(Recasts to add free cash flow, cash burn concerns, background comments from analysts and executives throughout)
By Jeb Blount and Guillermo Parra-Bernal
RIO DE JANEIRO/SAO PAULO, Aug 4 (Reuters) - Results at Brazil's Cia Siderurgica Nacional SA fueled concerns that Chief Executive Benjamin Steinbruch is delaying needed mining investment in favor of a stock buyback that analysts claim is to bolster short-term share prices.
Second-quarter net income sank 96 percent, the Sao Paulo steel and mining group said on Monday, as debt and other financial costs soared. While CSN, as the company is known, surprised with lower costs and a second steel-price hike this year, the buyback is casting doubts whether Steinbruch, who is the company's largest shareholder, is focusing enough on long-term growth.
CSN's free cash flow, or cash left after payments to bond and shareholders, was a negative 980 million reais ($433 million) as debt, buyback and inventory and working-capital expenses rose. Negative free-cash flow has become "a point of concern," said Rodolfo de Angele, an analyst with JPMorgan Securities.
The situation underpins apprehension over Steinbruch's history of investing CSN's cash in low-return projects. During a Monday conference call, executives justified the stock buyback as a way to boost the value of shares they consider undervalued by the market.
Shares rose 1.1 on Monday based on expectations the buyback will be extended when it expires Aug. 18. Since late March, when the buyback was first announced, shares soared 37 percent, trimming the stock's losses this year to 16 percent.
"We remain fundamentally cautious on CSN," said Leonardo Correa, an analyst with Grupo BTG Pactual SA in Sao Paulo. "However, the potential for more share buybacks should support shares in the near term."
CSN had nearly 12 billion reais of cash on June 30, the most among Brazil's three largest listed steelmakers but 21 percent less than a year earlier. Financial expenses are consuming about 60 percent of cash flow, Correa noted. Net debt rose 6 percent from the previous quarter.
Profit fell to 19 million reais ($8.41 million) in the quarter from 501.9 million reais a year earlier, 88 percent below a Reuters poll estimate of 143 million reais.
Lower profit came as demand for steel slumped and inventories rose worldwide. CSN raised iron ore output from its Casa de Pedra mine.
Net sales were little changed from a year earlier and 25 percent below the Reuters' analyst survey. Debt-servicing and other financial costs soared 78 percent to 815 million reais in the same period, paring profits.
Steel prices should remain stable for the rest of the year, and iron ore .IO62-CNI=SI should remain near $100 a tonne, executives said. CSN's low-cost, high-grade ore should keep it competitive, they added, despite a 29 percent decline in iron ore prices this year, they said.
Adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, was 1.3 billion reais, 19 percent more than a year earlier and inline with estimates as the company cut the cost of goods sold.
$1 = 2.2595 Brazilian reais Reporting by Jeb Blount and Guillermo Parra Bernal; Additional reporting by Alberto Alerigi Jr. in Sao Paulo; Editing by Jeffrey Benkoe, Lisa Von Ahn and Andrew Hay