02DIVERSIFICATION WITH QUALITY AND TRANSPARENCY

RISK MANAGEMENT

Eternit takes a proactive approach in the management of the risks inherent in its businesses as a way of obtaining competitive advantages. To this end, the Company continually monitors its processes in order to identify these risks and mitigate them.  In this respect, a multi-disciplined group accompanies the operational, labour, environmental, community and investor relations sectors on a daily basis in order to obtain more specific knowledge of the risks and deal with them in accordance with the peculiarities of each area.

The risks present at Eternit can be of an operational, environmental, financial or operational nature, due to the banning of chrysotile ore.

Operational risks

Operational risks for Eternit are those that can be considered to be prejudicial to the health or safety of employees, giving rise to labour-related issues.  In order to mitigate them, the Company insists that its employees use individual protection equipment within the mining operations and at the plants.

With respect to risks associated with chrysotile ore, in addition to the use of individual protection equipment, Eternit takes a series of other safety measures, such as the carrying out of its processes in a dampened environment (click here). Employees are also covered by the Tripartite Agreement.  This agreement, filed with the Ministry of Labour, guarantees autonomy for any employee, with his job safeguarded and supported by the plant inspection commission, to shut down production activities if he believes that a situation exists which could put health and safety at risk. The setting up of a commission is part of the terms of the agreement. Each manufacturing unit must have one, with members elected by the employees themselves to act as their representatives with the management on subjects related to chrysotile ore. LA6 LA9 HR5

In São Paulo, a public civil action brought against the Company by the State Public Ministry claiming compensation for supposed damage caused to the health of employees and ex-employees as a result of the use of chrysotile ore as a raw material, was ruled to be groundless in a unanimous decision on April 13, 2010. The judges considered that Eternit complied with the legislation on health and safety for its employees, as determined by Federal Law No. 9055/95 and by the Regulatory Standards of the Ministry of Labour. However in the opinion of the Company's legal counsel, a negative outcome for this case is "possible". The Public Ministry has filed an appeal. (click here)

NUMBER OF MEMBERS OF THE INSPECTION COMMISSION
UNITS		2010		2009
Colombo		4		4
Simões Filho		5		4
Anápolis		3		3
Rio de Janeiro		4		4
Goiânia		5		4
SAMA		10		8

ENVIRONMENTAL RISKS

Eternit constantly monitors its plants and the mining company with a view to taking a preventative approach with respect to environmental risks. Every six months, all the units undergo external auditing for the measurement of particles suspended in the air, and the emission of gases, verification of the destination of residues, the reuse of water, the revegetation of the tailing piles at the mining company, among other aspects.

A class action has been brought against the Company in Poções, in the state of Bahia, on local issues of a health and environmental nature.  In that state there are also two civil class actions of a similar nature brought by the Public State and Federal Ministries, in the judicial district of the town of Vitória da Conquista. Counsel's opinion taken on the probability of losing these cases has indicated that a negative outcome is "possible" (click here).

In 2010, Eternit maintained its success rate in 2009, of not incurring any infractions, significant fines or monetary sanctions. EN28

FINANCIAL RISKS

Eternit seeks to honour its financial commitments and making maximum efforts to proactively to avoid any risks of this nature. In this regard, the Company does not use any form of leveraging involving derivatives with speculative positions, while at the same time maintaining a low level of indebtedness.

Credit risk is also low, because Eternit and its subsidiaries serve more than 14,000 clients, who are subject to a rigorous credit granting process, which was strengthened in 2010 with the automation of credit analysis using a tool developed by Serasa Experian.  Known as the Credit Manager, it enables sales and marketing campaigns to be carried out for the winning of new clients making their portfolio of financial products profitable, standardising and facilitating the decision-making process. In 2010, no one single client represented more than 1.66% of the Company's trade receivables balance. More explanations on this subject can be found in the Explanatory Notes, the section on Financial Instruments.

With respect to contingencies, provisions have been booked depending on the probability of loss, based on the individual analysis of the respective lawsuits carried out by the Company's legal counsel and an independent auditor, in accordance with CVM ruling No. 489/05 (click here).

