Q4 2020 Vale SA Earnings Call
Good morning, ladies and gentlemen, welcome to the Valley's conference call to discuss FERC Q2, 80 Red zone.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and strict shows of the big even at the time.
If you should require assistance during the call. Please press star followed by zero as of your reminder, this conference is being recorded and their recording will be available on the company's website at the valley Dot com at the investors link.
This conference call is accompanied by a large presentation also available at the investors leak out of the company's website and is transmitted via internet as well there.
For the broadcasting via Internet, both the all of Gill and his lie the changes has a few seconds of the delay in relation to the audio transmitted via phone.
Before proceeding let me mention that forward looking statements are being made under the safe Harbor off the Securities Litigation Reform Act of 1996.
The actual performance could differ materially from that anticipated in any forward looking comment as the result of macroeconomic conditions market risks and the other factors.
With us today are Mr. Eduardo decided is about at the Ola Mill, Chief Executive Officer, Mr. Lucien Capt's CFO, Mr. Marcello Spinelli Executive officer for Ferrers mean of Roes.
Mr. Mark Travers Executive Officer for base metals, Mr. Carlos made Data's Executive officer for safety and operational excellence missed it Elisha on the rebate ETA Exec Chief Officer for global business soup for.
Mr. Louisa due out of those the Audrey Executive officer for institutional relations and communication, Mr. Paolo coal to director of Colwell. Mr. Lai send me the number of ours, you general coal, so and Mrs. Martie M of Kingstone director of people.
First Mr. Eduardo Bartolomeo will proceeds of the the presentation of valleys for acute 'twenty performance and after that he will be available for questions and ask for it is now my pleasure to turn the call over to Mr. Eduardo Bartolomeo, Sir you may now begin.
Well. Thank you good morning, everyone first I hope you're all well.
We will be remembered as one of the most challenging years in our history.
As we were making progress with the reparation of the Medina and resuming our iron ore of operations.
For the COVID-19 pandemic changing our lives around the world.
In early December.
Few base after our meeting it validates we all got more hopeful with the start of explanation of et cetera.
However.
Our priorities remain <unk> safety.
People and their operation of the Monday.
While the government's vaccination of plans are advancing Vale.
<unk> will keep its block hide the say.
<unk> of our people comes first.
One with the reparation of the money.
Next please.
As I had been the thing at each of our meetings volume is determined to fully repair the damage caused by the boom of the youth strategy.
Sites contributing even more to the development of the Permian, It's where we operate.
A major step the words as the direction one of the global agreement.
On February four signed.
With the public authorities, who are the legitimate representatives of the people of Minnesota.
The economic value of the global settlement was $37 7 billion Reais, which includes obligations to pay them to do in addition to expenses already incurred by Bob.
Such as the payment of the emergency aid and the environmental recovery works. However.
It is important to note.
That with this we have a clear number on our balance sheet from the obligations to compensate and repair some of the.
Eliminating a greater uncertainty related to our provisions.
The borough of line.
Yes.
That this governance allows for ease of BD reparation of compensation the legitimacy of these actions and the legal certainty.
Elements that we have always emphasized in our meetings is fundamental for the settlement I have right now Alex non barrage of to provide a little bit of more details about it.
Thanks Eduardo.
Well as Eduardo was just mentioning the agreement has two essential components from a volume perspective, the first it bring finality to it.
Our class actions and to all collective lawsuits.
And second it has what we call legal certainty to the extent that it was signed by all of the petition is of those class actions and in fact that was signed by the attorney General of himself Brazil's the attorney General and that was ratified by the court of appeals of the drives which is the highest court in the state.
So the agreement resolves all claims related to collective moral damages and to compensation to communities and to the state of Minas Your eyes.
The agreement was structured with both payment obligations and performance obligations.
<unk> payment obligations are twofold.
We established a fixed amount that will revert to the communities directly that were impacted by the disaster and will be distributed in.
Invested according to <unk> criteria to yet to be established by the public defenders in consultation with the communities.
And another fixed amount will be used by the state government for infrastructure and mobility project in the regions that were most impacted by the disaster.
These amounts represent approximately two thirds of the value of the agreement because of the fixed amounts.
And the <unk>.
Hollywood deposit these amounts in the judicial account to be managed by the court of Appeals.
All of you then released from payment obligations.
Upon the positive these amounts in the court and we will have no further influence in how these amounts will be employed are dispersed. So all we do is the positive the amounts and we are released from that part the.
The second part of the agreement relates to volume performance obligations.
And these are essentially environmental recovery obligations monitoring of water quality and the continuity of certain health and safety programs.
And these obligations were constructed.
By jointly with the petitioners and our based where based on the independent Technical studies, which became part of the agreement and were validated by all of the parties involved. So for that reason, we're confident that these measures. These obligations are adequate and sufficient to address.
Of the reparations for the region.
Volume will be released from these performance obligations of once we show evidence of the completion of step by step to the court.
So I think that wraps up that explains the global agreement in the nutshell.
The back to you Eduardo Thank you.
Thanks, All ex funnel is important to note that the reparation of the individual damage will continue.
What part of the global settlement since 2019, almost 9900 people have answered the placebo or labor in the mitigation of agreements with Vale, which total more than two for being in Reais.
This is evidence that we will spare no effort nor resources for a fair and quick Reformation for boom of being in the region.
