Vale Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

There are 16 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss the 3rd Quarter Results of 2023. All participants are currently in a listen only mode. At the end of the presentations, we will provide instructions on how to participate in the question and answer session. This call is being translated simultaneously to Portuguese.

Operator

As a reminder, This conference is being recorded, and the recording will be available on the company's website at fali.com in the area for investors. The slide presentation that accompanies this call is being broadcast on the Internet and is also available in the Investors area of the company's website. There is a slide 2 second delay between the audio and slide changes compared to the audio transmitted via phone. Before proceeding, let me mention that Forward looking statements may be provided in this presentation, including Vale's expectations about future events or results in contesting those matters listed in the respective presentation. We caution you that Forward looking statements are not guarantees of future performance and involve risks and uncertainties.

Operator

To obtain information on factors that may lead to results different from those forecast by Vale, please consult the report Vale's files with the U. S. Securities and Exchange Commission, SEC, the Brazilian Conicao de Valores Mobileiario TVM and in particular, the factors discussed under forward looking statements and risk factors in Vale's Annual Report on Form 20 F. With us today are Mr. Eduardo Desales Bartolomeo, Chief Executive Officer Mr.

Operator

Gustavo Pimenta, Executive Vice President of Finance and Investor Relations Mr. Marcelo Spinelli, Executive Vice President, Iron Ore Solutions Mrs. Deshne Naidu, CEO of Vale Base Metals Mr. Carlos Medeiros, Executive Vice President of Operations. Mr.

Operator

Eduardo Bartolomeo will begin his presentation on Vale's 3rd quarter performance. And after that, He will be available for questions and answers. It is now my pleasure to turn the call over to Mr. Eduardo Bartolomeo. Sir, You may now begin.

Speaker 1

Thank you. Good morning, everyone. I hope you are all doing well. We continue to make significant progress on our strategic business priorities. We delivered a solid production performance This quarter and throughout 2023.

Speaker 1

In IRR Solutions, we delivered substantial output with increased average quality, while also lowering our production to sales gap as expected. In Energy Transition Metals, Salobo III is successfully ramping up, contributing to our copper growth year to date with total production 10% higher in the quarter in supporting lower unit costs. In nickel, we remain on track to deliver our production guidance while reviewing our assets to unlock value potential. On our path to decarbonization, we are accelerating breakthrough irons Our solutions, we are commissioning our 1st brick ready plant into Barone and signed 2 strategic agreements to assess the development of mega hubs. We are advancing in circular mining initiatives.

Speaker 1

We created Agera to develop our sustainable sand operations and we signed an agreement with Bluestone to foster Waste to value transformation solutions in base metals. On dam safety, we continue to deliver On a new framework towards a safer value, we completed the de characterization of our upstream dam and reduced the emergency level of B2B4 dam to the lowest. On top of that, we remain with our disciplined capital allocation approach. We just approved A $2,000,000,000 shareholder remuneration payment for December. With that, total dividends and interest in capital distributed Since 2021 represents a 29% yield for our shareholders.

Speaker 1

We also launched our 4th share buyback program. Since 2021, Vale has repurchased Over 16% of share base concentrating shareholders' future earnings by about 20%. As you can see, we are delivering on our commitments and reaping good results from our structural change. Let me go into more detail about our performance. Next slide, please.

Speaker 1

We had strong results this quarter And we are starting Q4 at a robust pace, well positioned to deliver on our guidance. In Iron Ore Solutions, we continue to operate S11D at a high rate, while increasing pellet feed production from Blue Coat 2. Thanks To the Tortodem commissioning, we delivered 5,000,000 tons above the 9 months output in 2022. We also improved our portfolio average quality and boosted pellet production by 11% this quarter. We faced one off engineering issues at SLM and D and the effects of a power outage across Brazil.

Speaker 1

And despite those issues, we are on our way to deliver a solid Q4 output. Iron ore fines And pellet sales increased by 6% this quarter, reducing our accumulated production to Sales gap. Usually, in the Q3, we have a high production to sales gap, but this quarter, we shortened that gap by around 50% Compared to last year, in Q4, we expect to reduce this gap even further. In Energy Transition Metals, Copper production grew 10% in the quarter and 22% on a 9 months basis, As an increase of 41 kilotons compared to last year, thanks to the successful ramp up of Salobo III, which is now operating at 80% of its capacity. In September, the Salobo complex reached its highest Monthly production level since 2019.

Speaker 1

Copper sales were exceptional for the period, Growing about 5% quarter on quarter and 22% on a 9 months basis. Even though We have been delivering a substantial output. We have decided to lower our production guidance by around 15 kilotons Given some change to the North Atlantic mining method and additional maintenance, in nickel, we are performing as Which includes the continued transition of the Voya's Bay mine to underground and the rebuild of the On Sapoma Furnace number 1 later this year. Our outlook for 20 22 nickel production remains unchanged. Next slide, please.

