Vale Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 17 speakers on the call.

Operator

Morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss the 23 Second Quarter Results. All participants are currently in a listen only mode. At the end of the presentations, we will provide instructions on how to paid in the question and answer session. This call is being translated simultaneously to Portuguese.

Operator

Please press the star key followed by 0. As a reminder, this conference is being recorded and the recording will be available on the company's Web filed at valley.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 slight 2 second delay between the audio and slight 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 encompassing those matters listed in the respective presentation.

Operator

We caution you that Forward looking statements are not guarantees of future performance and involve risks and uncertainties. To obtain information on factors that may lead to results different from those forecast by Vale, please consult the reports Vale's files with the U. S. Securities and Exchange Commission, SEC the Brazilian Comision de Valores Mobile Arias, CVM and in particular, the factors discussed under forward looking statements and risk factors and Vale's Annual Report on Form 20 F. With us today are Mr.

Operator

Eduardo De Salis Bartolomeo, Chief Executive Officer Mr. Gustavo Pimenta, Executive Vice President of Finance and Investor Relations Mrs. Darshne Naidu, CEO, Vale Base Metals Mr. Carlos Medeiros, Executive Vice President of Operations. Mr.

Operator

Eduardo Bartolomeo will begin the presentation on Vale's 2nd 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 very much. Good morning, everyone. I hope you are all well. Let me start With a very significant milestone that we delivered and announced last night, we signed a strategic partnership With world class diversified investors for the energy transition metal business. This partnership Attributed a very attractive valuation for our ETM business, which shows that our partners Recognize the value generation potential of our assets and how uniquely positioned they are.

Speaker 1

This is an encouraging starting point for what we believe is a powerful platform for growth. I will give you more details during the presentation. Now let me cover our operating results. We delivered a solid production performance for our business this quarter. In Iron Solutions, we are growing quarterly output year on year, While our all in costs declined yearly and quarterly, we are so commissioning total dam, which will increase availability of pellet feed for Bluekutu operations and improve the average quality of our portfolio.

Speaker 1

In Energy Transition Metals, Salobo III is ramping up ahead of schedule with a solid contribution to our corporate growth year to date. In nickel, we are firmly marching towards our annual guidance. Moving on to debt management. We reached the 1st deadline for implementing the global industry standard for tailing management, the GISTM. With a positive outlook, All of our prioritized structures are in conformance with the standard with ongoing action plans to assure that the best practice are in place.

Speaker 1

This is part of our commitment to being a safer company for our employees, communities and society. On top of that, our disciplined capital allocation remains pristine. We announced the distribution of 1.7 $4,000,000,000 in shareholder remuneration with payment in September. Since 2021, The total amount distributed in dividends and interest on capital translated into a 27% yield to our shareholders. This shows Vale's solid track record in creating and sharing value.

Speaker 1

In addition, our 3rd share buyback program is now 69% complete. Since launching our 1st share buyback program in 2021, Vale has repurchased about 16% of its share base, representing a concentration in shareholder future earnings of almost 20%. With that, we are walking the talk, delivering in our commitments. So let me go now over some details of our performance. Next slide.

Speaker 1

We reached the end of the first half of twenty twenty three with strong results and a positive outlook being well positioned to deliver the production guidance for 2023. In Iron Solutions, asset reliability initiatives Have started to bear fruits this quarter and driving the solid performance across our 3 systems. We set a new production record for a second quarter at S11D. It's a bit and Virgin Grande performed very well as well And our mix improved substantially. As I mentioned, Tortue is finally commissioned, Which should allow for more pellet production improving our mix and average price premium.

Speaker 1

In Energy Transition Metals, copper production in the 2nd quarter grew 41% year on year, mainly To the successful ramp up of Salobo III and improved performance at Sosebu benefiting from the extended side mill maintenance done last year. Copper sales were exceptional for the period, growing 43% year on year. Finished nickel production grew 8% year on year, giving continued solid performance from our Sudbury mines An improved production sourced from Indonesia. With planned maintenance in the quarter, voices Bay and Long Harbor operations had a lower output. Onsa Puna furnace is currently operating at a lower rate in preparation for the furnace rebuild later this year.

Speaker 1

Despite that, our outlook for 2023 nickel production remains solid. Next slide. We are ramping up Salobo III ahead of schedule with strong production rates. We had an increment of 10 kilotons this quarter versus the Q1 with a total output of 16 kilotons in the first half of twenty twenty three, meaning 9% of our total copper output in the same period. Once at peak capacity expected at the end of 2024, Salobo III will add 30,000 to 40,000 kilotons per year of copper to our total Salobo complex output.

