Q3 2021 Vale SA Earnings Call
This conference call is accompanied by slide presentation also available at the investors link at the company's website and distress made it to the Yang Tonight as well.
The broadcasting the Internet, both the audio and the slide Cheng congressmen seconds delay in relation to the audio transmitted via phone.
Before proceeding let me mention destroyed looking statements are being made under the Safe Harbor of Securities Litigation Reform Act House 99 logistics.
Actual performance could differ materially from that anticipated in any forward looking comments as a result of macroeconomic conditions market risks and other factors.
With us today are Mr to drive to decided spectral Emil <unk> Chief Executive Officer.
Lucien Youll see any PD is equity Vice President finance and Investor Relations.
Mr. Marcello Spinelli Executive Vice President IR, Mr. Mark Travers Executive Vice President's base metal and they said Alicia Belgium is equities, Vice president legal and tax.
First let me state a drive to backfill a mill. We proceed to the presentation of Valley's third quarter 2021 per farmer and after that he'll be available for questions and answers.
Now my pleasure to turn the call over to Mr. Eduardo Bartolomeo, Sir you may now begin.
Thank you.
Good morning, everyone.
I hope you're all fine.
Regarding COVID-19.
The next visual of our employees is progressing very well.
With actions of the public health care system.
<unk> already 92% of our own workforce, which at least one vaccine shot in Brazil.
Yeah gradually resuming activity no office today for example.
Our almost altogether at the company's headquarter for the school bus stations for the first time since the beginning of the pandemic.
Before God op, we are getting back to a normal routine keeping our focus on safety and people.
We continue to work with the authorities strength.
With $37 7 billion Reais agreement for Integra reparation and blew my deal.
In February this year.
By the end of the third quarter.
Disbursed.
4 billion Reais for a payable obligations and actions for environmental recoveries.
With respect to true should reach 13 beat in Reais by the end of 2021.
The visual damage compensation also continues with over 11400 people covered by civil or labor indemnification agreements answered.
Do we body.
We remain committed to repairing and Brahma <unk> <unk>.
Fair and quickly.
We are also advancing on our ESG agenda.
And our new backwards Society will you be announced our mining rights, you mean gino's lamps in Brazil.
On the social front we.
We've donated more than 600000 foot baskets to the families and less sick.
Tuition of food.
<unk> security in Brazil.
In action in partnership with Civil Society to entities and volunteers.
By the end of the year.
We must reach.
1 million foot baskets for over 200000 families.
One of our purpose on the social front.
Contribute to the strengthening of autonomous and resilient communities through education.
<unk> income generation programs.
We are defining our new social ambition and redesigning our goals as we did on our journey towards a low carbon Mike.
Our social agenda is increasing in its ramp and we expect to announce further details on the validate 2021.
On the climate agenda.
Please to announce some important advances this quarter.
In scope three emissions reduction we achieved some milestones.
In July the partners to buy realm.
<unk> first our care.
Rogers sales system.
August are both of them are data terminal received the first festival with air Lubrication Tech knowledge, which creates a sort of carpet of air bubbles between the ship in the water, both technologist increase energy efficiency by up to 8%.
In August we announced our partnership with <unk>, the largest steelmaker in Latin America to develop Decarbonization solutions. Finally in September we announced the Briquettes.
<unk> D of iron ore glob merits, which can corrupt C O two emissions of our steel making clients by more than 10%. The break. It is the result of years of research and develop it by volume.
You already have three plants under construction.
Investment of $185 million.
We're assessing the feasibility of building another five plants for a potential production capacity of 50 million tons per year.
With that.
We are well positioned to lead the way you reduce scope three emissions with innovative technology and a portfolio of high quality products.
Thanks, Joe for the low carbon economy transition.
Now focusing on our performance this quarter.
We produced close to 9 million tons of iron ore, 18% higher than the previous quarter and this nine months, we increased our production by 8% compared to 2012.
2020.
Oh, the resumption, we had an important progress in the <unk> Grande complex with Oprah nationally stop top of the <unk> III dam and the commissioning of the long distance conveyor belt.
This release.
Unlocked another.
6 million tons of annual capacity.
We continue to move forward with a safe operational resumption in a year is still marked by COVID-19 restrictions.
Spinelli will give you more details about our performance in iron Arsenal.
Well in vehicle our performance was impacted by two important events first the labor disruption at Sudbury.
In August we reached a five year collective bargaining agreement and we started operations in September.
And also Puma.
I had a longer maintenance due to COVID-19 safety measures, we've production resumption by the end of September as well.