Speaker 1

We are accelerating breakthrough iron ore solutions to deliver the high quality required by a decarbonizing world. The 1st brick carrying plant is under commissioning with the ramp up expected by the end of this year. We expect to commission the 2nd plant in early 2024 with the ramp up at the beginning of the second quarter. The combined capacity will be 6,000,000 tonnes per year. 2024 will be our 1st year with industrial level production It will be a year of operational fine tuning for the long term reliability.

Speaker 1

On the mega hubs development front, We signed 2 strategic agreements to assess opportunities with Porto Duaso for a facility in Brazil for hot britated iron production Using our pellets and with H2 Green Steel for concentration units in Brazil and the United States directed towards products for the low carbon steel value chain, including HPI using our breakouts. Concentration solutions are critical to our decarbonization strategy, and we expect to build our 1st mega hub in 2024. Next slide, please. Posturing circular mining, we launched Agera, a company dedicated to developing our sustainable sand business. Agera trades and distributes sand extracting from the tailings dams of our iron ore operations.

Speaker 1

This type of operation allow us to reduce the use of dams and piles in our iron ore operation and we hope to scale up this business. In addition, Vale based Metals signed a long term agreement with Bluest 1 to reuse tailings to produce fertilizers. On Sapuma mine, we will supply Bluest 1 with slag for the next 10 years. This initiative expands circular mining within our Energy Transition Metals business. Furthermore, we signed 2 other strategic partnerships to assess decarbonization opportunities.

Speaker 1

With H2 Green Steel, Vale is taking its first step into the green hydrogen market. H2 Green Steel expertise We will be critical for developing green hydrogen in the mega hubs in Brazil and the United States. With Petrobras, We will assess the acceleration of low carbon solutions, taking advantage of the joint technical expertise and synergies of our 2 companies. Vale plays a leading role in the decarbonization journey by leveraging relevant actions to enable the energy transition. These agreements fit perfectly into this context.

Speaker 1

Next slide, please. Finally, We are building a safer valley. We've completed the de characterization of the 13th upstream dam. We are progressing on our upstream dam decharacterization program with the highest safety standards in place. In addition, After removing around 85 percent of tailings from B3 before them, we reduced East's emergence level to the lowest possible with the characterization to be completed in 2025.

Speaker 1

Since 2020, we have implemented Several safety measures upgrading over 40% of our structures at emergency levels to a safe status. We continue to systematically reduce them risks and to implement the best international practice in their management, while simultaneously developing solutions to minimize them usage. Now for our financial results, I'll pass the floor to Gustavo. Thank you.

Speaker 2

Thanks, Eduardo, and good morning, everyone. Let me start with our EBITDA performance for the quarter. As you can see, we delivered an EBITDA of $4,500,000,000 in Q3, almost $500,000,000 higher than the same period last year. The increase is explained by higher realized prices, which increased 13% year on year for iron ore and 16% for copper. On volumes, iron ore finest and pallet sales increased 4,400,000 tons year on year, taking advantage of favorable market conditions while reducing the usual Production to sales GAAP in Q3.

Speaker 2

The impact of costs and expenses on EBITDA was $189,000,000 year on year, partially explained by the $56,000,000 effect from the consumption of iron ore inventories from the previous quarter at higher costs as well as higher maintenance carried out in our nickel business. I will go into more detail on costs later in my presentation. Finally, the exchange rate had a negative impact of $4,000,000 in our EBITDA, while byproduct revenues from our operations in Canada were $103,000,000 lower. Iron ore C1 cash cost ex third party purchases came down $1.6 per ton quarter on quarter. This was driven by lower demurrage costs as well as higher fixed cost dilution with more production volumes, especially from the Northern System, where production costs are lower.

Speaker 2

We also continue to benefit from our rollout of our efficiency program, bringing sustainable cost savings of $0.3 per ton in the quarter. We are on track to deliver our annual guidance of $21.5 to $22.5 per ton, considering an expected further decrease in C1 cash cost in Q4. With regards to all in costs, our EBITDA breakeven is slightly increased to $55.7 per ton in the quarter, driven essentially by external factors, which offset the Solid C1 performance. Freight costs went up from $17.6 per ton to $18.9 mainly reflecting the increase in bunker oil prices in Q3. For sensitivity purpose, A $10 per barrel increase in Brent oil prices translates into a $0.9 per ton increase in our freight costs.

Speaker 2

Additionally, despite the positive effect of lower time chartering rates, Our exposure to the spot market treatment increased in Q3 due to our seasonally higher production and shipments in the second half of the year. Finally, despite an improvement of 87 basis points in the average iron ore quality in the quarter, The lower weighted contribution of pallet businesses and the lower 65% FE market premiums negatively impacted our all in costs. This is primarily driven by lower margins in the steel industry. We continue to believe and the strong fundamentals supporting demand of high quality products given circular trends such as The decarbonization of production processes, electrification of everything, the continuous urbanization of large emerging economies and the reshoring of supply chains. These are just a few of the examples that support our thesis and validate Vale's unique position in offering high quality products across all of our portfolio.

