tax and social contribution withheld at source.......................................... 76 18,058 7,349 23,016

Taxes payable in installments.............................................................................. 6,459 12,883 11,819 15,427

Other ................................................................................................................ - 1,432 31,849 14,485

____________ ____________ ____________ ____________

6,808 42,455 386,238 171,776

____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

19 - Tax Recovery Program (Refis) and Special Installment Payment Program (PAES)

a) REFIS

On December 6, 2000, the Company enrolled in the REFIS program to pay the Social Integration Program (PIS) and the Social Contribution

on Revenues (COFINS) contributions in installments. The balances of these tax liabilities are recorded in Taxes and contributions payable,

in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were originally

divided into 60 installments of which 5 installments are not yet due, are restated by the Long-Term Interest Rate (TJLP) rate, and are as follows

at the year end:

Company and Consolidated

_____________________________________________________________________________________________________

2004 2003

________________________________________ _________________________________________

Principal Interest Total Principal Interest Total

PIS....................................................................... 2,608 2,551 5,159 9,895 6,494 16,389

COFINS................................................................ ______________ 620 ____________ 605 ____________ 1,225 ______________ 2,351 ____________ 1,540 ____________ 3,891

Total....................................................................

______________ 3,228

____________ 3,156

____________ 6,384

______________ 12,246

____________ 8,034

____________

20,280

Current................................................................ 3,228 3,156 6,384 8,644 5,671 14,315

Long-term............................................................ - - - 3,602 2,363 5,965

Taxes, contributions and other liabilities are paid by the Company on their due dates, which is a basic requirement to remain eligible for the

REFIS program.

As guarantee for this installment payment program, the Company pledged the land and buildings of the Piratini plant, located in the

municipality of Charqueadas, in the state of Rio Grande do Sul, amounting to R$ 78,494.

The total income tax and social contribution credits from third parties offset against fines and interest on the consolidation of the REFIS

debts on December 6, 2000 totaled R$ 57,040 and were purchased for R$ 4,351. The Company’s own tax credits were not used.

The constitutionality of the use of credits of R$ 40,118 of the total purchased is being challenged in court. This is because the Federal Revenue

authorities understand that tax credits must first be used to offset the assignor’s own debts, only transferring the excess to the assignee.

This understanding, based solely on a REFIS Management Committee Resolution, edited subsequently to the Company’s enrollment in the

program, does not comply with the legal order. In fact, the law which established the Program authorized, with no conditions, the purchase

of third party tax credits for offset against own liabilities.

b) PAES

The proportionally consolidated (52%) subsidiary Dona Francisca Energética S.A. enrolled in the PAES, established by Law 10684/03, at the

Federal Revenue Secretariat, to settle Corporate Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program (PIS)

and Social Contribution on Revenues (COFINS) liabilities. The balances of these tax liabilities are recorded in Taxes and contributions payable,

in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were divided into

180 installments of which 161 are not yet due, are restated by the TJLP and are as follows at the year end:


128 129

GERDAU S.A.

Consolidated

_______________________________________________________________________________________

2004 2003

_________________________________________ ________________________________________

Principal Interest Total Principal Interest Total

IRPJ..................................................................... 20,303 3,160 23,463 21,816 1,255 23,071

CSLL.................................................................... 7,360 1,145 8,505 7,908 455 8,363

PIS....................................................................... 720 112 832 774 45 819

COFINS................................................................ 3,326 518 3,844 3,574 206 3,780

______________ ____________ ____________ ______________ ____________ ____________

Total.................................................................... 31,709 4,935 36,644 34,072 1,961 36,033

______________ ____________ ____________ ______________ ____________ ____________

______________ ____________ ____________ ______________ ____________ ____________

Current................................................................ 2,364 368 2,732 2,363 136 2,499

Long-term............................................................ 29,345 4,567 33,912 31,709 1,825 33,534

Dona Francisca Energética S.A. pays its taxes, contributions and other liabilities on their due dates, which is a basic requirement to remain

eligible for the PAES program.

20 - Provision for Contingencies

The Company and its subsidiaries are parties in labor, civil, and tax processes. Based on the opinion of its legal advisors, management believes

that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and the

final decisions will not have significant effects on the financial position of the Company at December 31, 2004.

The balances of the contingencies are as follows:

I) Contingent liabilities provided

Company

Consolidated

____________________________________ ____________________________________

2004 2003 2004 2003

a) Tax contingencies

Eletrobrás................................................................................ (a.1) 50,456 50,456 50,456 50,456

Finsocial.................................................................................. (a.2) 6,891 6,891 6,898 6,948

ICMS....................................................................................... (a.3) 1,099 1,099 17,300 14,346

Social contribution on net income............................................. (a.4) 7,216 8,978 7,333 40,756

Corporate income tax............................................................... (a.5) 19,993 20,247 19,993 101,134

INSS........................................................................................ (a.6) 12,963 12,954 24,900 17,372

PIS.......................................................................................... (a.7) 1,831 1,831 1,903 2,357

Cofins..................................................................................... (a.7) 6,387 6,387 6,935 6,935

Emergency Capacity Charge...................................................... (a.8) 9,368 9,306 25,563 10,074

Extraordinary Tariff Recomposition............................................. (a.8) 5,283 5,283 13,037 5,847

FGTS and other tax contingencies.............................................. (a.9) 305 299 1,503 2,330

( - ) Judicial deposits................................................................ (a.10) ______________ (34,818) ______________ (36,703) ______________ (73,938) ______________ (155,138)

86,974 87,028 101,883 103,417

b) Labor contingencies............................................................. (b.1) 16,257 16,257 49,573 29,609

( - ) Judicial deposits................................................................ (b.2) ______________ (8,349) ______________ (8,285) ______________ (10,313) ______________ (10,244)

7,908 7,972 39,260 19,365

c) Civil contingencies................................................................ (c.1) - - 100,364 99,493

( - ) Judicial deposits................................................................ (c.2) ______________- ______________- ______________ (1,207) ______________ (1,063)

______________- ______________- ______________ 99,157 ______________ 98,430

Total liabilities provided ..........................................................

______________ 94,882

______________ 95,000

______________ 240,300

______________

221,212

INSS (National Institute of Social Security).

FGTS (Government Severance Indemnity Fund for Employees).

a) Tax contingencies

a.1) Of the total provision, R$ 50,456 (Company and consolidated) refers to the contingency of compulsory loans to Eletrobrás, the

constitutionality of which is being questioned by the Company. In March 1995, the Federal Supreme Court judged the proceedings against the

taxpayers. Certain of the Company’s proceedings are pending decision, but the outcomes are already foreseeable, in view of the prior decisions.

The Company established a provision related to “compulsory loans”, taking into consideration that, although the payment to Eletrobrás was

made as a loan: (i) the reimbursement to the Company would probably be in the form of shares of Eletrobrás; (ii) the conversion will be made

based on the net asset book value of the shares; and (iii) based on the current available information, the shares of Eletrobrás are valued at

substantially less than the net asset book value.


a.2) R$ 6,891 (Company) and R$ 6,898 (consolidated) relating to the unconstitutionality of the Social Investment Fund (FINSOCIAL). Although

the Supreme Court has confirmed the constitutionality of the tax at the rate of 0.5%, some of the Company’s claims are still pending

judgment, most of them in the Superior Courts.

a.3) R$ 1,099 (Company) and R$ 17,300 (consolidated) relating to amounts for Value-Added Tax on Sales and Services (ICMS), the majority of

which relates to credit rights involving the Finance Secretariat and the State Courts of the First Instance in the state of Minas Gerais.

a.4) R$ 7,216 (Company) and R$ 7,333 (consolidated) relating to social contribution on net income. The amounts refer to challenges of the

constitutionality of the contribution in 1989, 1990 and 1992. Some proceedings are pending decision, most of them in the Superior Courts.

a.5) R$ 19,993 (Company and consolidated), relating to Corporate Income Tax, challenged at the administrative sphere. Considering the many

legal decisions unfavorable to the unconstitutionality of the limitation of the offset of income tax and social contribution losses to 30% of

net income, the subsidiary Gerdau Açominas S.A. decided to no longer deposit in court the amounts related to the matter and requested at

September 30, 2004, in the court injunction records in which it is the petitioner, the conversion of the amounts deposited in court (R$ 338,992) into

tax payments, and started observing the legal limitation.

The legal challenge has been maintained; however, in the event the STF reviews its current guidance and the subsidiary is successful, it will

plead the offset of the amounts overpaid.

a.6) R$ 12,963 (Company) and R$ 24,900 (consolidated) on contributions due to the INSS which correspond to suits for annulment by the

Company with judicial deposits of practically the whole amount involved, in progress in the Federal Court of the First Instance in the state

of Rio de Janeiro.

In the consolidated statements, the remaining amount refers to lawsuits questioning the position of the INSS in terms of charging INSS

contributions on profit sharing payments made by the subsidiary Gerdau Açominas S.A., as well as on payments for services rendered by third

parties, in which the Institute calculated charges for the last ten years and assessed the company because it understands that the company

is jointly liable. The assessments were maintained at the administrative level, and Gerdau Açominas S.A. filled annulment actions with the

judicial deposit of the corresponding amount, based on the understanding that the right to assess part of the charge had prescribed and

that there is no such liability.

a.7) R$ 1,831 (Company) and R$ 1,903 (consolidated), relating to contributions for the Social Integration Program (PIS), and R$ 6,387 (Company)

and R$ 6,935 (consolidated) to the Social Contribution on Revenues (COFINS), in connection with lawsuits questioning the constitutionality

of Law 9718, which changed the calculation basis of these contributions. These suits are in progress in the Federal Regional Court of the 2 nd

Region and the Federal Supreme Court.

a.8) R$ 9,368 (Company) and R$ 25,563 (consolidated) relating to the Emergency Capacity Charge (ECE), as well as R$ 5,283 (Company) and

R$ 13,037 (consolidated) relating to the Extraordinary Tariff Recomposition (RTE), included in the electric energy bills of the companies’ plants.

According to the Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal

Constitution. For this reason, the constitutionality of this charge is being challenged in court. The lawsuits are in progress in the Federal Justice

of the First Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the

Federal Regional Courts of the 1 st and 2 nd Regions. The companies have fully deposited in court the amount of the disputed charges.

a.9) R$ 305 (Company) and R$ 1,503 (consolidated) relating to a lawsuit brought by the subsidiary Gerdau Açominas S.A. regarding the Government

Severance Indemnity Fund for Employees (FGTS) increased charges, which arose from the changes introduced by Complementary Law 110/01.

Currently, the corresponding court injunction is awaiting the judgment of the extraordinary appeal filed by the company. The amount

provided is fully deposited in court.

a.10) The judicial deposits, representing restricted assets of the companies, relate to amounts deposited and maintained in court until the

resolution of the related legal matters. The balances of these credits, which at December 31, 2004 amounted to R$ 34,818 (Company) and

R$ 73,938 (consolidated), are classified as a reduction of the provision for tax contingencies recorded in the books.

b) Labor contingencies

b.1) The Company and its subsidiaries are also defending labor claims, for which there is a provision of R$ 16,257 and R$ 49,573 (consolidated)

at December 31, 2004. None of these claims refer to individually significant amounts, and the lawsuits mainly involve claims for overtime pay,

health hazards and risk premium, among others.

b.2) The balances of the deposits in court, which totaled R$ 8,349 at December 31, 2004 (Company) and R$ 10,313 (consolidated), are classified

as a reduction of the provision for labor contingencies.

c) Civil contingencies

c.1) The Company and its subsidiaries are also defending in court civil claims arising in the normal course of its own and the subsidiaries’

operations, including claims arising from work accidents, in a total amount at December 31, 2004 of R$ 100,364 (consolidated) as contingent

liability for these claims.

