Item 4. Information on the Company

 

A. History and Development of the Company

 

We are a limited liability exempted company incorporated under the laws of Bermuda on April 30, 2007 for an indefinite term. We are registered with the Registrar of Companies in Bermuda under registration number EC 39981. Our registered office is located at Crawford House, 50 Cedar Avenue, Hamilton HM11, Bermuda. Our principal executive office is located at Av. Juscelino Kubitschek, 1726 – 6th floor, São Paulo – SP, Brazil and our general telephone and fax numbers are 55 11 3897-9797 and 55 11 3897-9799, respectively.

 

The objects of our business are set forth in our memorandum of association and provide that we have unrestricted objects and powers and rights including to:

 

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import, export, produce and sell ethanol, sugar, sugarcane and other sugar by-products;

 

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distribute and sell fuel and other fuel by-products;

 

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produce and market electricity, steam and other co-generation by-products;

 

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render technical services related to the activities mentioned above; and

 

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hold equity interests in other companies.

 

Our history dates back to 1936 when the Costa Pinto mill was established by the Ometto family in the city of Piracicaba in the State of São Paulo, with annual sugarcane crushing capacity of 4.0 million tons. Beginning in the mid 1980s, we began to expand our operations through the acquisition of various milling facilities in the State of São Paulo. In 1986, Usina Santa Helena and Usina São Francisco became part of Cosan, with annual sugarcane crushing capacity of 2.1 and 1.4 million tons, respectively. In 1988, Usina Ipaussu added an extra 2.0 million tons of annual sugarcane processing capacity. In 1996, we were granted a concession from the Brazilian government for the construction, development and operation of a sugar-loading terminal at the Port of Santos, currently managed by our subsidiary Cosan Portuária. In 1998, Usina Diamante and Usina da Serra became part of our group, with annual sugarcane crushing capacity of 2.0 and 1.8 million tons, respectively.

 

In February 2000, Cosan’s then shareholders approved an increase in the share capital of Irmãos Franceschi Agrícola Industrial e Comercial Ltda., Cosan’s predecessor company, in exchange for the contribution to Cosan of the Costa Pinto, Santa Helena, São Francisco and Tamandupá mills. As a result, Cosan

 

 

 

became a corporation and changed its name to Cosan S.A. Indústria e Comércio. Since 2000, we have expanded our operations primarily through acquisitions, partnerships and corporate restructurings, taking strategic advantage of the deregulation of the sugar industry in Brazil.

 

Our operating activities are carried out primarily through Cosan, Cosan Alimentos S.A. (formerly known as Nova América S.A. – Agroenergia) and Cosan Açúcar e Álcool S.A., or CAA, (formerly known as Usina Da Barra S.A. Açúcar e Álcool, or Da Barra). We also operate a sugar port terminal at the Port of Santos through Rumo Logística and own a 66.67% interest in an ethanol terminal also located at the Port of Santos named TEAS. We currently operate 23 mills, two of which are leased from third parties (Junqueira and Dois Corregos) under operating leases. One of these mills incurs lease payments that are based on a percentage of its sales.

 

Acquisitions, Partnerships and Corporate Restructurings

 

Since May 2004, we have expanded our annual sugarcane crushing capacity by 102.8% from approximately 24.8 million tons to approximately 60 million tons as of March 31, 2010, primarily through acquisitions, partnerships and corporate restructurings (after the completion of the Nova América acquisition, on June 18, 2009 we added approximately 10.6 million tons to our sugarcane crushing capacity). As a result of these acquisitions, partnerships and corporate restructurings, our net sales and gross profit have increased significantly.

 

Our principal acquisitions, partnerships and corporate restructurings since May 2004 consist of the following:

 

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In December 2004, Cosan acquired, through FBA, controlling interests in the Destivale Group (which consists of Destilaria Vale do Tietê, or “Destivale”, Destiagro Destivale Agropecuária Ltda., or “Destiagro”, Agrícola Destivale Ltda., or “Agrícola Destivale”, and Auto Posto Destivale Ltda., or “Auto Posto Destivale”) for an aggregate purchase price of US$36.7 million. The Destivale Group has 1.0 million tons of sugarcane crushing capacity. In March 2006, Destivale and Destiagro were merged into Corona.

 

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In May 2005, Cosan acquired from Tereos do Brasil Participações Ltda. and Sucden Investimentos S.A., for US$100.9 million the remaining 52.5% of the outstanding shares of FBA, generating goodwill in the amount of US$32.9 million.

 

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In July 2005, Cosan transferred all of its ownership interest in Amaralina to Cosan’s shareholders, valued at US$118.6 million.

 

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In December 2005, Cosan indirectly acquired 100% of the common shares of Mundial, and of Alcomira S.A. The purchase price was US$29.2 million in cash plus the assumption of certain existing liabilities of Mundial in an amount of US$23.0 million. Cosan recorded US$52.2 million in goodwill related to this acquisition. At the time of the acquisition, Mundial was located in Mirandópolis, São Paulo, and had an annual sugarcane crushing capacity of approximately 1.3 million tons of sugarcane.

 

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In February 2006, Cosan purchased all of the equity capital of Corona from Aguassanta Comercial Exportadora e Importadora S.A., or “Aguassanta Comercial” (a company indirectly controlled by our chairman), S.A. Fluxo Comércio e Assessoria Internacional, or “Fluxo” and certain individuals, for

 

 

 

US$180.6 million (generating goodwill in an aggregate amount of US$196.4 million, due to liabilities assumed in an aggregate amount of US$15.9 million). Corona owns approximately 14,500 hectares of land located in the Ribeirão Preto region in the State of São Paulo and two mills (Bonfim and Tamoio) with a total annual sugarcane crushing capacity of approximately 6.0 million tons.

 

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In March 2006, Cosan merged Usina da Barra S.A.—Açúcar e Álcool, and FBA, among other subsidiaries, into Corona and changed Corona’s name to Usina da Barra S.A.—Açúcar e Álcool, currently CAA.

 

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In April 2006, Cosan acquired controlling interests in Bom Retiro for an aggregate purchase price of US$51.1 million (generating goodwill in an aggregate amount of US$16.4 million). At the time of the acquisition, Bom Retiro owned one mill (Bom Retiro) with an annual sugarcane crushing capacity of 1.2 million tons.

 

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In October 2006, Mundial and Bom Retiro, among other subsidiaries, merged into Cosan.

 

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In February 2007, Usina da Barra merged into Danco Participações S.A., having its corporate name changed to Usina da Barra S.A.—Açúcar e Álcool, currently CAA.

 

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In April 2007, Cosan, together with São Martinho S.A. and Santa Cruz S.A. Açúcar e Álcool acquired Usina Santa Luiza and Agropecuária Aquidaban Ltda. for an aggregate purchase price of US$112.0 million, of which US$39.4 million was paid by Cosan. The acquisition was carried out through Etanol Participações S.A., a holding company formed by Usina São Martinho S.A. (a wholly-owned subsidiary of São Martinho S.A.), Cosan and Santa Cruz S.A. Açúcar e Álcool, with respective interests of 41.67%, 33.33% and 25.00%, and which will be managed on a joint basis, with representatives of each shareholder on the board of directors and the executive board. Usina Santa Luiza is located in the City of Motuca, in the State of São Paulo.

