Morgan Stanley downgraded its rating for CSN Mineração (CMIN3), Brazil’s second-largest iron ore miner, from equal-weight to underweight.
According to local media InfoMoney, the stock has been downgraded and the target price reduced from R$6.20 to R$5.30, citing concerns over the company’s execution of its expansion strategy and a negative supply-demand balance for iron ore.
At 10:51 a.m. Brazil’s local time, shares of the mining group slid 3.80% to R$5.31.
One of the primary issues flagged by Morgan Stanley is the elevated execution risk associated with the company’s marquee expansion project, the Itabirito P15 mine.
The mine was supposed to be operating in 2023, but it has been postponed for the fourth time, with commissioning now scheduled for the December quarter of 2027.
The project aims to produce 16.5 million tonnes of 67% iron ore annually, with low impurities and high quality.
Multiple postponements have now raised questions over the company’s capability to deliver the project within the timeframe and cost, both of which could have a fundamental bearing on CSN Mineração’s earnings.
Prepayment contracts put pressure on free cash flow
Morgan Stanley’s analysis also identifies liquidity limitations caused by prepayment agreements.
The company has seven current contracts totalling approximately 55.1 million tonnes to be delivered by the fourth quarter of 2029 in exchange for US$2.4 billion in prepayment.
Although these contracts provide quick liquidity, CSN Mineração is burdened with payback commitments that require working capital, limiting its financial flexibility.
The repayment of these liabilities over time reduces the company’s EBITDA conversion to free cash flow.
As a result, Morgan Stanley expects a negative average free cash flow income of 9% between 2025 and 2027, provided no new prepayment contracts are signed.
While such arrangements can help with short-term liquidity, the bank warns that they jeopardise the company’s long-term financial sustainability.
Earnings outlook revised downward
Morgan Stanley’s new estimates point to an EBITDA of R$1.63 billion now for the second quarter of 2025, 3.8% below the previous forecast.
The EBITDA estimates for the full year have also been reduced to R$ 6.41 billion for 2025 (-9.0%), R$ 7.00 billion for 2026 (-15.5%), R$ 6.86 billion for 2027 (-16.3%), and R$ 12.10 billion for 2028 (-13.3%).
Similarly, earnings per share (EPS) estimates have been lowered.
The estimated 2Q25 normalised EPS is R$0.10, followed by R$0.24 in 2025, R$0.31 in 2026, R$0.26 in 2027, and R$0.70 in 2028.
However, these forecasts are still higher than the consensus amongst the market, meaning the company seems expensive at current market prices.
CSN Mineração is currently priced at 4.7x its 2025 EV/EBITDA forecast, approximately 15% above its historical mean despite its poor free cash flow outlook.
Iron ore prices are seen declining amid surplus
The company’s outlook is further complicated by a less favourable iron ore situation.
Morgan Stanley’s commodities team expects the average iron ore price to decline to $100/tonne in 2025 and $95/tonne in 2026, down from $110/tonne in 2024.
The current spot price is already at $100 per tonne.
The price reduction is due to a predicted excess in the seaborne iron ore market, which is expected to reach 62 million tonnes in 2025 and continue to expand until 2029.
This follows a modest 2 million-tonne shortfall in 2024. The anticipated surplus is caused by both weakening demand, mainly from China, and increased production, including a planned 20 million tonnes from Guinea’s Simandou mine beginning in 2026.
CSN Mineração faces challenges due to execution delays, financial constraints from prepayment contracts, and a pessimistic forecast for iron ore.
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