Speaker 1

Next slide. In 2020, we committed to implement the GISTM, the global industry standard for tailing management Within the industry timeframe. I'm glad to inform that we have implemented the standard for all of our prioritized structures Within the first deadline, we've ongoing action plans to ensure full performance. This is an important milestone in the evolution of our BAM management towards the safety of our employees, neighboring communities and society. In addition, We are on track to full conformance for all our tailing facilities, not in state of closure by 2025.

Speaker 1

We are consistently reducing risks associated with RDAAMS and implementing the best international practice in dam management, while developing alternative solutions to reduce dam use. So we will continue to deliver on our ASG 2 commitments so that Vale becomes a leader in sustainable mining and a benchmark in safety. Next slide. Finally, talking about our ETM business. As you all know, we have been working over the last 18 months On a series of initiatives to position our ETM business for success, we have completely redesigned our organization, ReinFest the business into a single vehicle and lean leaner structure and a dedicated governance.

Speaker 1

We attracted industry experts for the board, top talents like Jerome Guillen and Marc Cuthani, who needs no introduction. In addition, we define management incentive plans tailored to foster business development. All of that to establish a more fit for purpose organization that will allow us to unlock the ETM business value over the next several years. Today, I am very proud to announce the formation of a partnership with world class strategic investors to ATM, which I'm confident will create substantial long term value to All of our shareholders, I am honored to partner with Manara Minerals Investment Company, A new venture between Madden and PIF, the public investment fund that brings In experience and help us in accessing strategic geographies providing, including the iron ore business with our mega hubs. I am also honored to partner with Engine 1, a reference in sustainability focused investments with solid ESG credentials.

Speaker 1

The future ahead of us is very promising. The need for a lower carbon economy is a generational challenge, But at the same time, it's an enormous opportunity as this simply will not be achieved without a significant increase in the supply of critical minerals. We see ETM uniquely positioned to play a relevant role in this process, Not only because we have a tremendous mineral endowment, but also because we are building the leading ESG Future facing minerals platform in our space, one that pursues long term value creation to all stakeholders. We all share the same vision for long term growth and value creation. And the terms of our partnership is a validation of that.

Speaker 1

I said we would close a deal only at the right value and with the right partners. That is exactly what we achieved today. So now I pass the floor to Gustavo, who will detail the transaction and our financial results. And I'll get back to you on our Q and A at the end and thank you for your attention.

Speaker 2

Thanks, Eduardo, and good morning, everyone. As Eduardo explained, this partnership is another important milestone in building a leading future facing commodities platform With significant mineral endowment and resources inclusive of reserves amounting over 30,000,000 tons for copper In 90,000,000 tons for nickel, we see potential for ETM to invest $25,000,000,000 to $30,000,000,000 in highly accretive projects over

Speaker 3

the next

Speaker 2

decade, growing its copper production from approximately 3 50 kilotons per year to 900 kilotons per year and its nickel production from around 175 kilotons per year to 300 kilotons per year. With this exciting outlook, I now turn to the transaction details in the next slide. Given the strong interest to partner with ATM In the high caliber of potential partners, we together with our Board decided to accommodate a greater share of investors And increased the equity capitalization to 13%, considering an enterprise value of $26,000,000,000 The implied pre money equity value for Vale was $25,100,000,000 The total net proceeds I expect it to reach $3,400,000,000 out of which $1,000,000,000 will stay with BBM and the balance will be returned to the parent company for future use as per our capital allocation framework. Now moving to our financial performance in the Q2. Let's start with our EBITDA.

Speaker 2

As you can see, we delivered an EBITDA of $4,100,000,000 $1,400,000,000 below the same period in 2022. This decrease is explained by $15 per tonne lower iron ore fines realized price And by the $3,000 per tonne lower nickel realized prices, following the decline in the reference prices since Q2 2022. The impact of costs and expenses on EBITDA was relatively small at $96,000,000 mainly from transitory effects in the nickel business related to the maintenance and higher third party nickel feed purchases. In iron ore and copper, despite the year on year inflationary pressure, costs and expenses improved EBITDA by $218,000,000 I will go into more details on costs later in my presentation. Sales volumes and byproducts Helped increase our EBITDA by $154,000,000 as a result of initiatives to improve asset reliability, And we expect to continue seeing these positive results in the second half of twenty twenty three.

Speaker 2

Now on to iron ore costs. Our C1 cash cost ex third party purchases came down slightly to $23.5 per ton quarter on quarter, Even considering a $0.70 per ton negative effect from the Brazilian currency appreciation. Given the significant appreciation of the Brazilian real, we're now considering an average exchange rate of BRL4.95 for the year Versus our previous assumption of BRL5.20 per dollar, we have adjusted our C1 guidance for the year to $21.5 to $22.5 per ton. This means an expected C1 below $22 per ton in the second half of this year, driven by more Northern System production in the mix And the continuous rollout of our productivity program with gains in asset reliability and procurement initiatives. With regards to all in costs, our EBITDA breakeven reached $53 per ton, roughly flat year on year And $5.2 per ton lower quarter on quarter.