The next.
Well, we are committed to transforming values culture and for culture that puts people and safety at the center of every decision we make.
We have our levers to accelerate this transformation and I highlight the role of our management model. The EPS in this process at the end of 2020, we have completed the first global assessment of the Vps implementation and now.
And the plan for the rest of the gaps identified.
We also continue to accelerate the implementation of our new tailings and then management model and the other process safety tools such as here we've listed mention here.
The message is clear, we do not tolerate deviations and conduct and procedures, which expose people to safety risks.
The quarter transformation, which is underway has the full commitment of the executive Board and our board of directors net.
<unk>.
As you know we have a plan to address our ESG gaps, which was built based on what we heard from community and society.
The first plan Firstly income best 52, guests, which 37 already dressed of which 11 were resolved in 2020, continuing with our open dialogue and active listening we identified 11 more opportunity for improvement.
Some important gaps in Govs have already been sent by the board of directors for shareholders' decision at the extraordinary General meeting coal for March 12th one of the gaps for example deals with expanding the number of independent members of the board, which currently has three members reportedly in the.
And according to the proposed amendments of the bylaws will reach at least set.
The proposed change.
The line Bally with International Garden Breakfast and not the result of a process of listening to our investors.
On another note to support volume and it's both commitments regarding the ESG theme. The board of directors approved the creation of an executive office dedicated to sustainability.
With the fiber who has extensive experience in making this happen we will lead the strength and we report the mi from.
From March 15.
I think there's opportunity to outcome model of user and to thank missiles for.
<unk> for the part of the advances he has brought in the topic of sustainability.
We will continue with its functions.
The director of institutional relations and communications.
As it can be seen our ambition is to transform vale into a reference EMEA SA practice with these actions will contribute to a more sustainable mining and we will act in accordance with our new pack the society.
Well now talking about the operational performance of our business. We ended 2020 with the partial resumption of all of iron ore operations that were halted in 2019, we are on track to reach the capacity of 400 millions of tons per year by the end of 2022.
In December we assumed Sal asked true and dry processing.
And in January we.
Resumed pellet production in Boston, but we ended 2020 with the production in line with 2019, but stronger than we were when we started the year in a very complex condition given the pandemic scenario.
We managed to replenish our inventories ensuring the maintenance of our product portfolio and we expect more robust sales for 2021 effect that you have already noticed in our fourth quarter results, which became our second best in the history of iron ore.
Which was obtained by strong sales and prices in the long term strategy, we were granted the necessary licenses to implement the capa name of project, which should start operations in 2023, and we will bring 14 million tons of capacity of volume in the first years of <unk>.
<unk> of almost half a billion dollars and important step towards the creation of wireless capex. The buffers. The short we are taking the necessary actions to ensure the stability, we need to operate efficiently and the growth options required by the market one of the Starplex Marcellus Binet W. P.
More information to you of heads.
We also had an excellent quarter in base metals I would like to highlight also up almost record production and indeed for the.
In copper, we also had a record of BPI.
We operated that with cash cost at the lowest level in its history, Mark can give more details about it in the Q&A session.
To conclude we remain firm on the risking volume to build a better box.
So more items for you the most important recent advances I would like to highlight.
The first the global settlement for the debut of reparation of the Nomad team.
Second the progress of modest cultural transformation into a safer company.
Third the continuous and consistent resumption of our production under safe conditions, and finally, keeping the focus on cash discipline.
Addressing our cash drain for.
<unk> organic projects in ferrous and base metals, where we are competitive.
And allocating an important portion of our cash generation to the payment of.
For our shareholders.
Above this last topic.
Resumed our shareholder compensation policy last year.
We announced together with for our results the approval of the dance in the amount of the $4 26 reais per share referring to the second half of 'twenty plan.
This decision reflects our confidence in valleys cash generation capacity, our healthy balance sheet and above all our commitment to return value to shareholders.
Shareholders.
Finally, we intend to continue creating and sharing value with all of our stakeholders. Most importantly, I assure you that we are doing and will continue to do everything we can to ensure the safety of the people in our operations in our communities.
So I would like to thank our 123000.
Employees and contractors, our suppliers and customers who made it possible for Vale to overcome a 2020 with all the challenges brought by the from that.
Thank you and now I give the floor for its been Andy will provide more details on the iron ore production resumption. Thank you.
Thank you Eduardo would after the neutral.
We've been talking about the reception of plant to reach the 400 million tons.
<unk> is a good time to reinforce our commitment to reach this goal of next year.
And I want to emphasize that the ore.
<unk> also said that we have another an additional 50 million tonnes.
Our buffer of capacity and cap on the them of product is a good example of a connection into the direction.
Well our production guidance for 2021 is a range between $3 15, and three sort of five.
We are really confident to deliver this goal of this this year, so you'll have a chance to see the.
The production report.
I don't need to go in Rio details here, but you saw that we we have a checklist. So we can follow up all of the achievements.
One by one.
In the check box in.
And the production report, but I wanted to draeger of potential for five points here.
The first one as Eduardo said, we bought back all of our sites of our operational sites. That's a good sign that we are ready to drill now.
The second.
We've been progressing.
Bringing the authorizations and permits to tap.
Past the operations in the southeastern system. So now fabric is already operating in dry process and now we already have the the license to SaaS. The wet process. So it's a very important information because can increase for the most and quality in this side.