Speaker 2

Now moving to our Energy Transition Metals business. In copper, we continue to see gains from higher production at both Salobo and Sosego, which support the reduction of unit COGS by diluting fixed costs. All in costs, Excluding the Huu project, were about $3,300 per ton, a slightly increase driven by lower byproduct revenues due to a decrease in gold prices. At our nickel operations, our COGS ex third party feed increased To about $23,300 per ton with higher maintenance cost in Sudbury. With the end of the maintenance period and increased production in our North Atlantic operations, we expected unit COGS to materially reduce in Q4.

Speaker 2

In addition, our all in costs were impacted by lower byproduct credits, mainly due to maintenance at Sudbury And mining method changes requiring additional ground support at the Coloman mine. Now moving to cash generation. As you can see, Q3 free cash flow from operations was about $1,100,000,000 roughly $350,000,000 higher than Q2. We had an increase in working capital this quarter due to greater accounts receivable given higher iron ore sales and prices. Income taxes also increased as a result of better performance.

Speaker 2

Free cash flow from operations was used to return value to our shareholders with the payment of $1,700,000,000 in dividends and $500,000,000 in share buybacks. This is part of our disciplined capital allocation strategy, which leads to my next slide. Yesterday, our Board of Directors approved a distribution of $2,000,000,000 in dividends and interest on capital to be paid on December 1. This results from better cash flow generation to date and the expected inflow from the base metals partnership. Looking at our dividend distribution since 2021 and including this latest announcement, we have generated robust dividend yields to our shareholders.

Speaker 2

On top of our dividends commitment, we continue to see share buyback as one of the most accretive ways to create long term value for our shareholders. To that end, yesterday, our Board of Directors approved a new buyback program to repurchase up to 150,000,000 shares in the next 18 months. Since we started our first program, we have repurchased A total of 830,000,000 shares, representing 60% of our shares count. As a result, a shareholder who invested in Vale during this period has increased their participation of earnings per share by 19%. With that, I would like to now turn the call back to Eduardo for his closing remarks.

Speaker 2

Thank you.

Speaker 3

Thank you, Gustavo.

Speaker 1

So to summarize, here are the key messages from our presentation today. 1st, Implementing cost efficiency initiatives while growing production volumes have enabled A continued improvement in our unit cost. 3rd, the Energy Transition Metals asset review Confirms the potential to unlock significant value. We designed a more fit for purpose organization, Brought in top talents and entered a partnership with world class strategic investors. We are taking our assets to an optimal operating flow sheet for verification.

Speaker 1

And finally, we remain 100% committed to disciplined capital allocation. The distribution of an additional $2,000,000,000 in dividends And the launch of our 4th buyback program are evidence of that. We are At the forefront of global decarbonization, leveraging relevant actions for the energy transition while driving local and regional development. We have completed change how Vale manages its dams and risks. We are changing the company culture with a focus on safety, Always listening to our stakeholders in an open and transparent dialogue.

Speaker 1

We will continue to promote sustainable mining, Foster low carbon solutions and remain disciplined, making Vale a reference in creating and sharing value. Finally, I would like to thank the management team, our employees and partners for contributing to this quarter's results. Thank you. And now let's start our Q and A session.

Speaker 4

Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from Carlos De Alba, Morgan Stanley.

Speaker 5

Yes. Thank you. Good morning, everyone. So my first question is on the nickel results. I see you're making progress quarter on quarter production increase.

Speaker 5

Clearly, you sold the stake in the company and set up an independent board and a But the results continue to show increasing costs. And so You are guiding you're keeping your all in guidance flat for 2023 or unchanged better for 2023, which implies a very significant drop in the Q4. So my questions are, is there a time where you think we could See a more sustainable, better performance in terms of costs in that unit? And 2, Can you point us to specific actions that will drive that significant decline in all in cost In the Q4. And then my second question has to do with Clearly, you are generating strong cash flows.

Speaker 5

IONOR is contributing quite a lot. The company is making improvements in operations. And so you generated cash, paid this special dividend. How did you decide it between the dividend and share buybacks? Because while we have a new share buyback program, really the incremental shares to be bought are only €10,000,000 So it's not that significant, But clearly the EUR 2,000,000,000 special dividend is significant.

Speaker 5

So what is the decision? Can you walk us through How do you decide between dividends and share buybacks? Thank you.

Speaker 3

Thanks, Carlos. Here's Eduardo. I'll give the questions to Darshney and then afterwards to Pimenda. But just to make it clear, right, The structure that we are implementing is actually being implemented, is being implementing. So we believe the results are going to be right Above operational improvements, I think and Dachen can even explore a little bit about that.

Speaker 3

But I'll pass the word for Dachen to explain about the nickel results and the nickel expectations.

Speaker 6

Thank you, Eduardo, and thank you Carlos for the question. So if I just look at the quarter specifically, we produced 42,000 tonnes of nickel, but only sold 39. And as it and as Pimenta guided as well, we did sell less byproducts in the quarter. So that largely contributed to the overall higher unit cost in the quarter. In terms of performance, when it comes to production numbers, I mean, year on year, some of the markers that I use in terms of how the actions are translating into the right results, We have year on year increased our overall development in North Atlantic by over 20%.