We will continue to work towards greater operational reliability, particularly in the base metals business.
Tired management team is committed to this.
And we continue with our disciplined capital allocation our cash generation.
In addition to supporting the reparation business safety and the resumption of operations allow us to return value to our shareholders as our recent track record of dividend payments makes clear.
We ended the quarter with a strong cash generation of <unk>.
Seven 8 billion dollar one.
Two $1.2 billion higher than the second quarter.
Sticking to our value over volume strategy will continue to create and share value with our shareholders.
With consistency in dividend payout.
And with our buyback program almost 100% complete.
Our board of Directors has just approved a new buyback program. This time for up to 200 million shares equivalent to four 1% of outstanding shares.
Our buyback program shows our cost of dance <unk> potential to create that.
To conclude.
I want to reinforce that we are making progress we fired derisking.
Reshaping and re rating to build a better value.
To recap.
In the Derisking, we are implementing the agreement for the Integra reparation of providing you with total payments of 13 billion Reais expected by the end of 2021.
Executing our dam the characterization program <unk>.
We expect to eliminate one more structure by the end of this year.
Totaling seven completed structures.
Continue to resume our production with the release of the long distance conveyor belt and it's the top of model three damps in barge and good edge.
And our next big believer is broker to any type of beta.
The works of the torture dam are advancing and the filtration plants have a physical progress higher than 80% as you can see the speakers.
Finally, we are committed to increase the reliability of our operations.
Thus, forming the base metals business is one of our top priorities for 2022.
You reshaping.
We are moving towards divesting the cooperation with good prospects until the end of the year.
In fact in coal, we expect an important cash generation in the fourth quarter due to excellent market conditions.
We also expect to complete the divestment of manganese assets and as a result, we will move forward with the divestment of other noncore axis.
The re rating we continue to implement our management model the vps.
Continuing to work hard on virus cultural transformation.
And we are moving forward with our agenda and commitments to transform ourselves into a more sustainable mining company engaged in madis relevance to society.
I would like to conclude by thanking Luciano for his excellent work in charge of values finance and Investor relations areas since 2012.
And I'm sure that he will make a significant contribution for the future of the company as our new executive Vice President of strategy and business transformation.
I also would like to welcome stuff the Manta, our newest active vice president of finance and Investor Relations.
We'll stop it brings his global experience and a renewed vision to our business.
Now I hand, it over to spin the Ali who will give more details about the performance in iron ore. Thank you very much.
Thank you Eduardo.
Morning, and good evening.
I want to start my presentation, giving you an update about the resumption plan.
We had a chance to go into day, as an hour or less or.
Last Investor Tour, if you need more information you can find in our website.
Washington, Grinches Eduardo set this is almost there step by step model. We just three is now running.
And the long distance conveyor belt, just added 6 million tons of capacity. So we reach at 341 million tons of capacity.
As we planted.
Now moving to production overview in Q3, we produced almost 19 million tons due to the seasonality coming from the rainy season to the dry season.
Proven to northern system, Washington D. As I mentioned is in ramp up.
It is running really well much more efficient.
And we have the full operation in fabric.
But once you drag your attention to the northern system.
As we presented also and in the last Investor Tour, we expect a smooth ramp up to reach the 240 million tons of production there.
<unk> is a brand new projects, you know very well reckless system lower opex, but your SKU.
And the learning curve.
<unk>, we've been improving our ore body knowledge, we found more Jeff delight than we expected just the ladies is a very compact waste.
T Rowe and if it's the system there is less flexible than the conventional system, we need to crush this material into the mine site. So these small rocks we are.
Followed the able crushers will have a one already installed now would have the other three youre going to do this into the in the next quarters and to solve bigger rocks, we need to stall a bigger crusher there'll be ready in three years, but still there you're going to.
Stockpiled this rocks.
The mine site.
We have good news from.
From the northern system, several actions and assets are coming online such as the plus 10 expansion, Yes, 11 D plus 20, Zale I do northern range, we have and three and two in one and east range all of them together, we will support the ramp up of 204.
What are your medium tons.
Well, we you may ask is about the gap between production and sales.
Last year, we had a the same the same problem.
And you'll remember that we have and do you have a production seasonality comparing to Q2 and Q3 and.
And we need to add the supply chain extension the blending process time.
Remember it definitely would have some volume adjustments don't forget as an example, if you produce pellets, we reduce that 10% of the mess, but all of this together we could expect a gap of eight to 9 million tonnes, but we had an additional 4 million tonnes.
We decided to delay the sales of the stand alone high silica.
And blend that.