The third information you saw this week, we just announced that we brought back the ETA.
Sure the App.
It seemed a bit of complex.
Sure.
No.
The really important that we have of remaining capacity.
And we have two breached these operations today.
The the filtration process that'll be in place in the early 2021, we also need to finish the finalized the the.
The raising works that we have it'll be it'll show them.
We are not in a rush.
It's important to emphasize that.
This capacity in the future.
It would be just for them is not the the critical path for the for operation in beta and the way to do this with the Berry.
The safety mode, we need to go into sales and check the mold where you are doing this operation. So we.
We don't we're not in a rush to do that.
The first the information is about the north.
In the loss range.
Been talking about that we need to always true green new pits on line.
And this is the new information here of chest approved in all of our board of directors the.
Any three mine <unk> and Threep Pete.
It's like for both of them.
We are now coal.
With all of the contractors and moving forward the the.
The.
The German.
The actions of activities and we're waiting for the final license in the first half the.
The lives dissection of.
Talk about the timber bad but simple payback.
Last year, we brought back three lines.
In the six.
Now operating in.
In wet processing, we have of milestone till the end of March to bring bad the remaining three lines, we are already testing.
The those lines and we expect to bring earlier the next.
And then we have an hour of plan.
But we will let you know as shown as we have the for operation there.
And the next slide.
We have the roadmap for for this year, so I'm not going to.
The chalk in details about this but if you have any question. Please let me know in the Q&A.
But I want to give you more information.
Last year, we mention.
The linear if effect. So we were worried about this the.
The fact of it in the the consequence of our operation.
We had in the end of the year last year.
The impact in our operations with the rainy season, we called the winter in the North Star.
To start the rainy season of heavy rainy season, but suddenly in January we had a great opportunity in the north of the <unk>.
<unk> MOF, so we could take advantage.
<unk> our production in this in this month.
So just to conclude with all of this the new assets.
The resumption in menu operations and also of this.
The possibility to increase.
The patient in the north and the dry mouth now we already have now the winter in place since the since the second half of February.
By now all of this we are really confidence that's the kind of lever higher volume in Q1, this year compared to Q1 the last year.
So first true Luciano.
Good morning, and good afternoon, everyone, great results second largest EBITDA ever.
Interestingly.
Once we saw the reports of the other mining companies of the the second half results.
All of these EBITDA was actually the the largest in the industry.
Obviously, there are circumstances to that because of the relative prices of iron ore to the art of commodities, but it shows the potential of our business because we are also operating.
Under a lot of impairments in our operations and still we posted the highest EBITDA in the industry for the second half of 2020, and we've got a lot of momentum.
Cash flow of ice for example.
We increased our accounts receivable by $1 3 billion in the fourth quarter, we already collected all of those proceeds in this quarter together with the sales of the quarter. The volumes are better than they were last year.
So there's a lot of momentum caught us as premiums are very good right now.
We ended the fourth quarter of 12 $13 per ton. There now stands at $25 per ton pellet premiums are on the rise for the second quarter, they will be above $40 per ton and they were very calm.
Compressed in the fourth quarter. So there's a lot of positive momentum for the business in the first and second quarter of this year.
Talking a little bit about costs just to highlight.
So you saw costs the increase in the quarter from $14 nine to $15 three of the relevant measure for costs is cost without the purchase of third party or because of the increasing amount of ore prices now we're paying over $60 per ton.
Our opportunistic purchases of iron ore from third parties. When you average all of this costs have increased if you strip out this effect.
We have costs stable at below $13 per ton, it's a better measure of our productivity. We can discuss further the trends of costs in iron ore.
In base metals as Eduardo said also Puma.
Full quarter without any problems of the operation beat injunctions or problems of maintenance and furnaces of whatever $50 million in EBITDA.
At today's prices it could be generating as much of a $70 million EBITDA per quarter. So from zero in the past two years. So this is another.
Another contributor to EBITDA going forward.
Negative cash cost and <unk> for the second quarter in the role so pay attention to the prices of by products very good.
For copper not only for that in Canada, Theres lots of byproducts that are selling a good price a.
Price and that's the reason why also the EBITDA for.
Base metals was above $1 1 billion U S very good performance.
Performance.
We had a very interesting quarter in reshaping our business.
A lot of movements in our portfolio, we collected more than $600 million in divestitures this quarter.
For example, we sold of 25% stake in the coal mining China of.
A stake in the Pelletizing plant in China, We sold our Palm oil company with over 3000 employees, Yes Vale had a palm oil company not anymore.
We finally left our potash of Hill, Colorado project in Argentina, we collected the proceeds from the divestiture of the TVA and looking for do we also signed.
The agreement the the binding put option agreement with the consortia with the presence of Trafigura for the sale of VNC.
We shall discussing the Q&A.
We are hopeful that this.
It may come to a conclusion and we also signed the heads of agreement with Mitsui, we're working into definitive documents for the exit.
More to you so a lot happening in the portfolio.
And for those of you who also look at the portfolio into some of the parts.
While the ratios of value.
We have this company the just general cargo company called via line, which we're studying the IPO of the company in Brazil.
And beyond the asked the Brazilian development Bank exercise no the option call option that they had against us.