Speaker 6

And that's why you would see the mining production It's actually increased year on year by over 16%. So that's an excellent way to say that the actions are resulting in the right numbers. If you ask then what are we doing to structurally change the business to get to those lower cost numbers. So firstly, in quarter 4, We will sell some of the difference of what we didn't sell in quarter 3, and we mainly hold that back in terms of inventories for maintenance, Etcetera. So that together with a higher production number will result in a much higher production as well as sales, Which is exactly what happened last year this time when we sold close to last year about 50,000 tonnes.

Speaker 6

This year, we've got Probably close to 47,000, 48,000 tons of nickel sales in quarter 4. So that together with some of the copper that we know will now come back into the system because we are sitting with inventories ahead of the plant will result in much higher copper byproducts as well, which will then give us the lower unit cost in quarter 4 that will dilute the overall year to date results. And that is why we are still holding on to the nickel cost guidance. In terms of just the overall structural changes, VBME continues to ramp up And that those ramp up tons will come in at a more efficient rate and that will result in the overall unit cost improvement that we will see from the Q3 of next year onwards. And then some of the other initiatives and productivity, etcetera, in Sudbury would But as Eduardo mentioned in his opening comments on the asset reviews, in fact, Tony and the team are currently in Sudbury, A lot of the work there is whether we can reduce some of the cutoff grades.

Speaker 6

And what the team is initially coming up with is huge opportunities Of possibly relooking on those cut upgrades that will result in far higher tons. That together with some of The technology initiatives that Tony wants to put on the table is telling us there's a lot more value potential unlock within the asset base. I'll leave it there and hand over to Pimenta.

Speaker 7

Thanks, Teixe and thanks, Carlos, for your question. Look, We've been favoring both over the last couple of years, right, both dividend and share buyback. And We like both. I think both have a role to play in our capital allocation, especially even where Stock prices are today. This one, it's a combination of things.

Speaker 7

I think one, as you said, we continue to generate strong cash flow. I mean, prices Remain constructive and therefore cash flow remains strong. But there is also an element of the VBM Partnership here which has more a one off nature. So that is what led us to favor The cash dividend payment of $2,000,000,000 But again, we continue to believe share buyback is a great Capital allocation 2 for us and that's the reason why we decided to extend the program for another 150,000,000 shares.

Speaker 4

Our next question is from Caio Ribeiro, Bank of America.

Speaker 8

Yes, good morning. Thank you for the opportunity. So firstly, I just wanted to explore a bit How you see the company's breakeven EBITDA for iron ore evolving with some of the changes, right, that you're working at in the company And also due to some changing industry dynamics ahead as well, right? So with this focus on developing Fuel mega hubs together with fuel makers, right? And given that under this structure, you will be supplying briquettes and other high grade Agglomerates in certain regions in the world, including the Middle East, possibly the U.

Speaker 8

S. As well. Presumably, there will be some shift, right, in your geographical breakdown Shipments, right. Today, it's largely directed towards China, right, but with this focus on energy transition, DRI, EAS and your strong positioning In delivering higher grade ore, I imagine your regional shipment destination could change, right, and that could perhaps alter your average maritime freight. And a higher maritime freight from Brazil to China has always been a disadvantage versus Australian peers.

Speaker 8

But with this potential change in the regional So do you see that potentially helping you gain an edge versus other peers on a breakeven EBITDA perspective? And then secondly, on the base metals division, right, it's clear that there's a lot going on there with the 13% stake still underway. You brought some high profile names to the Board and manager of the company. You're carrying an asset with you. Yet the short term results, they show the challenges still exist With maintenance of some assets, the transition to underground operation of Oasis Bay, I just wanted to see if you could give us an indication As to what milestones you're looking to achieve here over the next 2 years, right?

Speaker 8

And what signs do you think we should be looking for As clear signals that this turnaround of the asset is being successful. Thank you.

Speaker 7

Hey, Caio. Gustavo here. So I'll get started with the all in question for iron ore and maybe Dheshini can help us out With the base metals here. So in iron ore there is a couple of things which will benefit our breakeven Over the next couple of years, right? One is the simple fact that we should be resuming capacity, right?

Speaker 7

So That is a plan as we laid out in validate and we provide more color now in December in terms of ramping up capacity, but also ramping up capacity of higher quality products Which will help on the premiums and therefore the all in. Certainly the ability for us to sell to markets that are closer to our operations Helps additionally to that case. So overall, I think we are moving in that direction of being over time even more competitive from an all in So you're right on your assessment and that's the way we also see. So I'll just hand it back to Dijon, if she can talk About, about, base metals. But before that maybe Spinelli can complement, on the iron ore, if there is anything else you want to add to the holding?

Speaker 9

Thank you, Caio. That's exactly the strategy that we have, right? So it's based On the carb segmentation and as we need to the carb we have the direct production route And we go after competitive energy. So Middle East is a target, U. S.