OPERATIONAL RISKS TO DUE TO THE BANNING OF CHRYSOTILE ORE

The Brazilian production chain uses chrysotile ore in a safe manner. Therefore, before touching on the question of the risk of banning this mineral, it is necessary to understand the question of safe use.

SAFE USE OF CHRYSOTILE ORE

The mineral available in Brazil, known as chrysotile ore, or “white asbestos”, is hydrated magnesium silicate belonging to the "serpentine" group. Its makeup does not pose significant risks to human health at levels of exposure of less than 2 fibres/cm³, in addition to the fact that its fibres have a low level of bio-persistency.

To guarantee the health of its employees, Eternit works with concentrations of up to 0.1 fibres/cm³, 20 times lower than the legal tolerance limit. It is very difficult for chrysotile ore fibres to become separated in a fibre cement product, because the ore consists of only 10% of the material, and its bonding with the cement mix is very strong. Even so, the Company constantly measures the concentration of fibres in suspension at its mine and at the plants.

In addition to opening its doors for a half-yearly inspection by a specialist consultancy, of its working environment, as required by law, Eternit has its own self-assessment mechanisms.  At SAMA, for example, monthly measurements are carried out which have always recorded a fibre suspension rate of less than 0.1 fibre/cm³ at the mining installations, and 0.0005 fibre/cm³ in the town of Minaçu. Similar concentration levels have been verified at Eternit's plants.

Among the various safety measures taken to ensure that these numbers are achieved, processes are carried out in a dampened atmosphere to avoid the creation of dust, while the manufacturing and processing areas are completely enclosed, with the adoption of collective protection systems.

For this reason, and guaranteed by the Tripartite Agreement signed between the companies, unions and filed with the Ministry of Labour (click here), in contrast to that which occurred in Europe at the time of asbestos prohibition, employees support the continuance of their activities, as they understand that it does not put their health at risk. Various entities and associations also support the use of the fibre, such as Anamaco (National Association of Construction Material Merchants), Abramat (Brazilian Association of Construction Material Industries), and Fiesp (São Paulo State Industry Federation), Fieg (Industry Federation in the State of Goiás) and CNI (National Industry), as well as unions and other sector bodies, such as Ibram (Brazilian Mining Institute) and IBC (Brazilian Chrysotile Institute). This last organisation is also a source of studies and research on the subject, whose results are available on the website www.crisotilabrasil.org.br. LA9 SO5

Proof of the safe use of chrysotile ore under controlled conditions is the absence of any record of workers in the production chain with respiratory dysfunction problems related to this mineral among those employees joining the Company since the 1980s, as well as there being no record in scientific medical literature, not even with the World Health Organisation, of any Brazilian having contracted any disease whatsoever as a result of using tiles and water tanks made from asbestos.

In this regard, unprecedented research was carried out in Brazil in a project approved by the National Council for Scientific and Technological Development – CNPq and carried out by doctors linked to well-known Brazilian and foreign universities, whose aim was to establish if there were any risks or health effects for the population that use fibre cement tiles, and for workers in the mine.

The results of this research, which was published on November 25, 2010, prove that the concentrations observed in the study are within the range found in major Western urban centres and within acceptable limits in accordance with the World Health Organisation and the international agencies for exposure control, meaning that there is no risk inherent in the use of fibre cement tiles containing chrysotile ore as a roofing material, and that with respect to the evaluation of the sample of inhabitants studied, no alterations were found in terms of clinical, respiratory function, or high resolution scans, that can be attributed to the environmental inhalation of asbestos fibres (chrysotile).

In an occupational evaluation, no alterations were identified, nor progression in pleural or intersticial aspects among employees in the Group exposed after 1980, in high resolution computerised scans carried out in two studies.  This entire research is result is available on http://www.sectec.go.gov.br.

Motivated by the absence of health cases and the advantages of fibre cement, following the example in the United States, the European Commission has already expressed interest in re-evaluating the use of chrysotile asbestos, as carried in an article in the French newspaper Le Monde published on February 21, 2009.  If the text of the proposal is approved, it would permit European Union countries to extend the use of chrysotile ore, in addition to its use in electrolysis in the production of chloro-soda, to the manufacture of industrial parts for the automotive sector.