The provision refers mainly to the issue involving the jointly-owned (52%) subsidiary Dona Francisca Energética S.A. According to a resolution

of the Brazilian Electricity Regulatory Agency (ANEEL), the operations of the subsidiary are restricted to the South of Brazil submarket. Since


130 131

GERDAU S.A.

some of its transactions were carried out in the remaining submarkets, Dona Francisca Energética S.A. may have to acquire the energy it

sells from third parties. The subsidiary challenges in court the validity of the ANEEL resolution and has obtained a favorable preliminary

injunction.

c.2) At December 31, 2004, the balances of deposits in court totaled R$ 1,207 (consolidated) and are classified as a reduction of the provision

for contingencies.

II) Contingent liabilities not provided

a) Tax contingencies

a.1) The Company is defendant in assessments filed by the state of Minas Gerais demanding ICMS tax payments arising mainly from the sales

of products to commercial exporters. The restated amount of the lawsuits totals R$ 32,848. The Company has not recorded any provision for

contingency in relation to these claims since it considers this tax is not payable, because products for export are exempted from ICMS.

a.2) The Company and its subsidiary Gerdau Açominas S.A. are defendants in assessments filed by the state of Minas Gerais, which demand

ICMS tax payments on the export of semi-finished manufactured products. The total amount demanded is R$ 249,742. The companies have

not recorded any provision for contingency in relation to these claims since they consider this tax is not payable because the products cannot

be considered semi-finished manufactured products as defined by the federal complementary law and, therefore, are not subject to ICMS.

a.3) Also, R$ 68,431 are being demanded due to the understanding of the Federal Revenue Secretariat that the transactions carried out by

the subsidiary Gerdau Açominas S.A., under the drawback concession granted by DECEX, were not in conformity with the legislation. Gerdau

Açominas filed a preliminary administrative defense of the legality of the arrangement, which is pending judgment. Since the tax liability

has not been definitely established, and considering that the arrangement which originated the demand conforms with the assumptions

required for the drawback concession, and also that the concession was granted after analysis by the legal administrative authority, Gerdau

Açominas S.A. considers an unfavorable outcome to be remote and, for this reason, has not recorded any provision for the contingency.

b) Civil contingencies

b.1) Two civil construction syndicates in the state of São Paulo alleged that Gerdau S.A. and other long steel producers in Brazil divide

customers among them, violating the antitrust legislation. After investigations carried out by the National Secretariat of Economic Law (SDE)

and based on public hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier opinion by the

Secretariat for Economic Monitoring (SEAE). The process has now been forwarded to the Administrative Council for Economic Defense (CADE)

for final decision.

Gerdau S.A. denies having engaged in any type of anti-competitive behavior and believes, based on information available, including the

opinion of its legal advisors, that the administrative process until now includes many irregularities, some of which are impossible to resolve.

For example, the investigations carried out by SDE did not follow the due legal course and the representatives of the SDE influenced certain

witnesses who testified in the process. In addition, the SDE report was issued before Gerdau S.A. had the chance to reply to the closing

arguments, which indicates that there was a bias in the judgment made by the SDE. The same applies to the SEAE report, which does not

analyze the economic issues and is based exclusively on the witnesses’ testimony.

These irregularities, which also reflect non-compliance with the related constitutional provisions, will no doubt affect the administrative

decision by CADE, based on the conclusions presented by the antitrust authorities until now. Gerdau S.A. has pointed out and tried to combat

all these irregularities and will continue doing so in relation to the allegations and the irregularities in the administrative process, believing

in a favorable outcome to this process, if not in the administrative sphere, possibly in the judicial sphere.

Because of the above, no provision has been recorded for this case. According to Brazilian legislation, fines of up to 30% of gross revenues

in the prior fiscal years may be applied to the Company and, if personal responsibility of an executive is proven, such executive may be

penalized by 10% to 50% of the fine applied to the Company. There are no precedents for fines exceeding 4%. In a similar case involving flat

steel companies, the fine was 1%.

b.2) A civil lawsuit has been filed against Gerdau Açominas S.A. regarding the termination of a contract for the supply of slag and indemnities

for losses and damages. At December 31, 2004, the lawsuit amounts to approximately R$ 37,014.

Gerdau Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach

of contract.

The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion,

the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained

by the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation

of the contract. The process was in the High Court of Justice (STJ) and was returned to the TAMG for judgement of the appeal requesting

clarification of the decision.

Gerdau Açominas S.A. believes that any loss from the case is remote, since it understands that a change in the judgment is unlikely.

b.3) A civil lawsuit has been filed by Sul America Cia. Nacional de Seguros against Gerdau Açominas S.A. and Banco Westdeustsche Landesbank

Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court. The


insurance company pleads doubt in relation to whom payment should be made and alleges that the subsidiary is resisting in receiving and

settling it. The lawsuit was contested both by the Bank (which claims having no right over the amount deposited, which resolves the doubt

raised by Sul América) and by the subsidiary (which claims that there is no such doubt and that there is justification to refuse payment since

the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in the Bank’s representation,

and this matter is therefore already settled, which resulted withdrawal in December 2004 of the amount deposited. The process should enter

the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal advisors, the subsidiary expects loss to

be remote and that the sentence will declare the amount payable within the amount stated in the pleading.

Also, Gerdau Açominas S.A. filed, prior to this lawsuit, a lawsuit for the payment of the amount recognized by the insurance companies. The

lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit.

The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel mill, which resulted

in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the loss

of profits arising from the accident, were covered by an insurance policy. The report on the event, as well as the loss claim, was filed with

IRB - Brasil Resseguros S.A., and an advance payment of R$ 62,000 was received in 2002.

In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total

amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of

the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the

advance amount received plus the amount proposed by the insurance company as a complement to settle the indemnity. Subsequently, new

amounts were added to the discussion, as stated in the subsidiary’s plea, although not yet recorded.

Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of

operations or the Company’s consolidated financial position are remote.

III) Contingent gains not recorded

a) Tax contingencies

a.1) The Company believes that the realization of certain contingent gains is probable. Among them is a court-order debt security issued in

1999 in favor of the Company by the state of Rio de Janeiro in the amount of R$ 26,580, arising from an ordinary lawsuit against the noncompliance

with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI).

Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00, which granted the government

a ten-year moratorium for payment of securities issued to cover court-order debts not related to food, the realization of this credit is not

expected in 2004 and, also, there is no expectation of realization in 2005 and following years. For this reason, this gain is not recognized in

the financial statements.

a.2) Gerdau S.A. and its subsidiaries have filed several ordinary proceedings relating to the correct basis of calculation of PIS under

Complementary Law 07/70, due to the declarations of unconstitutionality of Decree Laws 2445/88 and 2449/88. The companies expect to

recover the taxes incorrectly paid. The amounts under discussion total R$ 84,245.

a.3) Also, the Company and its subsidiaries Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits.

Gerdau S.A. and the subsidiary Margusa Maranhão Gusa S.A. have filed administrative appeals for recovery, which are pending judgment.

With regards to the subsidiary Gerdau Açominas S.A., the proceedings were directed to the courts, with an unfavorable judgment. Currently,

the process awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 394,002 but no accounting

recognition has been made thereof because of uncertainty as to their realization.

21 - Related Companies

a) Analysis of loan balances

Company

Consolidated

___________________________________ ___________________________________

2004 2003 2004 2003

Fundação Gerdau.............................................................................................. - (32) 1,304 16,762

Sipar Aceros S.A. and other................................................................................ - 1,677 (122) 13,607

Metalúrgica Gerdau S.A. ................................................................................... (115) - 266 (3,390)

Gerdau Açominas S.A. ...................................................................................... (51,245) (22,606) - -

GTL Financial Corp. .......................................................................................... ____________ (113,189) ____________- ____________- ____________-

Total....................................................................................................... ____________ (164,549) ____________ (20,961) ____________ 1,448 ____________ 26,979

Financial income (expenses)............................................................................... 5,890 62,497 20,448 70,071


132 133

GERDAU S.A.

b) Commercial transactions

Company - 2004 Company - 2003

________________________________ ______________________________________________________________

Income Accounts Income Accounts

(expenses) receivable Sales Purchases (expenses) receivable

Armafer Serviços de Construção Ltda........................ - - 207 - - -

Aço Minas Gerais S.A. - Açominas ............................ - - 5,112 193,020 - -

Açominas Overseas Ltd. (*)...................................... - - 272,616 - - -

Gerdau Laisa S.A. .................................................. - - 585 - - -

Gerdau Aza S.A. .................................................... - - 6,027 - - -

Sipar Aceros S.A. ................................................... - - 58,617 - - -

Banco Gerdau S.A. ................................................. 287 1,962 - - 399 2,113

Grupo Gerdau Empreendimentos Ltda. (**) ............... (600) - - - (600) -

Indac - Ind. Adm. e Comércio S.A. (***).................... (3,345) - - - (7,098) -

(*) Transaction carried out due to securitization operations.

(**) Payments for the use of Gerdau trademark.

(***) Payments of guarantees of loans.

c) Guarantees granted - The Company is the guarantor of loan agreements of the jointly-owned subsidiary Dona Francisca Energética S.A.,

in the total amount of R$ 97,275, corresponding to 51.82% of the joint guarantee. The Company is the guarantor of the Euro Commercial

Paper program of the subsidiary GTL Trade Finance Inc., of US$ 110 million, equivalent to R$ 291,984 at the balance sheet date. The Company

is also the guarantor of financing agreements of the subsidiary GTL Financial Corp., of US$ 5,000, equivalent to R$ 13,272, and securitization

operations of the subsidiary Gerdau Açominas Overseas Ltda., of US$ 233 million, equivalent to R$ 618,475 on the balance sheet date. The

subsidiary Gerdau Açominas S.A. is the guarantor of the vendor financing loan agreement of the associated company Banco Gerdau S.A., in

the amount of R$ 68,138.

22 - Post-Employment Benefits

Considering all types of benefits to employees granted by the Company, the asset and liability positions at December 31 are as follows:

Company

Consolidated

___________________________________ ___________________________________

2004 2003 2004 2003

Pension plan actuarial liability - defined benefit .................................................. - - 154,199 162,719

Actuarial liability with post-employment health benefit........................................ - - 130,283 105,964

Retirement and discharge benefits payable......................................................... - - 9,996 10,187

______________ ______________ ______________ ______________

Total liabilities.................................................................................................. - - 294,478 278,870

______________ ______________ ______________ ______________

______________ ______________ ______________ ______________

Unrecognized actuarial assets............................................................................ 352 150 162,928 122,683

______________ ______________ ______________ ______________

a) Pension plan - defined benefit

The Company and other Group subsidiaries in Brazil are the co-sponsors of defined benefit pension plans that cover substantially all

employees in Brazil (“Açominas Plan” and “Gerdau Plan”).

The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement the

social security benefits of employees and retired employees of the Ouro Branco unit of Gerdau Açominas S.A. The assets of the Açominas Plan

mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties.

The Gerdau Plan is managed by Gerdau - Sociedade de Previdência Privada, a closed supplementay pension entity to complement the

social security benefits of employees and retired employees of the Company of the other units of Gerdau Açominas S.A. and of other

subsidiaries in Brazil. The assets of the Gerdau Plan comprise investments in bank deposit certificates, federal public securities and

marketable securities.

Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all

of their employees.

The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to complement the social security benefits of

employees of Gerdau Ameristeel Corporation and its subsidiaries. The assets of the Plans mainly comprise marketable securities.

The sponsors’ contributions to these pension plans were R$ 40 in 2004 and R$ 1,508 in 2003 for the Company and R$ 68,258 in 2004 and

R$ 63,708 in 2003 consolidated.


The current expenses of the defined pension plan are as follows:

Company

Consolidated

___________________________________ ___________________________________

2004 2003 2004 2003

Cost of current service....................................................................................... 111 5,612 49,798 41,068

Interest cost..................................................................................................... 345 14,402 124,782 109,114

Expected return of plan assets........................................................................... (569) (15,297) (161,554) (120,556)

Amortization of unrecognized liability................................................................. - - 462 467

Amortization of past service costs ..................................................................... - - 778 1,332

Amortization of (gain) loss................................................................................. (49) - 2,589 2,764

Employees’ expected contribution...................................................................... ______________- ______________- ______________ (4,383) ______________ (3,576)

Pension plan cost (benefit), net..........................................................................