With Scottish asked for them they'd be RBS later.
So that's the beauty of the supply chain flexibility, we have in Bali, we can't daily.
Take decisions to maximize our margin.
You also may ask about why module for volume at this level of price So don't forget we.
We also have in this in this analysis the discount of the product it's totally related to the demand.
And the freight and in this case this time of the year, we have the spot freight as a marginal product we need to consider this portrait.
And we are participants of this market the spot market as you put more pressure or less pressure, we can increase or decrease the impact for the whole portfolio of body. So all this together.
We decided to delay this sales we.
We didn't decide yet due to the market condition to replenish.
This high silica standalone product, so we are not producing.
This yet so that's the reason our production guidance is 315 to 335, we didnt change that but we are in the lower than the middle of the range.
Of the guidance, what we can expect for the production in 2022.
Well, we you always ask us about the guidance for next year, we are going to announce only in the validating the end of November.
What what you can consider in our rationale to define this this range for next year.
Firstly, the presumption plan you know the following an increase of capacity will come more in the end of next year like door towards you're allowed to.
We will add more volumes, but as it was said don't we need to.
Understand that the guidance is related to volumes, but we are increasing the quality since the beginning of the year with the filtration unit upbeat and broker too, but we are going to increase more volumes in the end of the year, we're going to run most part of the year with 343.
But in terms of capacity.
Well they were bought in the second point is our mantra show you.
If you have capacity and we don't have demand.
You're going to use the total capacity.
One example is due to this market conditions today, we can.
Reduce the production of the high silica stand alone that is two available every time, we increase the quality of the the process to increase the quality, we're going to leave these kind of product, but we have 12.
12 to 15 million tons that we can reduce in our capacity are introduced last last year.
That's an example.
Third we also consider buffers for some production setback.
If you have any any variation any.
And normally in our production we considered in our planning. So all of these together will be part of the definition of the production guidance for 2022.
Stay here for further questions personnel chilled Lucianne luciana.
Okay I'll start my.
Commentary on the results by the elephant in the room, which is.
The wild variation of EBITDA estimates from what we actually posted.
In this chart you see here.
Usually we bring this on our on our releases, but now we're bringing more detail.
It shows the value realized prices compared to the average of the quarter.
And there are two large red bars here.
Present, Mrs in revenue.
With a direct impact on EBITDA.
And why those large bars, because we had an unprecedented quarter in terms of price swings.
Minder, we started the quarter with $207 per ton prices.
That was exactly what was provisioned for the sales which were open at the end of the second quarter.
And we ended the third quarter with the same provisional prices for the sales opening in the third quarter of 117, so its a $90 swing in the space of three months that creates those those types of effects.
The first effect the minus eight point to Miss in our realized prices.
Relates exactly to the open sales, we bring the numbers here 18 million tons.
Which were opened in provision at $207 per ton.
They were actually realized at 176.
So that difference of $30.
Was revenue and EBITDA that was recorded in the second quarter that shouldn't have been recorded.
So the way to deal with that is you would need to reduce revenues in the third quarter and give back those revenues and in EBITDA. When you account for this.
The second big effect.
You read on the call I'm provisional prices in the current quarter.
14.8 negative dollars per ton.
In total, we fact, which with of almost a billion U S. Absolute numbers is exactly the 22 million tons that we have outstanding so sales, which were not yet settled.
Provision was $117 compared to the average of the quarter of 163.
So this is actually we can call it an opportunity cost right.
If I if we had sold those tons at the average price for the quarter, we would have realized a billion additional revenue, but that that's not the case and some of you might have done the calculation, but the entire volume so by body at the average price for the quarter.
As I just explained part of this is provision at much lower prices.
So that's the reason behind.
Important declining maybe down compared to the when you when you look at the average prices for for the quarter.
Moving into cash flows.
You saw that the cash conversion was actually more than 100%, which means we generated more cash than EBITDA, which is also a odd.
And the reason for this is because of the tax the cash collections off of the open sales from the second quarter.
And you you might have noticed a variation of working capital above 3 billion U S. So about 2 billion of it is explained by the changing in and accounts receivable. So we collected a lot of sales from previous periods at very high prices.
And the open sales for disputed are recorded at much lower prices.
And there's another 1 billion actually.
Which is.
Money from our clients that we still need to offset because of the decline in prices. In these offsets are ongoing in the quarter and will continue in the fourth quarter. So about a billion dollars of this positive release of working capital will be reversed in the fourth quarter as we due to settlements with our clients and give them back.
The excess in voices at much higher prices.