Speaker 2

This can be attributed to the improved product portfolio mix with more Northern System Ore and lower high silic product sales in addition to greater volumes. We also adjusted our iron ore all in cost guidance to $52 to $54 per ton for the year. This change is essentially The result of external factors such as the lower all in premiums due to market conditions And the adjustments in C1 due to the Brazilian real appreciation. Just to give a sensitivity, A $0.10 appreciation of the Brazilian real converts into a $0.30 per ton increase in C1 cash costs Ex third party purchases and a $0.50 per ton increase in all in costs in 2023. In corporate, we continue to see gains from higher production at both Salobo and Sosego, which supports the dilution of fixed costs at our operations, Higher gold prices and the one off effect on tax credits contributed to reducing our total costs lower than in the Q1, which is in line with our expectations with the continued ramp up of Salobo III.

Speaker 2

At our nickel operations, our COGS Ex third party feed increased about 5,000 year on year due to lower availability of our own feed, which we were already expecting with the ongoing transition in Voyases Bay mine and the relatively longer planned maintenance period at Long Harbor. Also in connection with Voyages Bay, transition and long harbor maintenance, this quarter, we have recognized a one off decrease in the recoverable value of inventories, which were produced at higher costs. As a result, our all in costs increased year on year, but stayed essentially flat quarter on quarter at just over 17,000 per ton. The all in cost guide for Anecco in 2023 Has been adjusted to 15,500 to 16,000 per ton, mostly reflecting lower than expected by product prices and volumes, which we expected to continue throughout the second half of twenty twenty three. For the second half, we expect all in costs to decline as production increases and no other one off event materializes.

Speaker 2

Now moving to cash generation. As you can see, Q2 free cash flow Was negatively impacted by working capital as we had 7,000,000 tons higher accrual sales volumes in iron ore In addition to higher Primatino related commitments. Also in the 2nd quarter, Vale raised $1,500,000,000 from bond issuance, Those proceeds were mostly used to repurchase $500,000,000 of higher cost debt and to repurchase $1,400,000,000 of shares as part of our buyback program. Looking specifically at our capital allocation strategy, yesterday Our Board of Directors approved a distribution of $1,700,000,000 in interest on capital to be paid in September based on financial results from the first half of the year. Since 2021, Vale generated 27% of dividend yield.

Speaker 2

Additionally, we continue to see the repurchase of our shares as one of the best ways to create long term value for our shareholders. Since the beginning of our share buyback program, Vale has repurchased 16% of our share base, representing a concentration in shareholder future earnings of almost 20%. So before we move on to the Q and A session, I would like to reinforce the key messages from today's call. We continue to make substantial progress in our operational performance And I'm extremely confident in delivering our production targets for the year. At our Energy Transition Metals business, we are thrilled with today's announcement and believe the actions we have taken over the last 18 months will position the business to be a winner in the global energy transition.

Speaker 2

At the same time, we have been taking immediate and consistent actions to improve dam safety, being now adherent The GISTM for all critical structures. And finally, we remain highly committed to a disciplined capital allocation process as evidenced by today's dividend announcement and the continuous execution of our highly accretive buyback program. Now, I would like to open the call for questions. Thank you.

Speaker 4

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Daniel Sasson, Itau BBA.

Speaker 5

Hi, guys. Good morning. Thanks for the presentation. My first question is on the cost front. If you could give us more details on the cost difference between your northern and southern systems, That would be helpful and help us understand the evolution of your costs going forward, given the increase of Participation of the Northern System in your total mix and your total sales mix in the second half.

Speaker 5

And if you could remind us of Your exposure, what percentage of your C1 is actually denominated in AIs? That would be great. And my second question, congrats on the transaction for the base metals division. If you could give us More color on your expectations on the potential contributions from Maven and The NPIS from a strategic standpoint to the development and stabilization of operations In your base metals division, that would be great, right? And I'm trying to understand that in addition from the interest That you're able to read, what is your what your partners could bring to the table and help us with Those with unlocking value in those operations.

Speaker 5

Thanks a lot.

Speaker 6

That will be first in the cost and we're going to detail a little bit more the partnership later.

Speaker 7

Thanks, Eduardo. Thanks, Daniel, for your question. So on the Northern system, C1 is on the mid teens. So you can do the math. You see There is certainly a contribution as we bring more volume from the north to our overall mix, right?

Speaker 7

We've seen some improvement in Q2 and you continue to see in the second half of the year. Regarding your FX question, I think the best way to look into that is To assess the sensitivity that I've talked about in my prepared remarks, so every €0.10 of BRL appreciation It's about $0.30 of increase in our C1. I think that's the best way to look into the overall exposure that we have and $0.50 at the all in. So I'll pass the third question to Eduardo.