 

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In August 2007:

 

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Aguassanta Participações S.A., or “Aguassanta” and Usina Costa Pinto S.A. Açúcar e Álcool, or “Costa Pinto”, controlling shareholders of Cosan and both indirectly controlled by our chairman, Mr. Rubens Ometto Silveira Mello, contributed their common shares of Cosan to us in exchange for 96,332,044 of our class B series 1 common shares. The common shares contributed to us by Aguassanta and Costa Pinto consist of 96,332,044 common shares of Cosan, representing 51.0% of Cosan’s outstanding common shares; and

 

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Aguassanta then contributed our class B series 1 common shares to Queluz Holdings Limited, its newly created British Virgin Islands subsidiary, which is also indirectly controlled by our chairman, Mr. Rubens Ometto Silveira Mello, in a manner that resulted in Queluz Holdings Limited and Costa Pinto being our direct shareholders. As a result we currently own 96,332,044 common shares of Cosan, representing 51.0% of Cosan’s outstanding common shares.

 

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We completed our initial public offering and listed our class A common shares on the NYSE. We received US$1.1 billion, net of directly attributable costs, in aggregate proceeds from the initial public offering.

 

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In December 2007:

 

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Cosan contributed to the capital stock of its controlled entity Usina da Barra S.A., shares representing 33.33% of the capital stock of Etanol Participações S.A.

 

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Cosan’s shareholders approved a capital increase in the amount of 82,700,000 common shares. The results of the capital increase were announced on January 23, 2008. Minority shareholders subscribed for a total of 26,092,604 common shares and Cosan Limited subscribed for a total of 56,607,396 shares.

 

 

 

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On February 14, 2008, Cosan acquired 100% of the capital stock of Benálcool Açúcar e Álcool S.A. for US$42.7 million.  Cosan recorded US$88.1 million in goodwill related to this acquisition. The purchase price was paid in cash by Cosan. The principal asset of Usina Benálcool is its sugarcane and alcohol mill, which has an annual processing capacity of approximately 1.3 million tons of sugarcane. Usina Benálcool is located in the Araçatuba region, where Cosan already has four other operational units. With this acquisition, Cosan has increased its presence in an important production region.

 

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On April 23, 2008, Cosan entered into an agreement with Exxon, for the acquisition of 100% of the capital of Esso Brasileira de Petróleo Ltda. and its subsidiaries, or “Essobrás”, a distributor and seller of fuels and producer and seller of lubricants and specialty petroleum products of ExxonMobil in Brazil. On December 1, 2008, Cosan completed the acquisition of all of the outstanding shares of Essobrás for a purchase price of approximately US$715 million and assumed debts in the amount of US$175 million. On January 16, 2009 the corporate name of Essobrás was changed to Cosan Combustíveis e Lubrificantes S.A. At the time of the acquisition, CCL had a distribution network of more than 1,500 stations in Brazil and 40 fuel distribution centers. Additionally, CCL registered annual sales of more than 5 billion liters of ethanol, gasoline and diesel, 160 million cubic meters of VNG and 127,000 cubic meters of lubricants produced at our plant in Rio de Janeiro, which will continue to offer products under the Esso and Mobil brands, developed using Exxon’s global technology. With this acquisition, we expanded our business model to become the first integrated renewable energy company in the world, with operations ranging from sugarcane cultivation to fuel distribution and sales in the retail market.

 

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On August 28, 2008, Cosan announced the incorporation of a new subsidiary named Radar Propriedades Agrícolas S.A., or “Radar”, which makes real estate investments in Brazil identifying and acquiring rural properties with high appreciation potential for subsequent leasing and/or sale. Cosan currently holds 18.9% of Radar. Cosan initially invested US$35 million and the other investors US$150 million.  Furthermore, the parties have committed to invest an amount equal to US dollar equivalent of the Brazilian reais amount initially invested, which should only be disbursed when approximately 50% of the initial capital contribution has been invested.  Cosan has the right to exercise significant influence on Radar’s operations and, therefore, the investment is accounted using the equity method.

 

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In October 2008, a private subscription was announced involving US$50 million by the controlling shareholder, Mr. Rubens Ometto Silveira Mello, and up to US$150 million by the funds managed by Gávea Investimentos Ltda., at US$4.50 per class A share or BDR subscribed. The offering was extended to all class A share or BDR holders, as permitted by applicable law. The offering was concluded on October 27, 2008. As a result, Mr. Rubens Ometto Silveira Mello holds 41.5% of our total capital and 86.1% of our voting capital.

 

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On April 9, 2009, Cosan and Rezende Barbosa, concluded the port terminals combination of Cosan and Teaçu, a subsidiary of Rezende Barbosa.  As a result, Cosan, through its subsidiary Novo Rumo acquired 100% of the outstanding shares of Teaçu for R$121 million (US$53.0 million) and shares representing 28.82% of Novo Rumo’s capital.  Teaçu holds a port concession in the City of Santos and operates a terminal dedicated to exporting sugar and other agricultural products.  As a result of the transaction, Cosan’s indirect participation in Novo Rumo’s capital is of 71.18%.

 

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On June 17, 2009, Cosanpar Participações S.A., or Cosanpar, a wholly-owned subsidiary of Cosan, sold to Shell Brasil Ltda. its equity interest in Jacta Participações S.A., or “Jacta”, a distributor of aviation fuel that was part of Essobras.  Cosanpar received R$115.6 million (US$59.2 million) from the sale.

 

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On June 18, 2009, Cosan entered into an agreement with Rezende Barbosa to acquire 100% of the outstanding shares of Curupay S.A. Participações, or “Curupay”.  The acquisition was carried out through the merger of Curupay into Cosan resulting in the issuance by Cosan of 44,300,389 new common shares, representing 11.89% of its corporate capital on June 18, 2009, fully subscribed and paid-in by Rezende Barbosa. The 11.89% reflects the interest acquired by Rezende Barbosa in Cosan’s capital.   The total amount of Cosan’s capital increase was US$170 million, related to this transaction.

 

 

 

The principal investment of Curupay was the ownership of 100% of the outstanding shares of Nova América S.A. Agroenergia, or “Nova América”.  Nova América is a producer of sugar, ethanol and energy co-generation which also operates in trading and logistics.  The assets acquired include the non-controlling interest in Novo Rumo representing 28.82% of its outstanding shares which were issued in the Teaçu acquisition, and 100% of the outstanding shares of two operating companies, Nova América S.A. Trading and Nova América S.A. Agroenergia, and the “União” brand, which is the leading sugar brand in Brazil.  Nova América is a producer of sugar, ethanol and energy co-generation and also operates in trading and logistics.