This situation strengthens the Company's conviction that its products are safe for the population and that sustainable production management does not put the health of its employees at risk, or the health of those in the surrounding communities. Information and clarification on this subject is widely publicised by Eternit through all its communication channels.

RISK OF BANNING CHRYSOTILE ORE

Eternit uses chrysotile ore in a safe manner and believes that its banning would make no sense.  A study by Fiesp (Industrial Federation of the State of São Paulo) conducted by FGV (Getulio Vargas Foundation) in 2008 showed that the sudden banning of chrysotile ore would create a supply shortage in Brazil's roofing market, significantly increasing prices making access to the product difficult for low-income families. In parallel, the adverse effect on supply would have an impact on incomes, jobs and taxes, without any prospect for recovery over the relatively short term. According to the study, fibre cement industries account for sales of R$ 2.6 billion a year, and generate more than 170,000 jobs throughout the Country. For the complete research on this subject, please refer to www.fiesp.com.br/deconcic/default.aspx.

The mineral was banned by the countries of the European Union once its reserves of this mineral had been exhausted, and as a consequence of its incorrect use, principally of the amphibole type used in spray applications, at a time when demand for fibre cement products was relatively insignificant.

The fibres of chrysotile asbestos and amphibole asbestos are different. The former is malleable, and has magnesium in its composition, while the latter is hard, straight and pointed, composed in large part of iron. These characteristics result in different levels of bio-persistence (period that the inhaled fibre remains in the lung). Chrysotile ore fibre remains in the organism for two to three days at most, while the amphibole variety remains for more than a year. In order to be carcinogenic, a substance must remain in the lungs for at least 10 days.

These differences strengthen Eternit's belief that the banning of chrysotile asbestos in Brazil is not justified. The prohibition of asbestos by a number of states is also not justified, but this is generating additional demand, and Eternit believes it necessary to create the conditions to meet this.  According to a study by the FGV, the sector is likely to encounter difficulties in carrying out investment and dominating technology for the production of alternative fibres.

THE LEGAL ISSUE OF CHRYSOTILE ORE IN BRAZIL

The extraction, industrialisation, use, sale and transport of chrysotile asbestos in Brazil is regulated by the Federal Law 9055/95, by Decree 2350/97 and by Ordinance 3214/78 – NR15 – Annex 12, available on website www.brasil.gov.br. This legislation exclusively regulates the safe use of chrysotile asbestos and prohibits the use of other asbestos types. In 2001, the first laws against asbestos were introduced in Brazil.  Law No. 10,813 of 2001 in the state of São Paulo and Law No. 2210 in the state of Mato Grosso do Sul.  Both were ruled upon by the Federal Supreme Court (STF), following allegations of being unconstitutional (ADI) No.º 2656 and No. 2396, and declared unconstitutional due to the fact that they encroached on the powers of the Union. PR6

There are currently four state laws against the use of asbestos, as well as the questioning of Article of Federal Law No. 9055 of 1995, awaiting judgment on merit by the STF, which is likely to again issue a ruling on the competence of states to legislate on this matter, shown below:

Article 2 of Federal law No. 9.055 of 1995

Anamatra (the National Association of Magistrates of the Labour Tribunal) and ANTP (National Association of Labour Court Attorneys) have questioned through an ADI (direct allegation of unconstitutionality) No. 4066, the constitutionality of Article 2, according to which: “ asbestos of the chrysotile variety (white asbestos), of the serpentine group of minerals, and other fibres, natural and artificial, of any origin, used for the same purpose, must be extracted, industrialised, used and sold in accordance with the terms of this Law”. This case remains pending judgement by the STF.

Eternit is of the opinion that these entities do not have the legitimacy to propose this action, because their representation is limited to the interests of their associates.

In order to accompany or consult this ADI, please access the following link: www.stf.jus.br/portal/processo/verProcessoAndamento.asp?n umero=4066&classe=ADI&codigoClasse=0&ORIGEM=J UR&recurso=0&tipoJulgamento=.

State of Rio de Janeiro

In this state there are two laws, the first being law No. 3579 of 2001, which envisages the progressive substitution of the production and sale of products that contain chrysotile ore, and law No. 4341 of 2004, which is related to health issues. Despite the fact that a ruling is being awaited from the STF, since 2003 Law No. 3579 has been suspended by a court injunction, following the filing of a writ of security issued by the STJ (Superior Justice Tribunal). To monitor these progress of both these lawsuits, please access the following website: www.stf.jus.br/portal/processo/verProcessoAndamento.asp and enter the ADI numbers 3406 and 3335.