______________ (162)

______________ 4,717

______________ 12,472

______________

30,613

The reconciliation of the assets and liabilities of the plans is presented below:

Company

Consolidated

___________________________________ ___________________________________

2004 2003 2004 2003

Total liabilities ................................................................................................. (50,196) (44,164) (1,779,443) (1,613,516)

Fair value of plan assets ................................................................................... ______________ 108,988 ______________ 64,759 ______________ 1,844,817 ______________ 1,645,528

Net assets ....................................................................................................... 58,792 20,595 65,374 32,012

Unrecognized (gains) losses............................................................................... (58,491) (20,445) (87,897) (85,274)

Past service costs ............................................................................................. 51 - 26,323 7,722

Other .............................................................................................................. ______________- ______________- ______________ 4,929 ______________ 5,504

Total assets (liabilities), net ..............................................................................

______________ 352

______________ 150

______________ 8,729

______________

(40,036)

Actuarial asset ................................................................................................. 352 150 162,928 122,683

Pension plan liability recorded in balance sheet................................................... ______________- ______________- ______________ (154,199) ______________ (162,719)

Assets (liabilities), net ......................................................................................

______________ 352

______________ 150

______________ 8,729

______________

(40,036)

Changes in plan assets and actuarial liabilities were as follows:

Company

Consolidated

___________________________________ ___________________________________

2004 2003 2004 2003

Changes in benefit liabilities

Benefit liabilities at the beginning of the year .................................................... 44,164 141,739 1,613,516 1,543,659

Cost of service.................................................................................................. 111 5,612 49,798 41,068

Interest cost .................................................................................................... 345 14,402 124,782 109,114

Actuarial loss (gain).......................................................................................... 8,485 (11,789) 86,910 77,637

Payment of benefits .......................................................................................... (2,960) (2,779) (69,419) (58,486)

Past service costs due to changes in the plan ..................................................... 51 - 10,497 -

Effect of merger/operational integration.............................................................. - (103,021) - -

Foreign exchange effect on foreign companies ................................................... - - (45,000) (99,476)

Initial liability recognition adjustment ................................................................ ______________- ______________- ______________ 8,359 ______________-

Benefit liabilities at the end of the year .............................................................

______________ 50,196

______________ 44,164

______________ 1,779,443

______________

1,613,516


134 135

GERDAU S.A.

Company

Consolidated

___________________________________ ___________________________________

2004 2003 2004 2003

Changes in plan assets

Fair value of plan assets at the beginning of the year................................... 64,759 149,865 1,645,528 1,381,584

Return on plan assets................................................................................ 47,149 67,229 227,308 311,599

Sponsor contributions............................................................................... 40 1,508 68,258 63,708

Participant contributions........................................................................... - - 5,202 4,232

Payment of benefits ................................................................................. (2,960) (2,779) (69,419) (58,486)

Operational integration............................................................................. - (151,064) - -

Foreign exchange effect on foreign companies............................................. - - (32,060) (57,109)

______________ ______________ ______________ ______________

Fair value of plan assets at the end of the year............................................ 108,988 64,759 1,844,817 1,645,528

______________ ______________ ______________ ______________

______________ ______________ ______________ ______________

As a result of the operational integration on November 28, 2003, the assets and liabilities of the Gerdau Plan, relating to the employees

transferred to Gerdau Açominas S.A., were allocated to the Açominas Plan, and the Supplementary Social Security Secretariat approved the

addition of Gerdau Açominas S.A. as a sponsor of the Retirement and Supplementary Retirement Plans managed by Gerdau - Sociedade de

Previdência Privada.

The method for calculating the actuarial liability is the Projected Unit Credit Method, as determined by CVM Deliberation 371/2000.

The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period,

the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the

fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for

the employees that participate in the plan.

The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and

consolidated:

North American

Gerdau plan Açominas plan plan

Average discount rate...................................... 11.30% 11.30% 5.75% - 6.00%

Increase in compensation................................. 9.20% 8.675% 2.50% - 4.25%

Expected rate of return on assets ...................... 12.35% 12.35% 7.25% - 8.40%

Mortality chart................................................ GAM 83 (-1 year) AT-83 GAM 83

Disabled mortality chart................................... RRB 1944 AT-83 RRB 1977

Turnover rate................................................... Based on service Null Based on age and service

and salary level

(plan experience)

b) Pension plan - defined contribution

The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan administered by Gerdau - Sociedade

de Previdência Privada. Contributions are based on a percentage of the compensation of employees.

The foreign subsidiary Gerdau AmeriSteel US Inc. has a defined contribution plan, the contributions to which are equivalent to 50% of the

amount paid by the participants, limited to 4% of salary. The other companies do not have this type of pension plan.

The total cost of this plan was R$ 149 in 2004 and R$ 2,145 in 2003 for the Company and R$ 11,892 in 2004 and R$ 9,713 in 2003 consolidated.

c) Other post-employment benefits

The Company estimates that the amount payable to executives on their retirement or discharge totals R$ 9,996 (consolidated) at December

31, 2004 (R$ 10,187 in 2003 - consolidated).

The American Plan includes, in addition to pension benefits, specific health benefits for employees who retire after a certain age and with

a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are

based on amounts actuarially calculated.


The composition of the net periodic cost for the post-employment health benefits is as follows:

Consolidated

_____________________________________

2004 2003

Cost of service.................................................................................................................................................................. 3,007 2,542

Interest cost..................................................................................................................................................................... 5,715 6,492

Amortization of past service costs...................................................................................................................................... (563) -

Amortization of (gain) loss................................................................................................................................................. _______________ 80 _______________-

Expense for post retirement health benefits, net.................................................................................................................. _______________

8,239 _______________

9,034

The status of the fund for post-employment health benefits is as follows:

Consolidated

_____________________________________

2004 2003

Plan assets at market value................................................................................................................................................ - -

Projected benefit liabilities................................................................................................................................................. _______________ (130,559) _______________ (111,390)

Fund status...................................................................................................................................................................... (130,559) (111,390)

Unrecognized gains and losses, net ................................................................................................................................... 8,101 5,426

Past service costs.............................................................................................................................................................. _______________ (7,825) _______________-

Post-retirement health benefit liabilities recorded in the balance sheet.................................................................................. _______________

(130,283) _______________

(105,964)

The changes in plan assets and actuarial liabilities were as follows:

Consolidated

_____________________________________

2004 2003

Changes in projected benefit liabilities

Projected benefit liabilities at the beginning of the year....................................................................................................... 111,390 112,991

Purchase of North Star...................................................................................................................................................... 23,136 -

Cost of service.................................................................................................................................................................. 3,007 2,542

Interest cost..................................................................................................................................................................... 5,715 6,492

Participant contributions.................................................................................................................................................... 1,946 1,870

Actuarial loss.................................................................................................................................................................... 4,759 3,432

Administrative benefits and expenses paid.......................................................................................................................... (6,639) (6,528)

Foreign exchange effect..................................................................................................................................................... (4,364) (9,409)

Initial liability recognition adjustment ................................................................................................................................ _______________ (8,391) _______________-

Project benefit liabilities at the end of the year.................................................................................................................... _______________

130,559 _______________

111,390

Consolidated

_____________________________________

2004 2003

Changes in plan assets

Plan assets at the beginning of the year ............................................................................................................................. - -

Sponsor contribution ........................................................................................................................................................ 4,693 4,658

Participant contributions.................................................................................................................................................... 1,946 1,870

Administrative benefits and expenses paid.......................................................................................................................... _______________ (6,639) _______________ (6,528)

Plan assets at the end of the year....................................................................................................................................... _______________

- _______________

-


136 137

GERDAU S.A.

The assumptions adopted in the accounting for post-employment health benefits were as follows:

North American plan

Average discount rate........................................................................................................................................................ 5.75% - 6.00%

Health treatment - rate for the next year............................................................................................................................. 9.50% - 13.00%

Health treatment - rate for cost decrease to be reached from 2010 to 2013.......................................................................... 4.50% to 5.50%

23 - Shareholders’ Equity

a) Capital - authorized capital at December 31, 2004 comprises 240,000,000 common shares (240,000,000,000 at December 31, 2003) and

480,000,000 preferred shares (480,000,000,000 at December 31, 2003), with no par value.

The Extraordinary General Meeting (AGE) of shareholders held on April 29, 2004 approved the capital increase of R$ 1,735,656 through the

capitalization of the reserve for investments and working capital, with a bonus of 100% on the shares on that date, representing 148,354,011

new shares (51,468,224 common and 96,885,787 preferred).

At December 31, 2004, 102,936,448 common shares (51,468,224 at December 31, 2003) and 193,771,574 preferred shares (96,885,787 at December

31, 2003) are subscribed and paid-up, totaling R$ 3,471,312 (R$ 1,735,656 at December 31, 2003). Preferred shares do not have voting rights and

cannot be redeemed, but have the same rights as common shares in terms of profit sharing.

b) Treasury stock - at December 31, 2004, the Company had 1,573,200 preferred shares (345,000 preferred shares in 2003) held in treasury for

subsequent sale in the market or cancellation, totaling R$ 44,139 (R$ 17,103 in 2003).

c) Interest on own capital and dividends - the Company calculated interest on own capital in accordance with the terms established by

Law 9249/95. The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was

recorded as dividends, not affecting net income. The related tax benefit through the reduction of the income tax and social contribution on

net income charge for the year was R$ 114,395 (R$ 119,424 in 2003). Shareholders are entitled to receive, each year, a minimum mandatory

dividend of 30% of adjusted net income.

The amount of interest on own capital and dividends credited for the year was R$ 858,843, shown as follows:

2004 2003

Net income for the year..................................................................................................................................................... 2,831,339 1,137,216

Transfer to legal reserve.................................................................................................................................................... _______________ (141,567) _______________ (56,860)

Adjustment net income...................................................................................................................................................... 2,689,772 1,080,356

Distributions during the year

Period Nature R$/share Credit Payment 2004 2003

1 st quarter ........................................................ Interest 0.64 03/30/2004 05/18/2004 94,443 74,177

2 nd quarter ........................................................ Interest 0.36 06/30/2004 08/17/2004 106,249 50,440

Dividens 0.29 06/30/2004 08/17/2004 85,589 -

3 rd quarter......................................................... Interest 0.46 08/13/2004 11/17/2004 135,762 75,661

Dividens 0.53 11/03/2004 11/17/2004 156,422 -

4 th quarter ........................................................ Interest - 150,969

Dividens 0.95 02/11/2005 02/22/2005 ___________ 280,378 ___________-

Interest on own capital and dividends............................................................................................................................................................. ___________

858,843 ___________

351,247

% interest/dividends paid or credited............................................................................................................................................................. 32% 33%

Credit per share (R$)..................................................................................................................................................................................... 2.91 2.37

Outstanding shares (thousands)..................................................................................................................................................................... 295,135 148,009

The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws.

24 - Statutory Profit Sharing

a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the

Company’s by-laws;

b) The employees’ profit sharing is linked to the attainment of operating goals and was allocated to cost of production and general and

administrative expenses, as applicable.


25 - Long-Term Incentive Plans

I) Gerdau S.A.