 

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On August 25, 2010, we successfully concluded negotiations with Shell and entered into definitive agreements for the creation of a proposed joint venture.  The formation of the joint venture is expected to occur in the first half of 2011 and is subject to customary closing conditions and receipt of required regulatory approval. The combined assets of the joint venture would result in an estimated enterprise value of US$12 billion. Cosan and its subsidiaries would contribute their sugar and ethanol businesses, their energy co-generation business, their fuel distribution and retail fuels businesses and their ethanol logistics assets and would transfer net debt of approximately US$2.5 billion to the joint venture.  Cosan and its subsidiaries would transfer additional debt of up to R$500 million from BNDES currently used for capital expenditures relating to the sugar and ethanol business from March 31, 2010 through the closing of the transaction. Shell and its affiliates would contribute their Brazilian fuel distribution and retail businesses, their Brazilian aviation fuels business, their beneficial interest in two companies (Iogen and Codexis) involved in the research and development of biomass fuel, including ethanol and a capital contribution resulting in cash proceeds to the proposed joint venture of approximately US$1.6 billion. See “Item 10. Additional Information — C. Material Contracts. ”

 

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The joint venture would consist of three separate legal entities: the Sugar & Ethanol joint venture would carry out the production of sugar and ethanol and co-generation activities; and the Downstream joint venture would carry out the supply, distribution and sale of fuels in Brazil; and the Management joint venture would facilitate the building of a unified corporate culture.  The resulting company would have a network of approximately 4,500 fuel stations throughout Brazil, and the joint venture would be the third largest fuel retailer in the country, with strong potential for future growth.

 

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Mr. Rubens Ometto Silveira Mello would serve as chairman of the board of directors (or equivalent body) of the joint venture.

 

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Cosan would not contribute to the joint venture its lubricants manufacturing and marketing business, its logistics business carried out by Rumo Logística, its land prospecting and development business carried out by Radar Propriedades Agrícolas S.A., and its food retail brands such as “Da Barra” and “União”.

 

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On July 2, 2010, Cosan entered into a subscription agreement with investment vehicles controlled by TPG Capital, or “TPG”, and Gávea Investimentos, or “Gávea”, pursuant to which, upon the closing of the transaction contemplated thereunder, the investors agreed to make an equity investment in Rumo Logística, that shall be made by means of a capital increase in the total amount of R$400 million

 

 

 

(US$224.9 million), to be paid by the investors in equal proportions, that will represent 12.5% of issued and outstanding capital stock of Rumo Logística for each investor.

 

We are continuously searching for opportunities to increase our production capacity of sugar, ethanol and bio-electricity, including the development of greenfield projects. In fiscal year 2010, two new mills, the Jataí mill in the State of Goiás and Caarapó mill in the State of Mato Grosso do Sul (the latter is a project we inherited in its final stage of development with the Nova América acquisition) began operating.

 

Our capital expenditure program is focused on four key areas:

 

Greenfield Project

 

We have begun operations at two ethanol and sugar plants in the States of Goiás and Mato Grosso do Sul, Brazil.   We have acquired the land for the industrial facilities and entered into leases for sugarcane cultivation. Our estimated capital expenditures for the Goiás (Jataí) project amounts to approximately US$500 million, US$360 million of which we plan to finance and for which we have obtained BNDES approval. Production at this facility began in the third quarter of fiscal year 2010 and is expected to reach full capacity by fiscal year 2013, with an expected crushing capacity of 4 million tons of sugarcane and production of approximately 97 million gallons (370 million liters) of ethanol per year. Our estimated capital expenditures for the Mato Grosso do Sul (Caarapó) project is approximately US$259 million US$155 million of which we plan to finance and for which we have obtained BNDES approval.  Production at this facility began in the third quarter of fiscal year 2010 and is expected to reach full capacity by fiscal year 2011, with an expected crushing capacity of 2 million tons of sugarcane and production of approximately 75 million liters (19.8 million gallons) of ethanol per year.

 

Expansion of Our Crushing Capacity

 

We intend to make additional investments to expand the crushing capacity of our mills. These investments are expected to be applied primarily to our Bonfim, GASA, Costa Pinto, Barra, Tamoio, Ipaussu e Junqueira mills, both in industrial equipment and in new sugarcane crop plantation.  See “—Acquisitions, Partnerships and Corporate Restructurings.”

 

Cogeneration Projects

 

We intend to invest in cogeneration projects in six of our existing 23 mills, which will allow these mills to sell energy to third parties. Besides those projects, we have already finalized cogeneration projects in Serra,

 

 

 

GASA, Costa Pinto, Rafard, Tarumã and Maracaí mills. By the end of 2012, all these projects will have received R$2.2 billion in investments, out of which R$1.5 billion have already been invested. We have obtained from BNDES financing of R$1.5 billion of this total.

 

Cosan has already won bids in seven government energy auctions and entered into five bilateral contracts to sell, during the next 15 years, approximately 2.500 GWh/year to the Brazilian electricity grid. We expect that four of our mills will start delivering in fiscal year 2011 energy to the grid.

 

Strategic Acquisitions along the Business Chain

 

We invested approximately US$1.0 billion in strategic acquisitions along the business chain in the past year.  We have added fuel distribution operations through the acquisition of downstream assets of ExxonMobil in Brazil and taken equity stakes in Radar, a newly incorporated land development company, Rumo Logística, a new sugar logistics company, and Uniduto, a newly incorporated company that is exploring an ethanol pipeline project in the central-south region of Brazil. In November 2007, we acquired 50% interest in Vertical UK LLP, a leading ethanol trading company.

 

On December 1, 2008, Cosan acquired 100% of the capital of Essobras (now CCL) and certain affiliates, marketers and distributors of fuel and lubricants in the Brazilian retail and wholesale markets as well as aviation fuel supply from Exxon. On May 2009, we sold the aviation fuel business to Shell for US$59.2 million, aligned with our strategy of focusing on our core businesses.

 

On June 18, 2009, Cosan acquired 100% of the outstanding shares of Curupay, the   parent company of Nova América and controlling shareholder of other assets related to trading, logistics and industrial production of sugar and ethanol and energy co-generation. Nova América is a producer of sugar, ethanol and energy co-generation which also operates in trading and logistics.  The assets acquired include the non-controlling interest in Novo Rumo representing 28.82% of its outstanding shares which were issued in the Teaçu acquisition, and 100% of the outstanding shares of two operating companies, Nova América S.A. Trading and Nova América S.A. Agroenergia, and the “União” brand, which is the leading sugar brand in Brazil.  Nova América is a producer of sugar, ethanol and energy co-generation and also operates in trading and logistics. We are now focused on the integration of these assets and extraction of synergies, however we will continue to analyze opportunities to grow organically or through strategic acquisitions and partnerships.

 

On August 25, 2010, we entered into definitive agreements for the creation of a joint venture with Shell to combine certain assets. See “—Acquisitions, Partnerships and Corporate Restructurings.”