And that option that the exercise values our stake in this general cargo company at around 1 billion U S dollars and probably more given that.
The development bank exercise because he sees prospects on this investment and also our steak and mosaic.
With the very good performance of Mosaiq very good improvement in margins cost coming down lots of the.
They are doing their homework, it's not worth also more than 1 billion U S. As we speak.
And finally, one last comment on the from a financial perspective of on Bromont gene with the the.
Definitiveness of the provisions.
You saw we added provisions on three different lines first day characterization of them 617 million of U S.
The mostly relate.
To the end of the.
The studies for the characterization of we determine where we need new backup the Ams to be built. So these were accounted for.
Future changes in all of those numbers should be marginal.
There are a few small docs that need to be also.
First of the the cost of the characterization.
And minor.
Minor of engineering adjustments could be made but pretty much in terms of big numbers. We are now very confident about.
The numbers for the characterization in terms of the global agreement you saw of $3 9 billion of new West being added to our provisions as Alex described two thirds of that amount to be spent is a fixed amount. So there is no uncertainty around dose and the other remaining third.
Relates to performance obligations obligations, which by now has been widely studied technical studies were mentioned and if the if changes if there are changes if any.
They are towards just a third of the amounts to be spent not to the full amount.
And finally, we added the additional provisions beyond the agreement beyond the characterization, which relate to individual indemnification.
And which relates to kind of arrow asset retirement obligations.
The old site of the the the more.
Mind that collapsed the the dam that collapsed. So some geotechnical studies, we need to recover of the area.
So we added another 237 million U S. Non were also concluded those studies.
And within those 237, there are also three months of extension of the emergency payments as the precedent conditions for for the agreement. So bottom line is unless there are minor of engineering adjustments on.
The techniques or performance obligations, which are a smaller proportion of all of the whole day.
The provisions in the balance sheet now are pretty much done as regards the bloom of genes.
And now let's move on to Q&A.
Yes.
Thank you we will now begin the question and answer session. If you have a question. Please press star one please restrict your questions to two of the time. Our first question comes from Timna Tanners of Bank of America.
Oh, Hey, happy Friday, Thanks, a lot why cash I'll just ask two if I could one is you know from the slide deck, it's clear that you're running at already within your range, even though the first quarter tends to be seasonally weak. So I was just wondering if if you continue to progress if it's safe to.
Say that we should assume you'd be closer to the high end of your.
Guided production range.
And then my second question is just you know we got a lot of questions recently about the potential government intervention in higher taxes. I think you know why I'm wondering if you could comment on that thanks a lot.
Okay Tina.
I'll, let the spinelli bring your first question have Friday by the way in the MLP.
I will get back to the government.
<unk>.
Hi, Timna. Thank you for the question. So yeah, we are really happy about the the.
Of this quarter.
We are much more prepared for the rainy season than ever.
Every time, we learn.
With this and we can bring other lessons from from the bestial everything is in place and.
And we expect should the lever this as I mention this quarter.
The better shape than the the quarter before and the.
The first quarter last year and.
And we are in the guidance yeah, Yeah, we are confident to deliver the guidance at the beginning.
The year, obviously, but we are really going for them to deliver the guidance.
Okay.
By means of a government intervention, we have to understand the projected that the body has it been going since.
With the went through the new market right.
For years ago.
We start to establish a set several changes inside the company as we speak in November of last year, the shareholders agreement standard.
So we are under what we call it through corporations, obviously the.
The new the new election of the board that is coming on the Naperville.
Consolidated net movement, but the movement has to be understood as I mentioned before historically when we started the new markets then when we brought.
The two in the band and then we had the third in the abandoned the.
<unk> created the nomination committee of just recently the nomination Committee as I mentioned in my initial speech was the.
The call then of General Assembly of extraordinary extraordinary General assembly to improve the governance to prepare ourselves and the company for this next step we are going to have the as just an example of salmon in the banners on the board. So we don't see any kind of.
Possibility of government intervention in the body because we are.
The diffuse control company, but of the guided by our shareholders.
Bye.
The <unk>, who have the interest on the company. So I don't I don't think that is the any issue for volume.
The effect of a tax.
Tax increases of course sometime.
Sometimes there are some noises I would like to ask the lax just to clarify one one recent noise because it's natural that there are some.
Some tax movements net where we're talking about the the tax reform, but the tax reform the has been blades.
By the government the federal government is always on the the principal theres going to be an equilibrium Brazilian is already really burden non taxed. So vaccine is not of the best way to improve our economy, but I think if you're referring specifically to the CFS L. L. I think Alex can give some more.
Color on that.
Yeah. Thanks Eduardo.
At the very good question of Tina seem the race.
As Eduardo said there every now and then we see the initiatives for increasing taxes in the mining sector and recently, we saw new tax bill proposing to increase the what we call the social contribution taxes here says Hello, and that's been brought into the lower house of Congress.
We're very confident that this bill will not succeed because we view it as essentially as unconstitutional. It violates the constitutional principle known as the isonomy to.
To the extent that it adds another layer of taxation on the sector, that's already very highly taxed and the effectively that it discriminates against the sector.
Also it doesn't it's not clear in the the proposal about which entities will be taxed.
And which will not.
Theres no justified reason in our view of two increased taxes on the mining sector much higher than in any other sector. So and also the project fails to take into account global benchmarks for taxation in the mining sector, which.