The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a previously agreed plan and within the limit

of the authorized capital, to grant options to purchase preferred shares to management, employees or persons who render services to the

Company or the companies under its control, and approved the formation of the Long-Term Incentive Program that represents a new form

of compensation of the strategic executives of the Company. The options should be exercised in a maximum of five years after the grace

period.

a) Summary of changes in the plan:

Stock option grants (Number of shares)

__________________________________________________________________

2003 2003 2004 2004 Total

Opening balance at December 31, 2003.......................................... 403,228 280,840 - - 684,068

Grants in 2004............................................................................. - - 2,430 171,125 173,555

Share bonus at April 29, 2004........................................................ 403,229 280,840 2,429 171,125 857,623

____________ ____________ ____________ ____________ ____________

Closing balance on December 31, 2004........................................... 806,457 561,680 4,859 342,250 1,715,246

____________ ____________ ____________ ____________ ____________

____________ ____________ ____________ ____________ ____________

Exercise price - R$ ....................................................................... 11.94 11.94 30.50 30.50

Grace period ............................................................................... 3 years - 3 years -

Grace period ............................................................................... - 5 years - 5 years

As mentioned in Note 23b, at December 31, 2004 the Company has a total of 1,573,200 preferred shares in treasury. These shares can be used

for this plan.

b) Plan status at December 31

Stock option grants

______________________________________________

2004 2003 Average

Total stock options granted .......................................................................................................................... 347,109 1,368,137 -

Exercise price - R$........................................................................................................................................ 30.50 11.94 15.70

Fair value of options at date of grant - R$ per option (*).................................................................................. 8.65 3.72 4.72

Average term of option to be exercised (years)................................................................................................. 3.68 1.82 2.26

(*) calculated using the Black-Scholes model.

The percentage of dilution in interest that the current shareholders may experience if all options are exercised is approximately 0.6%.

II) Gerdau Ameristeel Corporation - (“Gerdau Ameristeel”)

Gerdau Ameristeel Corporation and its subsidiaries have stock compensation plans for their employees, as follows:

a) Former Co-Steel Plan

According to the terms of the Co-Steel Plan, the Stock-Based Option Plan, the company was authorized to grant purchase options to employees

and directors up to the limit of 3,041,335 common shares. The exercise price was based on the closing price of the common shares in the

market on the day prior to the issue of the option. The options have a maximum term of ten years and are granted during various periods, as

determined by the administrator of the plan at the date of the grant, up to April 13, 2008.

b) Gerdau AmeriSteel US Inc. (“AmeriSteel”) Plans

According to the terms of the Transaction Agreement relating to the acquisition of Co-Steel, the minority shareholders of AmeriSteel

exchanged their shares and stock options for shares and stock options of Ameristeel at the ratio of 9.4617 shares and stock options for each

share or stock option of AmeriSteel. This exchange occurred on March 31, 2003.

b.1) Stakeholder Plan

In March 2000, the Board of Directors of AmeriSteel approved a long-term incentive plan available to the executive management (Stakeholder

Plan) to assure that the interests of the senior management of AmeriSteel are in line with those of the AmeriSteel shareholders. The

awards are determined by a formula based on the return on employed capital of AmeriSteel in a given year of the plan. The awards are

granted and paid over a period of four years. The participants may choose payment in cash or in shares of AmeriSteel and Gerdau, for which

a premium of 25% is given, if chosen. Expenses related to the benefits for the years ended December 31, 2004 and 2003 totaled US$ 1,300

thousand (R$ 3,450) and US$ 150 thousand (R$ 433), respectively. A premium of approximately US$ 14,000 thousand (equivalent to R$ 37,161)

was recorded at December 31, 2004 and will be granted on March 1, 2005. This premium will be provided in accordance with the payment

schedule established by the plan.


138 139

GERDAU S.A.

b.2) SAR Plan

In July 1999, the Board of Directors of AmeriSteel approved the SAR/Shares Purchase Plan (SAR Plan) available to basically all employees. The

SAR Plan authorizes the sale of 946,170 common shares to the employees during three offer periods, from July to September in 1999, 2002

and 2005. The employees who purchase the shares are rewarded with stock appreciation rights (SARs) equal to four times the number of

shares purchased. SARs at market value were granted at the date of grant, determined based on an independent appraisal at the end of the

prior year. SARs can be exercised at 25% annually as from the date of the grant, to be exercised over a period of ten years as from the date of

the grant.

In July 2002, the Board of Directors of AmeriSteel approved the issue of new purchase options under the SAR Plan, which were granted to the

executive directors, with the exercise price determined by the fair value at the date of grant. A total of 6,244,722 SARs were authorized and

issued. One-third of all awarded options and common shares are vested two years as from the date of concession, and one third after each

subsequent two-year period. The options may be exercised in up to ten years after the date of concession.

At December 31, 2004, an expense related to this plan of US$ 20,700 thousand, equivalent to R$ 54,946, was recorded in the consolidated

financial statements (at December 31, 2003, an expense of US$ 9,400 thousand, equivalent to R$ 27,158 was recorded).

b.3) Equity Ownership

In September 1996, the Board of Directors of AmeriSteel approved the Equity Ownership Plan of AmeriSteel Corporation (the “Equity

Ownership” Plan), which grants common shares, purchase options for common shares and SARs. The maximum number of shares that may be

issued under this plan is 4,152,286. AmeriSteel has granted 4,667,930 incentive stock options and 492,955 common shares under the Equity

Ownership Plan up to December 31, 2004. One-third of all options and common shares issued become vested two years from the date of the

grant, and one third after each subsequent two-year period. All grants were carried out at the market value of the common shares at the date

of grant, determined based on an independent appraisal at the end of the prior year. The options may be exercised for ten years as from the

date of the grant.

b.4) Purchase Plan

In May 1995, the Board of Directors of AmeriSteel approved an option/purchase plan (the “Purchase Plan”), available to essentially all

employees. The employees who purchased shares were rewarded with options for six times the number of shares purchased. A total of

356,602 shares were sold under the Purchase Plan at a purchase price of US$ 1.12 per share. The options were granted at market value at the

date of the grant, determined based on an independent appraisal at the end of the prior year. A total of 2,139,612 options were granted under

the Purchase Plan. No options are available for future grant. All shares granted can already be exercised, which may occur for ten years as

from the date of the grant.

A summary of the Gerdau Ameristeel plans is as follows:

2004 2003

__________________________________________ ______________________________________________

Number Weighted average Number Weighted average

of shares exercise price - R$ of shares exercise price - R$

Available at the beginning of the year............................. 3,606,570 17.01 1,367,400 26.87

Exchange for options of the Gerdau Ameristeel Plan (*).... - - 2,660,601 6.21

Exercised options........................................................... (374,609) 5.04 - -

Cancelled options.......................................................... (76,973) 5.10 - -

Expired options.............................................................. ________________ (321,700) _____________________ 51.65 _________________ (421,431) ________________________ 56.98

Available at the end of the year......................................

________________ 2,833,288

_____________________ 15.77

_________________ 3,606,570

________________________

18.52

(*) Exchange mentioned in item “b” above.

The table below summarizes the information on the purchase options of Gerdau Ameristeel shares available at December 31, 2004:

Quantity

Available Average Weighted average exercisable at

Exercise price (R$) quantity grace period exercise price - R$ December 31, 2004

3.50 to 3.80 ................................................................. 752,829 4.40 3.66 597,086

4.78 to 5.04 ................................................................. 824,536 5.90 4.88 497,369

5.60 to 7.86 ................................................................. 563,923 4.50 11.89 563,923

41.01 to 49.61.............................................................. 342,500 2.10 44.59 342,500

53.25 to 53.49.............................................................. ________________ 349,500 1.70 53.49 _________________________ 349,500

________________

2,833,288 _________________________

2,350,378


The effect on net income for the year and shareholders’ equity would have been as follows, had the expenses for the option plans of Gerdau

S.A. and Gerdau Ameristeel Corporation been recorded:

Company

Consolidated

_________________________________________ _________________________________________________

Net Shareholders’ net Shareholders’

income equity income equity

Balances based on financial statements........................... 2,831,339 6,073,856 3,234,887 6,073,856

Expenses for the period (Black-Scholes model)................. ________________ (1,959) ______________________ (4,936) _____________________ (2,649) _________________________ (8,383)

Pro forma balances........................................................ ________________

2,829,380 ______________________

6,068,920 _____________________

3,232,238 _________________________

6,065,473

26 - Calculation of EBITDA

Consolidated

_________________________________________________

2004 2003

Gross profit............................................................................................................................................ 6,245,024 3,290,221

Selling expenses..................................................................................................................................... (455,175) (448,131)

General and administrative expenses........................................................................................................ (1,003,826) (763,440)

Depreciation and amortization................................................................................................................. _____________________ 766,665 _________________________ 604,887

EBITDA..................................................................................................................................................

_____________________

5,552,688

_________________________

2,683,537

27 - Information by Geographic Area and Business Segment

Information by geografic area:

Geographic area

______________________________________________________________________________________________________________________________________

Brazil South America (*) North America Consolidated

__________________________________ _______________________________ _________________________________ ______________________________

2004 2003 2004 2003 2004 2003 2004 2003

Gross sales revenues................. 12,914,377 9,024,250 1,039,986 652,829 9,453,210 6,105,888 23,407,573 15,782,967

Net sales revenues.................... 9,975,760 7,306,927 763,865 490,122 8,857,637 5,569,912 19,597,262 13,366,961

Cost of sales............................. (5,668,217) (4,444,848) (488,120) (325,333) (7,195,901) (5,306,559) (13,352,238) (10,076,740)

Gross profit............................... 4,307,543 2,862,079 275,745 164,789 1,661,736 263,353 6,245,024 3,290,221

Selling expenses........................ (400,317) (407,717) (7,079) (5,140) (47,779) (35,274) (455,175) (448,131)

General and administrative

expenses............................. (704,073) (513,157) (45,934) (33,492) (253,819) (216,791) (1,003,826) (763,440)

Financial income

(expenses), net................... 5,948 (462,207) (4,491) (3,831) (177,563) (180,532) (176,106) (646,570)

Operating profit (loss)............... 3,040,687 1,192,855 219,272 120,012 1,194,708 (165,655) 4,454,667 1,147,212

Net income (loss) for the year.... 2,164,338 1,222,380 174,240 93,379 896,309 (61,274) 3,234,887 1,254,485

EBITDA (**).............................. 3,704,473 2,297,318 250,983 151,524 1,597,232 234,695 5,552,688 2,683,537

( * ) Does not include Brazilian operations.

(**) Income before financial expenses, income tax and social contribution on net income, and depreciation and amortization, as mentioned in Note nº 26.

The segments shown following correspond to the business units through which the Gerdau Executive Committee manages its operations:

Long Steel Brazil, Açominas (corresponding to the operations of the plant located in Ouro Branco, state of Minas Gerais), South America

(excluding Brazilian operations) and North America (Gerdau Ameristeel):


140 141

GERDAU S.A.

Information by business segment:

Business sector

________________________________________________________________________________________________________________________________________________________________

Long Brazil Açominas Ouro Branco South America (*) North America Consolidated

___________________________ __________________________ ___________________________ ___________________________ ____________________________

2004 2003 2004 2003 2004 2003 2004 2003 2004 2003

Net sales revenue......................... 7,329,008 5,359,998 2,646,752 1,946,929 763,865 490,122 8,857,637 5,569,912 19,597,262 13,366,961

Identifiable assets (**)................. 4,378,419 3,146,342 3,482,517 3,241,331 668,351 580,385 6,131,526 4,273,441 14,660,813 11,241,499

Capital expenditures.................... 648,070 329,999 265,851 355,984 27,367 22,253 1,156,660 164,803 2,097,948 873,039

Depreciation/amortization............ 235,613 235,720 265,707 120,392 28,251 25,367 237,094 223,408 766,665 604,887

( * ) Does not include Brazilian operations.

(**) Identifiable assets: accounts receivable, inventories and fixed assets.