Speaker 6

Thanks, Gustavo. I think, Daniel, thanks for the question. When we discussed the unlocking value for base metals, we always That is a conjunction of factors, right? It wasn't only the participation. The participation would come, As I mentioned, at the right value with the right partner, one that would see the opportunity down the road And the ability of ourselves to execute it.

Speaker 6

Well, obviously, as Gustavo mentioned, there were several interests And Manara to Madden together with PIF and then Genome 1 as well, they came up exactly on these two Fundamental elements that we believe will unlock value. First of all, they validate that this is they are long term investors. They're not here for the spring. They're coming here for the long term. They bring sector experience in Mad And Maden has partnerships with other several miners, so they will help us as well.

Speaker 6

And as I mentioned already, the long term value Investor and Angel Number 1 bring SDG credentials that is key as we are in a business of energy transition. So I believe the validation, the strength in the governance that will happen with them, their help in the sector And there's a collateral that, of course, is a benefit from us is that we have interest in the Middle East as well with the mega hubs, as you know. So There were several elements that added to bring the right partner, people that share the same view, share the same values, They have VSP credentials. So I think they will be very helpful on strengthening the governance because as we've been saying Repeatedly, it's all about execution and growth. And with Marc Cuthani leading the Board, Attracting talents like him, like Jerome, having a fit for purpose organization, having partners, this will add up To a convergence of interests and how can I say that objectives that we unlock At tremendous values because we're going to execute faster and grow faster?

Speaker 6

Thanks for your question, Daniel. And we are very excited, by the way. I think we are beginning a new phase in Vale that will unlock Tremendous value for our shareholders and fundamentally for the base metals business.

Speaker 4

Our next question comes with Leonardo Correa, Banco BTG Pactual.

Speaker 3

Good morning, everyone. Thank you. So my first question for is on base metals. Gustavo, you mentioned during The presentation the initial presentation that In the transaction, but you mentioned that $1,000,000,000 would stay at BBM and $2,400,000,000 would be returning to Vale, Right. I guess there were some doubts on how much would stay at the energy transition unit.

Speaker 3

So I think you clarified that. I just And this $2,400,000,000 that's flowing back into Vale, I mean, where would we See that being allocated. I mean, I can imagine the key question would be if that would be a return to shareholders in a form of a Special dividend or continued aggressive buybacks. So the question is what will Vale do with the 2,400,000,000 That's returning to the company or that's staying at Vale and not being allocated to DBM. The second question, Still on cash returns and still on I'll speak for you, Gustavo.

Speaker 3

I mean, from your approach, I'm just analyzing what Vale has been doing, right? You announced you're basically paying the minimum dividend based on the formula, Right. And you're allocating all the extra, right, towards a very aggressive buyback, Which has been on pretty much Validus cards over the past quarters. You're allocating something around 1.4 $1,500,000,000 per quarter of buybacks. Even with the changes in interest on equity, right, which in Brazil will probably be Do you think that's the same tone going forward?

Speaker 3

We should expect minimum dividends being paid And all the balance on the buyback, is that still the way to go? So those are the 2 questions. Thank you very much.

Speaker 7

Thanks, Leo, for your questions. So on the first one, yes, we wanted to provide more clarity in terms of where the money will stay. So Based on what VBM is able to generate on an ongoing basis plus their own balance sheet, We came to the conclusion that $1,000,000,000 was sufficient to fund the business for the next 3 to 4 years based on the plan that they have. So the rest is indeed moving back to the parent. It will come into our overall pool of cash and we'll then allocate based on our Capital allocation framework that we all know very well.

Speaker 7

So that links to the second conversation. I'm very happy with The way we've been allocating capital over the last couple of years, I think we are creating significant value for our shareholders, either through a very health dividend payment or the share buyback at a very attractive level. This is certainly a conversation that we have Constantly with our Board and we'll bring more clarity in terms of how we keep going on this one, but you should continue to

Speaker 4

Our next question comes with Vanessa Quiroga, Credit Suisse.

Speaker 8

Thank you and congrats on the transaction. I have a couple of questions. One of them is regarding The agreement with the partners, is there any optionality for off Take for the partners as part of the agreement? And will they have any dividend I mean, any rights to receive dividends from Vale in the future? And the second question is related The second question is related to I would like you to review basically your corporate governance protection to be able to avoid any student

Speaker 7

All right. So Gustavo here. The first on the first one, yes, so on the there is no Especially if anything like that on the agreement, I think the agreement is very proportional to the Final stake of each one of the partners. There is some commercial discussions that we've had, an agreement that we've had with Our partners and it's all based on market conditions and that's pretty much it. So it's very attractive From a governance standpoint for us, if anything, it just opens up new markets for Vale, right, including The opportunity for us to deploy our products in the Middle Eastern.