Has always been the rule and defining of the amount of taxes in Brazil for these reasons, we're very confident that this new bill will not evolve but.
But I'd like to take the opportunity to address the point that the on the other part of the team those question about government intervention and to add just to complement what Eduardo said, everyone knows that there are some golden shares that are still at Vale of their held by the government and the opportunity to clarify that these goldman shares have veto power and very.
Limited amount of matters and I will state, which matters. These are for clarification for the government. The federal government with these Goldman shares can veto of change in value of name.
A change in volume location of all of these headquarters.
A change in volume corporate purpose with regard to mining activities, meaning that we cannot ceased to be of mining company.
And the liquidation of Ali the government would have the Ito on <unk>.
And disposal of winding down of activities in any part of valleys of iron ore mining integrated systems mineral deposits or deposits railways ports in maritime.
Terminals and also we can't Vale cannot change the bylaws with regard to these.
I'm Goldman shares, which would otherwise defeat the purpose. So that's the these are the only matters for which the Goldman shares have veto power and that's the limit of government.
Prevention in any of the voting processes. So I hope we answered the question. Thank you.
Back to you would work.
Thanks, Alex.
Yeah.
Our next question comes from Carlos de Alba Morgan Stanley.
Hello, Good afternoon, good morning, everyone and thank you very much. So a couple of questions. One is the capital generation of always knew was really strong in the first quarter and I don't know prices remained quite high so I wonder if you could elaborate as to how you see capital returns to shareholders in the coming in the coming months of should we only.
Pegged another dividend in September as part of the tradition of.
Policy and what about the share buybacks.
Some of your former controlling shareholders and selling or potentially selling their stake even the start of may had been under pressure because of that and any plans to maybe come in to the market and do a buyback of given again, the the strong balance sheet and the Saudi the cash flow generation and then.
If I may ask a question on the Blue.
Crossing the so obviously a very solid comprehensive agreement with the authorities. Just one question was something that you watch it doesn't seem to have been included there which is the lawsuit that the.
Prosecutors have brought against Vale under the anti corruption of law any updates there how should we think about that.
That particular process what are the next of stamps.
And I guess, what is the company's positioned towards that thank you very much.
Okay. Thanks Carlos.
Good morning for you as well.
A true the cash generation is really strong.
We've been the being extremely.
Conservative on how we view of balance sheets, you'll note that because of the of the.
The commitments that we had then that would just assume this commitment with the my view that didn't.
Indeed us to pay a solid dividend on this first quarter versus the master sorry, So it's a matter of using of the proceeds against the cash generation.
I don't think we would move from a policy of doing that on September <unk>.
Obviously, if we have if you look the the trajectory even the expanded liabilities that we have.
We are going to be under the $10 billion and obviously any.
Excess cash.
Cash will be returned to the shareholders via we have.
Very well behaved is is the board in English of Capex, we have no.
Nothing in the in the in our horizon, Besides growing our platform to take profit of the cycle. We are very bullish on copper. So we're going to invest we've said that in the naira and.
And valid day, we're going to expand our bubbles in iron ore those are marginal capex, there's not nothing very peak the liabilities are known as Luciano mentioned, so the natural.
Way that the money to flow is for the shareholders is I think this is the metro weighted and it's.
As long as we can keep our business growing and safe the the excess cash flows of the shareholders specifically about buybacks and we always talking about that we are thinking it's something our agenda, we're talking to the shareholders and seeing what they see and what they want and the and truly but in our agenda, but it's not nothing.
That would have taken the decision yet.
I ask Luciano to of help me to elaborate on that and then we get back to the boom of D O lawsuit.
So just to highlight we were.
We are paying for billions of dollars in dividends in the same quarter that we're taking all of our shoulders and other 6 billion in liabilities right, because theres not only bromine, but theres VNC.
For the for the the divestiture of VNC and handle all of the so.
It's quite of.
A sign of disposition to return money to shareholders. That's one thing the second thing is on buybacks.
We want to establish a track record of paying hefty dividends. That's the goal that we have so buybacks of our subordinated for that.
The second thing is we don't want to be pro cyclical. So we're gonna be very mindful of where we are in the cycle not to to buy it are high.
However.
It bothers us a lot of the the relative valuation if you compare to other other mining companies in the GAAP has actually been increasing so these are all of the factors that will be taken into account when making the decision.
Together with the board Robinson and.
About the the law the board onto corruption of law, we think Theres, no Madison that but I'm not the legal counsel. So I'll ask my legal counsel to just give some more details to you will kick outs.
Thanks, Eduardo and thanks, Carlos I was hoping you'd ask that question. So I have a chance to clarify.
Clarify it.
Well, we appropriately purposefully did not include the corruption lawsuit in the settlement agreement.
Because of Eduardo said, we view it of having no merit whatsoever.
Remember that the charges brought in this lawsuit they're not supported by the facts and in our view they have no connection with anticorruption law.
As you may recall by reading the allegations. The lawsuit contains no allegations that Vale corrupted of government official and that is what defines corruption.
And.
Standard that's the purpose of the Anticorruption law. So we also have legal opinions from the lawmakers will draft of the anticorruption law and who agree with that type of position. So for these reasons, we believe that the charges or obligations will not prosper and we saw no reason to include that in the settlement and and the.
Give any sort of.