Board of Directors

Executive Committee

Chairman

JORGE GERDAU JOHANNPETER

Vice Chairmen

GERMANO H. GERDAU JOHANNPETER

KLAUS GERDAU JOHANNPETER

FREDERICO C. GERDAU JOHANNPETER

Board Members

AFFONSO CELSO PASTORE

ANDRÉ PINHEIRO DE LARA RESENDE

OSCAR DE PAULA BERNARDES NETO

Secretary General

EXPEDITO LUZ

President

JORGE GERDAU JOHANNPETER

Vice Presidents

FREDERICO C. GERDAU JOHANNPETER, Senior Vice President

CARLOS JOÃO PETRY, Senior Vice President

ANDRÉ BIER JOHANNPETER

CLAUDIO JOHANNPETER

DOMINGOS SOMMA

OSVALDO BURGOS SCHIRMER

FILIPE AFFONSO FERREIRA

RICARDO GEHRKE

Secretary General

EXPEDITO LUZ

Corporate Officers

DIRCEU TARCÍSIO TOGNI

ELIAS PEDRO VIEIRA MANNA

EXPEDITO LUZ

FRANCESCO SAVERIO MERLINI

SIRLEU JOSÉ PROTTI

Clemir Ühlein

Accountant CRC RS N0. 44.845 - S - RJ

CPF N0. 424.614.210-72


142 143

GERDAU S.A.

Report of Independent Auditors

To the Board of Directors and Shareholders

Gerdau S.A.

1. We have audited the accompanying balance sheets of Gerdau S.A. and the consolidated balance sheets of

Gerdau S.A. and its subsidiaries as of December 31, 2004 and 2003, and the related statements of income,

of changes in shareholders’ equity and of changes in financial position of Gerdau S.A., as well as the related

consolidated statements of income and of changes in financial position, for the years then ended. These financial

statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on

these financial statements.

2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we

perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented

in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking

into consideration the significance of balances, the volume of transactions and the accounting and internal

control systems of the companies, (b) examining, on a test basis, evidence and records supporting the amounts

and disclosures in the financial statements, and (c) assessing the accounting practices used and significant

estimates made by management, as well as evaluating the overall financial statement presentation.

3. In our opinion, the financial statements audited by us present fairly, in all material respects, the financial

position of Gerdau S.A. and of Gerdau S.A. and its subsidiaries at December 31, 2004 and 2003, and the results of

operations, the changes in shareholders’ equity and the changes in financial position of Gerdau S.A., as well as the

consolidated results of operations and of changes in financial position, for the years then ended, in accordance

with accounting practices adopted in Brazil.

4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as

a whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part

of the basic financial statements. This information has been subjected to the auditing procedures applied in the

audit of the basic financial statements and, in our opinion, is fairly presented in all material respects in relation

to the financial statements taken as a whole.

Porto Alegre, March 4, 2005

Auditores Independentes

CRC 2SP000160/O-5 “F” RJ

Carlos Alberto de Sousa

Accountant - CRC 1RJ 056561/O-0

Opinion of the Fiscal Council

The Fiscal Council of Gerdau S.A., in performance of its legal and statutory duties, in compliance with Article 163 of Law

6404/76, having examined the Company’s Management Report, the individual (parent company) and consolidated balance

sheets and the related statements of income, of changes in shareholders’ equity and of changes in financial position for

the years ended December 31, 2004, as well as the distribution of interest on equity and dividends, and based on the report

of PricewaterhouseCoopers Auditores Independentes, is of the option that these accounting statements fairly reflect the

Company’s individual and consolidated financial position, in conformity with current accounting practices.

Under these circumstances, the Fiscal Council recommends to the Stockholders the approval of the accounting statements,

which will be submitted to them in the upcoming Ordinary General Shareholders’ Meeting.

Rio de Janeiro, March 14, 2005

JOSÉ ANTÔNIO CRUZ DE MÓDENA

JOSÉ BERNARDO DE MEDEIROS NETO

PETER WILM ROSENFELD


Gerdau Açominas S.A.

Balance Sheet at December, 31

(In thousands of reais)

Assets Company Consolidated

2004 2003 2004 2003

Current Assets

Cash and cash equivalents ............................................................ note 5 597,950 179,266 763,821 258,327

Trade accounts receivable ............................................................. note 6 1,398,760 829,542 1,269,716 762,045

Inventories................................................................................... note 7 1,732,128 1,172,964 1,742,064 1,179,545

Tax credits ................................................................................... note 8 169,655 96,652 176,067 98,665

Deferred income tax and social contribution on net income ............. note 9 304,190 98,412 304,190 98,412

Other accounts receivable.............................................................. 117,977 147,337 115,965 151,760

Total current assets.......................................................................... 4,320,660 2,524,173 4,371,823 2,548,754

Long-Term Receivables

Related parties ............................................................................ note 19 8,178 - 21,804 -

Eletrobrás loans............................................................................ 1,304 1,304 1,304 1,304

Deferred income tax and social contribution on net income ............. note 9 109,298 385,423 111,719 388,373

Compulsory deposits and other ..................................................... note 10 105,877 53,502 114,811 62,823

Total long-term receivables............................................................. 224,657 440,229 249,638 452,500

Permanent Assets

Investments.................................................................................. note 11 154,372 197,463 43,669 66,638

Fixed assets ................................................................................. note 12 4,866,670 4,397,120 4,924,735 4,504,438

Deferred charges ......................................................................... note 13 23,608 10,515 29,665 12,386

Total permanent assets..................................................................... 5,044,650 4,605,098 4,998,069 4,583,462

Total assets ........................................................................................ 9,589,967 7,569,500 9,619,530 7,584,716

The accompanying notes are an integral part of these financial statements.


144 145

GERDAU AÇOMINAS S.A.

Liabilities and Shareholder’s Equity Company Consolidated

2004 2003 2004 2003

Current Liabilities

Trade accounts payable................................................................. 844,851 464,233 848,906 466,675

Financing .................................................................................... note 14 877,613 1,889,592 895,067 1,898,976

Taxes and contributions payable..................................................... note 17 287,503 105,363 291,106 107,126

Deferred income tax and social contribution on net income ............. note 9 149,905 19,790 149,905 19,790

Salaries payable............................................................................ 83,535 64,212 83,667 65,454

Dividends payable......................................................................... note 21 306,197 283,986 306,197 283,986

Related parties ............................................................................ note 19 - 138,309 - 125,320

Other accounts payable................................................................. 98,356 90,208 99,225 91,175

Total current liabilities.................................................................... 2,647,960 3,055,693 2,674,073 3,058,502

Long-Term Liabilities

Financing .................................................................................... note 14 2,079,721 1,412,705 2,083,176 1,424,506

Provision for contingencies ........................................................... note 18 51,993 31,533 51,993 31,645

Post-employment benefits ............................................................ note 20 6,418 7,794 6,418 7,794

Other accounts payable................................................................. 37,829 31,455 37,824 31,949

Total long-term liabilities............................................................... 2,175,961 1,483,487 2,179,411 1,495,894

Shareholders’ Equity

Capital ........................................................................................ note 21 2,340,576 2,340,576 2,340,576 2,340,576

Capital reserves............................................................................ 289,667 98,762 289,667 98,762

Revenue reserves.......................................................................... 2,135,803 60,222 2,135,803 60,222

Retained earnings......................................................................... - 530,760 - 530,760

Total shareholders’ equity............................................................... 4,766,046 3,030,320 4,766,046 3,030,320

Total liabilities and shareholders’ equity..................................... 9,589,967 7,569,500 9,619,530 7,584,716

The accompanying notes are an integral part of these financial statements.


Statement of Income

Years Ended December, 31

(In thousands of reais)

Company

Consolidated

2004 2003 2004 2003

GROSS SALES REVENUES .................................................................. 12,964,674 3,164,358 13,090,660 3,174,613

Taxes on sales.............................................................................. (2,300,771) (292,972) (2,305,821) (292,970)

Freights and discounts ................................................................. (627,550) (233,792) (629,425) (233,801)

____________ ____________ ____________ ____________

Net Sales Revenues .............................................................. 10,036,353 2,637,594 10,155,414 2,647,842

COST OF SALES ................................................................................ ____________ (5,828,901) ____________ (1,638,289) ____________ (5,914,999) ____________ (1,647,875)

Gross Profit.......................................................................... 4,207,452 999,305 4,240,415 999,967

SELLING EXPENSES .......................................................................... (396,972) (94,133) (400,301) (94,702)

FINANCIAL INCOME ......................................................................... note 16 81,317 (30,847) 82,364 (29,052)

FINANCIAL EXPENSES ...................................................................... note 16 (59,337) (93,827) (57,529) (94,173)

GENERAL AND ADMINISTRATIVE EXPENSES

Management fees......................................................................... (39,603) (9,460) (40,267) (9,706)

General expenses ......................................................................... (599,077) (164,086) (605,243) (164,334)

EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES

AND ASSOCIATED COMPANIES...................................................... note 11 10,391 6,458 (10,025) (1,323)

OTHER OPERATING INCOME (EXPENSES), NET.................................... note 22 143,473 (1,068) 145,150 (1,046)

____________ ____________ ____________ ____________

Operating Profit .................................................................. 3,347,644 612,342 3,354,564 605,631

NON-OPERATING INCOME (EXPENSE), NET ........................................ (13,916) 43,127 (13,363) 49,856

____________ ____________ ____________ ____________

Profit Before Taxes and Profit Sharing .......................... 3,333,728 655,469 3,341,201 655,487

PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION

ON NET INCOME.......................................................................... note 9

Current ....................................................................................... (610,180) (142,204) (617,176) (142,357)

Deferred ..................................................................................... (200,462) 346,038 (200,939) 346,173

MANAGEMENT PROFIT SHARING....................................................... note 23 (39,603) (9,460) (39,603) (9,460)

____________ ____________ ____________ ____________

Net Income for yhe Year ..................................................... 2,483,483 849,843 2,483,483 849,843

____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Net income per share - R$......................................................... ____________

15.65 ____________

5.36

Net equity per share - R$.......................................................... ____________

30.04 ____________

19.10

The accompanying notes are an integral part of these financial statements.


146 147

GERDAU AÇOMINAS S.A.

Statement of Changes in Financial Position

Years Ended December 31

(In thousands of reais)

Company

Consolidated

Financial Resources Were Provided By

2004 2003 2004 2003

Operations

Net income for the year ........................................................... 2,483,483 849,843 2,483,483 849,843

Expenses (income) not affecting working capital:

Depreciation and amortization.............................................. 485,481 147,273 492,433 148,450

Cost of permanent asset disposals........................................ 74,995 6,435 79,505 6,462

Equity in the (earnings) losses of subsidiaries and associated

companies ..................................................................... note 11 (10,391) (6,458) 10,025 1,323

Foreign exchange effects on working capital of foreign

companies...................................................................... - - (611) (44,901)

Monetary variations on long-term debt.................................. (180,542) (48,893) (180,542) (45,369)

Monetary variations on long-term receivables........................ ____________ (399) ____________ 102 ____________ (399) ____________ 102

From operations.............................................................. ____________ 2,852,627 ____________ 948,302 ____________ 2,883,894 ____________ 915,910

Third parties

Contributions to capital reserves................................................ 190,905 6,950 190,905 6,950

Increase (decrease) in long-term liabilities.................................. 864,334 (82,578) 864,059 (45,516)

Working capital - operational integration................................... - (256,530) - (256,530)

Working capital of merged/consolidated companies.................... 2,451 - - (1,157)

Dividends not included in income for the year............................. 5,613 600 300 -

Total funds provided........................................................................ 3,915,930 616,744 3,939,158 619,657

Financial Resources Were Used For

Investments.................................................................................. 6,441 52,814 148 52,814

Fixed assets.................................................................................. 970,534 393,501 977,457 395,552

Deferred charges.......................................................................... 13,803 1,581 18,654 1,639

Increase (decrease) in long-term receivables................................... (217,730) 274,841 (203,261) 275,079

Dividends/interest on equity ......................................................... note 21 938,662 283,986 938,662 283,986

Total funds used ............................................................................... 1,711,710 1,006,723 1,731,660 1,009,070

Changes in Working Capital........................................... ____________

2,204,220 ____________

(389,979) ____________

2,207,498 ____________

(389,413)

Working capital

At the beginning of the year...................................................... (531,520) (141,541) (509,748) (120,335)

At the end of the year............................................................... 1,672,700 (531,520) 1,697,750 (509,748)

Changes in Working Capital........................................... 2,204,220 (389,979) 2,207,498 (389,413)

The accompanying notes are an integral part of these financial statements.