Speaker 9

Is a target and also Brazil. So Exactly. The consequence of that is reduce our exposure to China. And we that's a way to go back In a much better shape to Atlantic, as you mentioned. And we're going to have the benefit As Pimenta said, of the premiums in the breakeven of EBITDA and also the freight And keep our competitiveness with big vessels we have a capacity to discharge in Oman.

Speaker 9

The Valemaxes, we also have capacity to discharge in Europe and Holterdam. So we're going to keep the All the advantage that we've been developing in China in a closer and stable territory. Now I hand over to Yixin.

Speaker 6

Thank you, Spy. Thank you, Gustavo. Sakai, thank you for the question. I'm just going to call out some of the progress that we're already seeing. We've had 3 progressive quarters This year for copper, as Eduardo said, quarter 3 versus quarter 1 is already a 22% increase.

Speaker 6

But turning to South Atlantic. South Atlantic has had a 47% increase in copper production during the 1st 3 quarters of this year. And September month and I'm seeing the same trend in October month, we are at the highest levels of copper production across South Atlantic since 2019. And then when I turn to Ontario mines, although we've had the issues which are very explainable in Coleman Mine, 4 out of the 5 mines in Ontario are above 96% of the budget target. So I think we can say that the improvement and the ramp up Are being delivered, but perhaps not at the pace that we need it to be.

Speaker 6

So one of the first milestones that we've delivered It's a factor Salobo III. I think it's absolutely a benchmark delivery on ramp up. Eduardo said, we're closer to 80% of the throughput, Which is around 10,000,000 tons per annum run rate already. And to deliver that within 9 months where we've had some delays in the second line start up is very impressive. On Salobo 1 and 2, we've previously mentioned in Vale Day that we are in the process of doing a recovery program and that recovery plan It was really targeted as catching up on some of the backlog maintenance.

Speaker 6

Very happy to say that, that work, the majority of it has been completed. And the improvements that we're seeing, Kai, now is that the plant availability, plant 12, is up to 90%, which is actually more than 5% increase year on year. And at Coleman, as we mentioned, we're not able to go after some of those more riskier sole pillars that we have in the mine. But what I can tell you is that because of the ground support initiatives that we had and other milestone achieved, We are set up to have a better quarter 4. So when I look at maintenance, what we've said up until the end of last year On backlog, the majority of that we are beyond.

Speaker 6

What we are now looking at, which is very seasonal, and I think this is something we must understand on the nickel We will take our smelters down in the middle of the year for a month to 2 months. There are assets that will go through 2 months of maintenance as I'm seeing on the surface plants for next year. So we need to perhaps guide better in terms of what to expect because nickel by design We'll be a little patchy per quarter over the year. Now with the asset reviews, what we are seeing as I mentioned It's things like cutoff grades, optimization. I think in terms of milestones to look for, Mark and I are working on a road map For the asset reviews that demonstrates how the value can be unlocked and as Marcus already mentioned, in fact, Kajal, at The discussion with you and Liam a couple of months ago that this will take a while to put in place and that from his experience These kinds of deep transformation programs will take almost 2 to 3 years to deliver.

Speaker 6

So we will come back to you at Vale Day and explain how the road map will come together. But I want everyone on the call to be very clear that the initiatives that we set out to do in terms of catching up on backlog maintenance is there and that is translating into improved

Speaker 4

Our next question is from Daniel Sasson,

Speaker 10

Hi, guys. Good morning. Thanks for the opportunity. My first question is related to costs because You did have an improvement in your C1 and yet your delivered in China breakeven increased versus the Q2. And part of that can be explained by higher expenses and royalties, at least As per what we can see from the table that you published, was there just curious if there was any sort of One off items on that line are extraordinary items that could revert ahead or if you could give us more color On your expectations for these, the remaining parts in addition to the C1 That composes your breakeven delivered in China.

Speaker 10

I think that would help us to forecast that going ahead. And my second question is more on the if you could share with us an overall view on the Premiums for higher quality products in China, we saw in recent months the Chinese steel makers margins not Being that great, so they favored to some extent the lower quality products which hurt premiums for better quality products, right? So if you could walk us through your thoughts on how this could evolve going forward, That would be great. Thank you very much.

Speaker 7

Thanks, Daniel. This is Gustavo. So I'll do the first one and then I'll ask It's Pinel to talk about the second one. So yes, Q1 performance came better. I think we were expecting The performance improved since Q1 and we've said that, so it's good to see You know C1 coming down especially versus Q2 and we should continue to see that performance improving in Q4.

Speaker 7

On the all in It's mostly driven by external factors frankly because what you were referring to in terms of royalties It was actually more a one off in Q2 than Q3. So there is no impact in Q3 Associated with any potential one off on royalties. In fact what we had if you look at big picture here it's more the external factors which Have impacted us in the quarter, right, especially bunker, which is almost $1 per ton increase versus what we had in Q2. And also premiums, especially market premiums which came down in the quarter, which is about $0.7 per ton. So that is primarily what has Driven the order to come up, but again we should continue to see improvements as we continue to bring volumes plus Our efficiency initiatives continue to deliver.