Adherence to our to the charges. So that's why we will fight this and we will win this court.
Back to Edward.
Yeah.
Thank you I hope I hope he will answer to you of Carlos.
Yeah.
Thank you. Our next question comes from Jon Brandt HSBC.
Hi, good morning.
All my questions.
I first wanted to ask you I guess of sort of a capital allocation question.
You ended the quarter with a very high cash position and obviously you have some some liabilities coming off with the dividend and I think you bought back some some of that that was announced today.
But still cash generation this quarter should be pretty robust from collecting on the working capital and high iron ore prices. So.
Just wondering if you can comment a little bit on sort of how you see the ideal cash position.
Going forward and on the global settlement I know there is a.
The timeline of payments, but.
In terms of liability management is that something that you can can prepay or should we expect that the fallout.
The payment schedule.
And then just sort of secondary to that you mentioned a potential IPO of the lie if you could just comment a little bit on the rationale.
For doing back just given you don't really need the cash or is that just sort of create and unlock some some shareholder value.
The second question for for Mark just as it relates to the copper projects.
So much so novel, but really the projects that you have in South East Asia of which which I understand the are pretty attractive given the high copper prices is that something that youre looking to potentially accelerate of or how should we think about timeline for those projects. Thank you.
Okay, Jonathan Thank you.
Our cash position.
Positioning is way too high it needs to be to be used the.
The first.
Direction could be pay down gross debt.
However, most bonds are trading out of very high premiums because of the low yields. So we are observing very.
With a lot of attention to.
The trajectory of yields that started to increase.
The us treasury yields more recently.
So we will be looking into opportunities to perhaps reduce our gross debt as well. So that's one thing.
The second thing you mentioned prepayments of values associated with the agreements that that will be looked into.
We might be looking into prepayments of our concession fees for the renewal of the concession because the.
The the interest rates the regulatory interest rates are really high we.
We have the project financed to refinance as well.
It is an obligation that was contracted at a time when interest rates were higher and it embeds the Mozambique risk so that's something to be looking upon.
So bottom line is we are looking into a number of alternatives none of those alternatives.
Have any interference with our ability to pay to pay dividends.
But the level of cash is too high and needs to come down and that's true, yes youre right.
To increase.
And as you pointed out and put on my genome itself. There are some lump sum payments to be made over the course of the next six months of significant.
But still the reality is that we need to degrees of those cash balances.
Okay.
Yes.
Jonathan just in terms of the the projects in Asia, I believe you're referring to our project in Indonesia coal projects, who.
It's a project, let's call it say in the pre feasibility stage.
Based on what we see already we see of very large ore body.
Hi potential annual production of copper, let's call it.
Around the 250000 tonnes per annum, but we're looking to optimize that with significant gold production as well we believe it's the potential first quartile costs.
Mine with about 45 plus years mine life. So we're currently doing some studies to optimize this looking at recoveries renewable energy options and extending the mine life.
Very.
Very positive about this project.
And.
One thing we would do is look towards bringing in.
Potential partners to Derisk the project for approval sometime around the 2025 period, there's a very significant amount of of study work and to get ready for that project approval and we believe this can add some great optionality to the robust copper projects to the opportunities that we haven't.
Harish asked which were outlined in the Vale day.
Yeah.
Thank you. Our next question comes from line Jerry is the booking heizer UBS.
Well. Thank you very much a couple of questions for me today.
One is on your cost base, especially your breakeven cost to China.
I'm going to ask but you kind of pull cost freight rates and whatnot, but obviously vale used to be.
Our breakeven cost.
The producer to China at about mid $30 per tonne.
I realize that all of it is sustaining capex has gone up and so on.
But what's the long term goal here I mean, do you think we're going to get back to sort of the mid thirty's.
Even with sustaining capex a bit higher I would imagine with some cost dilution as you ramp up to about 400 million tons that will be some cost dilution and then potentially from cost savings there because I mean potentially you could probably on the other another $2 billion to $3 billion of EBITDA. That's achievable I would think so could you give us a sense of kind of how youre thinking about the longer term breakeven cost.
The China, that's the first question.
And if I may on the second question.
Obviously youre thinking about all of you you obviously got to the passenger getting true capacity of 450, even though of the initial production rate will be 400 by 2020, well annualized by 2022, but full year 2023.
What takes you to for 50, I guess is the question and I realize this is not of 2023, Oh, that's not a consideration of until 2023, but what what what takes you to for 50 is that the purely on the <unk>.
Iron ore price.
Consideration of where you say all right well if iron ore of about 100 of whatever effectively then you'll push for for for 50 and when do you make that decision I'm, obviously, asking because of iron ore today is $1 seven seats sold presumably that would be something worth considering.
Okay Andrus, yes, we intend to get back to mid thirties.
Even considering sustaining.
The number of levers for that one is cost dilution for sure. The other thing is lowering the pre operational expenses were spending a lot of money and this is impacting our breakeven.
With with idle operations still.
There is some components, which are pro cyclical and the on the cash breakeven, namely royalties and third party purchases like the higher the iron ore prices the higher the royalties and the third party purchase costs.
And also sustaining capex is going through a bump now, especially because of the intensity of the investments infiltration.
So it is not expected that we will have a longer term $7 per ton of sustaining capital. So we should go back.