Statement of Changes

in Shareholders’ Equity

(In thousands of reais)

Capital reserves Revenue reserves

Premium Investments Total

Investment on issue and working Revaluation Retained shareholders’

Capital Incentives of Shares Other Total Legal capital Total reserve earnings equity

At December 31, 2002 1,699,503 65,615 23,822 2,375 91,812 17,730 - 17,730 372,742 255,694 2,437,481

Net income for the year - - - - - - - - - 849,843 849,843

Capital increase 641,073 - - - - - - - - (255,694) 385,379

Investment incentives - 6,950 - - 6,950 - - - - - 6,950

Realization and reversal

of reserve - - - - - - - - (372,742) 7,395 (365,347)

Distribution proposed for

the Annual General Meeting:

Legal reserve note 21 - - - - - 42,492 - 42,492 - (42,492) -

Proposed dividends note 21 - - - - - - - - - (283,986) (283,986)

At December 31, 2003 2,340,576 72,565 23,822 2,375 98,762 60,222 - 60,222 - 530,760 3,030,320

Net income for the year - - - - - - - - - 2,483,483 2,483,483

Investment incentives - 190,905 - - 190,905 - - - - - 190,905

Distribution proposed for

the Annual General Meeting:

Legal reserve note 21 - - - - - 124,174 - 124,174 - (124,174) -

Reserve for investments

and working capital - - - - - - 1,951,407 1,951,407 - (1,951,407) -

Interest on equity/

proposed dividends note 21 - - - - - - - - - (938,662) (938,662)

At December 31, 2004 2,340,576 263,470 23,822 2,375 289,667 184,396 1,951,407 2,135,803 - - 4,766,046

The accompanying notes are an integral part of these financial statements.


148 149

GERDAU AÇOMINAS S.A.

Statement of Cash Flows

Years Ended December 31

(In thousands of reais)

Company

Consolidated

2004 2003 2004 2003

Net income for the year............................................................... 2,483,483 849,843 2,483,483 849,843

Equity in the (earnings) losses of subsidiaries and associated

companies............................................................................. note 11 (10,391) (6,458) 10,025 1,323

Provision for credit risks.............................................................. 5,135 8,461 5,135 8,461

Loss on disposal of fixed assets.................................................... 9,771 1,492 9,843 1,537

Loss on disposal of investment..................................................... 4,227 - 3,574 -

Monetary and exchange variations................................................ (128,671) 85,604 (128,234) 85,398

Depreciation and amortization..................................................... 485,481 147,273 492,433 148,450

Income tax and social contribution on net income.......................... 317,856 (343,445) 318,769 (344,086)

Interest on debt.......................................................................... 177,641 79,159 179,827 79,356

Contingencies/judicial deposits.................................................... 6,469 (4,394) 6,136 (4,509)

Changes in trade accounts receivable............................................ (604,478) 164,479 (541,337) 59,154

Changes in inventories................................................................ (555,229) (106,265) (562,455) (105,083)

Changes in trade accounts payable............................................... 260,590 54,742 264,557 54,381

Other operating activity accounts................................................. 244,071 (21,756) 244,826 (31,452)

____________ ____________ ____________ ____________

Net cash provided by operating activities.................................. 2,695,955 908,735 2,786,582 802,773

____________ ____________ ____________ ____________

Purchase/disposal of fixed assets.................................................. (913,233) (405,273) (919,758) (407,342)

Increase in deferred charges........................................................ (13,803) (1,581) (18,006) (1,639)

Acquisition/disposal of investments.............................................. (7,984) (52,814) 650 (52,814)

Receipt of interest on own capital/profit distribution...................... 900 - - -

____________ ____________ ____________ ____________

Net cash used in investing activities......................................... (934,120) (459,668) (937,114) (461,795)

____________ ____________ ____________ ____________

Suppliers of fixed assets.............................................................. 151,445 8,585 151,022 8,511

Working capital financing............................................................ 219,262 (331,504) 232,498 (290,395)

Permanent asset financing........................................................... 442,306 268,753 442,653 268,881

Payments of permanent asset financing......................................... (892,765) (175,108) (898,300) (175,460)

Payment of financing interest....................................................... (176,594) (104,768) (177,706) (104,973)

Loans with related parties........................................................... (146,502) (19,012) (148,141) (10,695)

Payment of dividends/interest on equity and profit sharing.............. (940,345) (18,226) (939,655) (23,679)

____________ ____________ ____________ ____________

Net cash used in financing activities......................................... (1,343,193) (371,280) (1,337,629) (327,810)

____________ ____________ ____________ ____________

Changes in cash and cash equivalents....................................... 418,642 77,787 511,839 13,168

____________ ____________ ____________ ____________

____________ ____________ ____________ ____________

Cash and short-term investments

At the beginning of the year.................................................... note 5 179,266 101,479 258,327 276,444

Restatement of opening balance............................................... - - (6,345) (31,895)

Opening balance of consolidated/merged companies for the year..... 42 - - 610

At the end of the year............................................................. note 5 597,950 179,266 763,821 258,327


Notes to the Financial Statements

at December, 31 2004 and 2003

(All amounts in thousands of reais unless otherwise indicated)

1 - Operations

Gerdau Açominas S.A. is the company that includes the steel producing assets of the Gerdau Group in Brazil and has an installed capacity of

7.6 million tons of crude steel per year. The Gerdau Group is dedicated mainly to the production of common and special steel rods and sale of

general steel products (plates and rods), in plants located in Brazil, Uruguay, Chile, Canada, Argentina and the Unites States of America.

The Gerdau Group has an installed capacity of 16.4 million tons of crude steel per year, basically producing steel in electrical furnaces, from

scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). Gerdau also operates plants which are

capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special

steels. It is the largest scrap recycling group in Latin America and among the largest in the world.

The industrial sector is the most important market, including manufacturers of consumer goods, such as vehicles and household and

commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil

construction sector, which demands a high volume of rebar and wires for concrete. There are also numerous customers for nails, staples and

wires, commonly used in the agribusiness sector.

2 - Presentation of the Financial Statements

The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based

on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM).

A statement of cash flows (company and consolidated), prepared under the indirect method, is being presented as supplementary information

in order to provide additional information.

3 - Significant Accounting Practices

a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the

interest rates agreed with the financial institutions, and do not exceed market value;

b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the

exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes

the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees

and the legal advisors’ opinion, and is considered sufficient to cover eventual losses on realization;

c) Inventories - are stated at the lower of market value and average production or purchase cost;

d) Investments in subsidiary and associated companies - are recorded on the equity method of accounting. The equity in the earnings or loss

is recorded in an income statement account;

e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis, at the rates stated in Note 12,

which take into consideration the estimated useful lives of the assets. Interest on financing obtained to finance construction in progress is

added to the cost of the constructions;

f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented

projects in relation to their installed capacities;

g) Financing - are stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations.

Swap contracts, which are linked to the loan agreements, are classified together with the related loans;

h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated

in conformity with current legislation;

i) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated

amounts plus accrued charges and indexation adjustments (liabilities), when applicable;

j) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding.

The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of

inputs and products are made under terms and conditions similar to those of unrelated third parties;

k) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting;

l) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions.

The Company’s financial statements therefore include various estimates related to the useful lives of fixed assets, provisions necessary for

contingent liabilities, for income tax and other similar matters. Actual results may differ from those estimated;

m) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or

capitalized when incurred; and

n) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency

(R$) at the foreign exchange rate in effect at the balance sheet date (2004 - US$ 1.00 = R$ 2.6544 and 2003 - US$ 1.00 = R$ 2.8892).


150 151

GERDAU AÇOMINAS S.A.

4 - Consolidated Financial Statements

a) The consolidated financial statements at December 31, 2004 include the accounts of Gerdau Açominas S.A. and the directly controlled

subsidiaries listed below:

Percentage

Shareholders’

Consolidated company ownership equity

Margusa - Maranhão Gusa S.A. ....................................................................................................... 100 73,714

Açominas Com. Imp. Exp. S.A.- Açotrading ....................................................................................... 100 22,583

Gerdau Açominas Overseas Ltd. ....................................................................................................... 100 7,914

Florestal Itacambira S.A. .................................................................................................................. 100 7,650

b) The more significant accounting practices used in preparing the consolidated financial statements are as follows:

I) Gerdau Açominas S.A. and its subsidiaries adopt consistent practices to record their operations and value their assets and liabilities. The

financial statements of the subsidiary Gerdau Açominas Overseas Ltd. were translated using the exchange rate in effect at the balance sheet

date and were adjusted to conform with accounting practices adopted in Brazil; and

II) Asset and liability, and income and expense accounts balances arising from transactions between consolidated companies have been

eliminated.

c) The subsidiary Armafer Serviços de Construção Ltda. was merged on October 29, 2004 and the net assets of R$ 44,744 were recorded

in Gerdau Açominas S.A., replacing the investment account, without capital increase. The objectives of the transaction were to reduce

administrative expenses and improve operating synergy.

d) The Company has goodwill which is being amortized in up to three years based on the realization of projected future results, as

follows:

Amortization

Period Company Consolidated

Goodwill in the investment account

Balance at December 31, 2003................................................................................................... 43,564 43,564

(-) Reversal of goodwill based on the adjustment in purchase price

(Margusa - Maranhão Gusa S.A.) ........................................................................................... (5,258) (5,258)

(-) Amortization for the year....................................................................................................... Up to 3 years _________________ (13,578) __________________ (13,578)

Balance at December 31, 2004 (based on expectation of future profiability)................................... _________________

24,728 __________________

24,728

The goodwill arises from the assets of the subsidiary Margusa - Maranhão Gusa S.A.

5 - Cash and Cash Equivalents

Company

Consolidated

_______________________________ _____________________________

2004 2003 2004 2003

Cash and banks .............................................................................................................. 49,758 64,110 49,915 64,969

Financial investment fund ................................................................................................ 548,192 115,156 555,951 115,156

Fixed income securities .................................................................................................... _____________- ____________- ____________ 157,955 ____________ 78,202

_____________

597,950 ____________

179,266 ____________

763,821 ____________

258,327

Fixed income securities and financial investment fund include R$ 165,369 - consolidated (R$ 78,076 - consolidated in 2003) of investments

in U.S. dollars.

6 - Trade Accounts Receivable

Company

Consolidated

_______________________________ _____________________________

2004 2003 2004 2003

Customers in Brazil.......................................................................................................... 792,706 520,274 794,961 522,985

Brazilian export receivables............................................................................................... 675,881 372,717 544,582 302,509

Provision for credit risks .................................................................................................. _____________ (69,827) ____________ (63,449) ____________ (69,827) ____________ (63,449)

_____________

1,398,760 ____________

829,542 ____________

1,269,716 ____________

762,045


7 - Inventories

Company

Consolidated

______________________________ _____________________________

2004 2003 2004 2003

Finished products............................................................................................................. 542,924 356,825 547,126 357,180

Work in process............................................................................................................... 351,139 227,808 351,139 227,808

Raw materials ................................................................................................................. 450,218 287,478 454,801 290,470

Storeroom materials......................................................................................................... 327,666 262,583 328,272 265,635

Advances to suppliers ...................................................................................................... ____________ 60,181 ____________ 38,270 ____________ 60,726 ____________ 38,452

____________

1,732,128 ____________

1,172,964 ____________

1,742,064 ____________

1,179,545

The inventories (company and consolidated) are covered against fire and overflow. Coverage is determined based on the amounts and the

risks involved.