Speaker 7

So with that I'll ask Spinelli to talk about premiums in China.

Speaker 9

Thank you, Daniela, for your question. So firstly, just to reinforce, our long term view remain intact About premium. So I think the decarbonization is a trend. Energy efficiency is a necessity. We need high grade ores to decrease the impact of CO2 in blast furnaces and we need high grade ores in a global rated form to support direct reduction route.

Speaker 9

So this is our main strategy, long term Strategy and we strongly believe on that. In short term, let's split this in 3. So the first point, Pallets is doing really well. So we have high premiums for pallets and these related to this blooming of Direct reduction that is already going on in the Middle East and the U. S.

Speaker 9

The second one is related to low alumina. So that's another trend. Our competitors are increasing the alumina and we are taking advantage of how our And regarding the Carajas, the high grade ores, We always say that we have premiums when we need to save energy. So the cost of energy is high. That's not the case today.

Speaker 9

Coke This is another level or if you need more efficiency to increase the production and increase the volumes to support the market. So that's the main point here today in China. We have a strong market In a transition mode. So minimizing costs is the sense today. So we are also taking advantage of that.

Speaker 9

So we are Selling as we have a flexible supply chain, we are selling some high silicas with a lower discount today. And we are adjusting our supply chain to blend, so and have the low aluminum premium. But what we see is a transition moment. That's the longest period of low margins in China, only comparable to 2015. After in that moment in 2015 we had the supply side reform.

Speaker 9

We don't expect this in China today, but what we believe That we have a strong support from the Chinese government to keep their goals in GDP and GDP per capita. And that's an important message that came this week when we had the announcement of the 1,000,000,000,000 You want to support the infrastructure stimulus. So that will Support that transition and we believe that that will be a better pricing still That supports better margin, that supports better premium for our hard grade or that the Carajas. So that's the figure we have short term Focus on minimizing cost, but a transition for next year to rebalance the market in terms of price of steel in China.

Speaker 10

Thank you very much.

Speaker 4

Our next question is from Rafael Barcelos, Santander.

Speaker 11

Good morning and thanks for taking my question. My first question is about bureaus. So Vale has already started the commissioning test of the first 2 iron ore briquette plants in Tubarang, right. So I just would like to understand how these operations are evolving and when do you expect to reach the combined run rate production of 6,000,000 tons. And the second question is about the Brucutu complex.

Speaker 11

I mean, after the return of the Torto dam, How operations are evolving in terms of mix of products and volumes? And also, could you confirm when you'll be able to capture the The full benefit of Tortodaramine, if it will be in the 4th Q or more towards the next year? Thank you.

Speaker 12

This is Carlos Medeiros. Thank you for your questions. Regarding the briquettes, we are now, as We commented during the presentation commissioning the first line and addressing the technical problems. And so far, we have not found anything unexpected. Everything is coming according to plan.

Speaker 12

So we Our expectation is to move into more a startup In the beginning of November and then and from that point starting, we will start ramping up this line. Regarding the second line, As also mentioned during the presentation, we will start commissioning it During Q2 next year and after that ramping up. So We should be in a position to have the full capacity in place sometime in the second half of next year approximately. Regarding the Bruker 2 line, We have 3 lines in our processing plants up and running after the Torto dam. And we should continue as so until we have licenses for our Waste piles to be implemented and then we will be in a position to move to away from 3 lines up to 5 lines.

Speaker 12

So that's the outlook. And this won't happen before 2026.

Speaker 4

Our next question is from Myles Alsop, UBS London.

Speaker 13

Great. Thank you very much for the opportunity. So two questions. First of all, on CapEx. Could you give us, obviously, a bit more sense around how CapEx is going to trend this year and over the next few years?

Speaker 13

Obviously, This year, you're tracking well below the $6,000,000,000 As we look forward, with all the kind of mega hubs And the investments in Indonesia, how should we think about CapEx moving forward? I mean, how capital intensive from a Vale perspective, will these mega hubs be? And when will we start seeing spend on those? And then the second question is just around Samarco. Could you us a quick update.

Speaker 13

Obviously, there's the headlines earlier in the week. Could you give us a sense how Negotiations are progressing or not and what we should be thinking about in terms of liabilities?

Speaker 10

Thank you.

Speaker 7

Hi, Myles, Gustavo Quereta here. So maybe starting with the second question. So Look we continue to work on trying to find a resolution that works for everybody right. So that's I think Our belief that this is the ideal outcome here. So we continue to be hopeful that if not this year In the first half next year we'll be able to find a resolution and that should resolve some of the open disputes that we continue You see coming through, right.