Speaker 4

Our next question

Speaker 6

As for the no, no, no, no, no, no. With the minutes, we have to answer the second question still. On the corporate governance, I think it's a very, very important question for Vanessa is that we've been since, I think, 2017, if I'm mistaken, when we entered Novo Mercado, We've been improving the governance. So I think Vale's governance is fit for purpose for a world class organization like ours. So I believe that We are in good shape.

Speaker 6

We have independence. We have representation. We have lead independent directors. So I think the corporate governance It's the right it's right sized to avoid any problems that we would eventually have.

Speaker 4

Our next question It's from Carlos De Alba, Morgan Stanley.

Speaker 9

Yes. Good morning. Thank you very much And congratulations on finally executing the transaction. I wanted to maybe step back and think about How do you see the path forward now for BBM given whether you accomplished, I guess, what So only is the first step or the first two steps in that in what you want to do With this company in the future, do you want now to concentrate in improving operations and then potentially Do an IPO or see what opportunities are there to buy or merge with another entity and further increase The already attractive pipeline operator that you have. If you could comment and provide any color, that would be really useful.

Speaker 9

I have another question, but maybe I can ask it after the first one.

Speaker 6

Okay, Carlos, thanks. Your question is extremely important because As I mentioned before, it's a path, right? It's first of all, it's execute. That's why the Partners are relevant on that sense because they are not, how can I say that, short term Investors or short term viewers on this matter? That interest That fit for purpose organization that we mentioned that is being that is designed already is ring fenced, as I mentioned, is the first step.

Speaker 6

The acquisition of talents like Jerome and Marc will go under the first Hurdle, that is execute on existing assets, of course. We still have gaps to fulfill. There are 2 projects that are ramping up. So we believe that's the first and most important challenge that we have to Keep on doing as we have been doing. The difference, I believe, with this new design or this new arrangement is speed.

Speaker 6

The second one is growth. With a more dedicated organization, we believe that the projects, the attention, The drives are will help us on accelerate that growth. When those two things merge and will take a while, it's not something you need, it takes 2, 3 years, I don't know, we will see What kind of demands we will have? What kind of opportunities we will have? I don't know if Gustav wants to complement, but fundamentally, it's a path to execution, a path to growth And eventually opportunities that will arise later, right?

Speaker 6

Of course, there's capital allocation opportunities as well.

Speaker 7

Yes. No, I think you covered well, Eduardo. I think the key message for us here is also optionality. I think This transaction creates options that otherwise Vale wouldn't have, right, to fund the opportunities that will come along. So we are very excited Because I think we are through a series of actions over the last 18 months, I think we are setting this business for success, creating options that otherwise we would not have and a more focused organization, which over time, I think we all believe strongly that will create significant value for our shareholders.

Speaker 9

Thank you, Eduardo, Gustavo. And Gustavo, maybe the second question I have you could address is the following. So Vale has a dividend policy that is based on EBITDA generation minus sustaining CapEx. But assuming that iron ore prices were to come into some pressure, EBITDA will come down. Sustaining CapEx, you may have some space to bring it down, but presumably there is A minimum level that you want to do so that you maintain the integrity of your operations and assets.

Speaker 9

So there is a little bit of little room To maneuver, if EBITDA comes down, but not as much as your Free cash flow generation impacted by the repayments of the Brumadinho Mariana accident closer than the characterization. So meaning it is conceivable that your free cash flow yield could be lower than your dividend yield Suggested by your dividend policy. So how do you see this situation? What would the company do In such a scenario, clearly, the balance sheet is strong and you could sustain a dividend yield higher than your free cash flow yield, But potentially not for too long. So yes, I just wanted to explore how do you see this and if there is a possibility potentially To change the dividend policy or maybe I'm just mistaken and the payments and the expenses on Ruben Nino and That are adjusted out on EBITDA and some calculations are not adjusted out for the EBITDA policy purposes.

Speaker 7

Yes. That's a good question, Carlos. So look, those I think first thing is those Expenses or disbursements are temporary, right? So over a period of time, they will be heavier and then they will over time Reduce, which will free up cash down the road. In the very immediate term under the scenario frame, I think we will have the ability to Even use our balance sheet and we've been doing this as you've noticed.

Speaker 7

We have a very strong balance sheet, amortizations, debt amortization It's very smooth over the years. You've seen us doing a lot of liability management in the last 2, 3 years, Pushing out amortization, which should give us a lot of breathing room for us to accommodate and continue To deliver on our dividend policy. So we are this is very critical for us and we'll continue to be very disciplined In terms of delivering on the policy that we have.

Speaker 4

Our next question is from Thiago Lofiego, Bradesco BBI.