To notice as well that this quarter will be heavy in terms of Blue My junior cash outflows Eduardo already mentioned that.
<unk> 9 billion Reais, approximately and also first quarter of 'twenty. Two will also have a heavy bills to be paid in terms of our cash taxes are a collection.
So we if you notice the cash taxes are that there's a lag between cash taxes and the economic profit that we're generating.
There's an annual settlement every first quarter of the year they should be paid then.
Moving to iron ore.
<unk>.
But the commentary on costs, you, you see costs going sideways or a slight increase from $17 eight to 18.1.
You are observing in the industry a lot of inflationary pressures specifically in Brazil.
Rice index reached two digits in the past 12 months in the quarter.
And many of the contracts that were expiring and being renewed were subject to renewal pressures are from those indexes. So that's flowing through higher costs in the quarter and another effect is that.
The cost of goods sold in this quarter.
Is also tied to the production costs of.
The second quarter, which were our production was.
All the smaller volume less cost dilution. It takes some time of a couple of months for that those production cost to flow through and become cost of goods sold.
So therefore that explains why costs happened yet decreased due to cost dilution that will happen in the next quarter. So we continue to expect.
Because again of the large 90 million ton production in the third quarter, we expect cost dilution to pour over into the fourth quarter and still bring us about 1.5 dollars per ton reduction in costs.
There is a headwind which is the collective bargaining in Brazil.
Whatever number we saddle will be high because of high inflation that goes that has one off effects in terms of provisions for especially for profit sharing.
But also we have tail winds are the exchange rate is more depreciated in Brazil than we initially expected when we made that provision those effects may offset each other.
Another important cost component is freight you saw the increase from $17 seven to 26.
That obviously was because of the increase in bunker prices and the dramatic increase in spot freight rates.
But as you can see our sensitivity to those variables is nowhere near the market rates. So it it shows how our sort of is our strategy of having those very large ore carriers contracted for the long run.
For the fourth quarter, you should expect a small increase in all of the dollar per ton basically because the average spot rates should be higher in the fourth quarter than in the third however, SPN Eddie mentioned, we're taking some high silica material from the market from now on so therefore, we will be less exposed to spot than we'd initially envision.
And so that that.
Compensates this slightly.
My last comment is on coal.
Hum.
First performance and then a comment on the impairment in terms of performance September we generated $43 million of EBITDA.
In addition to that we had a negative impact of 27 million because of a thermal coal hedge you can see that number in the footnotes of the financial statements. So therefore, it if it wasn't for the hedge we would have generated $70 million of EBITDA in just one single month and also if you look in the release.
Coal is very much influenced by lack prices, we have on average thermal and metallurgical coal both thirty-five dollar prices lower in September than we should have that because of those like prices. So.
We could have had another $30 million of EBITDA in the month, if we had the proper price of which will come down in October So I'm, saying all of this just to highlight that the business is running at $100 million per month run rates at today's prices.
So the question might be why impair.
The assets that the.
The issue here.
Is that a <unk>.
No potential buyer will buy the coal assets based on today's prices.
Nor it will by the coal assets based on the business plan that we have not yet delivered.
This asset under normalized conditions requires 12 13 million tons of of production in order to breakeven.
And we haven't achieved that so we expect most of the proceeds and the economic value from a potential sale to come from a contingent.
Let's say contingent.
Economic value based on volumes and on prices so probably the.
The upfront value to be received will be will be smaller because we will not be able even if we do a sale with contingent a receivables based on volume and on price to record those as assets. The good practices in accounting recommend us to to impair.
The assets and and it wouldn't make sense to take.
Take out $2 3 billion in U S and try to find out exactly how much we would receive a product we don't know that because we havent yet received a binding offers so we decided to be conservative and go all the way down to zero, but the consequences will be it probably will have a sale for economic value and part of it will not as I said be Rick.
Courted because it will be contingent.
So we're almost at the half hour, we will be opening up for questions and answers.
Thank you ladies and gentlemen.
I will begin the question and answer session.
Has a question. Please press the star key followed by the one key on your thoughts on so now you said any time, you would like to remove yourself from the questioning queue crashes touch it.
Restrict your questions to two at a time.
Our first question comes from Carlos de Alba from Morgan Stanley.
Carla Yeah, Aldo is available.
Good morning. Thank you very much generally has been great working with you our CFO all the best in your new junior position.
Question I have first is if you could comment maybe on an update of how do you see the demand in your payment is scheduled in the coming quarters.
There'll be quite useful.
On the income statement as well as the cash flow.
Second maybe just spin out if you could.
