UPDATE 3-Brazil's CSN Q3 profit soars 28-fold, shares rally

* Profit jumps 28-fold yr-on-yr on nonrecurring gains

* CSN to group iron ore assets into one company

* Profits beat analysts' estimate

* Shares rally 3 percent in Sao Paulo (Recasts to add plans for iron ore unit, remarks on demand)

By Guillermo Parra-Bernal and Alberto Alerigi Jr.

SAO PAULO, Nov 4 (Reuters) - CSN (CSNA3.SA)(SID.N), Brazil's third-largest steelmaker, said on Wednesday net profit rose about 28-fold in the third quarter helped by a one-off gain from the sale of a stake in iron ore unit Namisa and a stronger currency that trimmed debt-servicing costs.

The company, formally known as Companhia Siderurgica Nacional, said net income climbed to 1.15 billion reais ($659 million) from a profit of 39.7 million reais in the same period of 2008. The result beat the 543 million reais average net income estimate of six analysts polled by Reuters.

CSN shares rallied 3 percent to 60.35 reais in Sao Paulo on Wednesday, hitting a one-week high.

Lower production costs and decreasing taxes also helped boost profits and margins from the prior quarter. A recovery in demand for steel is expected .

"The strong demand from China, the beginning of a recovery phase in several other markets and lower borrowing costs ... should bolster an increase in output through the end of the year," the filing said.

CSN booked an 835 million reais gain from the sale of 40 percent of its Namisa iron ore unit to a group of South Korean and Japanese companies. CSN still owns 60 percent of Namisa.

CSN management plans to group CSN's mining units into a single company as early as next year, Juarez Saliba, head of its iron ore division, told analysts on a conference call.

"All options are on the table, an initial public offering, the pursuit of a strategic partner," Saliba said. International Financing Review, a Thomson Reuters publication, said recently that a share offering in CSN's Casa de Pedra iron ore unit could fetch about $2 billion.

Itau Securities analyst Marcos Assumpcao said investors price Casa de Pedra and CSN's Namisa stake at $9 billion.

"If CSN manages to sell a stake of its mining business for more than $200 a tonne, there could be additional upside for CSN shares," Assumpcao wrote in a note to clients.

Earnings before interest, taxes, depreciation and amortization, a key measure of operational profitability known as EBITDA, were 992 million reais in the quarter ended Sept. 30, compared with 2.09 billion reais a year earlier.

EBITDA as a proportion of revenue, known as EBITDA margin, fell to 33.2 percent from 52 percent a year earlier but rose from 29.2 percent in the second quarter.

Yet the margin beat the 31 percent estimate in the Reuters poll.

RECOVERY FORESEEN

Capital expenditure rose to 416 million reais in the quarter, and focused on expansion in the steel, iron ore and logistics units. The company is in "advanced negotiations" with potential partners for the construction of two new steel mills in the state of Minas Gerais, Saliba said on the call.

The company foresees "very strong demand" for steel in the fourth quarter of 2009, sales director Luis Fernando Martinez told investors on the call.

The company's earnings gained steam over the second-quarter net profit of 335 million reais. Most operational indicators including revenue and costs pointed to a recovery relative to the prior three months, the company said.

Profit was bolstered by a 5 percent drop in costs to 1.81 billion reais, after CSN restarted a blast furnace in July.

The company booked a gain of 520.8 million reais from currency-related transactions after the real BRBY rallied 11 percent in the quarter, trimming its nonoperating shortfall to 115 million reais from 1.72 billion reais a year ago.

Revenue slumped 26 percent to 2.99 billion reais from a year earlier despite a 4 percent increase in sales volumes. Discounts, coupled with a deteriorating sales mix that spurred shipments of non-coated steel and other less value-added products, weighed on revenue, the company said.

($1=1.746 reais)

(Editing by Dave Zimmerman)