 

B. Business Overview

 

We are a leading global ethanol and sugar company in terms of production with low-cost, large-scale and integrated operations in Brazil. Our production is based on sugarcane, a competitive and viable feedstock for ethanol, sugar and energy because of its low production cost and high energy efficiency ratio relative to other ethanol sources, such as corn and sugar beet. We believe that we are:

 

Sugar and Ethanol

 

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Sugarcane : the largest grower and processor of sugarcane in the world, having crushed 50.3 million tons in fiscal year 2010 (of which 46.6% came from our own sugarcane and 53.4% came from suppliers), 43.2 million tons in transition fiscal year 2009 and 40.3 million tons in fiscal year 2008;

 

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Ethanol : the largest ethanol producer in Brazil and the fifth largest in the world, having produced 484.5 million gallons (1.8 billion liters) in fiscal year 2010, 441.2 million gallons (1.7 billion liters) in transition fiscal year 2009 and 402.8 million gallons (1.5 billion liters) in fiscal year 2008, and the largest exporter of ethanol in the world, having exported 155.3 million gallons (587.9 million liters) in fiscal year 2010, 120.4 million gallons (456.4 million liters) in transition fiscal year 2009 and 107.4 million gallons (406.5 million liters) in fiscal year 2008 ;

 

 

 

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Sugar : the largest sugar producer in Brazil and the third largest sugar producer in the world, having produced 3.5 million tons in fiscal year 2010, 3.2 million tons in transition fiscal year 2009 and 3.1 million tons in fiscal year 2008, and the largest exporter of sugar in the world, having exported 3.1 million tons in 2010, 2.7 million tons in transition fiscal year 2009 and 2.6 million tons in fiscal year 2008;

 

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Energy Co-generation : the world’s largest producer of energy from sugarcane bagasse. We currently have an installed energy capacity of 860 MW per year from our 23 plants, out of which six delivered energy to the grid in fiscal year 2010. Six additional energy co-generation projects will come online between 2010 and 2012. We estimate that by 2012 we will have a total installed energy capacity of 1,213 MW, out of which 869 MW will be from plants that will sell energy. We see co-generation of energy as strategic in our business as it allows for a more stable cash flow stream across commodity cycles, significantly reducing the volatility of our operations; and

 

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Land Portfolio : the largest landowner in Brazil, with a portfolio of 153,205 acres, comprised of 31,560 acres of land harvested for grains and 121,645 acres harvested for sugarcane.  Radar land portfolio is valued at US$402 million. In fiscal year 2010, Radar recorded US$14.5 million in lease revenues.

 

Fuel Distribution and Lubricants

 

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Fuel Marketing and Lubricants:   a leading fuel distributor in Brazil with an estimated 5.3% market share in terms of volume sold in 2009, according to ANP. In fiscal year 2010, we recorded sales of 5.5 billion liters of fuels, principally gasoline, ethanol, diesel and fuel oil, as compared to 1.7 billion liters in transition fiscal year 2009 and 4.6 billion liters of fuels in 2008. We have a strong market presence in the South and Southeast regions of Brazil, where our fuel sales amounted to 2.4 billion liters (9.9% market share compared to the Sindicom companies) and 1.0 billion liters (10.2% market share compared to the Sindicom companies) in fiscal year 2010, respectively, as compared to 1.1 billion liters (6.6% market share) and 3.1 billion liters (6.4% market share) in 2008, respectively, according to Sindicom. The Southeast and South regions are the largest markets in Brazil, accounting for 49.0% and 20.3% in fiscal year 2010, respectively, of the Brazilian fuel market in terms of volume sold through Sindicom as compared to 49.6% and 17.3% in 2008, respectively, according to Sindicom. Following the consummation of the joint venture with Shell, we will be the third largest fuel distributor in Brazil. As of May 2010, we are the third largest lubricant player in Brazil. We sell passenger vehicle lubricants, commercial vehicle lubricants and industrial lubricants under the “Mobil” and “Esso” brands, among others, both of which are licensed to us until 2018 by ExxonMobil;

 

Sugar Logistics

 

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Logistics operations : the owner of the largest bulk sugar port terminal in the world with a current annual loading capacity of 10 million tons.  We loaded 8.1 million tons in fiscal year 2010, generating net sales of US$76.1 million. We also started to provide transportation services for sugar through road and rail, which generated net revenues of US$8.6 million in fiscal year 2010. We expect Rumo Logística to become more significant over the next few years, as the transportation services started only recently in the last quarter of fiscal year 2010.

 

For our operations, other than our fuels marketing & lubricants, we operated 21 mills, two greenfields (Jataí and Caarapó that started operating in the end of this fiscal year), four refineries, two port facilities and numerous warehouses, as of March 31, 2010. All of these facilities are located in the Center-South region of Brazil, which is one of the world’s most productive sugarcane regions primarily because of its favorable soil, topography and climate, nearby research and development organizations and infrastructure facilities.

 

 

 

Competitive Strengths

 

We believe that, as a low-cost, large-scale producer with well-established integrated operations and long-standing relationships with key customers and suppliers, we can capitalize on the favorable trends in the ethanol and sugar industries—particularly, in light of our competitive strengths:

 

Low-cost producer

 

Our existing mills and other facilities are strategically located in the Center-South region of Brazil. Our operations also are in close proximity to our customers, sugarcane fields owned by us and growers, port terminals and other transportation infrastructure and warehouses. These factors help us to manage our operating costs. Increasing mechanization in our agricultural processes and improvements in industrial operations, combined with our energy self-sufficiency, should allow us to continue to lower our operating costs.

 

Leading market position

 

Our market position as one of the largest global producers and exporters of ethanol and sugar provides us with competitive advantages over our main competitors, particularly in terms of cost-efficiencies, higher pricing power and integrated logistics. We also believe we have the largest sugarcane crushing capacity in Brazil, as our production is approximately three times greater than that of the second largest Brazilian producer. We are focused on increasing our production capacity and maintaining our market leadership through expansion of existing facilities, development of greenfield projects and, as opportunities present themselves, acquisitions.

 

Moreover, our market position in Brazil as the fourth largest distributor of fuel products provides us with competitive advantages. Our retail station network is supported by an efficient logistics and distribution network. We have a 5.3% market share of the Brazilian fuel distribution market and approximate 11.4% market share of the Brazilian lubricants market. The large scale of our operations provides us with competitive advantages, principally meaningful cost-efficiencies and integrated logistics. Additionally, our retail station network, strategically concentrated in urban areas of higher population density and thus higher throughput per station, cannot be easily replicated by competitors without significant capital investments in brand conversion. We believe that the “Esso” brand is associated with high quality and reputation, differentiating our company from other fuel retailers.

 

Integrated platform

 

We are engaged in both the agricultural, land development, and industrial aspects of ethanol and sugar production. We purchase as well as cultivate, harvest and process sugarcane. We produce approximately 45% of our sugarcane requirements on owned and leased land and purchase most of the remaining 55% mainly from third parties under long-term contracts. These contracts incorporate ethanol and sugar-linked purchase price provisions, which provide us with a natural hedge and mitigate the risk of potential margin compression. We also produce our own energy which lowers our energy costs and reduces our dependence on third parties. In addition, we own a sugar terminal and a stake in an ethanol terminal, both in the Port of Santos, the largest commercial port complex in South America, and numerous warehouses, which reduces our dependence on logistics services provided by third parties.