Clarify or maybe expand a little bit more maybe I missed it but if you could explain the dynamics between iron ore production and shipment that you see for <unk> for the fourth quarter and perhaps for the first and second quarter.
Light or the ramp up in production and also the reduction in the steel.
Okay in China that that he's taking place right now thank you very much.
Yes.
Got it.
Thanks, very much for your kind comments.
The cash outflows for Blue My Gino I, believing in one of our prior presentation, which is on our website. There is an estimate.
And that we haven't been updating because it's still current.
I don't have the numbers top of my mind, but I the numbers will still be a very high in 2022 similar to dish to this year, which I believe are going to be close to $2 $5 billion.
So there'll be a lot because although there's a heavy concentration of payments 40 obligations to pay this.
This year next year, we will have less obligations to pay but there will be an acceleration of the obligations to perform the projects will start to come.
From design to execution. So we will have those sorts of payments and then we have 423 than we started decline.
Also another heavy year.
But a significant release of outflows just from 24 onwards.
Carlos Thank you for a question dynamics.
Between production and sales for four that's before next part of our Q4, we believe we will be like the last year. The same level of production and sales we don't see any gap.
And even in the first quarter.
This supply demand considering what's going on in China.
We need to we understand that we have a slowdown in China due to the disruption in energy rationing and and also property.
The but the industries you see healthy we have good margins we have.
A good price of offer for us too, but they they are.
Tracking the two two to go after the target off of our energy consumption.
And then beginning of the next year definitely there is another event that is the Olympics that can that.
Can make some pressure in the downstream demand and also the CSP production.
But we see a rebound after that and and the point, we must check not only our ER volumes production and sales, but also the supply.
That we see in the in the seaborne market.
We we in China, we have a dynamics, but in the other part of the World ex China, we have a.
Very heated market going really well today in terms of production and demand.
And our checks should be related to the seaborne coming from other parts of the world.
In Brazil, we expect to sell more in Brazil less.
Last year than this year.
That's the trend we see in India. That's the trend we see in C. I S and even supply coming from Australia, and a lower level than this year. So that's the balance we can see in China that will be important for you are we have a number.
And the Oh production 40 million tons of iron ore.
Next year.
On the supply Oh, the seaborne market. So that's the that's the point.
Our GAAP will be zero in terms of production and sales.
Our next question comes from Jonathan granted from HSBC.
Jonathan Yeah auto is available.
Hi, Good morning, good afternoon listen I would just like to Echo the comments, it's been great working with you and best of luck in your new role.
Spinelli I'm, hoping you can maybe elaborate a little bit more on Chinese demand next year. So obviously, it's going through.
A bit of a tough time now given.
The Olympics and the energy issues, but.
What are you seeing next year, what gives you the confidence to say that.
Chinese steel production will pick up in 2022.
Rather than sort of trend along it at current levels.
I guess, that's that's my first question and then my my second question, it's kind of a generic one I mean, obviously you've had a lot of disruptions in your operations.
Its iron ore or base metals and are.
I'm not necessarily talking about the labor issues in Canada, but more with the disruptions in Brazil from the.
The licensing issues that forces you to go to.
The courts and things like that so obviously, you're right reactor each situation but.
It's certainly a it takes a lot of management time and effort and you know I know that there's this ambition to be a more stable and sustainable mining company. So I'm, hoping you can maybe touch upon what you can do to proactively minimize these disruptions and prevent them from from happening going forward.
Thank you.
Thank you Jonathan Spinelli here well.
Let me clarify what I, just mentioned to Carlos we see a definitely a slowdown in China.
Smooth slowdown.
More nowadays here that they already achieved the goals for the fourth a <unk> 5 billion.
Five year plan Colby, there's a K G D piece, Okay energy conception, snarky, yet now better than the last quarter.
The they need to reduce debt that that's the point that I was mentioning what what I see for next year.
These year, we see the goal to two.
T S P a.
Probably less or equal or less than last year 1 billion 65, or less we can consider a gap here.
Ranch here of <unk>.
10 to 15 million tons less oriented you can see the same of last year and for next year it'll be about one beat them, but less than this year, probably what I'm, saying that weekends have a seasonality.
With more without rebound after all this pressure coming in the short term.
That can bring more volatility to this moment, but can be more.
In place did demand in place after the first quarter or in the end of the first quarter.
Well, what I was saying that despite China is slowing down have ex China.
Growing our the CSP that we we see for next year.
They're coming from 900 million tons of C. S. P. They they can go to 940 950.
And then the other point is that the balance of supply demand.