Speaker 7

That is from our perspective the best outcome for San Marco and we will continue to look and work very hard for that. Regardless, we continue to perform super well on the obligations that we have under the TTEC. So we've 80% of the housing solutions have been resolved. We have indemnified more than 430,000 People spent to date BRL33 billion, so things are moving and we'll continue to do so. On CapEx, yes, we are tracking well around the €6,000,000,000 We will provide more color and validate in terms of what is Our long term expectation there, but you shouldn't expect us to deviate much from it, because especially you've mentioned the mega hubs.

Speaker 7

Some of that investment will be done in partnership with our clients. So we'll do part of it. Our clients will do part of it. So we should be able to accommodate this substantially within the existing figures that we've been working on. So we'll provide that more color in Valide, but that's the direction you should expect from us.

Speaker 4

Next question is from Tyler Brodhead, RBC.

Speaker 14

Thanks very much for the questions. Hi, everybody. I have two questions. The first one is on iron ore. Rodney made the comment that the production to sales gap would tighten a bit in the Q4 for iron ore.

Speaker 14

Just wondering if you could give a bit of color on that, just See the reversal of that, so you see a destocking normally in the Q4. Is that just to clarify, should we expect a destocking In Q4, especially after the sort of the inventory built over the last 12 months. And then my second question is about nickel. And it's good to see the operations. They're moving in the right direction.

Speaker 14

I guess, Ashley, I don't know if you could share your outlook on the nickel price. You've been negative Free cash flow now for the last four quarters. I mean, how is that influencing your plans for investment? And I guess just what your thoughts are at the moment with prices where they are? Thanks very much.

Speaker 9

Hi, Tyler. Thanks for the question. So Yes. You may expect a higher sales than production in the Q4 as we have normally in our seasonality, okay? Slightly higher, the sales be slightly higher than Q3 and same pattern we have.

Speaker 9

So But it's important to reinforce one point here. Our inventories is healthy. We are not Carrying or rebooting any inventory rather than our operational inventory. I've been hearing some noise about that. We have flexibility in our supply chain.

Speaker 9

So as and we have the value of our volume. So we can We are now focusing on blending. Sometimes we need to hold The product to blend, so that's exactly what we are doing now. So we are drying Carajas and blending for Q1. And we are anticipating high silica, some high silica product to reduce the concentration in China and And anticipating this sales to Q4 this year.

Speaker 9

So it's dynamic And we need to think as an operational inventory. But pay attention for Some information, different information from the past. We are increasing the pelletizing, the pellet production. So We have a reduction of the mass due to the moisture reduction when you do this. So if you are comparing this year to last Here we have a reduction on the total mass of the company when you compare production sales.

Speaker 9

Moisture is something that you already Having your models and another information that we've been increasing our production in China, our Concentration in China that we lose, we have a mass recovered that we lose some part of our total volume. So just check these numbers when you consider The buildup of inventories that exactly is not part of our inventory. We are losing mass when you do this.

Speaker 6

Hi, Tara. Thank you so much for the question. I think on nickel, the question was more Around what am I thinking about the outlook in terms of how that price is going to match what's happening inside the business. Just in terms of inside the business, The nickel business is in transition. The voices Bay project in which we are taking or building 2 underground mines to replace the open pit ovoid mine We'll only start to deliver those ramped up tons from the Q3 of next year.

Speaker 6

Until that period, the kind of the spiky cost that we see will remain Within the business, I'm very confident after that we'll start to see a lot more cash come back into the business. In terms of current prices, Tyler, we do not speculate on the nickel price, but all I can say from the data that we are looking at is that the EV demand Still continues to be strong despite some of the softening that we are seeing today. And if I look at the current forecast for EV sales today, It's still trending just under $14,000,000 although the world was looking at $14,600,000 at the start of the year against the $11,000,000 next year. And despite what we're seeing in LFPs, it's still the gain in China. We're still seeing the right amount of EV battery chemistry demand in the rest of the sectors.

Speaker 6

So I'm going to leave it there. It's all about the business has been transition projects that we have to do So that Voisey's Bay does not create the drag that we currently have in the cost and that the EV sector is still what we are anticipating medium term to be the fastest

Speaker 4

Our next question is from Leonardo Correa, BTG Pactual.

Speaker 15

Good morning, everyone. Can you hear me?

Speaker 3

Yes.

Speaker 15

Hello? Okay, perfect.

Speaker 3

Yes, yes. No, you can go ahead.

Speaker 15

Okay, perfect. So good morning, everyone. Yes, so I just wanted to focus my first question on the market, specifically for iron ore, right? I mean, we've been seeing still very, Very solid trends for iron ore. Looking at the key, let's say, KPIs, right, I mean, very low inventories across the At the steel level and also at the port level, China continues churning out More than 1,000,000,000 tons annualized per year, right?

Speaker 15

I mean looking at Chinese steel exports, they continue very high. If If I'm not mistaken, the last level, right, of steel exports from China was the highest level in the year. If we think of the issues, right, the main concern, I guess, some months ago was that China would enforce Those output curves in steel, which is something that we still have not seen, right? And over the past weeks, it seems The sense in China is more of continuity rather than curving steel production. And at the same time, we're Moving into a zone, right, which is seasonally very restricted supply, we get into rainy Season in Brazil, in Australia, and at the same time, you see Chinese stimulus, right, at the macro level Just coming through and finally they're tapping the fiscal levers, right?