 

We also are a significant fuel distribution company in Brazil. Therefore, we have a fully integrated platform from sugarcane plantation to retail fuel distribution.  We will continue supplying ethanol to a diversified base of clients, and CCL will continue purchasing ethanol from multiple suppliers. As a result, we benefit from superior visibility on price formation, allowing us to better manage our inventory levels, with regard to ethanol and indirectly gasoline. In addition, a vertically integrated platform secures ethanol supply and optimizes our logistical, distribution and storage activities, saving storage and transportation costs. We believe we are in a unique position to anticipate market dynamics and increase our participation in the ethanol distribution market.

 

 

 

Innovative approach to business

 

Our acquisition of CCL has allowed us to directly expand into fuel distribution, and will lead to a more vertically integrated Cosan. With this acquisition, Cosan expands its business model to become the first integrated renewable energy company in Brazil, with operations ranging from sugarcane cultivation to fuel distribution and sales in the retail market.

 

We develop innovative products, production techniques and distribution methods to ensure that we continue to be at the forefront of technological improvements and standards in our industry. For example, we monitor the development of our crops by satellite and have also introduced innovative distribution methods to the Brazilian ethanol and sugar industry. We have established research and development partnerships with leading Brazilian institutions which resulted not only in new sugarcane varieties with higher sucrose content but also in implementing new techniques, such as agricultural and industrial yield improvements, new planting methods and genetic engineering improvements.

 

Strategic business relationships

 

We have developed important strategic relationships in our business, including the Kuok Group (one of the largest agricultural-focused conglomerates in Asia) and Sucres et Denrées, or “Sucden” (one of the two largest sugar trading companies in the world). Both the Kuok Group and Sucden are current shareholders of Cosan. We have also developed strong business relationships with some of our leading customers, such as Petrobras Distribuidora S.A. and Shell Brasil Ltda. in the ethanol business and Sucden, Tate & Lyle International and Coimex Trading Ltd. in the sugar business.

 

Production flexibility

 

We produce virtually every type of ethanol and sugar consumed in the Brazilian and international markets. Our facilities allow us to adjust our production (within certain capacity limits) between ethanol and sugar, as well as between different types of ethanol and sugar, to respond promptly to changes in customer demand and market prices at any point during the crushing process.

 

Strategically located operations and significant geographic overlap with Cosan mills

 

Our fuel distribution terminals are strategically located near major fuel product markets and our mills, thus improving delivery times, increasing operating efficiencies, facilitating response to shifts in demand, fulfilling orders and reducing costs. Additionally, we have a pier facility available for importing raw material, which gives us operational flexibility and a significant competitive advantage since we can arbitrage raw material prices. Upon receipt of ANP approval, we plan to use our fuel distribution terminals and fuel tanks to further maximize logistic gains and reduce our operating costs.

 

Experienced and professional management team

 

Our management team has considerable industry experience and knowledge. In addition, unlike many of our local competitors in the sugar and ethanol business, we have completed the shift from a family-operated business to a company managed by professionals with significant experience in the sugar and ethanol industries.  Our fuel distribution and lubricants business is led by a management team with a proven track record in the fuel distribution and lubricant markets.

 

Our Strategy

 

Our overall objective is to achieve sustainable and profitable growth, further reduce our operating costs and build on our competitive strengths in order to expand our leadership to become a global company with a worldwide platform in the ethanol and sugar markets. The principal components of our strategy are to:

 

 

 

Enhance our leadership position in the Brazilian and global ethanol and sugar markets and increase our market share in the fuel distribution and lubricants business

 

We expect to take advantage of future export opportunities likely to emerge from the liberalization of trade barriers that traditionally limited our access to some major markets, as well as mandatory blending requirements to use ethanol as an additive to gasoline. We intend to establish new commercial and distribution partnerships with international industry players to expand and diversify our client base. We closely monitor developments in the Brazilian and global ethanol and sugar industries and will continue to pursue selective acquisitions and partnerships in Brazil and internationally. We also intend to continue to expand our existing facilities and build additional large-scale facilities, featuring technology improvements and enhanced logistics.

 

The majority of our new retail stations will be added in the Southeast region of Brazil, which has higher exposure to gasoline and ethanol consumption and offers higher synergies with Cosan and our logistics infrastructure.

 

Capitalize on further integration with our business.

 

With the acquisition of CCL, we formed a fully integrated platform from sugarcane plantation to retail fuel distribution. The scale and integration advantages provide us with logistic synergies and unique market intelligence. We plan to improve our inventory and storage management to deliver ethanol through our retail fuel distribution network, by efficient use of our fuel tanks and the building of new distribution terminals near or at our mills.

 

Take advantage of the fast-growing ethanol demand.

 

Ethanol has become the most used fuel within the passenger vehicle industry in Brazil. According to ANP, demand for ethanol exceeded gasoline in 2008 due to the anhydrous ethanol blended gasoline. The increase in ethanol sales in Brazil has been supported by the increase in flex-fuel cars sold in Brazil. In fiscal year 2010, flex-fuel car sales accounted for 88% of total new vehicle sales in Brazil, according to ANFAVEA. We plan to increase our presence in the Brazilian ethanol market and take advantage of the fragmentation in the supply of ethanol where we are the largest player and account for approximately 7.5% of the market. We believe we are well positioned to benefit from increasing ethanol demand, since our vertical integration with CCL optimizes our logistical, distribution and inventory management capabilities.

 

Continue to realize operating efficiencies and margins

 

We are seeking to further improve the efficiency and productivity gains of our operations through investments in the development of new varieties of sugarcane, more efficient agricultural, industrial and logistic processes, expanded satellite monitoring of sugarcane development in the region, increased mechanization of harvests, emphasis on employee training programs and improvements in information flows and internal control systems.

 

We will continue to focus on improving the efficiency of our operations in the fuel distribution and lubricants business by focusing on three key areas: (1) exploring synergies among our business units, (2) maximizing the utilization of our retail stations and (3) focusing on the highest-value lubricant products. Our vertical integration, combining market intelligence, production and distribution strategies, will allow for synergies in logistics and acquiring ethanol, further reducing our costs by means of inventory optimization, transportation efficiencies and infrastructure rationalization. We continuously monitor the profitability and use of each service station in the retail network and eliminate underperforming sites, particularly in regions we consider less strategic. We will also continue to focus on high-grading our lubricant product mix and distributor network to be more heavily weighted towards higher margin products. In 2009, our premium, higher margin products represented approximately 72% of our lubricant volume sold, an increase of approximately eight percentage points from approximately 64% in 2008. In addition, we have also re-channeled our sales directly through 15 well-established, exclusive high-grade distributors.

 

 

 

Continue increasing sales of premium lubricants products

 

Sales of premium products, such as synthetic lubricants (i.e., Mobil 1 RACING 2T and Mobilith SHC 007), represented approximately 72% of our total lubricant volume sold in calendar year 2009, a significant increase compared to approximately 64% in 2008. We plan to continue improving our product mix and margins by focusing on premium high margin products. We plan to continue investing in marketing, training our employees and exclusive distributors, developing new innovative products and delivering superior services.

