Gerdau has "extensive" list of partners for spin-off

SAO PAULO (Reuters) - Brazilian steelmaker Gerdau (GGBR4.SA)(GGB.N) has an "extensive list" of potential partners for a plan to spin off a mining unit that has about 2.9 billion tonnes of iron ore reserves, Chief Executive André Gerdau Johannpeter said on Thursday.

Gerdau, the world's second-biggest producer of steel products for the construction industry, is seeking the spin-off to reach iron ore self-sufficiency and broaden its sources of revenue, Gerdau Johannpeter said on a conference call to discuss fourth-quarter earnings -- which rose more than expected from a year ago but plummeted from the third quarter.

The spin-off, which aims at helping Gerdau either raise more money to develop the asset or bring in a partner with greater expertise in handling ore mines, comes as prices for the mineral are expected to free-fall in coming years after having reached record early in 2011.

"We foresee that, in the long term, this is a good area of business and we want to be in there," the CEO said. Among options could be a sale to a strategic investor or an initial public offering, he noted.

The steelmaker, which uses scrap and iron ore as ingredients for steel, needs more stable supply of iron ore to tame costs and reduce reliance on third-party purchases. Plans by rival CSN (CSNA3.SA) to do the same with its Casa de Pedra mine have faced problems related to market turmoil and disputes inside another mining division, Namisa.

Preferred shares of Gerdau, the company's most widely traded class of stock, seesawed on Thursday, as investors fretted over a drop in fourth-quarter net income from the third quarter, as well as a sequential decline in production.

Gerdau shed 0.2 percent to 17.35 reais, the third straight daily decline. The stock, which gained 19 percent this year, had climbed earlier in the day after profit beat analysts' estimates on a year-on-year basis.

Goldman Sachs Group Inc (GS.N) was hired to manage the planned spin-off, Gerdau Johannpeter noted.

PROFIT BEAT WITH POOR MIX

Developing the mining unit could help Gerdau stem cost pressures that weighed on fourth-quarter profit on a quarter-on-quarter basis. Cost inflation - raw materials prices have surged for years - is a major concern for local steelmakers, which are also grappling with oversupply globally and a flagging economy.

Gerdau's net income plummeted 34 percent to 472 million reais ($271 million) in the last quarter of 2011 from 720 million reais in the third quarter, the company said in a securities filing. Year over year, however, it climbed a stronger-than expected 12 percent, beating the average profit forecast of 326 million reais.

The quarter-on-quarter drop may be an indication that earnings in the sector are likely to disappoint as high raw materials prices, which affected earnings for mills throughout 2011, keep hampering profitability.

Citigroup analyst Alexander Hacking said "increasing cost inflation came as our main concern," referring to the results. Cost per tonne produced jumped 7 percent from the third quarter, offsetting a 4 percent gain in prices for some of Gerdau's flagship products.

Gerdau's results might be a prelude to flagging results in the sector, some analysts said. Brazil's CSN (CSNA3.SA) and Usiminas (USIM5.SA), the other two local listed steelmakers, are expected to report earnings later this month.

On a year-on-year basis, profit jumped more than expected as rising revenue helped offset higher production costs and expenses for the largest steelmaker in the Americas.

Earnings before interest, tax, depreciation and amortization were down 16 percent from the third quarter at 1.025 billion reais. Sales volumes sagged at almost all business units.

EBITDA rose 26 percent from a year earlier and topped analysts' average forecast of 982 million reais.

Production of raw steel rose 8 percent from a year earlier to 4.732 million metric tons but was down 6 percent from the third quarter. Sales rose 4 percent from the fourth quarter of 2010 but slipped 3 percent from the third quarter.

Efficiency, as measured by how much operational revenue the company earned per ton of steel produced, jumped to 122 reais from 101 reais a year earlier but was down from the third quarter's 131 reais.

Citigroup's Hacking said that the weak sequential show of operating results might be reversed in the first and second quarters of 2012.

Osvaldo Schirmer, Gerdau's chief financial officer, said in the call that domestic prices are likely to remain stable throughout the year, adding that he sees the outlook for sales and output with "reasonable optimism."

($1=1.73 reais)

(Reporting by Guillermo Parra-Bernal; Editing by Derek Caney, John Wallace, Dave Zimmerman)