When do we see the the seaborne that can supply China. We see some are older forces are coming when do you have the domestic market.
Of many of these producers like Brazil or India.
In India or all the places they are.
The consumer in the iron ore.
Their domestic market. So that's that's how our view Ah Ah Ah Ah supply demand that would be more balanced after the fourth quarter.
But definitely there there'll be a reduction in China, but our growth next China.
I think it's been at Jonathan Thanks for the question I think is very appropriate because it's in the core it said lots of speaking okay is in the core of what we're doing here since I arrived and I think your question is extremely relevant to us I would put the situation in two sides one exon.
And one endogenous it's the award is writing English something that is up to us and that's something that is currently out of our control.
And courts are when you see that the disruption and the licensing of US up all my actually is.
But between conditions in the license that we believe are are fulfilled and that's a minor issue or indeed any back by the way any moment that also from a production. So I don't think that it's a relevant issue here I'm much more concerned about the endogenous issues that are related to our operational stability as you pointed.
When we go for instance for the fire in Salobo mine and the problems that we have at the mine movement. During the year goes goes to the core of what we call and I mentioned that in my speech about our management model.
That were implemented or it was implemented.
Extremely success in the railways allotted we'd have one of the best Railways and the worlds and it's there where we can manage to see what means the stability open interest that'd be what it means so that's what we're trying to break we assess that.
We have some levels of maturity for each of the dimension of this model is not from bodies.
All other business have similar with the obvious one is the is the D. P. S. T P. As as the father of all of the management module systems, who is acquainted with that we will understand what I'm trying to say and obviously the maturity level. When you look at the technical dimension or the leadership or the method at body as a whole is still very low.
When you go to this excellence aisles that we have inside body sit there is high so I'm pretty comfortable that the work that we're doing together with our cultural transformation and safety is.
Is the same as production, we say here didn't bother there just no production before before savings because there is no production really without it being a stable being able to control the process have the people engaged in the right manner to do what you would expect from him from that process.
The results were you result in adequate results and the stability and we'd like with less disruption as we do have in the railway for instance, as I said I haven't.
We are British pretty comfortable even in base metals business I've just been in a long harbour.
We are hitting the record in production for a long harbour and we're going to see what they've been doing there right people right process safety and production. So it's.
It's not rocket science, but it takes people it takes engagement.
So that's that's what I believe and my team is committed to a fully committed with that they understand that we have a gap between our competitors that is by the way translated in our opportunities on our C wants evening of iron ore with last I think iron ore has this has had the goodyear and its stability I believe.
All of the or our plans that we were supposed to resume we resumed or how we have planned.
But anyhow as I mentioned in my speech initially based matters the big focus, but we are very confident that we are doing the right things and and we'll get there for sure. Thanks for your question.
Ladies and gentlemen, let me remind you that you should have a question. Please press. These turnkey followed by the one key on your touch tone phone App.
But any time, you would like to remove yourself from the questioning queue precious time can't play.
Please restrict your questions to two at a time.
Our next question comes from and Trans booking Hauser from UBS.
But Andrea Yeah, I'll tell you something.
They love them.
Thank you very much. Thank you for taking my question also echoing my appreciation to our two you'll just yano. Thank you very much for all your time and availability over the years.
And especially your patience with us going through the numbers. So thank you very much for that.
Seems very fitting that.
I kind of direct my first question for you. This is something we've been talking about you know over the last six eight quarters I think it's just kind of the longer term cost cost or unit cost outlook for Vale.
Management has been saying that you still intend to get back to kind of the early thirties levels.
Overall waste, where it used to be pre Boumediene Ya.
Does that change now because you've always had you talked about maybe youre going to be producing less iron ore than you have capacity for.
And and if you don't produce as much iron ore does that mean that your cost dilution effectively at some being smaller and then your unit cost ended up being high is that is that how to think about it or does it still dropped because you're taking high cost production offline is that is that the way to think about.
That's the first question. Thank you.
Okay.
Andreas.
Very much appreciate your kind words same for Jonathan. Thank you very much and has been a pleasure all these years as well.
There, there's a number of effects playing right in our current cost position. So the first effect is a pro cyclical increasing costs, right, which you're seeing across the entire industry.
So we see this for example in higher oil costs higher freight costs higher royalties in the case of a variety of higher.
Purchase price for a third party horse, which although the volume is small because the prices are so high it it makes a difference for the the C. One base.
So this concerns as last because it's easily reversible over the long term.
The second theme is about what you just mentioned as normalized production when it normalizes, what what to expect we continue to believe that there's about a five dollar gap that we can bridge.