 

Increase investments in cogeneration

 

We are self-sufficient in energy by generating our own electricity through the burning of sugarcane bagasse in boilers.  Our current total installed capacity of cogeneration energy is approximately 860MW from our 23 plants. In 2003, we built a successful pilot cogeneration plant at one of our mills, from which we sell surplus energy to Companhia Paulista de Força e Luz - CPFL, one of the largest electric power distributors in the State of São Paulo.  We sell energy through bilateral contracts (we currently have contracts with CPFL and Grupo Rede) and through energy auctions promoted by the government, having participated in three auctions of "new energy" in 2005, 2006 and 2008. Currently, we plan to invest in our 10 mills and two greenfield projects, out of our 23 producing units, that have already settled contracts to sell energy to third parties. These investments would sum approximately US$1.2 billion and would allow Cosan to sell approximately 2,500 GWh per year. We believe that energy sales will represent a significant source of additional and stable cash flow.

 

Maintain capital investments discipline

 

We continue to take a disciplined and long-term approach to investments in order to sustain our returns. Our capital investments for the fuel distribution business unit include projects to further optimize our distribution terminals, further upgrade safety systems and lower operating costs. Investments aimed at increasing our distribution capacity will focus on supporting the expansion of our DODO Esso-branded station network in the Southeast region of Brazil intended to generate attractive returns, taking advantage of our existing distribution network and leveraging the closeness of Cosan’s mills.

 

Focus on environmental and social awareness

 

We plan to increase investments in the mechanization of our harvests, which not only is cost-efficient in the long-term but also will reduce our emission levels and decrease burning of sugarcane fields for manual harvesting. We continue to improve and develop new training programs for our employees, as well as programs to reduce workforce accidents.

 

We lead the Brazilian fuel industry with our low incident rate of work related injuries and illnesses. We will continuously work to improve the safety and health of our employees and contractors and our environmental and social awareness. We will continue to train our employees on effective safety, security, health and environmental leadership. We will continuously seek environmental best practices, benchmark technologies and clean operations, to sustain our best-in-class results and strengthen our relationship and cooperation with local environmental authorities and agencies.

 

Operations

 

Sugar and Ethanol segment

 

Sugarcane is the principal raw material used in the production of ethanol and sugar. Sugarcane is a tropical grass that grows best in locations with stable warm temperatures and high humidity, although cold and dry winters are an important factor for the sucrose concentration of sugarcane. The soil, topography, climate and land availability of the Center-South region of Brazil are ideal for the growth of sugarcane. The Center-South region of Brazil accounted for approximately 86.9% of Brazil’s sugarcane production in the 2009/2010 harvest.

 

 

 

As of March 31, 2010 we leased 437,698   hectares, through 2,128 land lease contracts with an average term of five years. Six of these contracts (covering 30,260 hectares, or 7.6% of the land leased by us) are entities controlled by our chairman and controlling shareholder under arms-length terms. In accordance with these land lease contracts, we pay the lessors a certain fixed number of tons of sugarcane per hectare as consideration for the use of the land, and a certain fixed productivity per ton of sugarcane in terms of TSR. The overall volume of TSR is obtained by multiplying the number of hectares leased by the committed tons of sugarcane per hectare by the TSR per ton of sugarcane. The price that we pay for each kilogram of TSR is set by CONSECANA. In fiscal year 2008, we paid an average of 16.9 tons of sugarcane per hectare, and an average of 122.8 kilograms of TSR per ton of sugarcane, at an average cost of US$0.2987 million per kilogram of TSR under our land lease contracts. In transition fiscal year 2009, we paid an average of 17.2 tons of sugarcane per hectare, and an average of 121.6 kilograms of TSR per ton of sugarcane, at an average cost of US$0.1461 million per kilogram of TSR under our land lease contracts. In fiscal year 2010, we paid an average of 17.52 tons of sugarcane per hectare, at an average cost of US$0.1751 per kilogram of TSR under our land lease contracts. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Recurring Transactions with Shareholders.”

 

We also purchase sugarcane directly from thousands of third-party sugarcane growers. Of our sugarcane purchases from third-party growers, we historically have purchased approximately 80% through medium- and long-term contracts with sugarcane producers, 5% on a spot basis and the remaining 15% from sugarcane producers with whom we have long-term relationships but no contractual arrangements. We generally enter into medium- and long-term contracts for periods varying from three and a half to seven years. All of our third-party sugarcane suppliers are responsible for the harvest of the sugarcane and its delivery to our mills. The price that we pay to third-party sugarcane growers is based on the total amount of sugar content in the sugarcane, measured by the amount of sugar recovered and on the prices of ethanol and sugar sold by each mill.

 

We harvested from owned or leased lands 46.6%, or 23.4 million tons, of the sugarcane that we crushed in fiscal year 2010, and purchased from third-party growers the remaining 26.9 million tons of sugarcane, or 53.4% of the total amount of sugarcane that we crushed in fiscal year 2010. The following table compares the amount of sugarcane grown on owned or leased land with the amount purchased from third parties during the last three fiscal years.

 

		For Fiscal Year Ended March 31,								For Eleven Months Ended March 31,								For Fiscal Years Ended April 30,
		2010				%				2009				%				2008				%
		(In millions of tons, except percentages)
Sugarcane harvested from owned/leased land			23.4				46.6				22.7				53.0				22.3				56.0
Sugarcane purchased from third-parties			26.9				53.4				20.4				47.0				18.0				44.0
Total			50.3				100.0				43.1				100.0				40.3				100.0

Sugarcane Harvesting Cycle

 

The annual sugarcane harvesting period in the Center-South region of Brazil begins annually in May and ends in November. We plant several species of sugarcane, and the species we use in a particular area depends on the soil quality, rain levels and the resistance to certain types of pestilences, among other factors. Once planted, sugarcane is harvested each year for several continuous years. With each subsequent harvest, agricultural yields decrease, and the current optimum economic cycle is five or six consecutive harvests. However, the harvests must be carefully managed in order to continue to attain sugar yields similar to the newly-planted crop.

 

Ideally, the sugarcane should be harvested when the crop’s sucrose content is at its highest level. Harvesting is either done manually or mechanically. As of March 31, 2010, 35.5% of our sugarcane is harvested manually. Manual harvesting begins by burning the sugarcane field, which removes

 

 

 

leaves and destroys insects and other pests. The amount of the crop that we may burn is subject to environmental regulations. The remaining 64.5% of our sugarcane is harvested mechanically.

 

Sugarcane yield is an important productivity measure for our harvesting operations. Geographical factors, such as land composition, topography and climate, as well as the agricultural techniques that we implement, affect our sugarcane yield. Although our agricultural yields are above the average Brazilian yields, we believe that by reducing the average age of our sugarcane fields and choosing new sugarcane varieties, our agricultural yields may continue to increase.

 

In fiscal year 2010, our accumulated sugar extraction was 129.8 kilograms of TSR per ton of sugarcane and our agricultural yield was 91.4 tons of sugarcane per hectare, compared to our average sugar extraction yield of 139.0 kilograms of TSR per ton of sugarcane and 91.0 tons of sugarcane per hectare in transition fiscal year 2009, and 142.5 kilograms of TSR per ton of sugarcane and 84.4 tons of sugarcane per hectare in fiscal year 2008.