Speaker 10

Hi, good morning, everyone. First question, congratulations on the base metals deal. And if I may go back to Carlos' question, which was in the lines of what next steps are. And I'll be more specific in my question here, which is, would you consider a NextStaff being A potential sale to a larger strategic shareholder. Now that you have the valuation kind of like a stamp, Would you pursue larger steps in terms of bringing in larger partners to solid base metals or is an IPO a higher probability scenario or you're not thinking about any of those Two scenarios and just thinking about the operating turnaround.

Speaker 10

And then my second question to Medeiros, if I may. Medeiros, could you please talk a little bit about the main initiatives you're focusing on at the operating side? What the main upsides are, we understand the licensing bottlenecks, the resuming production story. But from your perspective, Are there any other major levers that you're working on to increase production efficiency and operating efficiency?

Speaker 6

Okay, Thiago. Thanks for the congrats and thanks for the very specific question. Yes, There is no the path now is execution. What we have the focus now as we arranged every piece of the puzzle, We have a partner. We have a structure.

Speaker 6

We have the people. We have Marc. We have Jerome. We have Dazhne. We have our the structure execution.

Speaker 6

That's our primary focus. But as Gustavo has mentioned, the amount of investment that this business will require Down the road, the optionality is in our hands. It's an IPO, it could be, it's a merger, it could be, but it's not in our minds now. Our minds are totally focused on the execution, okay? I hope I had it more clear now.

Speaker 6

This is something for down the road 2 to 3 years to think For now, now that we did the deal, let's focus on accelerating the how can I say that, The filling the gaps or closing the gaps on the execution and accelerating growth, as I mentioned before? And then 2, 3 years down the road, I don't know. We might and then as Gustavo mentioned, the optionality will be all in our hands. We haven't think about that yet. Okay.

Speaker 6

I hope I have been specific and answered you at this time. And I'll pass to Medias to answer your second question.

Speaker 11

Thiago, So the main points have been working In the operational side, it is basically asset reliability in all systems. So that's a point where we believe that there is most room for an improvement. And clearly, we saw some results in the last quarter. Besides the reliability, there are some specific points That vary from system to system and also the geography where I believe that is the biggest opportunity for upsides is S11 gs In terms of reliability, yes, this is the main point.

Speaker 4

Our next question is from Amos Fletcher with Barclays.

Speaker 12

Yes, morning, gentlemen, and thanks for the opportunity. I just wanted to ask a question about the separation of VBM. Will it be run effectively with a separate balance sheet? And will that influence Vale's net debt target and cash returns policy? So for example, if VBM is free cash flow negative, for example, are you going to carve that out from Vale's adjusted net debt when you think about

Speaker 7

Hey, Amoz, Gustavo here. No, given the larger Share of participation, it will be all consolidated still. But certainly, they will be able to fund themselves With their own either generated cash, been able to raise capital and debt potentially that debt it's For now, we are expecting to be rigorous. But over time, as the business matures, we may be able to change it. But at this point, given The size of the participation from Vale, it will continue to be consolidated and treated as such.

Speaker 7

So no change in the policies at this point.

Speaker 4

Our next question is from Rodolfo, Angeli, Banco JPMorgan.

Speaker 13

Hi. Good morning. My first question, just wanted to confirm The cash that stays at VBM of $1,000,000,000 you mentioned this is what you see as What the company will need for the next 3 to 4 years? Did I get this right? Gustav, can you just confirm, please?

Speaker 7

Yes Rodolfo, because the company I mean the way we are setting the company up is there is no debt, day 1, right? So very Conservative balance sheet, we are adding $1,000,000,000 of cash, plus they do generate good cash flow. So that combination will allow them to Fund what they have planned for the next 3 to 4 years. So certainly, a SaaS may new opportunities to invest may come up. But at this point, based on That's what we have.

Speaker 7

So the rest, the 2.4 will come up to the parent.

Speaker 4

The next question is from Rafael Barcelos, Banco Santander.

Speaker 14

Good morning. Thanks for taking my question. My first question about the base metals. I mean, firstly, congratulations for the view. You mentioned that the Vale based metals division is expected to invest around $25,000,000,000 to $30,000,000,000 In the next decade in strategic projects, right.

Speaker 14

So could you please give us more color on how would you believe that the funding Of this investment plan would be, I mean, overall, how are you thinking about the capital allocation strategy for the division? If there is any risk that you could change the dividend policy to have the dividend policy more related to the iron ore division, just to understand How are you thinking about that? And the second question, I mean, about the iron ore business. So Vale finally received the license To operate the Tortoderm, which of course will improve its ability to produce more pellet feed. So my question is just to understand What can we expect in terms of ramp up?