Speaker 15

So there's a lot going on, but clearly The outlook for iron ore has been surprising, I think, all expectations. And I just wanted to hear how you're seeing the balance of risks, If you're seeing if it would be valid to say that the there's more upside risk at this point than downside, I think that would be helpful. And the second question On my side, I could have missed this. So sorry, I joined the call a little bit later. But Just on the base metals and moving back to the entire discussion on base metals, I'm going to avoid the performance issues, right, I think that they were addressed over the past Minutes, just on capital allocation in base metals, right?

Speaker 15

We still don't have a plan On the future investment program, where exactly you're allocating capital? I mean from previous commentary, I get a sense that you're probably going to be more inclined Investing in Brazil, probably more copper exposure in Brazil. But how is that progressing? I mean, is there any update or should we look into any announcement On where investments are moving at base metals specifically? Those are the questions.

Speaker 15

Thank you very much.

Speaker 3

Okay. Lael, I'll ask Spinelli to answer the market and Gustavo, on the base metals, but upside risk.

Speaker 9

Well, Lael, thank you for the question. So First of all, you point out many information that supports our Strong our view about what you just said. We have more optimistic view About China in the market. And we can say that that's the China resilience. It's Really clear that the government now is supporting and given all the signs that they want to Keep the year ago of GDP, GDP per capita that is already established.

Speaker 9

So many of us Always tracking the properties as a decrease that is actually decreasing and we have Some numbers of minus 7% of decrease and we have a more optimistic or a less A bearish view about this when you consider some other information rather than MBS like Bohor that we have A slight a slider decrease of minus 2%. So this is the common sense that we can't disagree, but I want to drag your attention for the bright side of what's going on in China. So first thing, There is a reinventing of the manufacturing in China. So we can see Like what the government said quality development. They are leading the green industry turbines all the equipments To support the decarbonization in the world being produced in China and to support their domestic demand and also the export, they are in Production of double digit for small appliance.

Speaker 9

EVs, they are flooding the world with their cars. Yes, we see this in Brazil. So there is a new platform of manufacturing that is going on in China and they need more High quality steel to support it. Infrastructure, they announced this stimulus of RMB1.3 billion That we saw that we'll support next year the increase of more infrastructure And they are already exporting as you said 8,000,000 tons that they will probably balance that export next year when the infrastructure will play a more important role. This is the main figure.

Speaker 9

Another point that we should Pay attention. We always track the CSP, the crude steel production in China. But pay attention in TIP, The PIGA production in China. There is a decoupling in the production of flat and rebar. So when you Need flat, you need a better quality production and we need to use the blast furnace route, so you need more iron ore.

Speaker 9

CSP is increasing 1.7 percent, PIP 2.8 percent. That is supporting also the iron ore production in China. And you have a lack of scrap to support AEF road. So there's another important information to show that we have a strong demand not only for short term but also for mid term, long term. Again in this supply side let's talk about the balance of supply side.

Speaker 9

We don't see A strong any strong support from any region to increase the supply of iron ore in the seaborne market actually is a decrease and India now is decreasing Probably for next year. They're blooming there. And that's important information. I'm not just taking information off the market. We are selling To India, we just signed a 5,000,000 tons contract to India to support them in this very high speed growth.

Speaker 9

So we see a tight market, a very balanced market in the supply side and demand side That can support this upside risk that Eduardo just mentioned.

Speaker 7

Liao, just quickly on base metals. We'll bring more information. We are running out of time here, but we'll bring more information at Vale Day as a result of the asset review. Remember one of the reasons why we did the carve out is exactly to position base metals for growth. There's a series of projects You probably saw in our release yesterday the project we announced in Indonesia, Pomala, it's a large project there.

Speaker 7

So there is a lot of copper projects in Brazil that we are looking to So we'll bring this in a more structured way at Validate, but certainly we want to accelerate growth at base metals.

Speaker 4

This concludes today's question and answer session. Mr. Eduardo Bartolomeo, at this time, you may proceed with your closing statements.

Speaker 3

Okay. Thank you. Well, I have never been so optimistic about the future of this company. After we did the reshape, after we sold 9 business, we focused on our 2 unique Assets in iron ore and base metals, what we're seeing all leading operational KPIs And safety indicators in iron ore are substantially better since 2019. As Spinelli mentioned, we have a very resilient market ahead of us, even In nickel, with this softening that is happening now, but we see a bright future for nickel and copper is needless to explain.

Speaker 3

And of course, the aftermath of the carve out is showing us in fixing the operational issues, we have Even more value to extract from those assets. As I've been always saying, it's not a sprint, It's a marathon, but as I said, I have never been so optimistic. And thanks a lot for your attention, and let's See you in the next call.

Speaker 4

Vale's conference call for today is now concluded.

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Earnings Conference Call
Vale Q3 2023
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