 

The average Brazilian sugar extraction yield for the 2009/2010 harvest was 130.68 kilograms of TSR per ton of sugarcane and the agricultural yield was 82.1 per hectare. The average Center-South sugar extraction yield for the last five years was 141.2 kilograms of TSR per ton of sugarcane and 84.0 tons of sugarcane per hectare. The average Brazilian sugar extraction yield for the 2008/2009 harvest was 140.2 kilograms of TSR per ton of sugarcane and the agricultural yield was 82.3 tons of sugarcane per hectare. The average sugar extraction yield in the State of São Paulo for the 2007/2008 harvest was 142.5 kilograms of TSR per ton of sugarcane and 90.8 tons of sugarcane per hectare. The average sugar extraction yield in the State of São Paulo for the last five years was 144.6 kilograms of TSR per ton of sugarcane and 87.8 tons of sugarcane per hectare.

 

Milling Facilities

 

Once the sugarcane is harvested, it is loaded onto trucks and riverboats owned by third parties and transported to one of our 23 mills for inspection and weighing. The average distance from the fields on which our sugarcane is harvested to our mills is approximately 24 kilometers (or approximately 15 miles). The proximity of our milling facilities to the land on which we cultivate sugarcane reduces our transportation costs and enables us to process the sugarcane within up to 48 hours of harvesting, thereby maximizing sucrose recovery as sucrose concentration in sugarcane starts to decrease upon harvesting. Currently our average sugarcane freight cost is US$3.14 per ton of sugarcane.

 

In fiscal year 2010, we crushed 50.3 million tons of sugarcane, or approximately 8.4% of Brazil’s total sugarcane production. In transition fiscal year 2009, we crushed 43.1 million tons of sugarcane, or approximately 7.6% of Brazil’s total sugarcane production. In fiscal year 2008, we crushed 40.3 million tons of sugarcane, or approximately 8.2% of Brazil’s total sugarcane production. Currently, we operate a total of 23 milling facilities, 21 of which we own and two of which we lease, with approximately 60 million tons of crushing capacity. Our Da Barra mill has the world’s second largest crushing capacity (approximately 7 million tons). twenty of our mills are prepared to produce both sugar and ethanol and the other two prepare only sugar. Jataí, our greenfield, produces ethanol only. We also own four sugar refineries and four packaging facilities.

 

Ethanol Production Process

 

We produce ethanol through a chemical process called yeasting, which is a process of fermenting the sugars contained in both sugarcane juice and molasses. Initially, we process the sugarcane used in ethanol production the same way that we process sugarcane for sugar production. The molasses resulting from this process is mixed with clear juice and then with yeast in tanks, and the by-product resulting from the yeasting process, called “yeasted wine”, has an ethanol content of approximately 7% to 9%. After the yeasting process, which takes approximately 10 hours, the yeasted wine is centrifuged, so that we can separate the yeast from the liquid. We use the separated yeast in the ethanol production process. We then boil the yeasted wine at different temperatures, which causes the ethanol to separate from other liquids. Hydrous ethanol is produced

 

 

 

after different distillation stages. In order to produce anhydrous ethanol, hydrous ethanol undergoes a dehydration process. The liquid remaining after these processes is called vinasse, a by-product we use as fertilizer in our sugarcane fields. After the distillation and dehydration processes, we produce hydrous, anhydrous, neutral and industrial ethanol, and store the ethanol in large tanks.

 

The ethanol production flow can be summarized as follows:

 

·	Preparation of the juice . The fermentation is fed with a juice composed by approximately 20% of sugar, which is prepared with juice (from the treatment), molasses (from sugar production) and water. This juice must be cooled to approximately 30°C.

 

·

Fermentation . The fermentation of the juice is the result of the action of yeast, which firstly inverts the sucrose to glucose and fructose (monosaccharide), and then converts the monosaccharide into ethanol and carbon dioxide. This reaction occurs in a fermenter, which is fed with juice and yeast.

 

·	Centrifuging . After the fermentation, the resulting product is carried to centrifuges that separate the yeast from the beer, a solution of approximately 9%v/v (oGL) of ethanol.

 

·	Treatment of the yeast . The yeast that comes from the centrifuges is treated with sulfuric acid and returned to the fermenter tank to be utilized again.

 

·

Distillation . The beer is distillated in a sequence of distillation columns, which separate the water from the ethanol. This process occurs basically due to the differences of ethanol’s and water’s ebullition temperatures. In order to produce hydrous ethanol, two columns are used to achieve the concentration of 94%v/v (oGL) ethanol. From the first column, a slop called vinasse is obtained, which is used as a fertilizer in the sugarcane fields.

 

·	Dehydration . In order to produce anhydrous ethanol, two more columns are used to achieve the concentration of 99%v/v (oGL) ethanol. In the first column, the excess of water is separated with the aid of cycle-hexane.

 

The following diagram presents a schematic summary of the above-described ethanol production flow:

 

Production Capacity and Output

 

Our current annual ethanol production capacity is approximately 660 million gallons (2.5 billion liters). All of our mills produce ethanol except for the São Francisco and Bonfim mills. We were the largest producer

 

 

 

of ethanol in Brazil in fiscal year 2008, transition fiscal year 2009 and fiscal year 2010, producing approximately 326.7 million gallons (1.2 billion liters) of ethanol, representing approximately 402.8 million gallons (1.5 billion liters) of ethanol, representing approximately 7% of Brazil’s total ethanol production in fiscal year 2008, approximately 446.0 millions gallons (1.7 billion liters) of ethanol, representing approximately 6% of Brazil total ethanol production in transition fiscal year 2009 and approximately 484.5 million gallons (1.8 billion liters) of ethanol, representing approximately 7% of Brazil’s total ethanol production in fiscal year 2010.

 

Products

 

We produce and sell three different types of ethanol: hydrous ethanol and anhydrous ethanol for fuel and industrial ethanol. The primary type of ethanol consumed in Brazil is hydrous ethanol, which is used as an alternative to gasoline for ethanol-only fueled vehicles and for flex fuel vehicles (as opposed to anhydrous ethanol which is used as an additive to gasoline). As a result, hydrous ethanol represented approximately 51% of our ethanol production in fiscal year 2008, 57% in transition fiscal year 2009 and 66% in fiscal year 2010.

 

Customers

 

We sell ethanol primarily through gasoline distributors in Brazil mainly at the mill that sell it to retailers that then sell it at the pump to customers. The distributors are required by law to distribute gasoline with an ethanol content ranging from 20% to 25%. Since July 1, 2007, the required ethanol content for gasoline has been set at 25%. In January 2010, the Brazilian government temporarily reduced the ratio of anhydrous ethanol in the C gasoline blend to 20% during the months of February, March and April 2010, seeking to minimize the impact of the lower ethanol supply in this period of inter-harvest. The main distributors in Brazil include Petrobras Distribuidora S.A., Shell Brasil Ltda., Esso Brasileira de Petróleo Ltda. (whom we have acquired), and Cia. Brasileira de Petróleo Ipiranga which has recently acquired Texaco Brasil Ltda. Produtos de Petróleo, among others smaller distributors. We also sell industrial alcohol, which is used in the chemical and pharmaceutical sectors. In fiscal year 2008, transition fiscal year 2009 and fiscal year 2010, our largest ethanol customer was Shell Brasil Ltda., accounting for 14.8%, 20.1% and 23.0% of our total ethanol net sales, respectively. Pricing is based on the ESALQ index and payment generally occurs within 12 days from delivery.  We sell our surplus in Brazil on a spot basis.