Just by bringing production to normalized levels.
And that has a number of in fact, the first one is obviously diluting costs you have operations for example, which are take broker to for example, which could be operating at 30 million tons. You have everything there to do it to all the fixed costs and you were still producing just 12 and and now with the high silica products in the past quarter 15.
So cost dilution is an important driver.
The second thing is the elimination of distortions in the way we produce again take broker to for example, instead of using a pipeline to deposit tailings on on the damn Mike We're basically trucking.
And sometimes with more than one operation. So if you put the patients on a particular price that they knew loaded again in your truck it again and do deposited by truck. So this creates all sorts of additional costs.
And finally third even the if you look at the release and you have that credit for quality, even that is being dropper. It is by the way we're producing today and Andy mentioned for example that when the filtration has come in we're going to improve substantially the quality of the production that we already have and therefore, we will improve price realization and.
That will help bridge part of those are are those are $5.
So with all of this is issue if you do the math and try to normalize we still believe it's appropriate to target a $35 per ton all in costs.
And including sustaining capital, which again is distorted as well because we are spending a lot of money to build for example to filtration plants.
Just mentioned.
So everything is tied into these posts blew my junior recovery of our entire production system, specifically on your point about Ah. Okay. We're gonna be producing last so there will be less cost dilution.
We intend to run the best minds at their full capacity. What eventually we may do is if you were just production if remove it from the less competitive mines. So therefore.
We don't expect this to be a let's say a drag in the overall cost performance. So we were targeting $35 per ton and and we want to be there as soon as we reach normality in our operations.
Hum.
Yeah.
Yeah.
Our next question comes from John Tumazos from John Tumazos Independent Research Mr. Joe Yeah, Aldo is available.
Thank you once again, all love and congratulations to Luciano there's been a tremendous joy to talk to you over the years.
My question concerns and market diversification.
For iron ore.
A little.
Shocked.
At the point 8 million ton per day, five months fall in Chinese steel output or 292 million tonnes crude steel annualized or.
Almost 15% of world output I think gotcha.
Biggest non recessionary decline in steel output any country history of the world.
There's a lot of explanations reasons, it's not my business.
It raises the question as to the desirability of China as a customer.
And.
The benefit of.
Moving more iron ore to Europe, or as annuities or D.
D R. I C H b I feeds pallets and other products.
In their own markets aside from China.
Excuse me for my question, if it's a little difficult.
Thank you John Spinelli here.
You're right Oh, you know what.
There is a trend that this now is theres no return that the the quality trend.
To this new World of you know zero carbon so that's the that's the trend we have a delay if you compare China with it but the other parts of the World as you mentioned Europe and Middle East.
And the key point here is we need to have high quality ores to compete and we are you know.
The the most important player in the world choose to supply these trend so.
How can you do that we are returning with the filtration the full capacity of Davita and <unk>.
And also bill could do in the end of the year, we have taught to damage that could do that we can.
Finally have back our valid feed production.
So we are bringing back the capacity of pellets are coming from 30 million tons to 60 million tonnes direct reduction is a key point here.
We are already developing the briquettes AR as a part of our strategy.
To replace.
Yeah. We're in this transition in the next 10 years, we still have blast furnace, so we need to improve.
These efficiency in the blast furnaces substitute the center with the brake kits.
With high quality flexibility to develop this kind of product.
That you have been really helpful for Europe, and also middle East in China, we see the trend of quality. Despite the market can reduce as you mentioned are there is a big market. There is two big market. There are we talking about 1 billion a bit.
Of protection of our SKU.
But if you can see that the increase of quality volley is it.
Really good shape to compete.
We see the trend in China, we are really close to them and to.
<unk> also developed the the the break out there.
Just fines in the north of Brazil is a key product today you can see.
The gap today are the premiums in Qatar, just fine even the I P F.
Sure.
For this whole transition you've seen China, even in the the rest of the world.
Yeah qualities of key is the key point here and we are really prepared and developing not only ample use to understand what they need but we are already investing in new products too to compete.
Our next question comes from Alex hacking from.
City.
Alex Yeah. It does.
They were adults.
Okay. Yeah. Thank you and let me add my thanks to our to Luciano.
You know if you've been a great.
Leader of Vale for some very difficult times, and I think all the shareholders and analysts appreciates it.
With regards to freight costs, obviously, it's been pretty volatile recently do you think there is anything structural there where you would be concerned that freight you know it could be higher going forward or you think this is just a you know a period of volatility and then we will settle down to a more normalized freight rates again.
Thank you Alex Spinelli here.
You know what happened then.