8 - Tax Credits

Company

Consolidated

______________________________ _____________________________

2004 2003 2004 2003

Value-Added Tax on Sales and Services (ICMS)............................................................ 94,547 87,636 97,207 88,631

Social Contribution on Revenues (COFINS) to offset..................................................... 55,579 - 56,302 -

Social Integration Program (PIS) to offset................................................................... 11,130 2,811 11,344 2,812

Excise Tax (IPI) ....................................................................................................... 3,107 6,097 3,310 6,358

Income tax and social contribution on net income....................................................... 2,222 90 4,843 115

Other..................................................................................................................... ____________ 3,070 ____________ 18 ____________ 3,061 ____________ 749

____________

169,655 ____________

96,652 ____________

176,067 ____________

98,665

9 - Income Tax and Social Contribution on Net Income

a) Analysis of the income tax and social contribution expense:

Company

_________________________________________________________________________________________

2004 2003

_________________________________________ __________________________________________

IR CS Total IR CS Total

Profit before income tax and social contribution, after statutory

profit sharing.......................................................................... 3,294,125 3,294,125 3,294,125 646,009 646,009 646,009

Statutory rates of tax.................................................................... 25% 9% 34% 25% 9% 34%

Income tax and social contribution expense at statutory rates.......... (823,531) (296,471) (1,120,002) (161,502) (58,141) (219,643)

Tax effects on:

- equity in earnings (losses).......................................................... 2,598 935 3,533 1,615 581 2,196

- interest on equity....................................................................... 74,824 26,937 101,761 (150) (54) (204)

- recovery of deferred tax assets.................................................... 141,864 48,109 189,973 305,724 117,027 422,751

- permanent differences (net)........................................................ __________ 20,337 __________ (6,244) __________ 14,093 __________ (343) __________ (923) _________ (1,266)

Income tax and social contribution expense................................... __________

(583,908) __________

(226,734) __________

(810,642) __________

145,344 __________

58,490 _________

203,834

Current....................................................................................... (447,281) (162,899) (610,180) (103,857) (38,347) (142,204)

Deferred...................................................................................... (136,627) (63,835) (200,462) 249,201 96,837 346,038

Consolidated

_________________________________________________________________________________________

2004 2003

_________________________________________ __________________________________________

IR CS Total IR CS Total

Profit before income tax and social contribution, after statutory

profit sharing.......................................................................... 3,301,598 3,301,598 3,301,598 646,027 646,027 646,027

Statutory rates of tax.................................................................... 25% 9% 34% 25% 9% 34%

Income tax and social contribution expenses at statutory rates........ (825,400) (297,144) (1,122,544) (161,507) (58,142) (219,649)

Tax effects on:

- equity in earnings (losses).......................................................... (2,506) (902) (3,408) (331) (119) (450)

- interest on equity....................................................................... 74,824 26,937 101,761 - - -

- recovery of deferred tax assets.................................................... 141,864 48,109 189,973 305,724 117,027 422,751

- permanent differences (net)..................................................... __________ 21,844 __________ (5,741) __________ 16,103 __________ 1,471 __________ (307) _________ 1,164

Income tax and social contribution expense.................................. __________

(589,374) __________

(228,741) __________

(818,115) __________

145,357 __________

58,459 _________

203,816

Current.................................................................................. (452,402) (164,774) (617,176) (103,962) (38,395) (142,357)

Deferred................................................................................. (136,972) (63,967) (200,939) 249,319 96,854 346,173

IR - Corporate income tax.

CS - Social contribution on net income.


152 153

GERDAU AÇOMINAS S.A.

b) Analysis of the deferred income tax and social contribution assets and liabilities, at the statutory rates of tax:

_________________________________________________________________________________________________________________________

Assets

___________________________________________________________

Company

____________________________________________________________

Consolidated

____________________________

2004

_____________________________

2003

_____________________________

2004

_____________________________

2003

IR CS Total IR CS Total IR CS Total IR CS Total

Income tax losses.................... 228,735 - 228,735 273,713 - 273,713 230,165 - 230,165 275,506 - 275,506

Social contribution losses ....... - 52,403 52,403 - 83,867 83,867 - 53,060 53,060 - 84,662 84,662

Provision for contingencies ..... 12,071 4,345 16,416 3,998 1,439 5,437 12,405 4,345 16,750 4,353 1,446 5,799

Commissions/other.................. 6,221 2,239 8,460 4,038 1,453 5,491 6,221 2,239 8,460 4,038 1,453 5,491

Amortized goodwill................. 1,094 394 1,488 - - - 1,094 394 1,488 - - -

Provision for losses................. ________ 77,931 ________ 28,055 ________ 105,986 ________ 84,799 ________ 30,528 ________ 115,327 ________ 77,931 ________ 28,055 ________ 105,986 ________ 84,799 ________ 30,528 ________ 115,327

________ 326,052 ________ 87,436 ________ 413,488 ________ 366,548 ________ 117,287 ________ 483,835 ________ 327,816 ________ 88,093 ________ 415,909 ________ 368,696 ________ 118,089 ________ 486,785

Current ................................. 245,685 58,505 304,190 72,362 26,050 98,412 245,685 58,505 304,190 72,362 26,050 98,412

Long-term ............................. 80,367 28,931 109,298 294,186 91,237 385,423 82,131 29,588 111,719 296,334 92,039 388,373

_________________________________________________________________________________________________________________________

Liabilities

___________________________________________________________

Company

____________________________________________________________

Consolidated

____________________________

2004

_____________________________

2003

_____________________________

2004

_____________________________

2003

IR CS Total IR CS Total IR CS Total IR CS Total

Inflationary/exchange effect..... ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790 ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790

Current ................................. ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790 ________ 115,934 ________ 33,971 ________ 149,905 ________ 19,790 ________- ________ 19,790

The tax benefits recognized on income tax and social contribution loss carryforwards, as well as on the provision for losses, both in

the Company and consolidated, are supported by projections of future taxable income adjusted to present values, based on technical

feasibility studies, approved by management. These studies, which consider the history of the Company’s and its subsidiaries’ profitability

and the maintenance of the current profitability in the future, permitted the recognition of an additional benefit for the year of R$ 189,973

(R$ 422,751 in 2003) in the Company and consolidated, whose estimated recovery is shown in item “c” below. Other credits, based on

temporary differences, mainly tax contingencies, were maintained according to their estimate of realization.

c) Estimated recovery of deferred income tax and social contribution assets:

Company

Consolidated

_______________________________ _____________________________

2004 2003 2004 2003

Up to 2004 ..................................................................................................................... - 98,412 - 98,412

2005 .............................................................................................................................. 304,190 93,101 304,190 93,101

2006 .............................................................................................................................. 22,128 84,086 22,128 86,411

2007 .............................................................................................................................. 16,979 83,905 19,284 84,178

2008 .............................................................................................................................. 25,367 76,707 25,367 77,059

2009 .............................................................................................................................. 10,947 20,377 11,063 20,377

2010 to 2012 ................................................................................................................. 23,497 27,247 23,497 27,247

2013 to 2014 ................................................................................................................. _____________ 10,380 ____________- ____________ 10,380 ____________-

_____________

413,488 ____________

483,835 ____________

415,909 ____________

486,785

10 - Compulsory Deposits and Other

Company

Consolidated

_______________________________ _____________________________

2004 2003 2004 2003

Compulsory deposits ....................................................................................................... 12,077 187 12,345 833

Receivables under contract............................................................................................... 23,770 20,544 23,770 20,546

ICMS credits on purchases of fixed assets.......................................................................... 69,992 32,722 69,992 32,730

Assets not for use............................................................................................................ - - 8,665 8,665

Income tax incentives....................................................................................................... _____________ 38 ____________ 49 ____________ 39 ____________ 49

105,877 53,502 114,811 62,823

_____________ ____________ ____________ ____________

_____________ ____________ ____________ ____________


11 - Investments

Company

________________________________________________________________________________________________________________________________________________________________________________

2004 2003

__________________________________________________________________________________________________________________________________________________________________ __________

Subsidiaries Other Total Total

_________________________________________________________________________________________________________________________________ _____________ ____________ __________

Açominas Com. Gerdau Florestal

Imp. e Exp. S.A. - Açominas Itacambira Armafer - Serv.

Açotrading Overseas Ltd. S.A. Margusa - Maranhão Gusa S.A. Constr. Ltda. 2 Other

________________ ______________ ______________ _________________________________ _________________ ______________

Investment Investment Investment Investment Goodwill Investment Investment

Opening balance............................................... 22,592 7,504 7,211 53,248 43,564 41,470 3,897 17,977 197,463 29,870

Merger/capitalization ................................... - - - - - (47,066) - 32 (47,034) 108,921

Reversal of goodwill ..................................... - - - - (5,258) - - - (5,258) 52,814

Acquisition ................................................... - - - - - - - 78 78 -

Sale ............................................................. - - - - - - - (4,294) (4,294) -

Equity in earnings (losses) 1 ........................... (9) 410 576 25,643 (13,578) (3,030) - 379 10,391 6,458

Deposit for future capital increase ................. - - - - - 8,626 13 - 8,639 -

Dividends......................................................... ________________ - ______________ - ______________ (137) _________________________________ (5,176) - _________________ - ______________ - _____________ (300) ____________ (5,613) ___________ (600)

Closing balance................................................. ________________ 22,583 ______________ 7,914 ______________ 7,650 _________________________________ 73,715 24,728 _________________ - ______________ 3,910 _____________ 13,872 ____________ 154,372 ___________ 197,463

Capital ............................................................ 17,689 133 5,790 10,702 -

Shareholders’ equity ......................................... 22,583 7,914 7,650 73,714 -

Net income (loss) for the year ........................... (9) 1,019 575 21,860 (3,030)

Percentage of interest (%)................................. 100% 100% 100% 100% -

Common shares/quotas held.............................. 400,000 50,000 158,985 8,615,249 -

Preferred shares held ........................................ - - - 2,086,310 -

1

Includes amortization of goodwill.

2

Company merged on October 29, 2004.


154 155

GERDAU AÇOMINAS S.A.

Consolidated

____________________________________________________________________

2004 2003

_____________________________________________________________ ___________

Investment Goodwill Total Total

Margusa - Maranhão Gusa S.A. ........................................................................... - 24,728 24,728 43,564

MRS Logística S.A. ............................................................................................. 4,772 - 4,772 4,772

Corporate joint ventures ..................................................................................... 10,036 - 10,036 9,984

Other investments .............................................................................................. 4,133 - 4,133 8,318

________________ __________ _________ _________

18,941 24,728 43,669 66,638

________________ __________ _________ _________

________________ __________ _________ _________

12 - Fixed Assets

Company

_______________________________________________________________________________________

2004 2003

_______________________________________________ ___________

Annual

Accumulated

depreciation

depreciation

rate - % Cost and depletion Net Net

Land, buildings and structures................................................ 0 to 4 2,385,691 (944,679) 1,441,012 1,508,988

Machinery, equipment and installations.................................. 10 4,571,194 (2,213,718) 2,357,476 2,126,167

Furniture and fixtures............................................................ 10 60,572 (36,584) 23,988 25,110

Vehicles............................................................................... 20 22,848 (18,581) 4,267 4,368

Electronic data equipment/rights/licenses................................ 20 266,201 (177,950) 88,251 85,268

Construction in progress........................................................ - 863,195 - 863,195 582,748

Forestation/reforestation....................................................... Feeling plan 123,431 (34,950) 88,481 64,471

___________ ____________ __________ __________

8,293,132 (3,426,462) 4,866,670 4,397,120

___________ ____________ __________ __________

___________ ____________ __________ __________

Consolidated

_______________________________________________________________________________________

2004 2003

_______________________________________________ ___________

Annual

Accumulated

depreciation

depreciation

rate - % Cost and depletion Net Net

Land, buildings and structures............................................... 0 to 4 2,403,143 (946,302) 1,456,841 1,529,014