 

In fiscal year 2010, we exported 27.4%, by volume, of the ethanol we sold, which consisted primarily of refined hydrous ethanol for industrial purposes, compared to 30.5% in transition fiscal year 2009, 26.4% in fiscal year 2008. Our main customers are trading companies, which distribute our products mainly to the United States, Japan and Europe. The table below sets forth customers that represent more than 5% of our ethanol net sales.

 

Sales and Distribution

 

In fiscal year 2010 our net sales from ethanol operations were US$936 million or 11.4% of our total net sales, compared to net sales of US$548.7 million in transition fiscal year 2009, or 18.7% of our total net sales in that year, and net sales of US$604.7 million in fiscal year 2008, or 40.5% of our total net sales in that year.

 

 

 

The following table sets forth our domestic net sales and volumes of ethanol for the periods indicated:

 

The following table sets forth our export net sales and volumes of ethanol for the periods indicated:

 

Although we primarily sell ethanol in Brazil, we believe that the international ethanol market has a strong potential to expand substantially. The global trend toward adoption of cleaner-burning fuel and renewable sources of energy and alternative fuels, the tendency to reduce reliance on oil producing countries and the increasing use of flex fuel cars are expected to increase the demand for ethanol. Broader international acceptance of ethanol as a fuel or fuel additive could boost our exports of ethanol significantly.

 

The majority of our ethanol customers in Brazil receive shipments of ethanol at our mills. In fiscal year 2010, we distributed, through third parties, approximately 16%  of our ethanol production in Brazil. We transport the ethanol that we produce for export to the Port of Santos primarily through third-party trucking companies.

 

Ethanol Prices

 

The price of ethanol we sell in Brazil is set according to market prices, using the indices for ethanol published by ESALQ and BM&FBOVESPA, indices for ethanol as a reference. The prices of the industrial and neutral ethanol (a type of ethanol which has low impurity levels and is used as a raw material in the food, chemical and pharmaceutical industries) that we sell are also determined in accordance with market prices, which historically has been approximately 10% higher than the price of fuel ethanol. Prices of ethanol for export are set according to international market prices for ethanol. The international ethanol market is highly competitive. In May 2004, the New York Board of Trade began trading a futures contract for ethanol, known as the World Ethanol Contract.

 

The following table sets forth our average selling prices (in US$ per thousand liters) for ethanol in the Brazilian market and for exports for the periods indicated:

 

 

 

 

Ethanol Loading Terminal at the Port of Santos

 

On March 31, 2010 we owned a 66.67% interest in TEAS, an ethanol loading terminal at the Port of Santos, fully dedicated to ethanol exports that has a storage capacity of approximately 10.6 million gallons (40 million liters) of ethanol and loading rate of approximately 960,000 m3 per year.

 

Sugar

 

Sugar Production Process

 

There are essentially three steps in the sugar manufacturing process. First, we crush the sugarcane to extract the sugarcane juice. We then filter the juice to remove any impurities and boil it until the sugar crystallizes, forming a thick syrup. We use these impurities as fertilizer in our sugarcane fields. Lastly, we spin the syrup in a centrifuge which produces raw sugar and molasses. The raw sugar is refined, dried and packaged at our sugar refineries. We use the molasses in our production of ethanol, animal feed and yeast, among other products.

 

Production Capacity and Output

 

In fiscal year 2008, we sold 3.1 million tons of sugar, representing 11.8% of Brazil’s total sugar production output. In transition fiscal year 2009, we sold 3.1 million tons of sugar, representing 10.2 % of Brazil’s total sugar production output. In fiscal year 2010, we sold 4.1 million tons of sugar, representing 12.5% of Brazil’s total sugar production output.

 

As the production capacity of our mills is used for both ethanol and sugar, if we had produced only sugar (one ton of VHP sugar is equivalent to approximately 156 gallons (592 liters) of anhydrous ethanol and 163 gallons (618 liters) of hydrous ethanol), our sugar production for fiscal year 2008, transition fiscal year 2009 and fiscal year 2010 would have been approximately 5.2 million tons, approximately 5.7 million tons, approximately 5.9 million tons, and approximately 6.5 million tons, respectively, which would have made us the second largest sugar producer in fiscal year 2008 and the largest world sugar producer in transition fiscal year 2009 and fiscal year 2010.

 

Products

 

We produce a wide variety of standard sugars, including raw sugar (also known as VHP sugar), crystal sugar and organic sugar, and refined sugars, including granulated refined white sugar, amorphous refined sugar, refined sucrose liquid sugar and refined inverted liquid sugar. Currently, almost all of our mills produce standard ethanol and sugar, other than the São Francisco and Tamoio mills that only produce sugar and the Jataí mill, which produces only ethanol. The São Francisco mill and the Da Barra mill are our mills that produce refined sugar. The “Da Barra” brand is the second largest in the Brazilian market in terms of volume and, after Nova América’s acquisition, we also sell sugar under the União brand, which is the largest in the Brazilian market in terms of volume.

 

Standard sugars . VHP sugar, a raw sugar with approximately 99% sucrose content, is similar to the type of sugar traded in major commodities exchanges, including through the standard NY11 contract. The main difference between VHP sugar and the sugar that is typically traded in the major commodities exchanges is the sugar content of VHP sugar and the price premium that VHP sugar commands in comparison to most sugar traded in the commodities exchanges. We export VHP sugar in bulk, to be refined at its final destination. We also sell a small amount of VHP sugar to the Brazilian market. Crystal sugar is a non-refined sugar produced directly from sugarcane juice and sold to industrial companies in Brazil to be used as an ingredient for food products. We also sell a small amount of crystal sugar to the Brazilian retail market and to export markets. Organic sugar is a kind of raw sugar produced from organic sugarcane and is not submitted to any chemical treatments during its manufacturing process. We sell organic sugar in the international and Brazilian markets.

 

 

 

Refined sugars . We refine VHP sugar and crystal sugar into both granulated and amorphous (non-crystallized) sugar. We sell refined sugar in the Brazilian and export retail and industrial markets. Refined sugar is used as an ingredient in processed food products such as milk and chocolate powders, bakery products, powder refreshments, and pharmaceutical syrups.

 

Liquid sugars . We refine crystal sugar to produce sucrose liquid sugar and inverted liquid sugar, which has a higher percentage of glucose and fructose than sucrose liquid sugar. We sell both types of sugar for industrial use, mainly for the production of soft drinks.

 

For the Brazilian market, we sell sugar to a broad and consistent client base but we do not commit to set volumes or prices in advance.