In two years time of let's say to $4 per ton once the those investments are are done. So therefore, we see ourselves as.
Has the authority and even sub $30 per ton EBITDA breakdown in China, and when you add sustaining.
Sub $35 in of <unk>.
Turbine in two to three years.
On the channel about the 450 <unk> just to be clear on the road.
And then genetic and help me with that.
The the idea behind the 450 is much more on creating flexibility buffer store for a situation and grading growth optionality in the lower right.
Well, we just announced the couple of them of project is not based on the actual prices.
<unk> truly committed to the board of value over volume.
We are always looking at the margins, we are always going to look at the way the market a bit.
<unk>, they're not going to the.
The producing for them and if you always said we want to have the capacity of around in the 50 to have buffers to absorb problems worse or or else. Even if the market demands. We are able to do the 450. The scheme, that's something else that's been that would be great, but net net.
All of that.
We're looking now and I'm looking at the price of now to get to the 450.
Secondly, the history. We this is the decision for any spike of price and the and the.
The way, we manage that is the swing capacity. So we can.
You know the regulator the the.
The operations in the south for the North.
We can use the portfolio flexibility true improved premium products or not so it should bring the reliability to the plant to the 400 million tons plan and keep the optionality to.
You have a market for that but margin over volume as the king for that.
Yeah.
Our next question comes from Chris Terry of Deutsche Bank.
Hi, Eduardo and team, yes, I have two questions I wanted to ask the first is around production versus sales. So I'm. Just wondering if you could comment a little bit on where your general inventory levels right and some of your blending thoughts and how are you thinking about.
The the build of inventory on the on any of those blending thoughts and overall grade optimization of the selling products and the second question I wanted to ask was just around <unk>.
The exposure to batteries lithium ion batteries through through for nickel in particular, and just wondering if you could give an update on your latest thinking on what the company is working on that thank you.
Thank you Bruce go ahead spinelli.
Thank you Chris.
You're not you're not planning any GAAP are in our in our adventure for that.
The last year, the third quarter, we had a huge a.
Very important GAAP.
Ah Choo over the you know all of the supply chain all the all the to fulfill all of the supply chain. That's the last one year before so now we are with all of our adventures in an operational level that we can give flexibility to sometimes goes.
From a specific part of the light cash as our blend products. So.
Obviously, you see some gaps so it's not the the.
The number of production and the number of the sales can sometimes can be different but not a huge GAAP during the quarters.
And Mark please.
Of course, Gerardo, Chris just in terms of.
Batteries for electric vehicles space, maybe just to start.
Ill.
I think we're seeing.
Great evidence that the electric vehicle market is is here and is going to grow dramatically over the coming years, and it's going to be of a dramatic opportunity for the for the nickel business.
While there are discussions in the around the form of batteries lithium ion for sure is going to take a significant portion of that market.
And even if the end there are places for things like the lithium phosphate iron phosphate battery, but we believe that Nicole we'll take our preeminent position in the battery space in and it will be demanded by by the industry. So getting moving to two of the opportunities for Vale.
Hum.
What we what we see is a.
And acceleration of discussions around.
Creating the value chain or the supply chain in the European and U S markets and we're seeing lots of evidence in participating in many discussions on a number of different fronts around how we can participate we have a strong portfolio of of nickel and the.
Nickel that we produce including our Clos one Nick all out of our North Atlantic flow sheet in the UK and Canada seems to be.
Well demanded or the strong demand for that product and so that's something in the short term of we're very heavily engaged in those discussions now the that's demand that comes from our current flow sheet in and we will be participating in that and then I think we look towards the more.
Short to medium to long term opportunities and we start to look at all the opportunities within our flow sheet.
And the potential joint ventures, and partnerships and we are in discussions with that are around that as well and then just in terms of how we meet we look to supply that we obviously are very heavily engaged in and our exploration drilling activities and looking at other opportunities for innovation to participate fully participate in this opportunity.
Next question comes from Alex the hacking Citi.
Hi, good morning.
If I could just follow up on the last question with with Mark I guess first which is.
Market are you seeing in your discussions demand for sustainable class, one nickel and if so how does vale fit on that spectrum.
And other kind of initiatives that you're undertaking on that front.
And then the second question just coming back to iron ore.
In particular in the North carriage as you know when that's the 11 day was belt.
It was built for 230 million tons of export capacity.
You know I think the system is never really done much more than a 119 million tonnes.
Now I know Sarah last juice coming back on line.
But is there a pathway there for the northern system to achieve that 230 million ton rate and if so like when do you think that would be thanks.
Yeah.
Yeah.
Okay. So Alex Thank you for asking that complementary question, because absolutely we see significant opportunity in providing nicole that meet the strong ESG standards and we are seeing.
A lot of discussion we're hearing a lot of discussion around the type of nickel that's being provided in terms of ESG standards, whether its low carbon or coming from.
Well regulated well run.
Jurisdictions, and so clearly we can position and we do position of our Nicole.
In the top of all of.
Of that spectrum if.
If you take a look at our nickel is coming from our Canadian flow sheet. For example, it has an average carbon intensity significantly below comparable products and we have an opportunity to decrease of dramatically for example, taking removing diesel production.
Diesel fuel out of our of voyages Bay operations for dramatically.