Machinery, equipment and installations.................................. 10 4,586,568 (2,220,908) 2,365,660 2,160,821

Furniture and fixtures............................................................ 10 60,657 (36,827) 23,830 25,367

Vehicles............................................................................... 20 23,561 (18,797) 4,764 4,495

Electronic data equipment/rights/licenses................................ 20 266,217 (178,003) 88,214 86,383

Construction in progress........................................................ - 863,704 - 863,704 600,647

Forestation/reforestation....................................................... Feeling plan 156,672 (34,950) 121,722 97,711

___________ ____________ __________ __________

8,360,522 (3,435,787) 4,924,735 4,504,438

___________ ____________ __________ __________

___________ ____________ __________ __________

a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The coverage is determined based on the risks

involved. The Ouro Branco plant has coverage for loss of profits.

b) Capitalization of interest and financial charges - R$ 1,084 was capitalized during the year - Company and consolidated ((R$ 16,715) -

Company and consolidated in 2003).

c) Guarantees offered - fixed assets were pledged as collateral for loans and financing in the amount of R$ 371,494 - Company and consolidated

(R$ 249,924 - Company and consolidated in 2003).


d) Summary of changes in fixed assets:

Company

Consolidated

______________________________ ____________________________

2004 2003 2004 2003

Balance at the beginning of the year................................................................................. 4,397,120 2,825,208 4,504,438 2,825,208

( + ) Purchases/sales for the year...................................................................................... 905,549 387,067 912,003 389,090

( + ) Company merger...................................................................................................... 48,772 - - -

( - ) Depreciation and depletion in cost of sales.................................................................. (423,312) (131,180) (430,213) (132,352)

( - ) Depreciation and depletion in administrative expenses................................................. (61,459) (16,028) (61,493) (16,033)

( - ) Revaluation reversal................................................................................................... - (365,347) - (365,347)

( + ) Operational integration with Gerdau.......................................................................... - 1,697,400 - 1,791,555

( + ) Companies consolidated in the year........................................................................... - - - 12,317

____________ ___________ ____________ ___________

Balance at the end of the year.......................................................................................... 4,866,670 4,397,120 4,924,735 4,504,438

____________ ___________ ____________ ___________

____________ ___________ ____________ ___________

13 - Deferred Charges

Deferred charges (Company and consolidated) comprise pre-operating expenses with reforestation, research, development and restructuring

projects.

14 - Financing

Financing are represented as follows:

Annual Company Consolidated

_____________________________ __________________________

charges 2004 2003 2004 2003

Current

Working capital financing (R$).......................................... 8.00% to 14.00% 523 48,173 1,173 48,173

Fixed asset financing (R$) ................................................ 12.00% - 3,054 - 3,054

Investment financing (R$)................................................. CDI 4,500 4,500 4,500 4,500

Investment financing (US$)............................................... US$ 1,387 45,649 1,387 45,649

Working capital financing (US$)........................................ 1.36% to 10.50% 267,797 921,803 284,601 925,847

Fixed asset financing and others (US$) .............................. US$ - 2,912 - 5,082

Current portion of long-term financing............................... ___________ 603,406 __________ 863,501 __________ 603,406 __________ 866,671

877,613 1,889,592 895,067 1,898,976

Long-term

Working capital financing (R$).......................................... 10.02% 28,215 3,812 28,215 3,812

Fixed asset financing and others (R$)................................. 4.00% to 9.90% 599,817 554,153 603,272 569,124

Investment financing (R$)................................................. IGPM + 8.5% 29,045 35,019 29,045 35,019

Fixed asset financing and others (US$) .............................. 3.09% to 6.00% 619,884 616,837 619,884 616,837

Working capital financing (US$)........................................ 2.95% to 7.34% 1,406,166 1,066,385 1,406,166 1,066,385

(-) Current portion........................................................... ___________ (603,406) __________ (863,501) __________ (603,406) __________ (866,671)

___________ 2,079,721 __________ 1,412,705 __________ 2,083,176 __________ 1,424,506

Total financing................................................................ ___________

2,957,334 __________

3,302,297 __________

2,978,243 __________

3,323,482

CDI - Certificate of Interbank Deposit interest rate.

IGPM - General Market Price Index.


156 157

GERDAU AÇOMINAS S.A.

Summarized by currency:

Company

Consolidated

_______________________________ _____________________________

2004 2003 2004 2003

Brazilian real (R$).................................................................................................... 662,100 648,711 666,205 663,682

U.S. dollar (US$)...................................................................................................... ____________ 2,295,234 ____________ 2,653,586 ____________ 2,312,038 ____________ 2,659,800

____________

2,957,334 ____________

3,302,297 ____________

2,978,243 ____________

3,323,482

The schedule for payment of the long-term portion of financing is as follows:

Company

Consolidated

In 2006...................................................................................................................................................................... 462,261 462,889

In 2007...................................................................................................................................................................... 511,326 511,954

In 2008...................................................................................................................................................................... 522,084 522,712

In 2009...................................................................................................................................................................... 281,148 281,776

In 2010...................................................................................................................................................................... 168,086 168,715

After 2010.................................................................................................................................................................. ____________ 134,816 ________________ 135,130

____________

2,079,721 ________________

2,083,176

a) Events during the year

On June 3, 2004, the Company concluded the placement of the second tranche, of US$ 128 million (equivalent to R$ 339,763 at December 31,

2004), related to a US$ 400 million Export Notes Receivable program (equivalent to R$ 1,061,760 at December 31, 2004). This joint program

with Gerdau S.A. has an interest rate of 7.321% p.a., maturity in April 2012, a grace period of two years and quarterly amortization as from

July 2006.

b) Guarantees

The loans contracted under the FINAME/BNDES program are guaranteed by the financed assets, in the amount of R$ 180,109. The other loans

are guaranteed by sureties from the controlling shareholders, on which the Company pays a fee of 1% p.a. on the amount guaranteed.

c) Covenants

In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows:

I) Consolidated interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes,

Depreciation and Amortization);

II) Consolidated leverage ratio - measures the debt coverage capacity in relation to EBITDA;

III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and

IV) Current Ratio (current liquidity ratio) - measures the capacity to comply with short-term obligations.

All the covenants mentioned above are calculated on a consolidated basis of the parent company Gerdau S.A., except for item IV which refers to

the parent company Metalúrgica Gerdau S.A., and have been observed. The penalty for non-compliance is the prepayment of the contracts.

15 - Financial Instruments

a) General comments - Gerdau Açominas S.A. and its subsidiaries enter into transactions involving financial instruments, the risks of which

are managed through financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly

relate to the instruments listed below:

- financial investments - are recorded at their market value as of the balance sheet date and are explained and presented in Note 5;

- investments - are explained and presented in Note 11;

- related parties - are explained and presented in Note 19;

- financing - are explained and presented in Note 14; and

- financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on its liabilities, the Company entered into

swap contracts that were converted into Brazilian reais on the contract date and linked to changes in the CDI rate. The swap contracts are

listed below:

Company and Consolidated

_____________________________________________________________________________________________________________

Contract date Purpose Amount US$ thousand Rate Maturity

07/16/2001 to 05/07/2002 Prepayment 32,823 85.55% to 100.00% of the CDI 01/13/2005 to 03/01/2006

02/20/2002 Resolution 2770 54,000 106.00% of the CDI 06/20/2005

02/19/2003 Resolution 4131 3,300 85.70% of the CDI 02/04/2005


) Market value - the market values of the financial instruments are as follows:

Company

________________________________________________________________

2004 2003

______________________________ _____________________________

Book Market Book Market

Value Value Value Value

Financial investments............................................................................................... 548,192 548,192 115,156 115,156

Eurobonds.............................................................................................................. - - 370,342 370,956

Securitization financing............................................................................................ 627,908 627,908 303,282 303,282

Import financing...................................................................................................... 619,883 619,883 377,534 383,941

Prepayment financing............................................................................................... 808,983 804,724 807,385 818,786

Financing - Resolution 2770..................................................................................... 263,060 256,585 365,573 390,235

ACC (Advances on Export Contracts) financing ........................................................... 27,088 27,088 500,118 524,935

Financing - Resolution 4131 .................................................................................... 20,893 20,755 24,243 24,468

Other financing....................................................................................................... 589,519 589,520 553,820 573,067

Investments............................................................................................................ 154,372 154,372 197,463 197,463

Related parties (assets)............................................................................................ 8,178 8,178 - -

Related parties (liabilities)........................................................................................ - - 138,309 138,309

Consolidated

________________________________________________________________

2004 2003

______________________________ _____________________________

Book Market Book Market

Value Value Value Value

Financial investments............................................................................................... 713,906 713,906 193,358 193,358

Eurobonds.............................................................................................................. - - 370,342 370,956

Securitization financing............................................................................................ 627,908 627,908 303,282 303,282

Import financing...................................................................................................... 619,883 619,883 377,534 383,941

Prepayment financing............................................................................................... 808,983 804,724 807,385 818,786

Financing - Resolution 2770..................................................................................... 263,060 256,585 365,573 390,235

ACC financing ........................................................................................................ 43,891 43,891 500,118 524,935

Financing - Resolution 4131 .................................................................................... 20,893 20,755 24,243 24,468

Other financing....................................................................................................... 593,625 593,625 575,005 594,251

Investments............................................................................................................ 43,669 43,669 66,638 66,638

Related parties (assets)............................................................................................ 21,804 21,804 - -

Related parties (liabilities)........................................................................................ - - 125,320 125,320

The market values of swap contracts were obtained based on future income projections for each contract, calculated based on the present

value of the forward U.S. dollar + coupon rates (assets) and CDI future rates (liabilities) and adjusted to present value on the balance sheet

date, using the projected future CDI rate for each maturity. Swap contracts related to financing contracts are classified together with the

related financing, as a contra entry to the “Financial expenses/income, net” account, and are stated at cost plus accrued charges up to the

balance sheet date.

The Company believes that the balances of the other financial instruments, which are recognized in the books at the net contracted values,

are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these

instruments are not active, differences could exist if they were settled in advance.

c) Risk factors that could affect the Company’s business

Price risk: this risk is related to the possibility of price variations of the products that the Company sells or in the raw material prices and

other inputs used in the production process. Since the Company operates in a commodity market, its sales revenues and cost of sales may

be affected by the changes in the international prices of its products or materials. In order to minimize this risk, the Company constantly

monitors the price variations in the local and international markets.

Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to Company

assets (investments) and liabilities. In order to minimize possible impacts resulting from interest rate fluctuations, the Company has adopted

a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically renegotiates

contracts to adjust them to market.


158 159

GERDAU AÇOMINAS S.A.

Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income)

and the liability (or asset) balance of contracts denominated in a foreign currency. In order to manage the effects of these fluctuations, the

Company uses “hedge” instruments, usually swap contracts, as described in item “a” above.

Credit risk: this risk arises from the possibility of the Company not receiving amounts arising from sales or credit instruments at financial

institutions. In order to minimize this risk, the Company adopts the procedure of analyzing in detail the financial and equity position of its

customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company invests

solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum limit for investment,

determined by the Company’s Credit Committee.

16 - Financial Expenses/Income, Net

Company

Consolidated

____________________________ ____________________________

2004 2003 2004 2003

Financial income

Financial investments............................................................................................... 45,684 42,239 46,699 43,962

Interest received...................................................................................................... 31,265 3,934 29,025 3,962

Monetary variations - assets..................................................................................... 2,410 2,351 2,842 2,351

Foreign exchange variations - assets.......................................................................... (35,422) (81,329) (34,756) (81,329)

Other financial income............................................................................................. 37,380 1,958 38,554 2,002

___________ ___________ ___________ ___________

Total financial income ............................................................................................. ___________

81,317 ___________

(30,847) ___________

82,364 ___________

(29,052)

Financial expenses

Interest on debt....................................................................................................... (180,450) (79,159) (180,231) (79,356)

Monetary variations - liabilities .....................