Speaker 14

I mean, we will already see these effects in the 3rd Q or more to the 4th Q. In order to do that, I mean, I remember that the Brucutu complex used to produce like 30,000,000 tons before the Brumadinho tragedy, And it's now at a run rate of 20,000,000 tons. So just to understand whether or not the Brucutu complex could return To a run rate of 30,000,000 tons in the short term. Okay. Thank you.

Speaker 7

Thanks, Rafael. Gustavo here. So on base metals, there will be a ramp up for us to get to the $25,000,000,000 to $30,000,000,000 of investment The next decade, right? So I think the deal that we are doing now allows us, as I mentioned a couple of times here, To create options for us to fund those growth could be internally generated cash, their own balance sheet, But could be others, right? Valley could continue to fund its proportional, but we could also access capital markets either public or private as we just So I think we are opening up different alternatives and we will assess at its due time, right, 3 to 4 years from now if we need to make A large investment, we will assess where the market is and what is best for our shareholders.

Speaker 7

So that's the first one. On Torto, it's already in operations. So in terms of benefit, it's about $50,000,000 a month, not in terms of volume, but quality. So it's already there. In terms of bringing up to 29, the number that we've quoted, it will take Sometime, couple of years still because there is some work that we need to do in terms of waste disposal, which will require some license.

Speaker 7

So the first stage Well, it's really early to improve the quality of the 21,000,000, 20,000,000 tons that we currently produce. So we'll start to see this already in the P and L. The ability to ramp up It still requires some licensee, especially for waste disposal, which we are working on.

Speaker 4

The next question is from Rodolfo Anjali, Banco JPMorgan.

Speaker 13

Yes. Thanks for getting back to me. I had a second question for management. So the question is really about VBM, again, the ambition is really enormous, right? You're talking about the tripling copper, doubling nickel.

Speaker 13

So the question is really, do you have that mapped out? Is this going to be done at the current assets? Or is that at this point a target, a goal for the company and you're going to be evaluating Greenfields, M and As, and kind of this ties back to my first question because I felt like $1,000,000,000 was a bit shy given The ambition, so just wanted to hear your thoughts on that. Thanks again for getting me back online.

Speaker 7

Thanks Rodolf. Apologies for cutting you off earlier. So yes, the EUR 1,000,000,000 is mostly due to The ramp up profile. So it takes time for us to materialize some of those opportunities. Look, I think one of the unique competitiveness of our ETM business and from our perspective that is what attracted these partners Many others that were interested in being part of this is the fact that ETM or value based metals is sitting in a tremendous amount of resource, Right.

Speaker 7

And 3 of the most relevant mineral jurisdictions in the world. So Brazil With Carajas, you have Canada and then you have Indonesia, right? So we have A tremendous endowment. So I think the key message that we want to convey here is there is 2 elements of Value unlocking. There is one which is continued stabilization of the operations that we have, which Mark is working with Dichenate And being very focused on that.

Speaker 7

And then there's a second stage, which is how we anticipate the development of that endowment, right? How we'll bring more Projects faster to the market. We see tremendous opportunity to unlock value, good level of returns, mid to high double digit returns, And that's what we are going to go after. So we don't need to do any M and A, large M and A, a large transaction to get to that future.

Speaker 4

Our next question is from Tyler Brodha, RBC.

Speaker 15

Great. Thanks very much, gentlemen. Congratulations on the transaction. My question is On the nickel assets in Canada, I guess, in general, both Voisey's Bay and Sudbury have kind of underperformed this year. I know from the site visit last year that this is going to be a multiyear process.

Speaker 15

But I guess, how do you sort of assess what's gone wrong This year? And then secondly, with that, I guess, is how does Marc Kudafani's presence start to affect that? Like What's Marc doing in particular in his role? Thanks very much.

Speaker 6

Okay, Tyler. I'll let Daczni go over the first point about Vyaches Baid, and I don't agree that it's not going As planned, I think it is like planned. That's why exactly we had this gap between The seed for Long Harbor, but anyhow, but Marc Guitfani is a person that had worked with us. I worked with him when he was Still in IMCO at that time and when we acquired Vale. I think Mark brings a total alignment in the way we see how to Fix the problem, but he has done it and a track record.

Speaker 6

So he already is with us. We are doing an asset review with top Specialists to see exactly how we can accelerate things that are already undergoing and other elements that are He's going to chair the Board, of course. I will be there together with Samantha. So this kind of focus As I've been saying, help us to accelerate. So Mark is the right asset, The right guy at the right time in the right place with the right partners, exactly like our other partners that I mentioned before.

Speaker 6

And I asked Dashing to go up over voices bay because we are Very excited how we can actually go down underground and extract value that Eduardo's Bay has.