The reduce our carbon intensity in our kind of our product coming from long harbour. So we absolutely do see that opportunity and we do see and we are positioning our nickel and that way and certainly the supply suppliers are looking for that.
The analysis.
Yes, Thank you Alex.
Well, yes, we have our planning is to reach the two hazard of 30 million tons next year the capacity at the end of the year.
One of just check with you we.
We have three systems that we have the north range, the east, France, and the South Francesca <unk>, it's the only one all of this for.
The information of that that was the good news from the last year of towards the East Ranch and we can add the <unk>.
Millions of tonnes a day, we stop this operation two years ago now we were back.
So we are adding in this in this number of 203rd a.
Third of meetings.
The the North Ranch is a the challenge is to bring.
The new pits on line, so we always need to bring pits and have the construction and the license. So the good news is the entry operations that I mentioned in my in my initial speech and that's 11.
That is the the south ranch is going really well this year, we need to have some of it.
What that some some crushers, it's an hour of plant. This year. It came with the with the use of force.
Of the of the S 11 show, we're improving the operations there, but we will be ready in the end of the year beginning of next year or two.
The operation of that so.
We have the plan to reach the Schuh had the third it should end of next year.
Thank you. Our next question comes from Christian as yard so cities you're in the heart.
Thank you very much and good morning tool of the two.
Two questions for you the first one on your pilots of production.
Should we look at the production targets should we should we anticipate a gradual return to a 50 or 57 tons per annum in coming years.
The associated to that what should we anticipate for you.
For your cost of operations. So you know what are you seeing in the pit.
Going forward the the first question and the second is the on the the stoppage expenses at the.
The from from Virginia. This of course, which I'm that's covered by the settlement around the something that kind of an opinion the others.
How should we expect those to evolve over the next two years and on the side you seem to be very confident so on the liability to deliver production of this year.
Should we do kind of already at sort of being.
The more likely at the upper end.
And our view of 315.
The 35 million ton target. Thank you.
Yeah. Thank you Christian spin out of here are the pellet production, we expect to improve.
Slightly this year of comparing to two two last year.
Ours man the restriction is the production of pellet feed.
We have all the all of the evolutions of your face in the southeastern system.
With all the the damps that I mentioned, so our two at the end of the year is to have the breach of the of this production use of the remaining capacity of the dams.
And the next year Regrettably will go back to the landfill.
All of the production used to have show of it'll be around are the ramp up to 50 to 60 of capacity obviously the bands on the the demand.
Again, the margin of volumes as part of the strategy, but in terms of.
You can't consider of this year a slight.
Recover and that share after the production of pellet feed we can improve more in terms of cost of the dilution of of course will be will come.
The depth, we are operating as part of our capacity in in with idle capacity of show.
Definitely the dilution of true.
To be important to reach the.
The best of all of our of our operations next year.
[noise] stoppage expenses should decline in the same proportion of that the operations come back into production. So with the exception of advisory and good energy.
They should come to zero at the other sites by the end of 2022.
Thank you. Our next question comes from Amos Fletcher Barclays.
Yeah morning, junk out of <unk>.
Couple of questions first one on capital allocation can you clarify the once the expanded net debt gets below $10 billion can we expect all surplus cash flow to be returned to shareholders.
And then the second question is just.
On your base metals business once all the time, you look quite seriously of separating off of the base metals business.
When we look at the huge valuation differential between the pure play nickel and copper mine as compared to the iron ore mining companies do you think that the rationale to consider a separate listing of the base metal business again highlight the value of the thanks.
They think of them, yes, but look that the.
The understanding of the trajectory of the spend that is even more important. So obviously, if the or below then ex all excess cash is gonna be redundant shareholders and for.
Forms of the men's wearhouse.
And secondly about base metals are is obviously, we understand that you have a strong point, we see the same but we see that in iron ore today with the valuation of the heavier on the growing so we need to correct, both valuations and build the business and then the.
Of course, Optionality like that are always in the in the table to look at but we still have to do a big home work at the base metals business grow the copper as we mentioned before strengthen the newco, but the truly it's something that we always going to be looking at but it's not the.
For example.
And that the location of just to be clear of every.
The thing that's going to be return for shareholders.
But always on the trajectory because we pay the strong dividend the some.
Master and we had the.
The $3 billion.
The extended them.
And thank you for the first half.
Yes.
This concludes today's question and answer session instead of do out of the bulk of the law meal. At this time you May proceed with the or closing statements. Please.
Okay. Thank you. Thank you for a lot for you or thanks for your questions your interest.
I think we as you saw we had the very very good.
Good I would say even the excellent.
For quarter, but as I've been saying to you of this is not a.
Sprints of the marathon marathon the growth through Derisking the company reshaping the company and Rerating of the company, we are truly committed to the risk with the.
The strides very importantly, the by the U S with the Globus.
Agreement and safety, we're improving the of bringing our birds.
With the safety consistently capital discipline.
Screened the conservative and we are going to return what we have to do with the way our shareholders on the disciplined way we have reshaped the company Luciano mentioned several initiatives to clean up.
From bio diesel of Bob Pall Mario to the P&C problem to the other assets the draining cash well we are going to re rate. When we are truly a safe sustainable a reliable company. So thanks.
Thanks, a lot for your attention and the.
See you in the next call.
That does conclude the Valley's conference call for today. Thank you very much for your participation you may now disconnect.
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