In parallel with these lawsuits, there is also a public consumer civil action brought by the state public ministry, aimed at prohibiting the sale and industrialisation of chrysotile ore and its products in Rio de Janeiro. This decision was suspended by a court injunction following the filing of a writ of security before the STJ on December 3, 2009.

State of Rio Grande do Sul

In this state, since 2001 there has been Law No. 11,643, which prohibits the production and sale of products based on chrysotile ore. On October 6, 2008, the 4^th District Court of Porto Alegre issued a ruling on an action brought about by the Federation of Associations of Construction Material Merchants in the state of Rio Grande do Sul and by the Syndicate of Retail Construction Material Merchants against this law.

State of São Paulo

In July 2007 the state of São Paulo sanctions Law No. 12,684, which prohibits the use of products, materials or artefacts which contain any type of asbestos or other minerals which, accidentally, contain asbestos fibres in their composition.

In this same year, the production chain obtained an injunction referring to the court records of ADI No. 3.937, proposed by the CNTI (National Confederation of Industry Workers), suspending the effects of this law, while on June 4, 2008 this decision was revoked by the STF, and did not make judgment on the merits of the case, which is the reason why this prohibition did not become definitive.  This ADI can be consulted on the following link: http://www.stf.jus.br/portal/processo/verProcessoAndamento.asp?numero=3937&classe=ADI&codigoClasse=0&ORIGEM=J UR&recurso=0&tipoJulgamento.

While in 2009, moves were made to block the export of chrysotile ore fibre via the Port of Santos, which was overruled by the higher Court of São Paulo. However, a court injunction, confirmed in a ruling issued by the Santos Federal Court, Company’s right to export its product was recognised, supported by the Federal Law which regulates this activity. Despite the resumption of five exports from the Port of Santos, Eternit has developed export alternatives which do not depend exclusively on this port.

Also in 2009, Bill No. 917 was brought before the Legislative Assembly of the State of São Paulo, which defines the rules of transition for the use of chrysotile ore in the state. The progress of this Bill can be consulted on website www.al.sp.gov.br.  In Eternit's view, if this Bill is approved, there would be a trend for the rest of the Country to follow in the same direction.

State of Pernambuco

In this state Law No. 12,589, of 2004 is in force, which prohibits the manufacture, sale and use of materials which contain asbestos.  This law has also had its constitutionality contested through ADI No. 3356, which was declared unconstitutional in a decision by the Plenary Session on October 26, 2005, and which has not become definitive pending a request for site of the court records. Also a formal declaration of unconstitutionality of the Pernambucan law has been made by the General Attorney's Office of the Union and the Office of the Attorney General of the Republic.

Despite the arguments of the unconstitutionality of the Pernambucan law, the state public ministry for labour has filed a public civil action against Eternit and the distributor Meridional, alleging non-compliance with the law, and demanding a full to the sale and supply of products which contain chrysotile ore. A court injunction was granted, subsequently revoked, with the Court of Garanhuns (PE) ceding competence to rule on this issue to one of the district courts of Recife. The progress of this case can be accompanied on the following link: http://www.trt6.jus.br/consultaProcessual – typing in the case number: 0000918-79.2010.5.06.0351.

ETERNIT'S POSITION

Having been in business for 71 years in Brazil, Eternit guarantees the quality and safety of its products, and in view of this scenario, emphasises its belief in Brazilian Justice and hopes that the technical and scientific evidence will be considered in the judgment on the merit of the actions and laws, being not susceptible to pressure from groups in favour of banning chrysotile ore, based solely on the unsuccessful European experience. It should be pointed out that, of the four states carrying laws against the use of chrysotile ore, three have plants belonging to the Company's main competitor, which is evidence of a commercial war that is without precedent.

The Company is at the disposal of anyone wishing to clarify any questions on this matter, extends an open invitation to the Brazilian people to come and learn about the industrial and mining processes at its units, through its Opendoor Program (for more, please click here and www.eternit.com.br/portasabertas).

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