The market dynamics in freight the early.
Early this year, we saw the you know the supply chain disruption in order.
Kind of off market like container and Panamax is touching the the Cape sizes business.
But what happened after that.
Was a combination of other factors that we don't we see a kind of one off effect.
We don't see it as a structural problem that Deb can see in the future first one is related to.
The efficiency in China to discharge the vessels waiting lines two to three times more than the average it was related to do Australia and China tensions in the older. The problems should just charge of coal and also the iron ore vessels are in all the ports.
And the other point is related to the energy crisis. So we hit up huge mass in this market.
With thermal coal going to Europe go into China also met coal.
Without their production in China in dollar they are catching up the production there and stabilize them. The demand. So we see now movement that can organize better. This this market with the the the impact of the cold.
And then the last one that I can mention Alex is the seaborne market for iron ore for next year.
We will see last product coming from everyplace from Brazil from from Australia from ship from India going to China, because we see these markets are improving the consumption of iron ore in their domestic market. So do real relief.
The freight market for for the first and second quarter of next year.
Alex and John Let me Express my appreciation for your comments I hope to be together in the future as well maybe welcoming both of you in our operations here in Brazil.
Our next question comes from Andreas what can Hauser from UBS.
Yeah.
Oh.
Thank you I just had a follow up on the inventory strategy. So obviously in Q3, you built some inventory.
Can you just told.
Talk us through quickly what the thinking is there I understand it's obviously a high silica product in and you weren't happy with the price, but just kind of thinking on where we are in the price cycle I mean iron ore is still above $100 a ton historically, a very high level.
Arguably iron ore price fundamentals are somewhat challenging inventories are rising Chinese steel production I'm, just I guess I'm just worried that you know.
Is there a chance here that you basically need to destock their inventory at a later date at a lower price than what why not just sell it now that when prices are still relatively high.
Thank you and the rest sorry above the the second question Duffy, we missed it from the first the first round well we.
We see again that the high silica product because there is not a common product that we already have an hour.
Our.
Operations.
When we increase the penetration in all of the projects, we will reduce the exposure of high silica products, but that's a marginal project that product. We we just sold.
Our Indian band densely this product because the market was really good but what kind of impact we have not only the level of the price, but the discount Ah, we we need to come from that.
And the other point it was the freight as a marginal.
Cost we are considering that we need the spot freight to move from Brazil to China.
And the the level of the spot freight was pressuring the margins there so.
Wait to sell as a b or B F.
And the negative margin with the Standalone Hiseq was well it was a better.
Better solution for that but.
That's the reason, we decided not to produce more high silica standalone without Carter just to blend SBR behalf, but again, that's a very dynamic decision.
And this quarter, we are already assessing everyday this if you'll have a chance.
If you go to the market. We just can we have the flexibility to sell from B R. B after yourselves as a as individual product everyday we can do this but that that was the problem. The last month, and we had the reduction and the and the.
And then the this the level of spot freight was really high.
Was the decision.
And the last quarter, but we we can change these everyday and we already assessing the possibilities to make this happen. This this quarter.
This concludes today's question and answer session. Mr. Duan to backfill them out at this time you May proceed with your closing statement.
Okay. Thank you.
First of all I would like to reinforce that congratulations to Luciano and just remind everyone is still with US and is making we will make a huge contribution in the future.
And again, thanks, a lot Leslie on the welcome with stifle.
That's.
So what I'm gonna coming back to you.
Is the same every quarter, but we had something last quarter or last six months I was asked about super cycle and I were talking China.
Bust.
As a mining company that happens to be ready for any cycle.
So the <unk>.
Question has been answered is by the Derisking.
The reshaping and Baidu re rating the Derisking brings us to the level of the game, we need to repair, but my D. We need to get back to our structure to produce what is needed within the market.
Added to that are yet to practice in our daily routine.
Capital discipline is isn't touchable. So this is just not.
Not done, but he is really reading them going a reshaping has a lot of merits, we got out of the a b and C. We're gonna get today, we're gonna ex Mozambique, we gone up focus on what we know to do and not to do good and when we re rate. The company has been exactly the answer that the question that was it.
There was being was asked before is around being a stable being a reliable.
Safe operator, that's when our interruption on are coming in you are going to reward us as a C. One in the first quartile or iron ore nickel and copper nickel modest, though you'll be in so again I would like to thank you a lot for your attention for your interest in our call and I hope to see.
Either in the Valley day or in the next call. Thanks, a lot keep safe.
That does conclude the Vilest conference call for today. Thank you very much fair participation you may now disconnect.
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