Speaker 16

Thank you for that, Eduardo, and thank you, Tyler. So as you mentioned, the Investor Day that we had, so in Sudbury, the challenge has been on development. I'm very happy to say that the development that the team is achieving this year is more than double what we've achieved last Yes. And the tonnes are coming to plan. But as we guided at Vale Day, the challenge we have in Sudbury is some of the one off maintenance activities that we have, Including things like the Kraton cage one off.

Speaker 16

So that's why you're seeing the slight decrease. But exactly as Eduardo is saying, The times are actually coming to plan, and we're very satisfied with the performance. But as we also guided in Vale Day regarding voices Bay, Boise's Bay and in fact the entire VNL entity will be in transition for another 18 months or so. And the reason for that is we are busy ramping down the open pit, which is near completion right now and ramping up to the underground mines. But sticking very discipline to our PMP schedule, we then took Long Harbour down for a 2 month PMP this past quarter.

Speaker 16

So both transitions in terms of the tonnes as well as the PMP came together To give us what looks like a horrible quarter, but I can assure you it is to plan. And just echoing what Eduardo said about Mark, Mark and I have already started working together. We are putting together something that looks like a pathway to value plan. And in addition to what Mark brings from an expertise point of view in terms of helping the management team and myself, We do have the likes of Tony O'Neill and some of the other industry experts helping us with an asset review that we will then use to look at how we can unlock the full potential outside of the current initiatives to fix and get back to the run rates that we need. Thank you.

Speaker 4

Our next question is from Alex Hakim with Citi.

Speaker 7

Yes. Good morning. Thanks for the call. So two questions. Firstly, could you maybe give us an update on the outlook For mining taxes in Brazil?

Speaker 7

And then secondly, could you maybe discuss the role that engine number 1 will play In base metals, the fund does have some history of being quite active in its investments. Thank you. Thanks, Alex. So on mining tax, I think we mining tax, I think we are following closely all the discussions In Brazil, lately, it's also important to remind always important to remind that our sector is highly Tax already compared to others when you take the full taxation in consideration. So we are feeling good about Where we're heading towards, of course, everybody like everybody monitoring closely potential impacts, but so far so good.

Speaker 7

And we'll continue to monitor that closely. In terms of Engine 1, we've met then, talked To Chris James and team over the last several months about this opportunity, and we are highly aligned in terms of the Louis C long term and I'm sure he and his team are very excited to join Vale based metals and we are thrilled to have them join. I think he will be A very important strategic voice to help us drive value in the long term. So we are excited, very aligned long term And looking forward to working with them.

Speaker 4

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

Speaker 6

Okay. Thank you. I'm just going to echo Gustavo's point in the end. I think We are very confident at the middle of the year that we are with a stronger operational performance in all of our assets. Etm, as we were able to discuss today, has a tremendous opportunity ahead.

Speaker 6

The puzzle is done. Now it's a matter of execution and growth. Very happy to be able to conform with JSTM, Vale. It is going to be a reference in them management. We started earlier and of course we have the obligation with society to be A reference on that and JSTM is a very welcome standard to protect ourselves and society.

Speaker 6

And lastly, as was discussed during the call as well, there is no doubt about our capital discipline. Everything that we do here It's on the way to create value for our shareholders and, of course, for all stakeholders, society, our employees And the ones that we think, by the way, that had a hard time to create this transaction that everybody received, How much value there is in the assets that Vale owns and will extract. As I always say, we are in a Marathon, and we are in kilometer 25 now, and we're going to get there. And the ones that come together with us, Surely, you're going to benefit from that. And thanks a lot for your attention and see you in the next call.

Speaker 4

Vale's conference call for today is now concluded. Thank you very much for your participation. You may now disconnect.

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Key Takeaways

  • Vale signed a strategic partnership with world-class investors for its Energy Transition Metals business, valuing the unit at $26 billion and raising $3.4 billion to help fund $25–30 billion of copper and nickel growth investments over the next decade.
  • In Q2 iron ore output grew year-on-year with record S11D volumes and lower all-in costs, copper production rose 41% thanks to a faster-than-planned Salobo III ramp-up, and finished nickel was up 8%, keeping 2023 guidance on track.
  • Q2 EBITDA was $4.1 billion, down $1.4 billion YoY due to lower iron ore and nickel prices; iron ore C1 costs fell to $23.5/ton (guidance now $21.5–22.5/ton) and all-in costs are guided at $52–54/ton, while nickel all-in costs are guided at $15.5–16 thousand $/ton.
  • Vale has completed 69% of its third share buyback (repurchasing 16% of shares since 2021), and approved $1.7 billion in September shareholder remuneration, delivering a 27% yield since 2021 under its disciplined capital allocation policy.
  • All prioritized tailings facilities now comply with the Global Industry Standard on Tailings Management ahead of the first deadline, with full conformance by 2025 as Vale enhances dam safety and risk reduction.
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Earnings Conference Call
Vale Q2 2023
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